Auditing and Assurance in Australia

This article discusses the importance of auditing and assurance services in Australia, with a focus on the collapse of ABC Learning Centre. It also includes an analysis of the financial statements of the organization using DuPont analysis, common size trend analysis, and Beneish M-Score.

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and Assurance in Australia
Name of the Student:
Name of the University:
Authors Note:

1AUDITING AND ASSURANCE IN AUSTRALIA
Contents
Introduction:....................................................................................................................................2
Literature Review:...........................................................................................................................2
Application of DuPont analysis, common size trend analysis and Beneish M-Score:....................3
Analysis:..........................................................................................................................................9
Summary:.......................................................................................................................................22
Recommendations:........................................................................................................................24
Conclusion:....................................................................................................................................25
References:....................................................................................................................................26
Appendix:......................................................................................................................................28

2AUDITING AND ASSURANCE IN AUSTRALIA
Introduction:
Auditing and assurance services are used to appraise the financial statements of an
organization with independent view point to express an appropriate opinion on these statements
to assure stakeholders about the reasonability of these statements. The auditors have the
responsibility to conduct an audit in accordance with the applicable auditing standards in the
country to provide an independent opinion on the financial statements of an organization as to
whether these correctly reflect the true and fair financial performance and position of such
organization as on a particular period and date.
Literature Review:
ABC Learning Centre has collapsed leaving the lenders and investors with number of
unanswered questions regarding the financial statements of the organization. Was there any
signal in the financial statements of the eventual collapse of the organization? Do the auditors
mentioned any such sign in the audit reports? Has there been lack of emphasis on the importance
of financial reports? And many more of such questions (Knechel and Salterio, 2016).
Arens et. al. (2007) has mentioned the importance of auditing and assurance services for the
stakeholders of an organization. The auditing is the process of independent verification of
financial statements to evaluate whether there is any material error or mistake in financial
information rendering the financial statements incapable in reflecting the true and correct picture
of an organization (I Ulrich, Blouch and Michenzi, 2017).
Leung, Coram and Cooper in 2017 has discussed on the use of modern day technologies to carry
out an audit effectively. Modern audit requires auditors to go beyond the normal procedures of
substantive and analytical techniques. Use of Computer assisted auditing techniques and tools

3AUDITING AND ASSURANCE IN AUSTRALIA
have helped auditor to carry out an audit effectively. It is important to use innovative technology
to effectively carry out an audit in the modern business environment (Shubbak and Thorne,
2016).
Knechel and Salterio in 2016 has further elaborated on the ever increasing importance of
auditing and associated risks in auditing. Use of auditing and assurance standards is immensely
important to conduct an audit in accordance with the relevant standards to provide an
independent opinion on the financial statements which is correctly.
Application of DuPont analysis, common size trend analysis and Beneish M-Score:
The table below contains calculations essential for DuPont analysis.
Ratio Analytics 06/00 06/01 06/02 06/03 06/04 06/05 06/06 06/07
Dupont Analysis
Return on Equity
= Net Income /
Avg. Shareholder
Equity
2.3764195
06
5.78 8.43 5.17 3.66 1.80 1.51 1.91
Return on Assets
= Net Income /
Avg. Total Assets
5.72 3.04 4.06 2.84 2.27 1.28 1.16 1.12
Financial
Leverage = Avg.
0.11 0.47 0.52 0.46 0.40 0.35 0.33 0.43

4AUDITING AND ASSURANCE IN AUSTRALIA
Total Assets /
AVG.
Shareholders’
Equity
Return on Sales =
Net Income / Sales
11.63 27.45 30.02 30.31 27.42 22.69 13.70 8.78
Asset Turnover
Ratios
Asset Turnover =
Sales / Avg. Total
Assets
0.39 0.11 0.14 0.09 0.08 0.08 0.08 0.13
Accounts
Receivables
Turnover = Sales /
Avg. A/R
26.21 7.70 2.24 2.26 2.20 2.57 2.02 4.50
Inventory
Turnover = Cost
of Goods Sold /
Average Inventory
#DIV/0! #DIV/
0!
#DIV/
0!
#DIV/
0!
#DIV/
0!
8.02 7.88 25.48
Accounts Payable
Turnover =
3.40 0.70 1.40 1.05 1.80 1.43 1.26 1.67

5AUDITING AND ASSURANCE IN AUSTRALIA
Purchases* /
Average Accounts
Payable
* (Purchases =
Ending Inventory
+ COGS –
Beginning
Inventory)
Fixed Asset
Turnover = Sales /
Avg. Net PP&E
0.44 0.13 0.16 0.10 0.09 0.09 0.10 0.14
Earnings
Management
YoY (Year over
year) Revenue
Growth:
(Revenue this
quarter – Revenue
same quarter last
year) / Revenue
same quarter last
22.79 92.83 74.33 95.71 195.9
1
156.7
7
175.1
9

