Analysis of Motorcycle Holdings Limited Financial Statements - MA611

This report presents a financial analysis of Motorcycle Holdings Limited, focusing on its performance over three financial years. The analysis includes a review of key financial ratios, such as profitability, liquidity, and leverage, to assess the company's financial health. The report identifies potential risks of material misstatement at both the financial report and assertion levels, discussing the implications of director's integrity, experience and pressures, market conditions, and industry trends. It also outlines relevant substantive audit procedures to address these identified risks, particularly focusing on sales, inventory, and cash balances. The report provides insights into the company's operational performance and strategic planning, offering a comprehensive overview of its financial position and potential vulnerabilities. Finally, the report also acknowledges the growth of the motorcycle industry and its potential impact on the company's future performance.

Running head: MOTORCYCLE HOLDINGS LIMITED
MOTORCYCLE HOLDINGS LIMITED
Name of the Student
Name of the University
Author Note

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MOTORCYCLE HOLDINGS LIMITED
Executive Summary
The report is presented on the Motorcycle Holdings Limited, upon the analysis of the ratio for
the last three financial years, it was observed that the outcome of ratios is positive upon
which the affect can be seen on the financial statement of Motorcycle Holdings Limited. In
every industry there are certain risk factors that affect the growth of any organization and this
cannot be neglected very easily. So, it is important for the higher authority of Motorcycle
Holdings Limited to create a risk management so that they can control all the risks upon
which they are getting affected. The sales, inventory and cash balance of Motorcycle
Holdings Limited is showing as positive affect. In the financial year 2017-18, the outflow
was much more, but in current financial year it has recovered and has resulted positive.

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Table of Contents
Answer to Question 1:................................................................................................................2
Answer to Question 2:................................................................................................................2
Answer to Question 3:................................................................................................................5
References................................................................................................................................10
Appendix..................................................................................................................................12

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MOTORCYCLE HOLDINGS LIMITED
Answer to Question 1:
Results of Analytical Procedures
As per the financial report of the Motorcycle Holdings Limited, the ratios that has
been calculated are profitability, liquidity, leverage and operating. The liquidity ratios which
includes current and quick ratio has gradually increase over the years, thus it suggests that the
organization has maintained their liquidity (Sari, Nurlaela & Titisari, 2018). In case of
profitability ratio, which includes gross and net profit has decreased in the current year
compared to the previous year.
Under the efficiency ratio, there is average collection period and stock turnover ratio.
It can be observed that in average collection period the collection period should be reduced
for better operation of the organization. The stock turnover ratio in current year is less
compared to last year which is good for the organization (Hermuningsih, 2019). In leverage
ratio, there is debt and debt to equity ratio, which can be observed decreasing over the year
which signifies that the organization has a positive net worth.
From the above discussion, it can be concluded that, there is a positive change in the
ratio of Motorcycle Holdings Limited that means the management is correctly doing the
operations. There is also a positive effect can be seen in the financial statement of Motorcycle
Holdings Limited.

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MOTORCYCLE HOLDINGS LIMITED
Answer to Question 2:
Risk of Material Misstatement (Inherent Risk) at the Financial Report Level
Risk management has become a concerning factor in the corporate industry. There
can be some significant misstatement in the financial reports of this company which the
director should take care of. The most important factors that need to be discussed based on
the financial statements are given below
a. Director’s Integrity
Directors play an essential role in an organization’s integrity. The board of directors
also monitors every regulation and organizational policies. There must be loyalty in
production with integrity; hence many people fail to put their purpose and aim in practice.
The board’s main objective to maintain this integrity includes establishing a connection
between the CEO and directors, understanding the requirements from the management. The
board also needs to be very strategic and should always review any financial activities.
Directors cannot commit themselves to regular risk management; however, they can evaluate
the risk management policies and take necessary steps accordingly (deloitte.wsj.com, 2020).
The directors should be aware of each step that the company seeks to lessen the risk from
within the organization. To improve and diminish the risks, the directors should measure and
establish a clear framework and analyse and the risk material, implement any risk policy,
communicate with all of the managers as well as reviewing the qualification of the directors.
b. Director’s experience
From the previous year, the directors have experienced an increase in overall profit
and revenue. The directors also assumed that the organization is not aware of its

