Analysis of ARB Corporation's Annual Report

This finance assignment analyzes ARB Corporation's annual report, covering materiality concerns, analytical review, and cash flow statements. The company is a manufacturer and distributor of 4*4 accessories and has its headquarters in the USA. The materiality level of the company has been calculated to be $350,000. The company has done well since prior years, but in comparison to the industry, it needs to perform better. The company is mostly dealing in credit, and the auditor has framed their relevant opinion on the consolidated financial statements of the company.

Finance Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
In this assignment, the annual report of the company must be studied. The company that has been
selected is ARB Corporation and the company has been listed on the Australian Stock Exchange.
The 2017 annual report of the company has been studied to analyze various elements of
materiality and other primary elements. The financials of the company have been taken as a basis
to form an opinion on the overall working of the company. The audit report of the company and
the going concern ability of the company has also been analyzed and proper opinion on the same
has been formed. There are three sections in the entire report that access the overall financial
ability of the company through different analysis.
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Contents
Section 1: Materiality concern of the entity................................................................................................4
Section 2: Preliminary analytical review of the company............................................................................6
Section 3: Review of the cash flow statement of the company...................................................................8
References.................................................................................................................................................10
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Section 1: Materiality concern of the entity
Materiality is one of the most important element of the audit report of any company. It is covered
by ASA 320, which states that materiality is very important for the overall audit planning by the
auditor. Any kind of misstatements, omissions and errors are material in nature if they have any
effect on the financials of the company and might end up affecting the overall decisions of the
user of financial statement of the company. It varies from company to company and every
company might have some different level of materiality concern. Companies might be concerned
with $5000 materiality level and some might not be affected by $500,000 also. It all depends on
the overall organizational structure of the company (Alexander, 2016). It is both qualitative and
quantitative in nature. As per the relevant accounting standards there are certain materiality
levels that have been prescribed which are 0.5% to 1% of sales revenue, 2-5% of the
shareholders equity, 5-10% of net profit of the company, 1-2% of the total assets of the company
or the gross profit being made by the company (Arnott, Lizama, & Song, 2017).
The company that has been selected is ARB Corporation. It is one of the largest manufacturer
and distributor of 4*4 accessories that includes bull bars, canopies, tow bars and winches. The
company has expanded a lot in the recent years and the company has its headquarters in USA
and export network that is present in more than 100 countries (Belton, 2017). The company was
founded in 1975. In this assignment we are studying the overall materiality element of the
company that has been calculated based on the annual report of the company and the data present
in the financial statements of the company. Based on the parameters that are mentioned above,
the materiality levels of the company have been calculated. Given the data above, it can be taken
as $350,000 as the materiality level for the company. An extract from the annual report of the
company has been attached below:
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(in $ Mn.)
ARB CORPORATION LIMITED
Quantitative estimate of materiality
Criterion Base Amount
Materiality
level/range
0.5% to 1% of gross revenue
Gross
Revenue
382,599.0
0 1913 to 3825.99
1% to 2% of the total assets Total Assets
323,243.0
0 1616.22 to 3232.43
2% - 5% of the shareholders’
equity Equity
272,341.0
0 1361.71 to 2723.41
5% to 10% of the net profit Net profit 49,152.00 245.76 to 491.52
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The table shows every element that might be material to the company and the specific ranges
between which the company should raise any question about any given misstatement. The ranges
have been declared by the specific accounting standards and nothing above that should be
considered material. In case of the given company we see that everything falls within the specific
range hence that could be considered as low chance of any material misstatement to occur. As
per the auditor of the company, the few elemnets that the company should focus on more should
be the overall gross revenue and inventory and that might be considered as the overall nature of
materiality
The draft and notes to the account of the company include major declaration regarding key
matters like valuation of the inventory and the assumption regarding the going concern ability of
the company. It also includes disclosures regarding the key accounting policies and accounting
standards followed by the company in preparation of the financial statements of the company.
