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The assessment would be concerned with the analysis of the business of Jiajiafu Modern Agriculture Limited which is an ASX listed company for proper analysis of aspects such as performance, auditing and risks which is associated with the business. In terms of estimating the financial performance of the business, key financial ratios would be computed which reveals the financial performance of the business for different areas (Kharisova and Kozlova 2014). The ratios would be computed for a period of three years and this is done so that proper comparison can be made possible. In order to assess the auditing aspect for the company, the planning materiality for the business would be computed showing the basis on which the auditor would decide if an item is materially misstated. In addition to this, a sampling plan would also be undertaken for the purpose of facilitating the audit. The risk aspect for the business would be assessing in terms of the ten accounts which are susceptible to maximum risks from the perspective of audit.
The company which is considered for analysis is Jiajiafu Modern Agriculture Limited which mainly operates as a holding companies and functions through its subsidiaries. The company has an operation which focuses on the fruit and vegetable farming, harvesting, packing, marketing, supply, and distribution solutions. The annual report for the business shows that the business is in its growth stage considering the enhancement of revenue for the company. The industry is also in its growth face as farming is given importance in Australia and people like to have fresh fruits and vegetables (Jjfma.com. 2020). Therefore, there is natural demand in the market and the same is fulfilled by the company and some of its competitors operating in the market. The different types of risks which is faced by the business is tremendously and proper consideration should be paid by the management in this regard so that a level of efficiency is maintained in the operational process of the business. The business risks which can be identified are listed below:
In order to assess the primary accounts which can be materially misstated, the annual report for 2018 is considered for the business. The annual report properly shows the revenue generated by the business and also costs of operations. Further, the annual report shows the asset and liability position of the business. The auditor needs to make an assessment if the financial statements are showing true and fair view and whether the same is relevant from the perspective of the investors so that they can take appropriate decisions regarding the business. The revenue as well as profits for the business is shown to have increased from 2017 estimates which can be due to better performance of the business (Johnstone, Rittenberg and Gramling 2019). However, the auditor here needs to apply a sceptic approach and considering that the figures of revenue and profits can be misstated and thereby there is a risk in the financial reporting framework. The balance sheet of the company shows that inventory value for the business is significantly low which must be considered even though inventory is perishable in nature. The objective of the auditor is to ensure that the balances of assets are fairly valued and represented in the financial reports of the business. The business has represented significantly large amounts of borrowings as current liabilities which the auditor must ascertain to be correct as entire financial position of the business is impact if the same is false. The auditor needs to make proper assessment of the financial situation of the business and estimate every information which is presented is appropriate as such information would be used by potential investors to make investment decisions for the business.
While conducting an audit, different forms of risks arises which have a contribution on the overall audit risks of the business. The auditor needs to make assessment of such risks and take up steps so that such risks can be kept at a minimum. The risks which an auditor faces cam be classified into inherent risks, control risks and detection risks. The inherent risks takes place when a misstatement occurs in the books of accounts which is caused on factors other than internal control of the business. While on the other hand, control risks takes places due to faults in the internal control settings of the business (Hay, Knechel and Willekens 2014). The detection risk occurs when the auditor fails to identify certain risks or material misstatement from the books of accounts. The auditor in the case of Jiajiafu Modern Agriculture Limited needs to consider both inherent risks and control risks and assess whether any of the risks arises during the course of audit. The auditor would be applying audit risks model for the purpose of establishing the overall audit risks for the business. The audit risk model which is used by the auditor effectively establishes the relation between the three types of risks and compute the overall audit risks for the business. The audit risks model which is used for assessing the risks for a business is appropriately listed below in the form of equation:
AR – Audit Risks
DR – Detection Risks
CR – Control Risks
IR- Inherent Risks
The above equation effectively represents the different form of risk which an auditor faces while conducting an audit for a business. The auditor needs to formulate a proper audit program so that procedures and areas which is susceptible to risks can be identified from the annual report. This steps helps the auditor to identify the audit risks for the business and the same is appropriately shown in the table presented below:
Account Name |
Audit Risks (AR) |
Inherent Risk (IR) |
Control Risk (CR) |
Detection Risk (DR) |
Requirement of Evidences |
Total Revenue |
High |
High (90%) |
High (95%) |
Low |
High |
Costs of Sales |
High |
High (85%) |
High (80%) |
Low |
High |
Inventory |
High |
Low (40%) |
Moderate |
Moderate |
Moderate |
Borrowings |
High |
Low (30%) |
Moderate |
Moderate |
Moderate |
Figure 1: Audit Risk Model
Source: (Created by Author)
In order to assess the financial performance of the company, key financial ratios are considered and a three year analysis is used so that proper comparison can be made. This is also done so that trend for the business can be identified. The key financial ratios which are computed are portrayed in the table presented below and the same shows the financial performance of the business.
