Risks
The main focus of the report is to assess the risks which are associated with Altech Chemical ltd. Altech Chemical Ltd has been selected as the new client of the business (Annual Report | Altech Chemicals Limited”, 2018). The analysis of the financial reports of Altech Chemical Limited will be revealing the risks of the business and measures will be suggested as per the analysis.
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Risks |
Details |
Assertions and Impacted Accounts of Business |
Audit procedure |
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1. Accumulated losses bringing down profits |
The accumulated losses of the company as shown in the current 2016 is $ 10193106 which has increased from the previous year which was $ 8960030 in 2015. The company has shown a increased amount of accumulated losses in the year 2016. As per the notes to accounts these includes losses which have been incurred by the business on exploration sites which were abandoned while still in exploration (Miller, Cipriano & Ramsay, 2012). The company accumulated losses have brought down the profits of the company. |
Assertions: – Precisions – Accuracy – Exploration or mining activity – Reliability Impacted Books of Accounts · Revenue account · Cash account · Account receivable account · Bad Debts Account |
The audit process will be including a detailed analysis of the nature of losses which were recorded and writing off criteria will also need to be examined. The management accuracy will also be judged. |
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2. Exploration Expenditure Commitments |
The company has an exploration expenditure commitment which is of a material amount which has not been disclosed in the financial statements. The amount of exploration expenditure commitment which is not provided in the financial statement amounts to $491000 as per the notes to account. |
Assertions – Accuracy – Materiality – Relevance – Accountability Impacted Books of Accounts · Account receivable · Cash account · Expenditure accounts · Profit and loss account · Sales account |
The audit process will be including a detail analysis of the expenditure of the company on such commitments and the nature and agreement of the same is also to be ensured. The amount as shown in the financial report of significant value therefore the figure is of material amount and hence the same has to be recorded. The auditor will also need to ensure that such a commitment is of genuine nature as well. |
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3. Deferred tax |
A per note 3 of the annual report of the company deferred tax assets is used to set off against deferred tax liabilities (Florea & Florea, 2012). The unused deferred tax assets of the company shows that $932569 and the capital losses which is shown in the notes is at $5102. |
Assertions – Cutoff – Segmentation – Occurrence – Accuracy – Timing Impacted books of Accounts · Income statement · Account of current tax assets · Deferred tax assets and liabilities account · Balance sheet |
It has been assuned that the confronted judgement of management which is related to forecasting for the taxable profit of the company along with analysing the technique or the process the management uses for the forecasting composition. |
Ratio Analysis
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Column1 |
Column2 |
Column3 |
Column4 |
Column5 |
Column6 |
Column7 |
Column8 |
Column9 |
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Financial ratio |
Formula |
2016 |
2015 |
Difference |
Risk Factor |
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Short term solvency Ratio |
||||||||
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Current assets/ Curent liabilities |
5.13839138 |
1.48456556 |
3.65382582 |
Low |
||||
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Quick Ratio |
Quick assets/ quick liabilities |
5.13839138 |
1.48456556 |
3.65382582 |
Low |
|||
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Profitability Ratio |
||||||||
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Return on Equity |
Net Income/ Shareholders Equity |
-0.1945805 |
-0.508571 |
0.31399049 |
High |
|||
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Solvency Ratio |
||||||||
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Debt to Equity ratio |
Total Liabilities/Shareholders Equity |
0.07301368 |
0.3812753 |
-0.3082616 |
High |
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Calculations Table |
|||
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Formula |
2016 |
2015 |
|
|
Current Assets |
Cash+ Trade receivables |
2377508 |
1548871 |
|
Current Liabilities |
trade payable+ loan+ Provisions |
462695 |
1043316 |
|
Net Income |
-1233076 |
-1391646 |
|
|
Shareholders Equity |
6337100 |
2736385 |
|
|
Total Liabilities |
Non Current Liabilities+ Current Liabilities |
462695 |
1043316 |
The current ratio of the company for the year show that it has can take care of the liquidity requirement of the company (Engelen, Fernandez & Hendrikse, 2014). The increase in current ratio is due to the decrease in the current liability of the company, the quick ratio also depicts the same results. In this case as there is no presence of stock in the balance sheet therefore the current ratio is also the quick ratio of the company. Altech Chemical quick ratio shows that the company can meet its liquidity requirement with ease and similarly take care of its operating activities smoothly. The ideal current ratio for any company is 1:1 which means the current assets and current liabilities are same.
The company has not been able to pay the investor any dividends in the period of 2015 and in the current year also the company will not be able to meet the shareholders expectations of dividends (Hevert, 2013). The company has been earning losses from the past two years as per the balance sheet of the company. However the company has reduced this loss marginally in 2016 which was much more in 2015. This is the main reason which has contributed to the negative return on equity ratio. This cannot be allowed to extend from the viewpoint of the company or the company will be facing serious issues in the near future. The company is in high risk if return on equity is to be considered which is a performance standard in the view point of the investors.