The following contingencies have been mentioned in the draft reports - operating lease
commitments and capital expenditure commitments. The company has provided relevant
disclosure with respect to the same and have also mentioned how they are calculating it. In order
to check the contingencies, the auditors can check the age of the lease payments, the time period
during which they are due and whether the terms at which they have been given off is
favourable. The capital expenditures have also been checked in the smiliar way.
Section 2: Preliminary analytical review of the company
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There are two types of audit procedures that the auditors can apply for the audit of the key
element of the company. These are substantive test and the analytical review procedures. Two
types of substantive tests are vouching and verification. Vouching includes, check the income
and expenses of the company based on the supporting documents and verification includes
checking key areas, key elements of the company. Verification will check completeness,
appropriateness and any change in the overall value of the assets and liabilities of the company
(Erik & Jan, 2017). When the auditor is not able to make an opinion based on the substantive
measures, they can apply analytical procedures for the company. The analytical procedures
would include trend analysis, analysis of the variances and the auditors should put in efforts for
audit planning and assessing the key areas that might include any kind of risk element in the
entity. It is very important that any kind of material misstatement should be properly stated as the
users of the financial statements depends on the audit reports to take important decisions with
regards to the company. In this assignment the ratio analysis has been taken as a measure to
conduct analytical review of the company and the trend is shown for the following years given
below:
Ratios 2017 2016 2015 2014
Operating Margin 20.6 20.9 20.6 19.5
Return on Capital 18 19 17 17.5
Return on Equity 18.1 19 16.8 16
Payout Ratio 55 53 58 52
Dividend Yield 2.2 2.1 1.9 1.5
Revenue 382.6 356.9 424 297
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From the overall analysis based on the above ratios it can be said that the revenue of the
company has increased a lot since the prior years. From 2014 to 2017, the sales have increased a
lot. The overall gross profit has also increased and this shows that the company is doing good
both on the top line and the bottom line approach (Trieu, 2017). The return on capital shows how
much the company is getting in return with respect to the capital invested. So we see that over
the years the return on capital invested has increased from 17.5 to 18. The dividend yield ratio
shows how much dividend the shareholders are earning in return to their overall investment.
Here we see that the dividend yield has increased from 1.5 to 2.2 , which means that the
shareholders can invest in the company and get great returns. The return on equity also shows
how much the company is earning in respect to the shareholders investment from 16 to 18.1, this
shows that the company is performing well and the overall capital structure of the company has
also improved. (Erik & Jan, 2017).
Particulars
Compan
y
Industr
y Sector
Quick Ratio (MRQ) 1.14 1.35 1.23
Current Ratio (MRQ) 2.93 1.74 1.52
LT Debt to Equity (MRQ) 0 15.04 39.26
Total Debt to Equity
(MRQ) 1.32 24.09 68.22
Interest Coverage (TTM) 5,990.82 40.43 23.53
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Now, when we compare the ratio of the company with the industry, we see that the quick ratio
for the company is 1.14 and the industry is 1.35, which means that company is not able to pay off
its current liabilities fast in comparison to that of the industry. Also, we see that the total debt to
equity ratio of the company is very less 1.32% in comparison to the industry in which the
company is functioning (Werner, 2017). The company has no long-term debt and thus the overall
ratio is 0 in comparison to the industry. Overall it can be said that the company has done well
since prior year but in comparison to the industry the company needs to perform better (Kim,
Schmidgall, & Damitio, 2017). The company needs to invest more in other capital elements that
would include debts, debentures etc. as that would help in improving the overall liquidity
position of the company and taking more risks would also ensure that the management is
generating enough return to support the investors who are putting their money.
The second part deals with Audit assertions are the implications and claims that the management
of the company does to make sure that the financials of the company are appropriate and there
are no false claims in that. In case of audit risks the auditors might not be able to judge certain
areas that might include risks to the materiality of the company (Grenier, 2017). There are three
types of audit risks which includes control risk, inherent risk and detection risk. Detection of the
risks is very important with respect to the company. With respect to the company, the overall
financial statements of the company has been studied and key points have been developed-
Sl
No.