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environmental changes. It has also been found that no person has applied to the court for
leave to bring proceedings on behalf of the firm.
The organization had $9,175,000 in cash at the bank. Hence the directors decided not
to declare the dividend and began a program to reduce the group’s cost structure, debt and
also took advantage of the current trading environment by improving operational
performance. The directors are focusing on sales of used motorcycles by which the
transaction has also increased. From the 2018 report, the sale of the used motorbike was
17,754 units which have been raised to 18,536 units in the year 2019. The market share of the
company has also increased by 11%. The company should also be focused on improving its
position in the market and the directors are strategically planning to execute in the upcoming
years.
c. Pressure on Directors
Despite there was tremendous pressure on the directors in the previous years, the
directors have managed to make an increase in revenue of 9% of $329,887,000 (Motorcycle
Holding Limited, 2020). The Cassons and MCA which was acquired by the directors, helped
the company maintaining profit margin even though there was a miserable condition in the
current market. The board of directors has established an Audit and Risk committee to
monitor, access and control pressures within the firm. The firms have perfect competition in
the market which can pressurize their directors to plan their future projects accordingly. The
return on capital employed in this company is 8% which was 22% three years ago which has
affected the revenue and investment of the firm. The sale of the new motorcycle has
decreased by 1% and should be increased in the following years. The directors should
provide cost-effective and strategic plans to relieve from such pressures. The market of

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Motorcycle Holding limited in contracting and it can affect the profit margin of the
organization.
d. Motorcycle: A growing industry
The motorcycle industry is growing worldwide over the years and stable growth has
been seen from the past few years (Hashmi & Biesebroeck, 2016). The industry is evolving in
new inventions are upcoming in this industry. The preferences of consumers over electric and
hybrid vehicles have become a trend. It has also been observed that in rural areas, there is an
increase in the use of two-wheelers(Prnewswire.com, 2020). The global market has the
highest revenue in the motorcycle industry. From the financial report of this company, it can
be seen that there is an increase in the percentage of sales of two-wheelers over the past
years. Though there were some competitions in the market, the company performed well in
sales. Globally, U.S has 26% of share in the automobile industry.
e. Concerning factors of the motorcycle industry
Despite being profitable over the past years, there is some major factor which affects
the motorcycle industry the most. One of the most concerning factors in this industry can be
competition amongst the competitive sectors. Also, market share can affect the industry. The
brand name also affects consumer decisions. The economy of the global market can also
affect the organization. Specific changes in laws, interest rates can also be a concern.
Technological factors can affect the industry. Before the internet, there were lower sales
compared to these years.
From the above discussion, it can be concluded that the risk factors that are in the
industry of motorcycle cannot be neglected easily. The risk management of Motorcycle
Holdings Limited can be controlled by a proper risk management. Moreover, there are certain

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MOTORCYCLE HOLDINGS LIMITED
misstatements that can be avoided easily with a suitable strategic planning for Motorcycle
Holdings Limited.

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MOTORCYCLE HOLDINGS LIMITED
Answer to Question 3:
Risk of Material Misstatement (Inherent Risk) at the Assertion Level
Question Answer
(a) Explain why the
account balance is at
significant risk of
material misstatement.
Any account is at significant risk when there is
misstatement of the account related information without any
appropriate information and exaggeration and false information
to be shown. Here as per the company, Motorcycle Holding
Limited its Sales, Inventories and Cash projecting a good
statement and hence influencing the company in a successful,
growing and developed position (Xu, 2015).
2017($’000) 2018($’000) 2019($’000)
1. Sales 206,596 285,079 329,887
2. Inventory 45,225 87,421 84,396
3. Cash and
cash
Equivalent
4,516 2,469 9,175
1. In relation with Sales, in the year 2017, 2018 and 2019,
company’s sales were increased increase the sales value
gradually which reflect a positive scenario in terms of
company’s growth and a subsequent growth in the industry.
Here the company is not showing any risky state if such can
happen, the auditor must have to locate the risky zone of
sales that can be informative risk, strategic risk, ethical risk,
tactical risk and reputation risk (Xiong & Zhou, 2016).
2. Secondly, Inventory, in the year 2017 to 2018 the
inventory value increased and 2018 to 2019 inventory
decreased slightly, which implies that company had to use
the cash for additional inventories in the year 2018 which