6AUDITING AND ASSURANCE IN AUSTRALIA
year
YoY (Year over
Year) Growth in
A/R:
(A/R end of this
quarter – A/R end
of same quarter
last year) / AR end
of same quarter
last year
8.97 1072.8
2
-12.33 228.77 131.1
1
267.3
1
-
42.55
Fraud Prediction 06/00 06/01 06/02 06/03 06/04 06/05 06/06 06/07
Days sales
receivable index
(DSRI):
Days
Receivable* /
Prior Days
Receivables
* Days Receivable
= (Receivables /
0.89 6.08 0.50 1.68 0.78 1.43 0.21

7AUDITING AND ASSURANCE IN AUSTRALIA
Sales) *365
Days receivable 13.92 12.36 75.15 37.79 63.48 49.58 70.92 14.81
Gross margin
index (GMI):
Prior Gross
margin* / Gross
margin
* Gross Margin =
(Sales – Cost of
Goods Sold) /
Sales
0.78 1.10 1.00 1.14 1.46 1.14 1.34
Gross margin 41.67 53.64 48.94 49.09 43.07 29.41 25.76 19.24
Asset quality
index (AQI):
Asset Quality* /
Prior Asset
Quality
* Asset quality =
(Total Assets –
(Current assets +
PP&E)) / Total
1.15 1.96 2.81 2.00 3.71 1.99 1.75

8AUDITING AND ASSURANCE IN AUSTRALIA
assets
Sales growth
index (SGI):
Sales / Prior Sales
1.23 1.93 1.74 1.96 2.96 2.57 2.75
Depreciation
index (DEPI):
Prior Depreciation
Rate* /
Depreciation Rate
* Depreciation
Rate =
Depreciation /
(Depreciation +
PP&E)
1.22 2.70 0.95 0.96 1.07 0.86 0.89
Depreciation rate 15.43 12.64 4.69 4.91 5.10 4.78 5.56 6.23
SG&A index
(SGAI):
SG&A Ratio* /
Prior SG&A Ratio
* SG&A Ratio =
SG&A expense /
0.82 1.07 1.27 0.92 1.60 0.83 1.05

9AUDITING AND ASSURANCE IN AUSTRALIA
Sales
SG& A ratio 58.33 48.02 51.59 65.31 60.13 96.49 79.97 83.92
M-Score
M = -6.065+ .823 DSRI + .906
GMI + .593 AQI + .717 SGI
+ .107 DEPI
-2.94 2.77 -1.73 -0.96 0.34 -0.74 -1.57
From the above calculation it is clear that return on equity has reduced continuously. Compared
to 8.43% in 06//02 the return on equity did reduce to 1.91% in 06/07. Similarly return on assets,
financial leverage and return on sales all major parameters of financial performance e and
position of ABC Learning Centre has reduced each subsequent year since 2002 (Cohen and
Simnett, 2014). It is clear that the financial weakness of the organization as clearly visible in the
financial statements of the company. The M-score also shows how the financial position of the
company has weakened each year since 2002. In 2007 the M-Score was negative (1.57) whereas
in 2002 it was 2.77 (Kend and Basioudis, 2017).
Analysis:
The ever decreasing return on equity, sales, return on assets was a clear indication of
deterioration of financial health of ABC Learning which the investors and lenders of the
organization overlooked. Asset turnover ratio, accounts receivable turnover ratio, inventory
turnover ratio, accounts payable turnover ratio and fixed asset turnover ratio in 2007 were 0.13,

10AUDITING AND ASSURANCE IN AUSTRALIA
4.50, 25.48, 1.67 and 0.14 have all deteriorated significantly since 2002 (Simnett, Carson and
Vanstraelen, 2016).
Despite the increase in overall revenue since 2002 the inability of the organization to strengthen
the financial position of the organization resulted in demise of the organization. The investors
and lenders should have evaluated the financial statements properly as the indication of financial
deterioration was very much evident in the financial statements (Farooq and de Villiers, 2017).
The following information from profit and loss account of the organization showed clearly that
the organization was positing significant growth in the amount of revenue and operating profits
each year since 2000.
Profit and Loss 06/00 06/01 06/02 06/03
Operating Revenue 9,647,000.00 11,846,000.00 22,843,000.
00
39,823,000.0
0
Other Revenue 0.00 196,000.00 122,000.00 5,735,000.00
Total Revenue Excluding
Interest
9,647,000.00 12,042,000.00 22,965,000.
00
45,558,000.0
0
Operating Expenses -
5,627,000.00
-5,688,000.00 -
11,785,000.
00
-
26,008,000.0
0
EBITDA 4,020,000.00 6,354,000.00 11,180,000.
00
19,550,000.0
0

