PG6223 Semester 1 Auditing Assignment: Cathay Pacific and COLI Report

This report presents an analysis of the audit reports and financial statements of Cathay Pacific Airways Limited and China Overseas Land and Investment Limited (COLI) for the year 2017. The report begins with a brief overview of the companies' nature and core businesses, followed by a comparative analysis of their financial performance using ratio analysis, including liquidity, debt management, and profitability ratios. The report highlights key differences in the presentation of financial statements and accounting standards, such as the application of revised HKAS by COLI and the treatment of leases. The analysis reveals that COLI demonstrated profitability and strong financial health compared to its industry peers, while Cathay Pacific incurred losses during the period. The report concludes by summarizing the financial performance of both companies and their compliance with applicable financial accounting frameworks.

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CATHAY PACIFIC & COLI, Hong Kong
AUDITING ASSIGNMENT

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Contents
Background of the report........................................................................................... 2
Introduction................................................................................................................ 2
Discussion and analysis.............................................................................................. 2
Conclusion.................................................................................................................. 7
References................................................................................................................. 8
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Background of the report
The report has been prepared on the 2 listed companies in Hong Kong namely Cathay Pacific
and China Overseas Land and Investment Limited (Coli). Both the companies have been
analysed w.r.t. to audit and the financial statements for the year 2017. The nature and the core
business of the company has been explained in brief and then the financial statements of both the
companies has been compared with the respective industries in which they are working for
performance evaluation. The differences in presentation of financial statements has also been
highlighted.
Introduction
China Overseas Land and Investment Limited (Coli) is one of the subsidiaries of China State
Construction Engineering Corporation Limited which was incorporated in Hong Kong in the
year 1979 and is engaged in the construction and contracting, property and infrastructure
development sector with most of the operations in China and Hong Kong (Belton, 2017). The
company is listed on the Hong Kong Stock Exchange. The company’s main business line is thus
real estate which includes property development, property investment, infrastructure and other
operations including property management, logistic operations, consultancy services etc.
On the other hand, Cathay Pacific Airways Limited also known as Cathay Pacific is the flag
carrier of Hong Kong. The company has a history of 72 years and employs over 32000
employees. The company’s main operations include airline services catering over 190
destinations in 60 different countries. It has a wide variety of fleet consisting of Airbus A330,
Airbus A350 and Boeing 777 equipment with the total fleet size of 153 (Alexander, 2016). The
company is 10th largest airline in the world in terms of sales and ranked 14th in terms of market
capitalization. In the year 2010, it became world’s largest international cargo airline with Hong
Kong airport being the world’s busiest airport in terms of cargo handling (Jefferson, 2017).
Discussion and analysis
The financial performance of both the companies has been analysed through ratio analysis.
1. Liquidity Ratios
Current Ratio = Total current assets/ Total current liabilities 2017 2016
Total current assets 501,790,506 474,913,305
Total current liabilities 206,542,566 199,604,474
Result 2.43 2.38
Liquid ratio /Quick Ratio = (Total current assets - Inventory - Prepaid
expenses)/ Total current liabilities 2017 2016
Total current assets - Inventory - Prepaid expenses 128,128,505 187,689,120
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Total current liabilities 206542566 199604474
Result 0.62 0.94
2. Debt Management Ratios
Debt ratio = (Total Debts / Total Assets) or ((Total assets- total
owners' equity)/total assets) 2018 2017
Total Debts 147,814,640 133,534,250
Total Assets 645,404,785 571,289,277
Result 23% 23%
Debt to Equity Ratio = (Total Debt/Total owners' equity) or ((Total
assets- total owners' equity)/total owners' equity) 2018 2017
Total Debts 147,814,640 133,534,250
Total owners' equity 273,543,430 227,423,359
Result 54% 59%
3. Profitability ratios
Profit Margin / Net Profit ratio = Net income / Sales 2017 2016
Net income 42,142,115 38,390,776
Sales 163,972,170 158,716,981
Result 25.70% 24.19%
Operating Margin ratio = Operating Profit/Sales 2017 2016
Operating Profit 62,874,375 57,905,305
Sales 163,972,170 158,716,981
Result 38.34% 36.48%
Return on Equity = Net income/total owners' equity 2017 2016
Net income 42,142,115 38,390,776
Total owners' equity 273,543,430 227,423,359
Result 15.41% 16.88%
Return on Assets = Net income/total assets 2017 2016
Net income 42,142,115 38,390,776
Total Assets 645,404,785 571,289,277
Result 6.53% 6.72%
The ratio analysis for COLI has been shown above. From the above it can be seen that the
company has a very healthy current ratio which indicates that the company will be able to pay
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off its current liabilities on time. However, the liquid ratio which is the measure of liquid assets
with the company to pay off the short term obligations is on lower side and has deteriorated in
2017 due to substantial decrease in the liquid assets. In terms of the solvency ratios, the company
has a debt ratio of nearly 23% and the debt equity ratio of 54% which is healthy when the same
