Auditing and Assurance

This report provides an analysis of the financial performance of Dalby Logistics Limited (DLL) and discusses internal control weaknesses in Sweets R Us Pty Ltd. It includes key background information, analysis of going concern assumption, material misstatement risk, assertions involved with materially misstated items, and analysis of financial information. Recommendations for improving control weaknesses are also provided.

Running head: AUDITING AND ASSURANCE
Auditing and assurance
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Table of Contents
Introduction......................................................................................................................................2
Question 1........................................................................................................................................2
1. Key background....................................................................................................................2
2. Analysis of going concern assumption.................................................................................2
3. Material misstatement risk....................................................................................................3
4. Assertions involved with materially misstated items...........................................................3
5. Analysis of the financial information...................................................................................4
Question 2........................................................................................................................................5
1. Identifying control weakness................................................................................................5
2. Assertion related to account balance.......................................................................................6
3. Recommendation for improving control weakness.................................................................6
Conclusion.......................................................................................................................................7
Bibliography....................................................................................................................................8
Appendix........................................................................................................................................10
Appendix........................................................................................................................................13

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Introduction
The report will discuss about 2 question provided in the given task. The aim of the
report’s 1st part is to prepare report for the audit partner who is carrying out the audit of DLL
(Dalby Logistics Limited) provides cargo logistic services and is engaged into the operation of
delivering flammable components including manganese, coal and lithium.teh report will analyse
the financial performance of the company over the years from 2015 to 2018. For the 2nd part the
report will discuss Sweets R Us Pty Ltd’s internal control weaknesses and recommendation
regarding that.
Question 1
1. Key background
DLL was established in the year 2010 though merging of 2 entities those were engaged in
mineral, iron ore and forestry products. Primary objective of the entity was to provide cargo and
logistic services and generate higher revenues from there. It is also in the operation of delivering
warehouse services and have large building hub at Sydney. In addition to the above mentioned
product and services the entity is also engaged into the operation of delivering flammable
components including manganese, coal and lithium. Along with more than 20 subsidiaries and
more than 5 significant investments in other nations it is one of the largest entities in its industry.
Logistic industry of Australia is major productivity sector that’s contribution to GDP exceeds
14.5% that is crucial for the country’s productivity. Further, it is considered as a major source of
jobs as it provides more that 1 million jobs by 165,000 entities under this industry.
2. Analysis of going concern assumption
Going concern is considered as one of the fundamental assumption in accounting based
on which the financial statements are prepared. The financial reports are prepared with the
assumption that the business will continue its business and operation for the foreseeable future
without requiring liquidating on the management’s part. Hence, it is presumed that the business
will be able to realize the assets as well as will be able to settle the obligation in the normal
course of the business. For presuming going concern status of any organisation, its previous
period’s balance sheet as well as income statement is taken into consideration. Analysing DDL’s
income statement it can be found that the profit for the year 2018 has been remarkably enhanced

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by 107.51%. Moreover, if the past 3 years trend for net is considered it can be observed that the
same is in improving trend. It was further observed that the both current assets as well as current
liabilities are in increasing trend. However, the increase rate is such that the current assets are
sufficient to pay off the current liabilities. Further, instead of ceasing contracts of 2 large mines,
the organisation was able to increase its revenue and earn enormous profits. In addition to that it
acquired one more subsidiary that made addition to its assets amounting to $ 16.05 million with
$goodwill amounting to $ 35 million. However the liabilities added for only $ 5.8 million. These
financial highlights are sufficient to state that the going concern assumption made by the entity is
appropriate and in order.
3. Material misstatement risk
Going though the financial statements below mentioned accounts are seemed to be at
most of material misstatement risk.
 Inventory – inventory is material by its nature and it gives wide scope of misstatement
through fraud and intentional error. Though big changes not found in case of movement
of inventory, the staff responsible for looking after the inventory is always in a position to
misstate the stock of inventory if tight control is not there for the same.
 Cash and cash equivalent – being the most liquid assets cash is always susceptible to
theft, fraud and misstatement by its nature. Cash can be overstated or understated after
committing any fraud. Further, it is notable that the entity’s cash remarkably reduced in
2018 that indicates that the item has been misstated
 Trade receivable – this can be misstated through debiting the amount which is still has a
chance of receipt under bad debts or bad debts still recognising as receivables. Trade
receivable of the entity is revealing increasing trend that suggests that the entity has not
proper control on its receivables that could lead to misstatement.
4. Assertions involved with materially misstated items
 Inventory – 2 major assertions that is associated with inventory are – (i) accuracy that is
the risk that inventory has not been recognised in the balance sheet at exact amount and
(ii) completeness that is the risk that all the inventory related transaction for instance, all
receipts and issuance related transactions are not reported