11AUDITING AND ASSURANCE IN AUSTRALIA
Depreciation -360,000.00 -347,000.00 -318,000.00 -951,000.00
Amortisation 0.00 -2,000.00 0.00 -5,000.00
Depreciation and
Amortisation
-360,000.00 -349,000.00 -318,000.00 -956,000.00
EBIT 3,660,000.00 6,005,000.00 10,862,000.
00
18,594,000.0
0
Interest Revenue 0.00 226,000.00 160,000.00 453,000.00
Interest Expense -
1,448,000.00
-1,646,000.00 -
1,222,000.0
0
-1,959,000.00
Net Interest Expense -
1,448,000.00
-1,420,000.00 -
1,062,000.0
0
-1,506,000.00
PreTax Profit 2,212,000.00 4,585,000.00 9,800,000.0
0
17,088,000.0
0
Tax Expense -789,000.00 -1,333,000.00 -
2,942,000.0
0
-5,016,000.00

12AUDITING AND ASSURANCE IN AUSTRALIA
Net Profit after Tax Before
Abnormals
1,423,000.00 3,252,000.00 6,858,000.0
0
12,072,000.0
0
Abnormals -301,000.00 0.00 0.00 0.00
Abnormals Tax 0.00 0.00 0.00 0.00
Net Abnormals -301,000.00 0.00 0.00 0.00
Reported NPAT After
Abnormals
1,122,000.00 3,252,000.00 6,858,000.0
0
12,072,000.0
0
Outside Equity Interests 0.00 0.00 0.00 0.00
Shares Outstanding at Period
End
12,673,660.0
0
12,673,660.00 14,874,564.
00
97,521,146.0
0
Weighted Average Number
of Shares
12,673,660.0
0
10,877,848.00 13,942,987.
00
86,063,605.0
0
EPS Adjusted (cents/share) 11.23 28.90 49.19 13.90
EPS After Abnormal
(cents/share)
8.85 28.90 49.19 13.90
Profit and Loss 06/04 06/05 06/06 06/07
Operating Revenue 77,936,000.0 230,621,000. 592,176,000. 1,629,600,000.

13AUDITING AND ASSURANCE IN AUSTRALIA
0 00 00 00
Other Revenue 2,495,000.00 59,725,000.0
0
33,952,000.0
0
51,400,000.00
Total Revenue Excluding
Interest
80,431,000.0
0
290,346,000.
00
626,128,000.
00
1,681,000,000.
00
Operating Expenses -
46,865,000.0
0
-
222,522,000.
00
-
473,558,000.
00
-
1,367,500,000.
00
EBITDA 33,566,000.0
0
67,824,000.0
0
152,570,000.
00
313,500,000.0
0
Depreciation -
1,921,000.00
-
5,282,000.00
-
14,233,000.0
0
-36,500,000.00
Amortisation -6,000.00 -
4,832,000.00
-840,000.00 -2,400,000.00
Depreciation and
Amortisation
-
1,927,000.00
-
10,114,000.0
0
-
15,073,000.0
0
-38,900,000.00
EBIT 31,639,000.0
0
57,710,000.0
0
137,497,000.
00
274,600,000.0
0

14AUDITING AND ASSURANCE IN AUSTRALIA
Interest Revenue 1,120,000.00 2,354,000.00 5,322,000.00 15,400,000.00
Interest Expense -
5,032,000.00
-
6,478,000.00
-
22,401,000.0
0
-92,200,000.00
Net Interest Expense -
3,912,000.00
-
4,124,000.00
-
17,079,000.0
0
-76,800,000.00
PreTax Profit 27,727,000.0
0
53,586,000.0
0
120,418,000.
00
197,800,000.0
0
Tax Expense -
6,359,000.00
-
15,790,000.0
0
-
39,308,000.0
0
-54,700,000.00
Net Profit after Tax Before
Abnormals
21,368,000.0
0
37,796,000.0
0
81,110,000.0
0
143,100,000.0
0
Abnormals 0.00 14,541,000.0
0
0.00 0.00
Abnormals Tax 0.00 0.00 0.00 0.00
Net Abnormals 0.00 14,541,000.0
0
0.00 0.00
Reported NPAT After 21,368,000.0 52,337,000.0 81,110,000.0 143,100,000.0