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leads outflow of cash on this purchase and thus implies a
negative effect on the company’s cash balance. However,
decrease in inventories result in lower cost of goods sold
and the cash balance effect the company and increase the
risk factor in a misstatement.
3. Thirdly, Cash and the cash equivalent, in the year 2017 to
2018, cash amount decreased may be due to additional
purchase however, in 2019 increased a good amount can be
due to sales, overdue collection, expense control and
financial and investing activity in financial statement
resulting improvement in company’s profit and decrease in
cash leads to shortfall in liquidity ratio and increase the
purchasing of the company which again emerges the side of
risk statement.
(b) Explain the key
assertion at risk of not
being valid.
Key assertion at risk of not being valid:
i. In the case of sales, the assertion risk in this account
will be due to manipulation of sales, stocks mostly
overstating the sales amount or it included in a different
account or unclassified account and no documents or
evidence for the same shown. Hence the sales assertion
will not be valid in such circumstances (Xiong & Zhou,
2016).
ii. In the case of inventory, the assertion at risk mostly
when the valuation or any material items get obsolete
and impaired every year and for the merchants, it
appears to be difficult to sell due to special packaging,
branding and promotional changes each year and it
appears to be out dated. However, inventory valuation is
not valid. Another riskiest nature of inventory is
prepayment, in a large industry payment are made in
6month advance when the order for any item placed.
There is a risk of any item shown as purchased from the
supplier not received and items sold that have not been

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removed from the inventory account by the supplier.
Hence prepayment also not valid in this respect.
iii. In respect of cash balance, the assertion can be correct
and fair value, cut off amount, existence, completeness,
presentation and classification. The risk of assertion in
cash occurs when the individual cannot meet the short
term debt obligations and unable to convert asset into
cash. There are different scenarios to assess cash based
on its existence in the financial statement with correct
amount and date. It must be stated correctly in the
account at the end of the year and in the cash flow
statement to if there will be any misstated account and
value in operating, financing and investing activities
then the cash will never able to match the activities and
thus the assertion will not be valid (Xiong & Zhou,
2016).
(c) Detail one (1)
relevant substantive
audit procedure to
address the assertion at
risk as identified in b)
above.
Audit procedures in assertion at risk: Auditor should
work according to its provisions and guidelines. To identify any
assertion in material misstatements, auditor has to obtain all the
necessary and sufficient information from the company’s
financial statement as evidence and to analysis the true and fair
means in company’s accounts. Auditor must have to perform in
guidance with the financial statement (Knechel & Salterio,
2016).
 Audit procedure in response to material misstatement
 Evaluating the true and fair mean audit evidence
 Overall Guidance and facts checking
1. In case of sales: Substantive audit procedure for sales can
be done by verifying the sales and its related documents as
an evidence to relate items, stocks, cash, fixed assets,
revenue, expenses, profit and recorded sales transaction of
the financial statement of the given company (Lessambo,

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2018).
2. In case of inventory: Substantive audit procedure in
inventory verifies in two methods:
 Analytical procedure:
i. Comparing the gross margin with the last year.
ii. Comparing inventory turnover ratio with the last year.
iii. Comparing the unit cost of inventory with the last year.
 Test of detail balance: The auditor has to observe the
inventory count.
3. In the case of cash: Substantive audit procedure in cash is
to verifying cash and confirming cash balance. Checking
the reconciled bank statement of the respective month and
bank account which include general ledge and check the
deposits and expense on the account (Akter, 2014).
(d) Detail one (1)
relevant practical
internal control that
would mitigate the risk
in relation to the
assertion at risk as
identified in b) above
For sales: one internal control measures for sales return is to
identify the specific individual and not to process returns until
the approval by the designated person. However, as per the
company there was no sales return occurred so the journal entry
will be:
Sales A/c…. Debit (x)
to Accounts Receivable/cash A/c…...Credit (x)
For Sales account:
Accounts Receivable/cash A/c… Debit ()
To sales A/c…. Credit ()
Hence if the company had sales return, then it should be
deducted from sales or revenue to generate net sales. the journal
entry will be:
Sales return A/c …. Debit (x)
To Account receivables/ cash A/c…. Credit (x)
For inventories: one internal control measures for inventories
to identify and rectify the errors, misstatement and to prevent
from losses. Industry using inventory must verify and tag them
to identify as correct and not damaged. All the failed and