Financial Statement Analysis of Dalby Logistics Limited

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AUDITING
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Table of Contents
Question 1...................................................................................................................................................2
1).............................................................................................................................................................2
2).............................................................................................................................................................2
3).............................................................................................................................................................3
4).............................................................................................................................................................4
5).............................................................................................................................................................4
Question 2...................................................................................................................................................6
1).............................................................................................................................................................6
2).............................................................................................................................................................8
3).............................................................................................................................................................9
Question 3.................................................................................................................................................10
references..................................................................................................................................................11
Appendix 1................................................................................................................................................13
Appendix 2................................................................................................................................................14
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Question 1
This report is written in order to provide the key background and a detailed analysis of the
company Dalby Logistics Limited (DLL) and the industry in which it operates in order to
provide a report on the audit of the concerned firm. A financial analysis has also been carried out
in the form of ratio analysis. Some accounts which have a major impact on the performance of
the firm have also been studied. In addition to this, the accounts which have a major impact on
the financial performance of the firm have been studied and the risks associated with each major
financial account has been stated separately in the report below.
1)
The key background information and the industry details of the organization Dalby Logistics
Limited (DLL) has been listed as follows:
The firm Dalby Logistics Limited (DLL) is a transportation and cargo company which was
founded way back in 2010. This company is a result of the Merger of two companies. The two
companies which have been merged as one involved two companies dealing in different areas.
One of these companies was involved in the transport of oil, gas, and lithium, etc. The other firm
was involved in agricultural products such as grains etc. The firm Dalby Logistics Limited
(DLL), is involved in providing warehousing services and is currently involved in building a
larger complex in Australia itself i.e. in Sydney.
2)
The assumption of going concern is concerned with:
This assumption states that the concerned firm is going to continue to exist for a long time in the
future (Accountingtools, 2018). This means that the firm in concern will not stop its operations
in any near time in the future. This assumption allows that some of the expenses can be recorded
as outstanding expenses while some of the incomes can be shown as accrued income. This also
states the recording of some of the assets as accrued assets and some of the liabilities as accrued
liabilities.
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For the firm Dalby Logistics Limited (DLL), the going concern assumption stands true as it has
been operating from past various years since it was first founded in 2010. This firm has a
significant amount in the trade and other receivables column of the balance sheet and that too for
all the four years ranging from 2014 to 2018. Also, the current liabilities involve trade and other
payables in the balance sheet for all the four years i.e. from the year 2014 to the year 2018. This
shows that the firm is an ongoing concern because it records some of its assets and liabilities as
accrued assets and outstanding/ unpaid liabilities which are naturally to be paid in the next years
or in the recent future. This is because of the assumption that the firm is an ongoing concern
otherwise, it would not have recorded some its assets and liabilities to be received or paid in the
future. the current liabilities of the firm also entails of the tax payable, this shows that the tax for
the current year has not been paid as of yet rather it has been recorded as a liability which is
already accrued but the payment of this concerned liability will be made in future. the firm has
also created some of the provisions in all the four years. The accounts involving provisions and
liabilities to be paid in the future are allowed to be made just because of the going concern
concept of accounting.
3)
The accounts which are most likely to be at the risk of misstatement according to the financial
analysis and the background information are explained as follows:
The intangible accounts have a highly likely chance of being misstated as the pace at which they
are increasing is too much and looks unreal. The major account which seems to be at a high risk
of fault is the goodwill account. The goodwill account shows an unrealistic rise from the year
2014 to the year 2018. The goodwill has increased by almost 54.75 in all the four years. This is
unlikely for a firm which has started the operations in the year 2010 itself to accelerate the
goodwill at such a fast pace till the year 2018.
The second account which seems to be at a high risk of misstatement is the account of
capitalization of construction costs. The reason for this is that the capitalization was way too less
in the year 2015 which has increased by leaps and bounds in all the four years. From the amount
of 3.05 in 2015 to the amount of 69.35 in the year 2018 is a big jump for any firm.
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The other amount of which is at risk of being misstated is the amount of revaluation gain. This is
because the revaluation gain has increased from the year 2017 to 2018 by a great amount which
seems to be abnormal. The amount of revaluation gain in 2017 was 11.2 but in the year 2018, it
suddenly increased to 81. This is unrealistic because the firm has also accounted for impairment
loss.
4)
The two assertions that are identified for the above-chosen accounts are given accounts are stated
as follows:
 For the first account which is identified is the goodwill account. The main key assertion,
firstly, for the goodwill account being in the doubt of being not stated truly is the fact that it
has increased unrealistically in the past years. Secondly, the firm has opted for impairment
of assets as impairment account has been shown in the books of accounts and in the balance
sheet. In such a case, the goodwill account being so highly valued seems like a misstatement.
 The second account which was under the doubt of being misstated and not truly disclosed is
the capitalization of construction costs account. The major reason for this account being
doubtful is the sudden jump in the amount of capitalization cost. It is highly unlikely that any
firm can increase the capitalization cost all of a sudden. Instead, the capitalization cost is
more or less evenly distributed over the life of construction cost.