15AUDITING AND ASSURANCE IN AUSTRALIA
Abnormals 0 0 0 0
Outside Equity Interests 0.00 0.00 0.00 0.00
Shares Outstanding at Period
End
116,428,216.
00
250,344,916.
00
393,146,555.
00
412,676,809.0
0
Weighted Average Number
of Shares
111,954,777.
00
189,436,141.
00
292,937,000.
00
396,900,000.0
0
EPS Adjusted (cents/share) 16.20 17.82 27.00 36.05
EPS After Abnormals
(cents/share)
16.20 25.50 27.00 36.05
However, despite the improvement in financial performance of the organization in each year
since 2000 the financial position of the organization kept on deteriorating in all these years. The
following information form Balance sheet of the organization from 2000 to 2007 shows that
clearly (Carson, Fargher and Zhang, 2016).
Balance Sheet 06/00 06/01 06/02 06/03
CA - Cash 2,690,000.00 2,740,000.00 355,000.00 4,240,000.00
CA - Receivables 368,000.00 401,000.00 4,703,000.00 4,123,000.00
CA - Prepaid Expenses 0.00 103,000.00 333,000.00 1,063,000.00

16AUDITING AND ASSURANCE IN AUSTRALIA
CA - Inventories 0.00 0.00 0.00 0.00
CA - Investments 0.00 1,407,000.00 0.00 0.00
CA - NCA Held Sale 0.00 0.00 0.00 0.00
CA - Other 125,000.00 1,115,000.00 2,277,000.00 5,644,000.00
Total Current Assets 3,183,000.00 5,766,000.00 7,668,000.00 15,070,000.00
NCA - Receivables 103,000.00 104,000.00 110,000.00 203,000.00
NCA - Inventories 0.00 0.00 0.00 0.00
NCA - Investments 21,000.00 0.00 300,000.00 315,000.00
NCA - PP&E 1,973,000.00 2,398,000.00 6,463,000.00 18,399,000.00
NCA - Intangibles(ExGW) 19,590,000.0
0
20,237,000.00 41,223,000.0
0
122,944,000.0
0
NCA - Goodwill 0.00 0.00 0.00 0.00
NCA - Future Tax Benefit 0.00 16,000.00 39,000.00 93,000.00
NCA - Other 0.00 12,000.00 80,000.00 0.00
Total NCA 21,687,000.0
0
22,767,000.00 48,215,000.0
0
141,954,000.0
0
Total Assets 24,870,000.0 28,533,000.00 55,883,000.0 157,024,000.0

17AUDITING AND ASSURANCE IN AUSTRALIA
0 0 0
CL - Account Payable 1,655,000.00 2,274,000.00 1,886,000.00 7,744,000.00
CL - Short-Term Debt 242,000.00 1,095,000.00 5,460,000.00 2,316,000.00
CL - Provisions 1,079,000.00 2,789,000.00 5,136,000.00 2,988,000.00
CL - NCL Held Sale 0.00 0.00 0.00 0.00
CL - Other 0.00 0.00 0.00 0.00
Total Curr. Liabilities 2,976,000.00 6,158,000.00 12,482,000.0
0
13,048,000.00
NCL - Account Payable 0.00 0.00 0.00 0.00
NCL - Long-Term Debt 6,923,000.00 9,212,000.00 15,082,000.0
0
53,314,000.00
NCL - Provisions 1,000.00 1,000.00 818,000.00 1,514,000.00
NCL - Other 0.00 0.00 0.00 0.00
Total NCL 6,924,000.00 9,213,000.00 15,900,000.0
0
54,828,000.00
Total Liabilities 9,900,000.00 15,371,000.00 28,382,000.0
0
67,876,000.00
Share Capital 12,566,000.0 10,290,000.00 20,288,000.0 71,310,000.00

18AUDITING AND ASSURANCE IN AUSTRALIA
0 0
Reserves 810,000.00 521,000.00 2,206,000.00 3,484,000.00
Retained Earnings 1,594,000.00 2,351,000.00 5,007,000.00 14,354,000.00
Other Equity 0.00 0.00 0.00 0.00
Convertible Equity 0.00 0.00 0.00 0.00
SE Held Sale 0.00 0.00 0.00 0.00
Outside Equity -- -- -- --
Total Equity 14,970,000.0
0
13,162,000.00 27,501,000.0
0
89,148,000.00
Balance Sheet 06/04 06/05 06/06 06/07
CA - Cash 4,913,000.00 45,560,000.00 132,470,000.0
0
227,800,000.0
0
CA - Receivables 13,555,000.0
0
31,327,000.00 115,066,000.0
0
66,100,000.00
CA - Prepaid Expenses 2,851,000.00 12,124,000.00 16,667,000.00 30,400,000.00
CA - Inventories 0.00 4,226,000.00 5,453,000.00 700,000.00
CA - Investments 983,000.00 3,649,000.00 0.00 54,900,000.00

