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“Developing an Audit Program for company Ardent Leisure Group

The objective of this group assignment is to provide you with an opportunity to design a “risk-based” audit program for a real world company and focus on the “Substantive tests of balances”, which involves substantiating the ending balance of an account(s), which is comprised of multiple transactions, as at a certain year-end date.parts to be done are :

  1. perform analytical procedures on statements(financial position and performance) over last 3 years(4 key rations and metrics).
  2. which account balances are material calculate materiality for planning purposes
  3. select upto 10 different material account balances (5 assets 5 liabilities) and for each account list relevant financial report. explain

Financial Ratio Analysis

With ramified economic changes and strengthened the audit and assurance program, companies are complying with the international financial reporting standards. This report has been prepared on the materiality and material account balances, assertion test and other audit program of the Ardent Leisure Group. This report has been divided into main three parts.

There are main five ratios which could be used to analyse the financial performance of Ardent Leisure Group since last three years.

Liquidity ratio

This ratio reflects Ardent Leisure Group’s ability to pay off its short term and long term debts out of available current assets (Flannery, 2016).

Liquidity/Financial Health

2015

2016

2017

Latest Qtr

Current Ratio

1.28

1.03

0.55

0.55

Quick Ratio

0.13

0.07

0.22

0.22


The liquidity ratio of company has gone down to .55 points in 2017 which is .89 points lower as compared to last three year data. Company has decreased its liquidity in its current assets it wants to lower down its cash blockage. The quick ratio has been very low since last three year and suddenly went down to .22 points in 2017 (Weygandt, Kimmel, and Kieso, 2015).

Profitability ratio

Liquidity/Financial Health

2015

2016

2017

Latest Qtr

EPS

30.4

-39

27

.25

Net profit ratio

37.58 %

-34.45%

31.96 %

28.96 %

EBIT

28 %

-27%

26%

24%

Return on assets

12%

-20%

18%

20%


After analysing the profitability of Ardent Leisure Group, it is analyzed that Earning per share of company has negatively destructed and resulted to low amount of return availability on company. It is analyzed that company has faced high loss in 2017 due to the sluggish market condition.  The net profit ratio of company was 28% in 2016 which went down to -27% in 2016. The main reason of that amount of loss in its business shows that company failed to deliver what was expected and due to the tough competition it failed to undertake its business functioning in long run. In addition to this, company has also faced issues related to creating value on its investment.  The return on assets was also 12% in 2016 which decreased to -20 % losses in 2016. However, after the changes in its business, company maintained 20% net return on assets (Tseng, and Chiang, 2016).

Efficiency ratio

The efficiency ratio focuses on how well company has deployed its assets and investment in its business (Flannery, 2016). 

Efficiency

2015

2016

2017

TTM

Days Sales Outstanding

6.9

7.06

7.58

7.58

Days Inventory

92.53

209.38

193.4

193.4

Payables Period

27.82

41.22

40.45

40.45

Cash Conversion Cycle

71.6

175.22

160.53

160.53

Receivables Turnover

52.92

51.71

48.16

48.16

Inventory Turnover

3.94

1.74

1.89

1.89

Fixed Assets Turnover

1.03

0.75

0.77

0.77

Asset Turnover

0.61

0.47

0.53

0.53


After assessing the financial details of Ardent Leisure Group, it is analyzed that inventory turnover of company has maintained to 1.89 times in 2018 which is 2 times lower as compared to last three year data. It reflects that company has lower down its capital blockage in its capital by reducing the inventory time period rotation (Flannery, 2016).  The assets turnover of company has been stable since last three with the little fluctuation. The receivable turnover ratio of company has also reduced to 48.19 times in 2018 which is 10 times lower. It might negatively impact the cost of capital of business as if company has low debtors turnover then it will be getting easy availability of the funds in its business.  The creditor’s turnover ratio of company has also decreased to 22 times which reflects high blockage of capital in its operating activities. If company does not lower down its capital blockage then it will not only increase the overall costing of the business but also increase the financial leverage of organization.

Liquidity Ratio

Solvency ratio

The solvency ratio helps in determining the capital structure and financial leverage of company (Ehiedu, 2014).