Key risk areas Relevant assertion Audit procedure
1 The company might face
capital risk and currency
risk as the company is
Given the overall
financials of the company
and the data the company
The auditors can conduct
a thorough analysis of
the overall currencies
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conducting its operation in
many countries and thus if
the company does not enter
into hedge agreements it
might have to face many
issues (Jefferson, 2017).
is having only equity and
no debt burden on itself to
pay off and in order to
reduce the burden of the
currency the company has
undertaken measures that
includes entering into
swaps and hedging. But the
overall impact of the
company was low.
that the company is
dealing in and can see
what are the measures by
which the loss on
exchange would be
minimal. There are many
over the counter
transactions that the
company can deal in for
best results.
2 The company is into
manufacturing and there can
be many cases when the
company has to deal in
credit and there are chances
that the customers might
default in payment and then
that would lead to
overstatement of the books
of the company.
The company has taken
few steps in this regard by
doing frequent checks and
conducting studies on the
overall credit policy of the
company and checking the
history over the past years
(Sithole, Chandler,
Abeysekera, & Paas, 2017).
The auditors can check
the overall age of the
receivables to see
whether they are showing
a true picture or not and
can check whether the
bad and doubtful debts
have been carefully
provided for by the
company.
.
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Section 3: Review of the cash flow statement of the company
From the given cash flow, most of the cash flow of the company is from the sales made to the
customer $404,494 and the major payment have been made to the supplier and the employees of
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the company $32,448. Thus, major cash flow of the company is from operating activities and that
includes the major transactions made (Das, 2017). It can also be seen that the company has made
a lot of investment this year and that is evident from the investing activities where the company
has made investment in property plant and equipment, development cost and has also earned
from sale of property. These were the major investing activities done by the company and the
major financing activities would include payment of dividend that is also a major portion from
the cash $26,129. It can thus be seen that the overall cash element that the cash has is very less
and the company is mostly dealing in credit.
Based on the overall analysis it can be said that the company has done extremely well and the
company is operating on a going concern basis, where the company is investing a lot for growth
and expansion. The company has focused considerably on inventory valuation and the
management has taken appropriate steps to determine the inventory valuation. The overall
consolidated financial statements of the company as a group has also been studied and the
auditor of the company have framed their relevant opinion on the same (Goldmann, 2016). The
auditors have mentioned in their audit report that the company has aligned their operations with
respect to the relevant accounting and auditing standards. In case there would have been any
material misstatement the auditor would have stated the same (Farmer, 2018). The directors of
the company have mentioned that the financial statements of the company have been prepared as
per the Australian Accounting Standards and the Corporations Act 2001, and they have exercised
effective due diligence in making sure that all the internal controls of the company are in place.
The auditors have also highlighted few areas in which the management needs to work and put
more efforts and areas in which the chances of risk are more have been presented separately. An
extract from the audit report of the company is given below:
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References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Arnott, D., Lizama, F., & Song, Y. (2017). Patterns of business intelligence systems use in organizations.
Decision Support Systems, 97, 58-68.
Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Das, P. (2017). Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), 10-17.
Erik, H., & Jan, B. (2017). Supply chain management and activity-based costing: Current status and
directions for the future. International Journal of Physical Distribution & Logistics Management,
47(8), 712-735.
Farmer, Y. (2018). Ethical Decision Making and Reputation Management in Public Relations. Journal of
Media Ethics, 1-12.
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4, 103-112.
Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), 241-256.
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland .
Technological Forecasting and Social Change, 353-354.
Kim, M., Schmidgall, R., & Damitio, J. (2017). Key Managerial Accounting Skills for Lodging Industry
Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of
Hospitality & Tourism Administration, , 18(1), 23-40.
Sithole, S., Chandler, P., Abeysekera, I., & Paas, F. (2017). Benefits of guided self-management of
attention on learning accounting. Journal of Educational Psychology, 109(2), 220. Retrieved from
http://psycnet.apa.org/buy/2016-21263-001
Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, 93, 111-124.
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Werner, M. (2017). Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, 25, 57-80.
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