19AUDITING AND ASSURANCE IN AUSTRALIA
CA - NCA Held Sale 0.00 0.00 9,493,000.00 12,000,000.00
CA - Other 17,121,000.0
0
6,360,000.00 0.00 0.00
Total Current Assets 39,423,000.0
0
103,246,000.0
0
279,149,000.0
0
391,900,000.0
0
NCA - Receivables 267,000.00 414,000.00 29,895,000.00 114,100,000.0
0
NCA - Inventories 0.00 0.00 0.00 0.00
NCA - Investments 1,670,000.00 10,119,000.00 49,030,000.00 10,400,000.00
NCA - PP&E 35,762,000.0
0
105,291,000.0
0
241,962,000.0
0
549,600,000.0
0
NCA -
Intangibles(ExGW)
236,818,000.
00
773,347,000.0
0
1,374,954,000.
00
2,622,100,000.
00
NCA - Goodwill 0.00 170,193,000.0
0
313,717,000.0
0
269,000,000.0
0
NCA - Future Tax Benefit 113,000.00 2,849,000.00 34,579,000.00 110,000,000.0
0
NCA - Other 0.00 0.00 0.00 0.00

20AUDITING AND ASSURANCE IN AUSTRALIA
Total NCA 274,630,000.
00
1,062,213,000.
00
2,044,137,000.
00
3,675,200,000.
00
Total Assets 314,053,000.
00
1,165,459,000.
00
2,323,286,000.
00
4,067,100,000.
00
CL - Account Payable 4,605,000.00 52,214,000.00 121,601,000.0
0
272,500,000.0
0
CL - Short-Term Debt 19,671,000.0
0
4,456,000.00 8,067,000.00 1,149,700,000.
00
CL - Provisions 2,200,000.00 9,140,000.00 23,663,000.00 31,700,000.00
CL - NCL Held Sale 0.00 0.00 0.00 0.00
CL - Other 0.00 0.00 999,000.00 0.00
Total Curr. Liabilities 26,476,000.0
0
65,810,000.00 154,330,000.0
0
1,453,900,000.
00
NCL - Account Payable 0.00 0.00 0.00 12,300,000.00
NCL - Long-Term Debt 83,353,000.0
0
195,665,000.0
0
234,888,000.0
0
610,400,000.0
0
NCL - Provisions 1,665,000.00 58,450,000.00 79,856,000.00 88,900,000.00
NCL - Other 0.00 0.00 16,480,000.00 0.00

21AUDITING AND ASSURANCE IN AUSTRALIA
Total NCL 85,018,000.0
0
254,115,000.0
0
331,224,000.0
0
711,600,000.0
0
Total Liabilities 111,494,000.
00
319,925,000.0
0
485,554,000.0
0
2,165,500,000.
00
Share Capital 123,402,000.
00
626,328,000.0
0
1,635,028,000.
00
1,744,500,000.
00
Reserves 3,871,000.00 114,033,000.0
0
109,977,000.0
0
-15,400,000.00
Retained Earnings 24,679,000.0
0
54,566,000.00 92,727,000.00 172,500,000.0
0
Other Equity 50,607,000.0
0
50,607,000.00 0.00 0.00
Convertible Equity 0.00 0.00 0.00 0.00
SE Held Sale 0.00 0.00 0.00 0.00
Outside Equity -- -- -- --
Total Equity 202,559,000.
00
845,534,000.0
0
1,837,732,000.
00
1,901,600,000.
00

22AUDITING AND ASSURANCE IN AUSTRALIA
Summary:
The profit and loss account of ABC Learning Centre shows that in each year subsequent to 2000
the organization has managed to achieve sustainable growth in the amount of operating revenue.
In addition the other revenue of the organization has also increase year after year. In 2007 the
operating revenue of the organization was $1,629,600,000 in comparison to only $9,647,000 in
the year 2000. However, the inability of the organization to recover its dues from the customers
have led to the untimely demise of the organization as its financial health deteriorated rapidly
subsequent to 2002 (Bradbury, Raftery and Scott, 2018).
The following financial ratios showed that despite the growth in earnings and revenue the
organization’s financial health deteriorated at a rapid speed due to the inability of the
organization to recover its dues from the customers and use its assets and inventories effectively
in revenue generation operations (Prasad, 2017).
Ratio Analytics 06/00 06/01 06/02 06/03 06/04 06/05 06/06 06/07
Dupont Analysis
Return on Equity =
Net Income / Avg.
Shareholder Equity
2.376419506 5.78 8.43 5.17 3.66 1.80 1.51 1.91
Return on Assets =
Net Income / Avg.
Total Assets
5.72 3.04 4.06 2.84 2.27 1.28 1.16 1.12
Financial Leverage 0.11 0.47 0.52 0.46 0.40 0.35 0.33 0.43