 The third account stated as being misrepresented was the account of revaluation account. The
assertion for this account being misstated is the fact that the revaluation account exhibits
some unnatural gains. Any firm which has adopted the measure of impairment of an asset is
highly unlikely to have a revaluation profit of so many amounts.
5)
An appendix of comparison of the two years is written in Appendix 1 and 2.
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Conclusion
The report above shows the financial background of the firm and also shows some of the
accounts which are at risk of being misstated. It was found through the study of financial
statements that the assets such as goodwill, construction cost, revaluation gain, etc have high
chances of being misstated because of their unrealistic amounts and unrealistic growth in the
given years. A horizontal and vertical trend analysis of the balance sheet has also been carried
out. Ratio analysis has been done for this firm for all four years. The report studies the major
area of concerns for the firm and also specifies the accounts which need to be checked
thoroughly for the purpose of auditing.
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Question 2
This report is written in order to address the issues of internal control and the weakness of the
internal control regarding the major operational activities of the organization. The major
activities involve the purchase, sales, payment control and the accounts payable. All these
accounts and operational activities are crucial for any firm and therefore it is very important that
the firm takes the internal control very seriously for all these activities. This report also addresses
the account balance assertions that get affected because of the weakness of the control system. In
the end, this report also gives some suggestions for improving the control system of the
organization for each of the major operational activities that place in the firm Sweets R Us Pty
Ltd.
1)
The term internal control refers to the systems, procedures, rules, and processes that are
established in an organization in order to keep a check and monitor the activities in an
organization (Rouse, 2019). It is very important and a key essential for any firm to keep a strict
mentorship on the internal activities of the firm so as to avoid any kind of inefficiencies and
frauds on the part of employees as well by the organization as a whole. One of the most
important benefits of the internal control system is that it ensures that the tasks are carried out
efficiently in the organization.
Purchase control system
The purchase control system refers to the one which keeps track of all the activities that are
related to the purchase of products in the firm. This system ensures that the purchases are made
in time and there are no frauds in the purchase process.
The purchase system of the firm simply involves a system in which raw material is ordered by
checking a list of various suppliers and then the order is placed just by overseeing the raw
material quantity in inventory(blink, 2017). The orders are just placed in a haphazard manner
according to the current orders.
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This system of purchases gives rise to various weaknesses in the firm such as:
 In the given case of the purchase system, the biggest weakness is that the purchase orders are
placed not by any manual/ physical or virtual counting of the stock. Rather, the purchase
orders are placed just by overseeing the level of inventory. This is such a bad method of
placing orders.
 Secondly, This method of just overseeing the stock amount might even lead to ignorance of
the fact that what is the exact amount of inventory lying with the firm. Even if some part of
the stock gets wasted or in the case of pilferages.
 Secondly, the orders are placed based on current production orders. This can create the
situation of stock out for the firm at any given time and the firm might not be even able to
complete the orders of their clients. This is because it is not always necessary that the
inventory will be available with the raw material supplier on an urgent basis. Sometimes, it
may be the case that the raw material supplier is unable to fulfill the need for raw material on
an immediate basis.
 Thirdly, the firm lacks a formal purchase system as well. in today's day and age where all the
other firms rely upon a computerized system of purchase, this particular firm even lacks the
formal system of purchase (blink, 2017). If the firm opts for a better and a formal system of
purchase, then the cost of ordering will also become low and a proper record can also be
maintained. A formal or a computerized system of purchase would lead to better time
management and the stock out situations can also be delayed.
 The firm’s warehousing of products is also not proper. This is because the employees
working in the warehouse do not keep a track of the inventories that come in and go out of
the firm. The biggest mistake that the employees are trusted blindly. When the workers know
that they are not being watched, the chances of pilferage and theft automatically go up.
 The other loophole in the warehousing process is that there are no secondary checks on the
good's inflow and good's outflow from the warehouse. All the responsibility is on the same
person. The delivery dockets are also managed by the same person. A way should be made
for the two-way check.
The weakness of the accounts payable and payments accounts system are explained as follows:
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 The biggest weakness of the accounts payable system is the over-reliance on the production
manager's memory for the orders received and the payments made.
 The second major problem with the internal weakness system is that the firm does not attach
supporting documents for nonmajor suppliers(blink, 2017). This is a really bad sign for the
firm. in case, the non-major suppliers make a fraud, even when the payment will be made to
them. So, the firm must stop the activity of attaching the supporting documents only with the
major suppliers.
 The other loophole is that the clerk, in the absence of finance controller the cheques are
signed by the marketing manager. The marketing manager is although an authority still the
person, must not be allowed to interfere in the financial matters.
 The accounts reconciliation statement is also not maintained which is again a big fallout for
the payments system.
