Financial Statement Analysis Of ASX Listed Company Amani Gold Limited

Nature of the company and the industry

The main objective of the report is to focus on the financial statement analysis of ASX listed company Amani Gold Limited. For the purpose of analysis the performance of the company over the last 3 years period will be taken into consideration. The report will also focus on the company’s business operation, industry overview, investing as well as financing activities of the company. After analysing the financial statement of the company various ratios like current ratio, debt equity ratio, asset turnover ratio and net profit margin for the last 3 years period will be calculated. The ratios will be calculated to measure the performances of the company and changes in the performance level over the 3 years period. The report will also evaluate the materiality of different account balances and the assertions associated with them. Finally, based on the materiality and assertions comprehensive work steps for audit will be recommended to minimize the assertion level (Amanigold.com, 2018).

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ASX listed company Amani Gold Limited was formed as Amani Gold Limited in the year 2016 and carries on its operation from Milton, Australia. It is engaged in exploration, development and acquisition of the mineral interests for precious energy and metals in Democratic Republic of Congo. Primarily, the entity explores the gold deposits. Further, it holds shares in Giro project for gold with 2 permits of exploration that covers more than 497 kilometres and is located in the north-east of Democratic Republic of Congo. The company falls under the precious metal mining industry (Hofmann & McSwain, 2013). Gold has significant role in Australian and major gold production of Australia generated from the open-cut mines. However, the major argument against the gold investment is that gold does not yield any interest even if it is held for long term and therefore, it leads to low interest rate. However, on the contrary, if the investor holds bank deposits or government bonds then also the interest rate is not very high. In fact, the interest rate on government bond sometimes become negative that signifies that the investor is actually paying the government as a privilege to hold its bonds.

The company’s investing activities includes payments towards equipment and plant amounting to $98,732, payments towards development and exploration expenses amounting to $ 83,81,797 and option payment for acquiring projects amounting to $ 326,798. Further, the financing activities of the company includes the receipts from issuance of the securities amounted to $ 11,825,542, expenses towards share issuance amounted to $ 661,431, repayment of the loan amounted to $ 239,916 and fund receipts through borrowing amounted to $ 91,081.

The financial statement of the company is prepared based on the Australian Accounting Standards and the authoritative pronouncement of AASB (Australian Accounting Standard Board) and the interpretations of Corporation Act 2001. Further, the company prepares its financial reporting on going concern basis that considers that company will recognise the liabilities and assets under normal business course at the same value that is stated under the financial report (Almeida, Hsu & Li, 2013).  At the end of each year the company reviews all the relevant revised and new interpretations and standards released by AASB and apply them accordingly. The consolidated financial statements and associated notes are are complied with the IFRS (International Financial Reporting Standards) as released by IASB (International Accounting Standards Board). The financial statements of the company include 4 statements. Those are – consolidated statement of the comprehensive income, consolidated statement of financial position, consolidated statement for changes in equity and consolidated statement of cash flows. Further, the details regarding the items included in the financial statement are presented through notes to the financial statements.

Ratio

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Formula

2017

2016

2015

Short-term solvency

Current ratio

Current assets/current liabilities

2.62

0.98

0.90

Long term solvency

Debt equity ratio

Total liabilities/shareholder’s equity

1.90

4.19

5.33

Asset utilization ratio

Asset turnover ratio

Net sales/total assets

0.38

0.08

0.10

Profitability ratio

Net profit ratio

Net profit/net sales *100

262.02

-90872.05

-6764.40

Ratio

Analysis

Current ratio

Current ratio is the liquidity ratio used for measuring the ability of the company to pay off its short-term obligation with the short-term assets available with the company. For measuring the company’s ability the current assets of the company are compared with the current liabilities of the company. The formula used for measuring the current ratio of the company is current assets / current liabilities. This ratio is called as current as it takes into considerations all the current liabilities and current assets of the company (Schönbohm, 2013). Generally the current ratio of 1 or more than that represents that the liquidity position of the company is good as the current assets are more than the current liabilities. From the annual report of the company for the last 3 years that is for 2015, 2016 and 2017 it is found that the current ratio of the company was in increasing trend and for the year 2015 it was 0.90, for the year 2016 it was 0.98 and for the year 2017 it was 2.62. Therefore, the liquidity position of the company has been significantly improved over the year from 2016 to 2017.

Debt equity ratio

Debt equity ratio measures the debt of the company as compared to the shareholders equity. This ratio is used for measuring the leverage level of the company. It further measures the proportion of the assets of the company that is obtained through shareholder’s fund and proportion that is obtained through borrowing.  If the debt ratio of the company is high it indicates that the nature of the company is aggressive with regard to the financing the growth through debt. The practice of aggressive leveraging are generally associated with the high leverage risk (Mousa, 2015). It may lead to volatile earning which in turn may cause additional burden of interest expenses. Generally, the debt portion of 40% is considered good.  From the annual report of the company for the last 3 years that is for 2015, 2016 and 2017 it is found that the debt ratio of the company was in reducing trend and for the year 2015 it was 5.33, for the year 2016 it was 4.19 and for the year 2017 it was 1.90. Therefore, the leverage position of the company has been improved over the year from 2015 to 2017. However, as the debt payment is deductible expenses under tax the company shall raise additional fund through debt instead of equity (Gomariz & Ballesta, 2014).