23AUDITING AND ASSURANCE IN AUSTRALIA
= Avg. Total
Assets / AVG.
Shareholders’
Equity
Return on Sales =
Net Income / Sales
11.63 27.45 30.02 30.31 27.42 22.69 13.70 8.78
Asset Turnover
Ratios
Asset Turnover =
Sales / Avg. Total
Assets
0.39 0.11 0.14 0.09 0.08 0.08 0.08 0.13
Accounts
Receivables
Turnover = Sales /
Avg. A/R
26.21 7.70 2.24 2.26 2.20 2.57 2.02 4.50
Inventory Turnover
= Cost of Goods
Sold / Average
Inventory
#DIV/0! #DIV/
0!
#DIV/0! #DIV/0! #DIV/0! 8.02 7.88 25.48
Accounts Payable
Turnover =
3.40 0.70 1.40 1.05 1.80 1.43 1.26 1.67

24AUDITING AND ASSURANCE IN AUSTRALIA
Purchases* /
Average Accounts
Payable
* (Purchases =
Ending Inventory +
COGS – Beginning
Inventory)
Fixed Asset
Turnover = Sales /
Avg. Net PP&E
0.44 0.13 0.16 0.10 0.09 0.09 0.10 0.14
The auditor should have highlighted the ever deterioration of financial position of the
organization by specifically highlighting the deterioration in the ability of the organization to use
of inventories and assets in business operations (Hay, Stewart and Botica Redmayne, 2017).
Recommendations:
The auditors though not responsible to provide specific warning about the financial health of an
organization to its investors as per the Corporations Act 2001 but highlighting the deterioration
in financial health of ABC Learning would have helped the stakeholders top take appropriate
course of actions (Byrnes et. al. 2018). This could have helped the stakeholders to avert the
collapse of the organization. It is important to note though, that auditors are only required to
conduct independent verification of financial information with the objective of providing an
independent opinion on these information. The inventors and lenders should use the financial

25AUDITING AND ASSURANCE IN AUSTRALIA
statements not only to assess the financial performance and how much gain the stakeholders have
made but such information should be evaluated properly to ascertain the financial position of the
organization to take appropriate actions to avert major disaster such as collapse and liquidation
of organizations (Xu et. al. 2016).
Conclusion:
ABC Learning despite positing significant growth in its profit and loss account each year since
2000 was struggling to keep its financial state positive. Each year despite increase in revenue the
liquidity and solvency position of the organization was deteriorating. The ability to turnover
inventory, accounts receivables and make use of fixed assets in revenue generation process
deteriorated each year. This was a clear indication of organization’s inability to use its assets in
business operations. Correct course of actions at such time by the management to improve
collection of its revenue and use of fixed assets and current assets in business operations would
have helped the organization to stay afloat in the market (Griffin and Wright, 2015).

26AUDITING AND ASSURANCE IN AUSTRALIA
References:
Bradbury, M.E., Raftery, A. and Scott, T., 2018. Knowledge spillover from other assurance
services. Journal of Contemporary Accounting & Economics, 14(1), pp.52-64.
Byrnes, A., Banks, M., Mudge, A., Young, A. and Bauer, J., 2018. Enhanced Recovery After
Surgery as an auditing framework for identifying improvements to perioperative nutrition care of
older surgical patients. European journal of clinical nutrition, 72(6), p.913.
Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis
and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A
Journal of Practice & Theory, 34(1), pp.59-74.
Farooq, M.B. and de Villiers, C., 2017. The market for sustainability assurance services: A
comprehensive literature review and future avenues for research. Pacific Accounting
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Griffin, P.A. and Wright, A.M., 2015. Commentaries on Big Data's importance for accounting
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Hay, D., Stewart, J. and Botica Redmayne, N., 2017. The Role of Auditing in Corporate
Governance in Australia and New Zealand: A Research Synthesis. Australian Accounting
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Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Routledge.
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CURRICULUM: PERCEPTIONS OF PRACTICING CPAS. Journal of Business and
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more technical or financial?-An exploration of its translation from the lobbying process and
after.