The company debt to equity ratio is shown low and the same has further decreased in 2016. This implies the company’s capital structure is made up of more equity based capital than debt capital. In other words, the company does not rely on leverage as much as required (Heikal, Khaddafi & Ummah, 2014). The company’s capital structure is made up of mostly equity share capital and the balance sheet of the company for 2016 shows that the company does not have any loan and there is only provision.
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Identified areas of concern |
Explanations |
Impacts on the books of accounts |
Audit Procedure |
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1, Current Ratio |
The current ratio of the company shows a favorable results as the company has a decent liquidity situation and Altech Chemicals ltd can meet its requirement of liquidity easily. This is due to the reason as the current liabilities of the company has reduced. The perfect current ratio of any company is 1:1 (Ogundipe, Idowu & Ogundipe, 2012). |
1. Cash and cash equivalents 2. Accounts Receivable 3. Inventory 4. Prepaid expenses 5. Short-term investments (marketable securities). 6. Accounts payable 7. Payroll taxes payable, 9. Interest payable and |
The records of the company must be checked for any discrepancies on th part of the management. The account receivable leger and cash records are needed to be checked in details (Bierstaker, Janvrin & Lowe, 2014). |
|
Return on Equity |
The company has not been able to pay the investor any dividends in the period of 2015 and in the current year also the company will not be able to meet the shareholders expectations of dividends. The company has been earning losses from the past two years as per the balance sheet of the company. However the company has reduced this loss marginally in 2016 which was much more in 2015. This is the main reason which has contributed to the negative return on equity ratio (Kabajeh et al., 2012). |
1. Balance sheet 2. Assets totals 3. Sales account |
The auditor needs to check the dates and timings of every transaction of the company and ensure proper scrutiny. |
|
Debt to equity ratio |
The company debt to equity ratio is shown low and the same has further decreased in 2016. This implies the company’s capital structure is made up of more equity based capital than debt capital (De Mooij, 2012). In other words, the company does not rely on leverage as much as required |
1. Payables 2. Provisions 3. Revenue |
The auditor need to check the records of the payables and also the relevancy of provisions. |
The following recommendations are provided to Altech Chemicals Ltd in order to improve their business structure:
- The company needs to implement a strong internal control system in order to control trhe internal event of the business.
- The company needs to record the expenditure commitments in the accounts as they are material enough to influence shareholder’s decisions.
- The company needs to incorporate a regular check of inventories if any and also the sites where explorations are being conducted.
- The company needs to have a proper understanding of the deferred tax structure and how such can be set off and the same needs to be disclosed in the financial report.
Conclusion
As per the above discussions, it could be stated that major audit concerns of the company depend on the judgements of auditor. The audit committee has lesser responsibilities along with the nomination of an effective external auditor that will anticipate the company’s opinion regarding fairness and materiality associated with Audit report. The report concludes with the measures which can be implemented by the management to make the business more effective.
Reference
Annual Report | Altech Chemicals Limited. (2018). Altechchemicals.com. Retrieved 25 January 2018, from https://www.altechchemicals.com/annual_report
Bierstaker, J., Janvrin, D., & Lowe, D. J. (2014). What factors influence auditors’ use of computer-assisted audit techniques?. Advances in Accounting, 30(1), 67-74.
De Mooij, R. A. (2012). Tax biases to debt finance: Assessing the problem, finding solutions. Fiscal Studies, 33(4), 489-512.
Engelen, E., Fernandez, R., & Hendrikse, R. (2014). How finance penetrates its other: A cautionary tale on the financialization of a Dutch university. Antipode, 46(4), 1072-1091.
Florea, R., & Florea, R. (2012). The Implications of Inherent Risks’ Assessment in Audit Risk Limitation. Economy Transdisciplinarity Cognition, 15(1), 45.
Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia stock exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.
Hevert, S. R. B. (2013). Return on Equity.
Kabajeh, M. A. M., Al Nuaimat, S. M. A., & Dahmash, F. N. (2012). The relationship between the ROA, ROE and ROI ratios with Jordanian insurance public companies market share prices. International Journal of Humanities and Social Science, 2(11), 115-120.
Miller, T. C., Cipriano, M., & Ramsay, R. J. (2012). Do auditors assess inherent risk as if there are no controls?. Managerial Auditing Journal, 27(5), 448-461.
Ogundipe, S. E., Idowu, A., & Ogundipe, L. O. (2012). Working capital management, firms’ performance and market valuation in Nigeria. World Academy of Science, Engineering and Technology, 61(1), 1196-1200.
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