2)
The assertions regarding the raw material are as follows:
 In the raw material inventory, the major impact is placed on the amount of raw material to be
ordered each time. As the firm places the orders based on the current orders so it does not
have a proper record of how much to order each month/ period. Sometimes, this might lead
to wastage of stock and theft of the raw material by its own staff.
 As proper records are not maintained, even if some of the stock is not received, then it cannot
be identified immediately.
 As there is a major lacking of formal purchase system, the amount of stock cost and cost of
wastage in transit, etc can never be identified appropriately by the firm.
Impact placed on accounts payable system because of weak internal control system:
 The major impact of weak accounts payable system is placed on the timely payment due to
creditors. As the clerk gets signed some of the documents by the marketing manager also,
therefore, this might lead to major confusions regarding the amount of cash disbursed in a
particular month/ year/ period.
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 Secondly, as the supporting documents are not even placed for nonmajor suppliers, the
employees might get attracted towards making false cheques sometime in the name of a
nonmajor supplier. This makes it easy for frauds and cash mismanagement to take place in
the firm.
3)
Some of the improvements that can be made in internal control are listed as follows:
 The biggest change that the firm needs to make is to assign an internal authority who keeps a
strict check on both the financial payments system and the purchase system. However,
individuals must be different for both the departments (Signatureanalytics, 2019).
 Purchasing policy and a purchase order system must be formalized by the firm. The formal
purchase system must be a computerized one so that automatic updates are available.
 The vendors must be formally recorded in the computerized system of purchase order so that
there are no confusions regarding vendors (Wroblewski., 2017).
 For the payments system, the marketing manager must never be allowed to sign the cheques
on behalf of the finance controller.
 The supporting documents must be made a compulsory thing for all vendors whether small or
big.
Conclusion
This report studies the purchase order system and the payments system of the organization. The
internal control’s weakness regarding the purchase system and the payments system have also
been studied. Some of the suggestions have also been made in order to improve the weakness of
the control system.
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Question 3
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To: [e-mail]
From: [e-mail]
Subject: To convey the information whether the system needs to be tested or not and the justification for the
decisions.
Respected Sir,
The mail is written in order to specify the need whether the control system must be tested for the current
year or not. The list of the accounting software and the need for their re-testing is listed as follows:
 The control system of accounting which updates itself with all the totals need to be tested in this year.
 The second control system needs to be updated which notes the discrepancies in the purchase order and
receiving reports.
 The third control needs to be tested which measures the sales system.
 The perpetual inventory system needs to be updated.
 The client’s purchasing system need not be updated.
The probable reasons for testing and not testing the above-mentioned systems are mentioned as follows:
 The first system i. e the accounting software does not need to be tested as it has a very high IT security
and it was also tested in the last year only where no changes were made.
 The second control system needs to be tested as the system is prone to some of the discrepancies.
 The sales control system needs to be tested this year because the risk of shipping customers who exceed
the limit is relatively high and needs to be addressed.
 The perpetual inventory system needs to be updated as it was tested two years ago and the system might
have become obsolete and might require changes.
 The client's purchasing system has strong IT security and thus need not be updated.
This is the summary of all the testing that needs to be done this audit season. Kindly look into the matter.
Yours sincerely,
Xyz trainee auditor.

References
 Accounting tools. (2018) The going concern principle. [Online] Accountingtools Available
at: https://www.accountingtools.com/articles/2017/5/14/the-going-concern-principle
[Accessed on: 11th may 2019]
 Wallstreetmojo. (2019) Horizontal Analysis of Financial Statements | Formula | Example.
[Online] Wallstreetmojo. Available at: https://www.wallstreetmojo.com/horizontal-analysis/
[Accessed on: 11th may 2019]
 Rouse. M. (2019) internal control. [Online] searchcompliance Available at:
https://searchcompliance.techtarget.com/definition/internal-control [Accessed on: 11th may
2019]
 Signatureanalytics. (2019) ways to Improve Internal Accounting Controls and Oversight in
Your Business. [Online] Signatureanalytics Available at: https://signatureanalytics.com/5-
ways-to-improve-internal-controls-and-oversight-in-your-business/ [Accessed on: 11th may
2019]
 Wroblewski. M. (2018). Steps for Internal Control on Purchases. [Online] Smallbusiness.
Available at: https://smallbusiness.chron.com/steps-internal-control-purchases-69919.html
[Accessed on: 11th may 2019]
 Accountingformanagement. (2019) Horizontal or trend analysis of financial statements.
[Online] Available at: https://www.accountingformanagement.org/horizontal-analysis-of-
financial-statements/ [Accessed on: 11th may 2019]
 zenwealth. 2019. Ratio Analysis. [Online] zenwealth Available at:
http://www.zenwealth.com/businessfinanceonline/RA/RatioAnalysis.html [Accessed on:
11th may 2019]
 blink. (2017). Internal Control Practices: Purchasing. [Online] blink Available at:
https://blink.ucsd.edu/finance/accountability/controls/practices/purchasing.html [Accessed
on: 11th may 2019]
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