28AUDITING AND ASSURANCE IN AUSTRALIA
Appendix:
Ratio Analytics 06/00 06/01 06/02 06/03 06/04 06/05 06/06 06/07
Dupont Analysis
Return on Equity = Net Income / Avg. Shareholder Equity 2.376419506 5.78 8.43 5.17 3.66 1.80 1.51 1.91
Return on Assets = Net Income / Avg. Total Assets 5.72 3.04 4.06 2.84 2.27 1.28 1.16 1.12
Financial Leverage = Avg. Total Assets / AVG. Shareholders Equity 0.11 0.47 0.52 0.46 0.40 0.35 0.33 0.43
Return on Sales = Net Income / Sales 11.63 27.45 30.02 30.31 27.42 22.69 13.70 8.78
Asset Turnover Ratios
Asset Turnover = Sales / Avg. Total Assets 0.39 0.11 0.14 0.09 0.08 0.08 0.08 0.13
Accounts Receivables Turnover = Sales / Avg. A/R 26.21 7.70 2.24 2.26 2.20 2.57 2.02 4.50
Inventory Turnover = Cost of Goods Sold / Average Inventory #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! 8.02 7.88 25.48
Accounts Payable Turnover = Purchases* / Average Accounts Payable 3.40 0.70 1.40 1.05 1.80 1.43 1.26 1.67
* (Purchases = Ending Inventory + COGS – Beginning Inventory)
Fixed Asset Turnover = Sales / Avg. Net PP&E 0.44 0.13 0.16 0.10 0.09 0.09 0.10 0.14
Earnings Management
YoY (Year over year) Revenue Growth:
(Revenue this quarter – Revenue same quarter last year) / Revenue same
quarter last year 22.79 92.83 74.33 95.71 195.91 156.77 175.19
YoY (Year over Year) Growth in A/R:
(A/R end of this quarter – A/R end of same quarter last year) / AR end
of same quarter last year 8.97 1072.82 -12.33 228.77 131.11 267.31 -42.55
Fraud Prediction 06/00 06/01 06/02 06/03 06/04 06/05 06/06 06/07
Days sales receivable index (DSRI):
Days Receivable* / Prior Days Receivables
* Days Receivable = (Receivables / Sales) *365 0.89 6.08 0.50 1.68 0.78 1.43 0.21
Days receivable 13.92 12.36 75.15 37.79 63.48 49.58 70.92 14.81
Gross margin index (GMI):
Prior Gross margin* / Gross margin
* Gross Margin = (Sales – Cost of Goods Sold) / Sales 0.78 1.10 1.00 1.14 1.46 1.14 1.34
Gross margin 41.67 53.64 48.94 49.09 43.07 29.41 25.76 19.24
Asset quality index (AQI):
Asset Quality* / Prior Asset Quality
* Asset quality = (Total Assets – (Current assets + PP&E)) / Total
assets 1.15 1.96 2.81 2.00 3.71 1.99 1.75
Asset quality 24869999.79 28532999.71 55882999.75 157023999.79 314052999.76 1165458999.82 2323285999.78 4067099999.77
Sales growth index (SGI):
Sales / Prior Sales 1.23 1.93 1.74 1.96 2.96 2.57 2.75
Depreciation index (DEPI):
Prior Depreciation Rate* / Depreciation Rate
* Depreciation Rate = Depreciation / (Depreciation + PP&E) 1.22 2.70 0.95 0.96 1.07 0.86 0.89
Depreciation rate 15.43 12.64 4.69 4.91 5.10 4.78 5.56 6.23
SG&A index (SGAI):
SG&A Ratio* / Prior SG&A Ratio
* SG&A Ratio = SG&A expense / Sales 0.82 1.07 1.27 0.92 1.60 0.83 1.05
SG& A ratio 58.33 48.02 51.59 65.31 60.13 96.49 79.97 83.92
M-Score
M = -6.065+ .823 DSRI + .906 GMI + .593 AQI + .717 SGI + .107 DEPI -2.94 2.77 -1.73 -0.96 0.34 -0.74 -1.57
ASX Code Company Name Item 06/00 06/01 06/02 06/03 06/04 06/05 06/06 06/07
ABS A.B.C. Learning Centres LimitedOperating Revenue 9,647,000.00 11,846,000.00 22,843,000.00 39,823,000.00 77,936,000.00 230,621,000.00 592,176,000.00 1,629,600,000.00
ABS A.B.C. Learning Centres LimitedOther Revenue 0.00 196,000.00 122,000.00 5,735,000.00 2,495,000.00 59,725,000.00 33,952,000.00 51,400,000.00