Asset turnover ratio

The asset turnover ratio is used to measure the revenue generated by the company as compared to its asset value. It is further used to measure the efficiency of the company with regard to usage of the assets for generation of revenues. The company generally calculates the asset turnover ratio on annual basis using the calendar year or fiscal year. It is calculated by dividing the net sales of the company by total assets. If the asset turnover ratio of the company is higher it is considered that the company is performing better as the higher ratio implies that it is generating more revenue on each dollar of the asset (Ongore & Kusa, 2013). From the annual report of the company for the last 3 years that is for 2015, 2016 and 2017 it is found that the asset turnover ratio of the company was in reducing trend over the years from 2015 to 2016. However, the company was able to increase its revenue generating capacity from the assets in 2017 to some extent. For the year 2015 it was 0.10%, for the year 2016 it was 0.08% and for the year 2017 it was 0.38%. Therefore, the revenue generating ability of the company is significantly low.

Net profit ratio

The net profit margin is the proportion of profit left with the company after paying off all the expenses from the revenue of the company. The expenses paid out of the revenue of the company include production costs, financing costs and production cost. It is the best measure to evaluate the profitability position of the company (Jordan, 2014). However, the net profit does not indicate the cash flows as the net profit includes various non-cash expenses like depreciation, amortization and accrued expenses. Looking into the annual report of the company over the year 2015 to 2017 it has been identified that the company was not able to earn any positive profit margin for the year ended 2015 and 2016 as the amount of revenues were much lower as compared to its expenses. However, for 2017 the company has high profit margin that is 262.02%. The reason of this significant high profit margin is gain on the disposal of company’s subsidiaries amounted to $ 19,91,919

Analytical procedures of financial statement

Materiality is referred to amount of misstatement that is set by the auditor at the planning stage of audit as compared to materiality found in the financial statements. Materiality is planned by the auditor for assessing whether the materiality is found in the individual level or the item is aggregately material in combination with other account. Misstatement can mislead the financial statement users who use the information for the purpose of making the decision (Knechel & Salterio, 2016). The factors that will be considered for calculating the materiality of the items from income statement and balance sheet of the company are as follows –

  • 5% to 1% of sales revenue. Here, 2% of sales revenue can be considered as materiality, or
  • 1% to 2% of total assets. Here, 1% of total assets can be considered as materiality

Therefore, 2% of sales revenue = $ 98,321 * 2% = $ 1966.42

      1% of total assets = $ 26,161,196 *1% = $ 261,611.96

Higher among the above 2 amounts that is $ 261,611.96 will be considered as material amount (Edgley, 2014).

Items that will be considered as material are as follows –

Items

Amounts ($)

Consultants and corporate costs

(507,293)

Due diligence costs

(326,798)

Employee benefits expense

(407,833)

Share based payments expense

(270,579)

Gain on disposal of subsidiaries

1991,919

Cash and cash equivalents

10,62,471

Other receivable

211,777

Exploration and evaluation expenses

24,787,528

Trade and other payable

395,932

Contributed equity

47,883,517

Reserves

78,52,626

Material account balances from assets and liabilities –

Items

Amounts ($)

Assets

Cash and cash equivalents

10,62,471

Other receivable

211,777

Property, plant and equipment

99,420

Exploration and evaluation expenses

24,787,528

Liabilities

Trade and other payable

395,932

Loan

91,081

Contributed equity

47,883,517

Reserves

78,52,626

Accumulated Loss

(30,445,659)

Items

Assertions

Assets

Cash and cash equivalents

Irrespective of the amount involved cash and cash equivalent account is always susceptible to various assertions like all the accounts related to cash account may not have been taken into consideration. The amount of cash has been increased to $ 10,62,471 to $ 416,453. Therefore, chances are there all the transactions from other period may have been included under the period while the cash balances have been recorded (Johnstone, Gramling & Rittenberg, 2013).

Other receivable

Amount of other receivables has been significantly increased from $ 82,996 to $ 211,777. As the amount is increased considerably chances are there that some of the receivables of other periods may have been taken into consideration. Further, it may be the case that the cash sales also included under the credit sales and therefore recorded under receivable.

Plant, property and equipment

The amount of property, plant and equipment has been increased from $ 39,813 to $ 99,420 over the period from 2016 to 2017. Therefore, chances are there that depreciation may not have been provided or under charged. Further, the property purchased in other period may have been included in the period under consideration. Chances are also there that the properties are not tested for impairment or has been overstated to show the strong asset position of the company (Edgley, Jones & Atkins, 2015)

Exploration and evaluation expenses

The cost for evaluation, exploration and acquisition of mineral interest are accumulated for each of the recognizable interest area. The evaluation and exploration expenses have been increased from $ 16,051,029 to $ 24,886,948. Therefore, chances are there that the amount has been recorded at higher than the actual amount or the amount for other recognizable area of interest for other period has been included in the period under consideration.