Financial Health

2015

2016

2017

Latest Qtr

Financial Leverage

1.87

1.83

1.4

1.4

Debt/Equity

0.5

0.34

0.06

0.06


The financial leverage of company has been stable since last three year. However, in 2018, company reduced its debt funding with the decrease in its profitability. The financial leverage of company has also reduced to 1.4 times in 2018 which is .4 times lower as compared to last three year data. This has decreased as company has lower down its earnings before interest and tax. It might be risky for the company if it fails to cover its interest payment (Flannery, 2016).

Market based ratio

This ratio shows that company has been increasing its dividend pay-out to 25% in 2018. Nonetheless, due to the less profitability, it issued less dividend payment to its stakeholders.

Market Based ratio

2015

2016

2017

Latest Qtr

Dividend pay-out ratio

23%

10%

25%

30%

For any independent audit, it is compulsory for the auditor to set materiality level. In any audit it is impossible for the auditors to check all the transactions that have happened during the year. But even there is a big confusion when it comes to the checking of a few transactions. There needs to be a certain criteria for the same. That criterion is known as the materiality level (Christensen, Eilifseng, Glover, and Messier 2018). This is the figure amount at which there exist strong chances that the users might get their decisions influenced. However, there is no certain figure of materiality. It is on the judgement of auditor. The facts and circumstances of the case help in determining materiality. Materiality always demands a certain amount which can be used as a base for quantification purpose. That amount could be a 1-2% of revenue, 1-2% of expenses, 5-10% of the net profits, or 1-2% of the equity (Eilifsen, Hamilton, & Messier, 2017).

For the company Ardent Leisure Group, the base amount chosen is the revenue, and the percentage taken is 1%. The reasons are pretty simple. The net margin of the company is negative, while the revenues are somewhat stable. Further, a lower percentage is taken because of the negative profits and a large number of accounts having very low balance (Choudhary, Merkley, & Schipper, 2018). The revenues for the financial year 2018 are reported to be $ 422,393,000. At the rate of 1 % the amount of base materiality comes to $ 4,223,930. However, certain adjustments are required and after making them the materiality may be set at $ 5,000,000. The adjustments relate to the trends that the company has reported in the previous years as far as the performance and transparency is concerned (Grant, 2016).

Profitability Ratio

The material account balances are considered as follows:

ASSETS

($ ‘000)

LIABILITIES

($ ‘000)

Cash & cash equivalents

10,842

Payables

102,960

Receivables

5,376

Construction in progress deposits

50,050

Inventories

13,256

Current Interest bearing liabilities

54,466

Assets classified as held for sale

120,721

Non-current interest bearing liabilities

178,161

Properties classified as held for sale

13,840

Non-current provisions

7,595

Construction in progress inventory

56,756

Deferred tax liabilities

36,796

Other

5,089

Property, plant and equipment

636,440

Intangible assets

96,587

Deferred tax assets

11,549


The following account balances are considered material because they have exceeded the limit of materiality set for the entity. However, certain account balances even though may not have exceeded the materiality level but still can be considered material because of the risk involved in those account balances (Moroney, & Trotman, 2016).

The financial reporting assertions are the assertions that have been shown from the side of the management. But regarding these assertions the auditor has certain level of risk scepticism (Knechel, & Salterio, 2016). The following table shows the financial reporting assertions for certain account balances that have been considered material (Mwangi, and Murigu, 2015).

MATERIAL ACCOUNT BALANCE

FINANCIAL REPORTING ASSERTION

· Five assets

1. 1. Cash & cash equivalent

· Existence: the cash or bank balance mentioned in the books is existent in reality with the possession of company or in bank account (Tseng, and Chiang, 2016).

· Completeness: all the cash and bank balance has been reported. There is no absconding done on the part of management and cash handlers.

2. 2. Inventories

· Valuation: the inventories have been valued at the lower of cost or net realisable value. There are no discrepancies in the valuation model followed by the entity.

· Existence: the inventory mentioned in the books does exist at the balance sheet date. The physical count and the quantity valued in the financial books match with each other.

· Rights & obligations: entity have right of sale on the inventory. The inventory signifies the business asset of the organisation.

3. 3. Assets classified as held for sale

· Completeness: all the assets which can be classified as held for sale are reported under this account balance. No asset has been missed.

