BAO5524 Professional Auditing Assignment: Biofuel Solutions Ltd Report

This report presents an analysis of Biofuel Solutions Ltd (BSL), focusing on its financial performance based on provided financial data. It examines key financial ratios, including the current ratio and receivable turnover, highlighting significant changes and potential implications. The report applies auditing principles, referencing ASA 520 regarding analytical procedures to identify inconsistencies and areas of concern within BSL's financial statements. The analysis covers profitability metrics, such as return on assets and net profit margin, revealing a deteriorating financial position. Furthermore, the report scrutinizes expenses related to director's fees, professional fees, and employee benefits, suggesting further investigation. The conclusion recommends a balanced approach to funding, advocating for equity to maintain a healthy debt-equity ratio. The report utilizes information from past working papers and audited financial reports for the years ending 31 December 2016 and 2017 to provide a comprehensive overview of BSL's financial health. The assignment was part of the Victoria University BAO5524 Professional Auditing course, submitted in Trimester 1, 2019.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the student
Name of the university
Student ID
Author note

1AUDITING THEORY AND PRACTICE
ASA 520 regarding analytical procedure requires the auditors to recognize the
fluctuations or the relationships those are not consistent with the associated relevant information
or which differs from the expected values by the significant amount. Looking into the financial
performance of BSL it can be identified that the current ratio of the entity that signifies the
ability of the company with regard to payment of the short term obligation with available current
assets have been reduced from 44.49 to 14.01 over the years from 2017 to 2018 (Robinson et al.
2015). Though or both the years the current assets of the entity are sufficient to meet the short
term obligation, very high current ratio is indicating that the company is not using its working
capital efficiently. Looking into the receivable turnover days that signifies the number of days
taken by the entity to collect its dues is representing that the company’s efficiency has been
deteriorated as from 47.97 days its receivables days has been increased to 215.21 (Omar et al.
2014). Further, the profitability position of the company is indicating that for both the years it
was not possible to earn profit and therefore both return on assets and net profit margin are in
negative and the condition in 2018 has deteriorated further as compared to 2017. It has been
observed that huge amount has been expensed for paying director’s fees, professional fees and
employee benefits. Hence, the auditor shall look into the structure of fees offered to professional
and directors and the justifiability for the amount expensed for employee benefits. However, the
low debt equity ratio is indicating that the company is sustainable for long term as its debt equity
ratio is very low. Hence, it is recommended that for further requirement of fund it shall raise the
same through equity for balancing the debt and equity (Xu et al. 2014).

2AUDITING THEORY AND PRACTICE
Reference
Omar, N., Koya, R.K., Sanusi, Z.M. and Shafie, N.A., 2014. Financial statement fraud: A case
examination using Beneish model and ratio analysis. International Journal of Trade, Economics
and Finance, 5(2), p.184.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Xu, W., Xiao, Z., Dang, X., Yang, D. and Yang, X., 2014. Financial ratio selection for business
failure prediction using soft set theory. Knowledge-Based Systems, 63, pp.59-67.