Liabilities

Trade and other payable

The company records the amount of trade and other payable at the amortised cost and the amount are recorded only when the company is obliged to pay. The amount of trade payables has been increased from $ 270,029 to $ 395,932. Therefore, chances are there that the payables from other period have been included in the period under consideration. It may also be the case that the transactions for which the payments are already made are also included in the amount of payables (Czerney,  Schmidt & Thompson, 2014).

Loan

Loan amount of $ 403,177 for the year 2016 was interest free, unsecured loan that was repaid during the year in full. However, the loan amount of $ 91,081 for the year ended 2017 was interest free, unsecured loan that was repayable on demand. However, assertions may involve there that the loan amount has be under recorded that is recorded at lower amount than actual.

Contributed equity

The amount of contributed equity has been increased from $ 36,719,406 to $ 47,883,517. Therefore, chances are there that the amount has been recorded at higher than the actual at which the shares were issued. Further, it may also be the case that under the contributed equity that amount for which share amount has not yet been paid are also been included.

Reserves

The amount of reserves has been reduced from $ 9681,643 to $ 7852,626. The reserve on account of option premium are recorded when the consideration for issues are received. On the other hand the reserves from financial assets are recorded when upward revaluations are there. However, chances are there that the consideration that is already received is not recorded or the revaluations of the asset have not made appropriately.

Substantive procedure for audit is the activities carried out for detecting the fraud or material misstatement at the level of assertions. Different assertions for which the audit steps are performed include obligations, rights, validity and existence.

Items

Assets

Cash and cash equivalents

Cash is always exposed to the risk of theft, misappropriation and embezzlement. Therefore, to confirm the cash balance the bank reconciliation shall be obtained and matched with each transaction. Deposit in transit, balance as per the book, payment made through cheque shall be checked ad matched with the voucher and journal entries. Further, the cash held in the foreign currencies shall be converted to applicable rate.

Other receivable

In the very 1st step all the information and records associated with receivables shall be properly examined and analysed. Generally some transactions are selected on sample basis from the receivable ledger and the original records related to the transactions are reviewed and matched with the current balance. Through this step the fraudulent balances for receivable account can easily be found. Further, the records related to sales transactions like sales vouchers, journals shall also be checked to confirm the balance of receivables with the amount of credit sales.

Property, plant and equipment

In the very 1st step the authorization to sales and purchase of property shall be checked. The auditor must check that the purchases or sales are numbered serially and done after approval from the authorised person. Auditor shall also check the applicable method and rate of depreciation. The significant risk associated with the plant, equipment and property is the risk for unrecognized impairment and revaluations. Hence, the impairment procedures and revaluations of property, if any shall be checked properly (Eilifsen & Messier, 2014).

Exploration and evaluation expenses

The cost for evaluation, exploration and acquisition of mineral interest are accumulated for each of the recognizable interest area shall be properly checked with associated documents. The vouchers, journal ledger, authorization, date of expenses and approved amounts shall be checked with the recorded amount.

Liabilities

Trade and other payable

Amount of the trade payables as per the balance sheet shall be matched with the balance of general ledger. Listing of large debit balance and their nature shall be determined. These balances can be confirmed from the vendors. If the amounts are found to be material it shall be reclassified under other assets (William, Glover & Prawitt, 2016).

Loan

The overall process of loan shall be analysed. It includes the authorisation for obtaining loan, amount sanctioned to be obtained and the approval procedures from bank. Further, the loan documentation, loan letter and credit period allowed shall be examined. Moreover, the interest rate, payment procedures shall also be examined.

Contributed equity

The share issue price, date of issue and the number of shares opened to the market or existing shareholder for purchase and the associated documents like share issue journal, bank statement for receipts shall be examined properly. Further, the bonus shares issued, if any shall also be examined (Arens et al., 2016)

Reserves

Reserved from all the account shall be matched with the individual reserve account balance. The auditor shall also check the method of recognition and recording process of reserves to confirm that the amount recorded under reserves only after the consideration is received.

Conclusion 

It has been identified from the above that the found that the current ratio of the company was in increasing trend and for the year 2015 it was 0.90, for the year 2016 it was 0.98 and for the year 2017 it was 2.62. Therefore, the liquidity position of the company has been significantly improved over the year from 2016 to 2017. Further, debt ratio of the company was in reducing trend and for the year 2015 it was 5.33, for the year 2016 it was 4.19 and for the year 2017 it was 1.90. Therefore, the leverage position of the company has been improved over the year from 2015 to 2017. The asset turnover ratio of the company was in reducing trend over the years from 2015 to 2016. However, the company was able to increase its revenue generating capacity from the assets in 2017 to some extent. Moreover, except for the year 2017 for other 2 years the company’s expenses were significantly high as compared to its revenues. Therefore, the overall financial performance of the company was not good at all.

Reference list

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