· Valuation: the value determined and published in the annual report is being arrived after the adoption of all the applicable rules and regulations. The value is accurate.

· Rights & obligations: entity has a right to sale the assets mentioned under this head.

4. 4. Property, plant & equipment

· Existence: all the assets mentioned to make this balance exist physically with the entity.

· Valuation: the valuation done for the properties is in line with the acceptable standards and the help of valuation experts have been taken.

· Rights & obligations: the entity stands at the ownership position of the assets mentioned under the head property, plant & equipment.

5. 5. Intangible assets

· Valuation: the valuation method used is as per the applicable Australian accounting standard.

· Rights & obligations: the organisation has a right over the mentioned assets. They stand owned by the entity by either as a result of purchase or own generation.

· Liabilities

6. 1. Payables

· Completeness: all the creditor and payable balance have been entered to complete the figure of this account balance. No creditor has been intentionally or mistakenly missed.

· Existence: all the payables and creditors that have made up the balance do exist at the balance sheet date and are not yet settled.

7. 2. Current Interest bearing liabilities

· Rights & obligations: the organisation has an obligation to pay off the interest bearing liabilities.

· Existence: the interest bearing liabilities stand outstanding at the balance sheet date and have not been settled yet.

8. 3. Deferred tax liabilities

· Valuation: accurate tax principles and accounting policies have been kept in mind while determining the amount of deferred tax liabilities. The valuation shows correct amount.

· Completeness: all the temporary differences creating the deferred tax liability balance have been accounted for.

9. 4. Non-current provisions

· Valuation: the valuation is done in line with the accounting policies relating to the creation and valuation of provisions.

· Existence: the existence of provision is not questioned at the balance sheet date, i.e. the asset or the contingency for which the provision has been created is still in the picture (Weygandt, Kimmel, and Kieso, 2015).

10. 5. Non-current interest bearing liabilities

· Completeness: all the long term interest bearing liabilities on which the entity is bound to make periodic interest payments and eventual repayments have been accounted in the stated balance.

· Valuation: the valuation of the long term interest bearing liabilities is done with utmost accuracy. The amounts reflected are the actual outstanding balances (White, Sondh, and Fried, 2015).

Conclusion

The financial reporting assertions are the assertions that have been shown from the side of the management and ratio analyse have been used to evaluate the financial performance. Now in the end, it could be inferred that company should strengthen its financial reporting and performance both if it wants to keep its business more sustainable in long run.

References

Choudhary, P., Merkley, K. J., and Schipper, K. (2018). Auditors’ Quantitative Materiality Judgments: Properties and Implications for Financial Reporting Reliability 54(3), pp.12-29.

Christensen, B. E., Eilifsen, A., Glover, S. M., and Messier, W. F. (2018). The Effect of Materiality Disclosures on Investors’ Decision Making 24(3), pp.32-49.

Ehiedu, V.C., (2014). The impact of liquidity on profitability of some selected companies: The financial statement analyse (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Eilifsen, A., Hamilton, E. L., and Messier Jr, W. F. (2017). The Importance of Quantifying Uncertainty: Examining the Effect of Audit Materiality and Sensitivity Analyse Disclosures on Investors’ Judgments and Decisions., 4(3), pp.10-19.

Flannery, M.J., (2016). Stabilizing large financial institutions with contingent capital certificates. Quarterly Journal of Finance, 44(3), pp.20-29.

Grant, R.M., (2016). Contemporary strategy analyse: Text and cases edition. 2nd ed, UK: John Wiley & Sons.

Knechel, W. R., and Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.

Moroney, R., and Trotman, K. T. (2016). Differences in Auditors' Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research, 33(2), 551-575.

Mwangi, M. and Murigu, J.W., (2015) The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).

Tseng, F.M. and Chiang, L.L.L., (2016). Why does customer co-creation improve new travel product performance?. Journal of Business Research, 69(6), pp.2309-2317.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., (2015). Financial & managerial accounting. 3rd ed, Australia: John Wiley & Sons.

White, G.L., Sondh, A.C. and Fried, D., (2015). Analyse of Financial Statement. Analyse. 14(3), pp.240-259

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