is compared with the industry as the overall industry is operating at 1:1 debt equity ratio (Linden
& Freeman, 2017). It indicates that there is minimal dilution of ownership and that the company
can make use of low cost capital in future. Lastly in terms of profitability, the company is again
performing good as the net profit margin is at 25% and operating profit margin is at 38% which
is in line with the industry. The return on equity is at 15.4% in 2017 which has dropped and the
return on assets is at 6.5% which is again a cause of worry for the company. Thus overall it can
be said that the company has performed well as compared to the competitors and has also
improved as compared to the last year except a few indicators (Fay & Negangard, 2017).
1. Liquidity Ratios
Current Ratio = Total current assets/ Total current liabilities 2017 2016
Total current assets 32,835 31,392
Total current liabilities 41,278 44,092
Result 0.80 0.71
Liquid ratio /Quick Ratio = (Total current assets - Inventory - Prepaid expenses)/
Total current liabilities 2017 2016
Total current assets - Inventory - Prepaid expenses 30,455 29,847
Total current liabilities 41278 44092
Result 0.74 0.68
2. Debt Management Ratios
Debt ratio = (Total Debts / Total Assets) or ((Total assets- total owners'
equity)/total assets) 2018 2017
Total Debts 73,008 66,423
Total Assets 188378 177421
Result 39% 37%
Debt to Equity Ratio = (Total Debt/Total owners' equity) or ((Total assets-
total owners' equity)/total owners' equity) 2018 2017
Total Debts 73,008 66,423
Total owners' equity 61,272 55,526
Result 119% 120%
3. Profitability ratios
Profit Margin / Net Profit ratio = Net income / Sales 2017 2016
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Net income (888) (274)
Sales 97,284 92,751
Result -0.91% -0.30%
Operating Margin ratio = Operating Profit/Sales 2017 2016
Operating Profit (1,449) (525)
Sales 97,284 92,751
Result -1.49% -0.57%
Return on Equity = Net income/total owners' equity 2017 2016
Net income (888) (274)
Total owners' equity 61,272 55,526
Result -1.45% -0.49%
Return on Assets = Net income/total assets 2017 2016
Net income (888) (274)
Total Assets 188,378 177,421
Result -0.47% -0.15%
The above analysis is w.r.t. Cathay Pacific. It can be seen that the company has a very lower
current ratio of 0.80 times and a liquid ratio of 0.74 times which indicates that the company has
not got enough of current assets to meet the current liabilities on time, indicating weaker
liquidity status. In terms of debt management, the company is having the ratio of 39% for debt to
asset and 119% for debt equity (Heminway, 2017). The debt is on higher side as compared to
equity but it is still below the industry trend of 1.5-2 times which is a positive indicator for the
company. In terms of profitability ratios, the company has been incurring losses in both the years
2016 and 2017, the net loss and operating loss being 0.91% and 1.49% respectively. The return
on equity as well as the return on assets has both been negative indicating that the company has
been in operational loss (Goldmann, 2016).
When the audit report of the 2 companies is being compared we can see that the annual report
and the financial statements of Cathay Pacific have been prepared as per Hong Kong Financial
Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public
Accountants (“HKICPA”) and that the financial statements reflect a true and fair view as per
Hong Kong Companies Ordinance as confirmed by the auditor KPMG. Similarly the annual
report of COLI has been prepared as per HKFRSs and has complied fully with HKCO as
confirmed by the auditors (Knechel & Salterio, 2016). The screenshot of the audit report of both
the companies has been attached below. Some of the differences which were seen in presentation
was the use of revised HKAS by COLI considering the type of business it is in – like the
amendments in disclosure initiative (HKAS 7), classification and measurement of share based
payment transaction (HKAS 2), Revenue with contracts from customers (HKAS 15), leases
(HKAS 16) and sale or contribution of asset between the investor and the joint venture/associate.
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All these amendments were not applied by Cathay Pacific (Raghupathi & Wu, 2018). Similarly,
differences are there in way the leases are being treated by both the companies under new
accounting standard as Cathay Pacific values the liabilities on the fair value basis whereas COLI
has used the simplified transition approach and has not restated the comparative amounts (Choy,
2018).
(Source: Annual report, Cathay Pacific, 2017, pp. 57)
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(Source: Annual report, COLI, 2017, pp. 132)
Conclusion
From the above discussion and analysis, it can be said that COLI has been profitable in the long
run and has been performing well as compared to its peers and has also improved as compared to
the last year but Cathay Pacific has not been profitable. It has been in losses in both the years
under review. However, in terms of accounting policies and standards, both the companies have
been consistent and has complied the applicable financial accounting framework.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher
Education, 71(4), pp. 411-431.
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, 2(1), p. 145.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the
risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of
Polish Business. Financial Environment and Business Development, Volume 4, pp.
103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes,
Decisional Law, and Organic Documents. SSRN, 5(2), pp. 1-35.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres.
Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York:
Routledge.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in
Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.
Raghupathi, W. & Wu, S., 2018. The Strategic Association Between Information and
Communication Technologies and Sustainability: A Country-Level Study. IGI Global,
disseminator of knowledge, 1(1), p. 26.
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