Key Financial Ratios of the Business |
||||
|
|
JIAJIAFU MODERN AGRICULTURE LIMITED |
||
Particulars |
|
2018 |
2017 |
2016 |
|
|
$ |
$ |
$ |
Total Revenue |
|
$ 52,538,501.00 |
$ 39,682,173.00 |
$ 30,628,255.00 |
Net Profit |
|
$ 5,979,861.00 |
$ 1,760,052.00 |
$ 1,573,037.00 |
Operating Profit (EBIT) |
|
$ 5,979,861.00 |
$ 1,760,052.00 |
$ 932,113.00 |
Cost of Good Sold |
|
$ 44,553,927.00 |
$ 35,717,684.00 |
$ 27,272,805.00 |
Total Assets |
|
$ 47,339,955.00 |
$ 38,746,547.00 |
$ 34,833,515.00 |
Total Current Assets |
|
$ 20,977,935.00 |
$ 11,324,087.00 |
$ 14,925,280.00 |
Inventory |
|
$ 939.00 |
$ 492.00 |
$ 10,324.00 |
Debtors |
|
$ 3,200,694.00 |
$ 2,455,517.00 |
$ 3,724,105.00 |
Current Liabilities |
|
$ 5,135,225.00 |
$ 4,895,856.00 |
$ 5,706,051.00 |
Total Equity |
|
$ 41,984,754.00 |
$ 33,626,381.00 |
$ 28,860,851.00 |
Long term Borrowings |
|
$ 4,090,983.00 |
$ 4,071,677.00 |
$ 4,730,058.00 |
Interest Expense |
|
$ 271,753.00 |
$ 298,522.00 |
$ 267,450.00 |
Profitability Ratios |
|
|
|
|
Net Profit Margin |
|
11.38% |
4.44% |
5.14% |
Operating Profit Margin |
|
11.38% |
4.44% |
3.04% |
Return on Equity |
|
14.24% |
5.23% |
5.45% |
Return on Assets |
|
12.63% |
4.54% |
4.52% |
Efficiency Ratio |
|
|
|
|
Total Asset turnover ratio |
|
1.1098 |
1.0241 |
0.8793 |
Inventory turnover ratio |
|
62269.63941 |
6604.601331 |
3589.42433 |
Debtor Turnover Ratio |
|
18.57727762 |
12.84291272 |
16.44474394 |
Liquidity Ratio |
|
|
|
|
Current Ratio |
|
4.085105326 |
2.312994296 |
2.61569341 |
Liquid ratio |
|
4.084922472 |
2.312893802 |
2.613884103 |
Gearing Ratio |
|
0.09744 |
0.12109 |
0.16389 |
Figure 2: Key Financial Ratios of the Business
Source: (Created by Author)
The above table appropriately shows the key financial ratios for the business which re computed. The above table portrays profitability, efficiency and liquidity ratios for the business. These areas are considered to be important as the same is closely related with the performance of the business (Babalola and Abiola 2013). The profitability ratios show a tremendous increase in all the key performance estimates of the business. The net profit margin, operating profit margin have shown to have increased tremendously which is mainly due to increase in sales of the business. The return on assets and equity for the company is shown to have increased as well which shows that the business is generating appropriate returns from its assets and equity for the business. The auditor in such a case needs to properly ascertain the values of sales and costs of operations so that it can be established that the figures are presented in an accurate manner in the financial statements of the business. If in any chance the figures are misrepresented in the financial reports than the entire financial position of the business would be affected (Delen, Kuzey and Uyar 2013). It is for such reasons that the auditor of the business needs to apply proper audit procedures while conducting the audit procedures of the business.
