Literature Review

• The main purpose of the presentation is to give a detailed insight into how adoption of malpractices can spell doom for an entity via example of ABC LEARNINGS.
• This presentation will include the study of relevant auditing standards
• The Accounting theme that is being explored is the correct preparation and presentation of the financial information.
• The analysis of the financial performance will be done using some effective and time tested financial tools.

Literature Review  

The slides will give us a glimpse of the relevant Auditing standards applicable in our approach:

a)ASA 200:

The Overall Objectives of an Independent Auditor and conduct of an audit in accordance with the Australian auditing standards

1. b) ASA 220:

Quality control for an audit of  financial report and other historical financial information

1. c) ASA 230:

Audit Documentation 

1. d) ASA 240

Consideration of laws and regulations in audit of a financial report

1. e) ASA 315

Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

1. f) ASA 500:

Audit evidences

Tools used to analyse the financials of the company

a)DuPont analysis:     

1. b) Common size statement analysis:      

1. c) Trend analysis: 

1. d) Trend analysis:      

1. e) Beneish M Score Analysis:

Analysis

1)DuPont analysis:

      The companies ROE has reduced drastically to 14% in the year 2001. This was predominantly due to the ever decreasing trend in profit margin of the company.

2) Common size statement analysis:  

1. a) Common size income statement:

      The company’s EBITDA  and EBIT has reduced after the year 2003. They recorded a  minimum of 17% and 19% respectively.   

1. b) Common size balance sheet:

        it demonstrates that the company’s cash reserves with respect to sales has reduced over the years and the reserves and surplus of the company has become negative over the years (McKee, 2015).

3) Trend analysis:

a)Income statement analysis:

      The rise in the operating revenue of the company is far less or overshadowed by the rise in the operating expenses. This has resulted in lower profitability.

b)Balance sheet analysis:

      There has been increase in the cash balance of the company by cash infusion by way of share capital and increased profitability. This is accompanied by increase in the retained earnings of the company (Knight, 2015).

4) Beneish M Score Analysis:

      The company has been scoring more than -2.22 since year 2003 and the highest being recorded in the year 2006. This implies that the company has been involved high amount of mal practices and manipulation of the data. 

Summary of the findings

a)The company has not generated decent ROE for its shareholders.

b)The company is unable to increase its overall EBITDA and EBIT over the years as a percentage of revenue.

c)The company’s cash inflow as a percentage of revenue has declined over the years.

1. d) The company has been registering an adverse Beneish M score. This indicates adoption of  fraudulent practices.  

RECOMMENDATION

a)Adoption of fraudulent activities by the company must be stopped immediately.

b)In order to substantially increase the returns o the company it must focus on reducing the operating costs of the company.

c)The company must resort to measures which will increase its profitability to ensure reinstatement of the reserves and surplus positive balance.

d)The company should take the opportunity of increasing the return on the new capital being infused in it by the shareholders. 

• The companies need to increase their profitability in order to increase the balance in the reserves and surplus. Because profit and loss account balance is the main component of the reserves and surplus.
• Dwindling Return on Capital may instigate the shareholders to stop investing in the company
• Adoption of fraudulent activities by any company will result in the eventual destruction of its image and business in the long run.

Reference

´Ball, F., Tyler, J. & Wells, P., (2015). Is audit quality impacted by auditor relationships?. Journal of Contemporary Accounting & Economics, 11(2), pp.166-181.

´Bonevski, B., Magin, P., Horton, G., Bryant, J., Randell, M. & Kimlin, M.G., (2015). An internet based approach to improve general practitioners’ knowledge and practices: The development and pilot testing of the “ABC’s of vitamin D” program. International journal of medical informatics, 84(6), pp.413-422.

´Cheng, C. & Flasher, R., (2017). Two Short Case Studies in Staff Auditor and Student Ethical Decision Making. Issues in Accounting Education.

´Clikeman, P.M. & Diaz, J., (2014). ABC Electronics: An Instructional Case Illustrating Auditors’ Use of Preliminary Analytical Procedures. Current Issues in Auditing, 8(1), pp.I1-I10.

´Kasasbeh, M.A.M., McCabe, C. & Payne, S.,( 2017). Action learning: an effective way to improve cancer?related pain management. Journal of clinical nursing, 26(21-22), pp.3430-3441.

´Knight, M., (2015). Producing Transformative Learning in Business and Professional Communication.

´Le, N. & Lehmann, C.M., (2016). Purchasing Process Internal Control Assessment: A Comprenhensive Case Study Using Data Analytic Software. AIS Educator Journal, 11(1), pp.9-15.

´McKee, D., (2015). New external audit report standards are game changing. Governance Directions, 67(4), p.222.

´Olubunmi, A.G. & Tar, M., (2015). Impact of Psychological Well-Being on the Vocabulary Acquisition Level of Nigerian Adolescents Learning French Language in Rural Settings. Asian Journal Of Humanity, Art And Literature, 2(1), pp.24-28.

´Shabri, S.M., Saad, R.A.J. & Bakar, A.A.,( 2016). The Effects of Internal Control Systems on Cooperative’s Profi tability: A Case of Koperasi ABC Berhad. International Review of Management and Marketing, 6(8S).

´Thomas, V., (2015). Learning to adapt. Art Buyer, (2015), p.126.

´Yusoff, M., Rahman, A., Rahman, J.A. & Ab-Rahman, M.S., (2016). Designing a Reliable Academic Quality Management System in Nurturing Future Engineering Professionals-A Case Study. Pertanika Journal of Social Sciences & Humanities, 24.