ABS A.B.C. Learning Centres LimitedTotal Revenue Excluding Interest 9,647,000.00 12,042,000.00 22,965,000.00 45,558,000.00 80,431,000.00 290,346,000.00 626,128,000.00 1,681,000,000.00
ABS A.B.C. Learning Centres LimitedOperating Expenses -5,627,000.00 -5,688,000.00 -11,785,000.00 -26,008,000.00 -46,865,000.00 -222,522,000.00 -473,558,000.00 -1,367,500,000.00
ABS A.B.C. Learning Centres LimitedEBITDA 4,020,000.00 6,354,000.00 11,180,000.00 19,550,000.00 33,566,000.00 67,824,000.00 152,570,000.00 313,500,000.00
ABS A.B.C. Learning Centres LimitedDepreciation -360,000.00 -347,000.00 -318,000.00 -951,000.00 -1,921,000.00 -5,282,000.00 -14,233,000.00 -36,500,000.00
ABS A.B.C. Learning Centres LimitedAmortisation 0.00 -2,000.00 0.00 -5,000.00 -6,000.00 -4,832,000.00 -840,000.00 -2,400,000.00
ABS A.B.C. Learning Centres LimitedDepreciation and Amortisation -360,000.00 -349,000.00 -318,000.00 -956,000.00 -1,927,000.00 -10,114,000.00 -15,073,000.00 -38,900,000.00
ABS A.B.C. Learning Centres LimitedEBIT 3,660,000.00 6,005,000.00 10,862,000.00 18,594,000.00 31,639,000.00 57,710,000.00 137,497,000.00 274,600,000.00
ABS A.B.C. Learning Centres LimitedInterest Revenue 0.00 226,000.00 160,000.00 453,000.00 1,120,000.00 2,354,000.00 5,322,000.00 15,400,000.00
ABS A.B.C. Learning Centres LimitedInterest Expense -1,448,000.00 -1,646,000.00 -1,222,000.00 -1,959,000.00 -5,032,000.00 -6,478,000.00 -22,401,000.00 -92,200,000.00
ABS A.B.C. Learning Centres LimitedNet Interest Expense -1,448,000.00 -1,420,000.00 -1,062,000.00 -1,506,000.00 -3,912,000.00 -4,124,000.00 -17,079,000.00 -76,800,000.00
ABS A.B.C. Learning Centres LimitedPreTax Profit 2,212,000.00 4,585,000.00 9,800,000.00 17,088,000.00 27,727,000.00 53,586,000.00 120,418,000.00 197,800,000.00
ABS A.B.C. Learning Centres LimitedTax Expense -789,000.00 -1,333,000.00 -2,942,000.00 -5,016,000.00 -6,359,000.00 -15,790,000.00 -39,308,000.00 -54,700,000.00
ABS A.B.C. Learning Centres LimitedNet Profit after Tax Before Abnormals 1,423,000.00 3,252,000.00 6,858,000.00 12,072,000.00 21,368,000.00 37,796,000.00 81,110,000.00 143,100,000.00
ABS A.B.C. Learning Centres LimitedAbnormals -301,000.00 0.00 0.00 0.00 0.00 14,541,000.00 0.00 0.00
ABS A.B.C. Learning Centres LimitedAbnormals Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
ABS A.B.C. Learning Centres LimitedNet Abnormals -301,000.00 0.00 0.00 0.00 0.00 14,541,000.00 0.00 0.00
ABS A.B.C. Learning Centres LimitedReported NPAT After Abnormals 1,122,000.00 3,252,000.00 6,858,000.00 12,072,000.00 21,368,000.00 52,337,000.00 81,110,000.00 143,100,000.00
ABS A.B.C. Learning Centres LimitedOutside Equity Interests 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
ABS A.B.C. Learning Centres LimitedShares Outstanding at Period End 12,673,660.00 12,673,660.00 14,874,564.00 97,521,146.00 116,428,216.00 250,344,916.00 393,146,555.00 412,676,809.00
ABS A.B.C. Learning Centres LimitedWeighted Average Number of Shares 12,673,660.00 10,877,848.00 13,942,987.00 86,063,605.00 111,954,777.00 189,436,141.00 292,937,000.00 396,900,000.00
ABS A.B.C. Learning Centres LimitedEPS Adjusted (cents/share) 11.23 28.90 49.19 13.90 16.20 17.82 27.00 36.05
ABS A.B.C. Learning Centres LimitedEPS After Abnormals (cents/share) 8.85 28.90 49.19 13.90 16.20 25.50 27.00 36.05

29AUDITING AND ASSURANCE IN AUSTRALIA