The liquidity ratios reveals the cash position of the business and the ability of the business to meet current obligations of the business. The liquidity ratios show current ratio and quick ratios which are considered to be important indicators for assessing the financial performance of the business. The table above shows computation of current ratio, quick ratio and gearing ratios. The estimates which are projected in the table show that the same have increased during the period from previous year which suggests that improvements have been made in the liquidity status of the business (Eilifsen and Messier Jr 2014). The auditor needs to verify the values of current assets and current liabilities so that it can be established that the business has followed a proper reporting framework.
The efficiency ratios for the business represent the effectiveness of the internal policies of the business. The efficiency ratios are closely related with the internal control settings of the business. The efficiency ratios for the business as pre the table has improved from previous year which needs to be assessed by the auditor so that the value of assets such as inventory and accounts receivables. The changes in the efficiency ratios show that the internal policies of the business have changed which must be confirmed by the auditor. This can be done by assessing the internal controls of the business.
The materiality of an item is a very important concept in auditing and the same is the main basis on which judgements are formed by the auditor whether an item is materially misstated or not. The auditors are required to compute the materiality of an item considering the nature of the item and complexity of the item. The planning materiality for a business is used to assess the performance materiality for each item so that proper review can be made regarding the appropriateness of the financial disclosures which are portrayed in the annual report of the business. In order to compute the planning materiality for a business, the highest reported figure from the balance sheet is considered. In addition to this, a threshold is also considered for the purpose of analysis and computation of materiality estimate for the business (Mock and Fukukawa 2016). The annual report of Jiajiafu Modern Agriculture Limited is considered for computing the materiality for the business.
The business of Jiajiafu Modern Agriculture Limited is engaged in farming operations and therefore there are complexities in the reporting framework. The figure of total assets is considered for the purpose of computing the planning materiality of the business and the threshold which is considered for the purpose of computation is shown to be 2% considering the scale of operations of the business. The threshold of 2% is multiplied with the value of the total assets to give the estimate of planning materiality of the business. The computation of planning materiality is shown below:
The above equation shows the computation of planning materiality for the business and this would help the auditor to assess the financial statements of the business in a proper manner.
Account Balances |
Assertions |
Audit Work Steps |
Audit Sampling |
Cash and Cash Equivalents |
The auditor of the business must consider the assertions of completeness and accuracy while reviewing the cash balances for the business. The liquidity position of the business was has enhanced and therefore proper assessment is required to be made regarding the viability of the disclosures (da Silva and Dantas 2018). |
The major step which the auditor can take is to verify the inflows and outflows of the business. The auditor would be referring to cash books and cash flow statements and alsoto bank receipts so that it can be ascertained that the value of cash is fairly represented. |
The auditor would be applying random sampling techniques and therefore would require more time for selection of appropriate samples |
Inventories |
The main assertions which the auditor must check in this situation are the assertion of valuation and existence. The inventory value is portrayed to be low and therefore proper assessment is necessary. |
The auditor would be applying verification strategies so that proper assessment can be made whether the value of inventory is appropriately portrayed in the financial statements of the business. The auditor would also be applying physical count for the inventories so that proper judgment can be made regarding the information portrayed. |
The auditor would be applying ASA 530, stratified sampling approach where the auditor splits the population into different sections (such as high value and low value) and then selects from each section. |
Trade and Other Receivables |
The auditor would be applying assertions of completeness and occurrence for assessing the risks which is involved in trade receivables. The balances which are portrayed in the financial statements are significant high and therefore proper assessment is required to be made by the auditor. |
The auditor would be applying verification strategies to check the value of receivables which is portrayed in the financial statements of the business (Ashour, Sukoharsono and Ghofar 2015). The auditor would also be applying the guidelines provided by ASA 505. External Confirmations, in order to check with the external debtors if the value for the assets is fairly represented. |
The auditor must apply Block sampling techniques wherein consecutive series of items are selected for review. This is done with the purpose of collecting appropriate audit evidences for the business. |
Property, Plant and Equipment |
The auditor would be assessing the assertion of valuation and existence so that proper assessment can be made and evidences can be collected. The property plant and equipment form an important part of the reporting process and therefore the same needs to be considered for assessment. |
