Financial Malpractices and Audit of ABC Learning: Presentation

This presentation provides a detailed audit of ABC Learning, focusing on the impact of financial malpractices. It begins with an introduction outlining the presentation's purpose, which is to analyze the financial performance of the company and highlight how adopting malpractices can lead to significant issues. The presentation utilizes relevant auditing standards (ASA 200, 220, 230, 240, 315, and 500) to guide the analysis. Financial tools such as DuPont analysis, common size statement analysis, trend analysis, and Beneish M-score analysis are employed to assess the company's financial health. The analysis reveals a drastic reduction in ROE, declining EBITDA and EBIT, and an adverse Beneish M-score, indicating potential fraudulent practices. The presentation concludes with recommendations to stop fraudulent activities, reduce operating costs, and increase profitability to improve the company's financial standing, emphasizing the importance of maintaining a positive balance in reserves and surplus to avoid shareholder disinterest and the eventual destruction of the company's image.

AUDIT of ABC learnings

INTRODUCTION
 The main purpose of the presentation is to give a detailed insight into how adoption
of malpractices can spell doom for an entity via example of ABC LEARNINGS.
 This presentation will include the study of relevant auditing standards
 The Accounting theme that is being explored is the correct preparation and
presentation of the financial information.
 The analysis of the financial performance will be done using some effective and
time tested financial tools.

Literature Review
The slides will give us a glimpse of the relevant Auditing standards applicable in our
approach:
a) ASA 200:
The Overall Objectives of an Independent Auditor and conduct of an
audit in accordance with the Australian auditing standards
b) ASA 220:
Quality control for an audit of financial report and other historical
financial information
c) ASA 230:
Audit Documentation

Literature Review
d) ASA 240
Consideration of laws and regulations in audit of a financial report
e) ASA 315
Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment
f) ASA 500:
Audit evidences

Tools used to analyse the financials of the company
a) DuPont analysis:
b) Common size statement analysis:
c) Trend analysis:

Tools used to analyse the financials of the company
(d) Trend analysis:
e) Beneish M Score Analysis:

Analysis
1) DuPont analysis:
The companies ROE has reduced drastically to 14% in the year 2001. This was
predominantly due to the ever decreasing trend in profit margin of the company.
2) Common size statement analysis:
a) Common size income statement:
The company’s EBITDA and EBIT has reduced after the year 2003. They recorded a
minimum of 17% and 19% respectively.
b) Common size balance sheet:
it demonstrates that the company’s cash reserves with respect to sales has reduced
over the years and the reserves and surplus of the company has become negative over
the years (McKee, 2015).

Analysis
3) Trend analysis:
a) Income statement analysis:
The rise in the operating revenue of the company is far less or overshadowed
by the rise in the operating expenses. This has resulted in lower profitability.
b) Balance sheet analysis:
There has been increase in the cash balance of the company by cash infusion
by way of share capital and increased profitability. This is accompanied by
increase in the retained earnings of the company (Knight, 2015).
4) Beneish M Score Analysis:
The company has been scoring more than -2.22 since year 2003 and the
highest being recorded in the year 2006. This implies that the company has
been involved high amount of mal practices and manipulation of the data.

Summary of the findings
a) The company has not generated decent ROE for its shareholders.
b) The company is unable to increase its overall EBITDA and EBIT over the
years as a percentage of revenue.
c) The company’s cash inflow as a percentage of revenue has declined over
the years.
d) The company has been registering an adverse Beneish M score. This
indicates adoption of fraudulent practices.

RECOMMENDATION
a) Adoption of fraudulent activities by the company must be stopped
immediately.
b) In order to substantially increase the returns o the company it must focus on
reducing the operating costs of the company.
c) The company must resort to measures which will increase its profitability
to ensure reinstatement of the reserves and surplus positive balance.
d) The company should take the opportunity of increasing the return on the
new capital being infused in it by the shareholders.

CONCLUSION
 The companies need to increase their profitability in order to increase the balance in
the reserves and surplus. Because profit and loss account balance is the main
component of the reserves and surplus.
 Dwindling Return on Capital may instigate the shareholders to stop investing in the
company.
 Adoption of fraudulent activities by any company will result in the eventual
destruction of its image and business in the long run.

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