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 Cash and cash equivalent – 2 major assertions that is associated with cash and cash
equivalent are (i) accuracy that is the risk that inventory has not been recognised in the
balance sheet at exact amount and (ii) cut- off that is the risk that cash pertained to the
concerned period only included in the financial statements
 Trade receivable – 2 major assertions that is associated with trade receivables are (i)
classification that is the risk that transactions related to trade receivables have been
classified incorrectly. For instance, credit sales recorded as cash sales.
5. Analysis of the financial information
Comparing results of 2017 with 2018 –
It can be recognised that the entity’s current assets dropped to $ 213.7 million that was $
246.75 million in 2017. On the other side the current liabilities reached to $ 122.4 million in
2018 that was $ 114.5 million in 2017. Additional borrowing amounting to $ 81.60 million was
funded by the entity that proves that the gearing position of the entity deteriorated. Further,
reduction in current assets and at the same time increasing of current liabilities indicates that the
liquidity position worsened. Further, considering the income statement it is observed that the
sales for 2018 amounted to $ 788.95 million that was $ 709 million in the year 2017.
Trend analysis –
Looking into the performance trend for the years 2017 to 2018 it is observed that though
the current assets are in falling trend, the current liabilities do not maintain any noticeable trend.
Equities follow the rising trend since last 4 years and since 2016 the borrowing are also in rising
trend. Revenues of the company though dropped in 2016 it maintained the rising trend since then
and reached to $ 788.95 from $632.4 million in 2016.
Ratio analysis –
Profitability ratio – Gross profit margin of the entity is rising trend and reached to 12.61% from
7.31% since 2016. It indicates the improvement is earning capability of the entity.
Efficiency – efficiency in context of collection of the receivable dur from the debtors is
deteriorated as the company is taking now 71.36 days to collect the dues which were once
collected in 61.30 days.

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Solvency – it is observed that the company over the years increased its dependency on borrowing
for requirement of additional fund. It is established through the fact that the debt equity ratio
reached to 0.47 in 2018 that was 0.42 in 2016.
Liquidity – it is observed that the entity lost the level of efficiency in context of payment of short
term obligation. The fact that can be used to establish this fact is that the current ratio of the
entity reduced to 1.75 in 2018 that was 2.55 in 2016.
Hence, it can be found that if the profitability is not considered, all other performance
have been worsened.
Question 2
1. Identifying control weakness
Different weaknesses those can be found in case of accounts payable, payments and
purchases are mentioned below –
 For the purchase order any particular system is not followed by the entity. Maintaining
proper purchase system for making timely payment is very crucial
 Production managers controls everything related to managing the raw material, placing
order and for checking the inventories in hand
 There is only one staff in the warehouse who receives goods, verifies them, signs the
delivery dockets as well as acknowledge the same. When any one person is in control of
entire process it enhances the chances of committing fraud.
 Same warehouse personnel are for the long time and considered as trusted. However,
long association provides the scope of committing fraud
 No record is maintained when goods out from and received in the warehouse as the stock
level is always monitored. However, it is not sufficient as it will not be possible trough
monitoring the stock level that where and how much quantity of goods are issued and
from where and how much quantity is received.
 Accounts payable clerk is responsible for receiving invoice from the suppliers stamping
as well as printing them and processing them for payment. It enhances the chances of
error as missing any one invoice will create issue at the time of payment as it will not be
processed for payment.

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 Proper system regarding communication to the production manager for outstanding
invoices are not maintained and the accounts payable clerk communicate the same over
the phone. In case there is any issue regarding communicating the message or receiving
the same the entire payment process will be hampered.
 Only the non-major supplier’s payment check is associated with supporting documents.
Hence, the payment issue like error or fraud may take place in case of the major
suppliers.
 Production manager completely depends on his memory for taking deliveries and
checking the same. Not maintain the record in the book or in the computer system is
major internal control lack
 Particular signing authority for payment of the checks is not there. Though the financial
controller does the same, in his absence marketing managers signs the same.
2. Assertion related to account balance
Major assertions involved with the accounts payable are –
 Accuracy that is the risk of recording the transactions with accurate amount
 Cut off that is the risk that payments related to other period has not been included in
current year
Major assertions involved with the raw materials are –
 Completeness that is the risk all the raw material related transactions have not been
recorded
 Accuracy that is the risk of recording the transactions with accurate amount
3. Recommendation for improving control weakness
 For the purchase order there shall be proper system like receiving quotation and
authorisation
 Management of raw material shall be divided among 2-3 persons
 Warehousing activities must be divided among 2-3 persons
 Personnel responsible for warehousing activities must be alternated in the regular interval
 Goods taking our from and receiving in warehouse shall be recorded with every details
like supplier name, quantity received

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 Suppliers stamping as well as printing them and processing them for payment must be
divided among 2-3 persons
 Receiving order as well as processing outstanding invoices for payment shall run though
proper system and shall not be communicated over phone
 For the major suppliers also the supporting documents shall be attached with check to
avoid double payment
 There shall be proper system for receiving the deliveries and checking the same
 Payment check shall be signed by appropriate signing authority.
Conclusion
Analysing the financial performance of DDL it can be found that if the profitability is not
considered, all other performance have been worsened. Further, in case of Sweets R Us Pty Ltd
different internal control weaknesses are there for that the management shall take appropriate
measures.

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Appendix
Trend analysis

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Ratio analysis

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Appendix