The auditor needs to apply first verification of the assets so that it can be ascertained that the assets are appropriately valued by the business. The auditor also need to confirm with external parties if the asset is really under the ownership of the business at the balance sheet date (Bumgarner and Vasarhelyi 2018). The auditor can also appoint an external valuer as per ASA 620 Using the work of an Expert. This would provide the auditor with an appropriate opinion regarding the valuation of the assets of the business (Ruse 2018.). |
The auditor needs to apply random sampling technique which is most effective in such a case. |
Intangible Assets |
The key assertion which the auditor would be assessing in such a case is related to risks and the same needs to be properly assessed by the auditor of the business. |
The auditor would be applying verification practices in the business so that appropriate valuation can be done. In addition to this, the auditor would also be assessing if the impairment charges made on the asset are appropriately done. |
The auditor in such a case would be applying haphazard sampling technique which would allow the properly assess the risks |
Trade and Other Payables |
The auditor of the business needs to properly assess the trade payables from the perspective of assertions of completeness and occurrence for assessing the risks which is involved. This is done so that it can be accurately be estimated that the current liabilities are fairly projected. |
The auditor would apply verification of the trade payables and also engage in external confirmation under ASA 505 External Confirmation so as to ensure that the values which are presented are appropriate. The auditors also has a duty in this regard to review all credit purchases if any made by the senior executives. |
The sampling technique which the auditor would be applying in this case is Block sampling which can effectively portray the financial information of the business. |
Deferred Revenue |
The auditor of the business needs to properly assess the deferred revenues of the company and ensure that proper balances are portrayed in the financial statements. The auditor would be assessing the assertions of completeness and occurrence in this case. |
The auditor would be applying verification of the accounts and also ask for management representation so that it can be assessed why deferred revenue arises in the first place in the financial reports of the company. |
The auditor would be applying random sampling techniques so that proper assessment can be made regarding the quality of information and ensure proper evidences I available to the management. |
Translation Reserve |
The assertion which would be regarded in this regard is assertion of accuracy and assertion of cut off. These assertions would be the basis on which audit evidences are collected by the management of the company. |
The auditor would be applying verification and would also review the foreign exchange rate and the applicable rates of translation so that it can be assessed if the items are properly portrayed in the financial statements. |
The auditor would apply random sampling methods so that proper assessment can be made regarding the financial information of the business. |
Borrowings |
The borrowings of the business need to be assessed on the basis of assertion of completeness and valuation. The auditor needs to identify the reasons for portraying the value of borrowings in the current liability section of the annual report. |
The auditor needs to apply verification practices in the business and also engage in external confirmation under ASA 505 External Confirmation so as to ensure that the values are accurate as misstatement in the same can affect the financial position of the business. |
The auditor would be applying personal judgment and also confirm balances from the banks. |
Retained Earnings |
The auditor would assess on the basis of assertion of completeness and valuation. The auditor would be assessing the financial position of the business on the basis of the risks. |
The auditor would be applying verification practices in the business so that it can be confirmed that appropriate value is presented for the assets. The auditor would check prior period payments, net income or loss and dividend so that appropriate ascertainment can be obtained regarding the figure |
The auditor needs to apply attribute sampling as the same is internal policy of the business and is heavily dependent on the internal control of the business. |
Ashour, M.S.R., Sukoharsono, E.G. and Ghofar, A., 2015. The Impact of Competencies, Risk Management and Auditors Interactions on Internal Audit Effectiveness in Libyan Commercial Banks. The International Journal of Accounting and Business Society, 23(1), pp.1-20.
Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), pp.132-137.
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Hay, D., Knechel, W.R. and Willekens, M., 2014. Introduction: The function of auditing. In The routledge companion to auditing (pp. 23-32). Routledge.
Jjfma.com. (2020). JJF Modern Agriculture . [online] Available at: http://www.jjfma.com/gg.html [Accessed 30 May 2020].
Johnstone, K.M., Rittenberg, L.E. and Gramling, A.A., 2019. Auditing: A Risk-based Approach. Cengage.
Kharisova, F.I. and Kozlova, N.N., 2014. Applying the category of «Assertions (or preconditions)» in audit of financial statement. Mediterranean Journal of Social Sciences, 5(24), p.180.
Mock, T.J. and Fukukawa, H., 2016. Auditors' risk assessments: The effects of elicitation approach and assertion framing. Behavioral Research in Accounting, 28(2), pp.75-84.
Ruse, E., 2018. Risk Assessment in Financial Audit. SEA–Practical Application of Science, 6(17), pp.177-181.
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