Background

You are the audit manager of JDM, an accounting firm with offices in the Sydney metropolitan area. JDM is a middle tier auditing firm specialising in the audit of firms in the manufacturing and property development industries. During May 2020 you met with the audit senior of JDM, Tyrone Vickery, to discuss a number of findings and issues Tyrone has identified relating to several of JDM's clients.

Using analytical procedures to assess risk at Emms Ltd

Emms Ltd, is a manufacturer of laser printers. Tyrone has closely scrutinised the financial reports of the company and is concerned about its status as a going concern. Tyrone has calculated various ratios which are provided below.

2016

2017

2018

2019

Net profit ratio

-0.5%

-7%

-6%

-10%

Gross profit ratio

12%

11%

13%

12%

Current ratio

0.8:1

0.7:1

0.7:1

0.7:1

Quick asset ratio

0.4:1

0.31:1

0.35:1

0.38:1

Debt to total assets ratio

66%

92%

96%

98%

Inventory turnover

4.5

4.6

4.4

4.2

Receivables turnover

5.5

5.4

5.3

4.1

Tyrone also tells you that in an attempt to expand into overseas markets, Emms automated a lot of its operations in 2017 with the purchase of some highly sophisticated plant and machinery. The new plant and machinery was largely financed with a secured variable loan of $50,000 and a bank overdraft facility.

Emms purchases the parts that make up the printers from a variety of local and overseas suppliers. Emms has plans to broaden its sales base to both local and overseas markets (currently 85% of its sales are to one discount office supplies chain). This broadening of the company's sales base revolves around the development and production of a state of the art printer that will be tailored to meet the needs of the premium end of the market. The development of the new printer however will require a significant injection of capital that the directors hope will come via a new public issue of shares and promises of loans and other forms of assistance from business acquaintances of the CEO.

question is

• Emms Ltd'sgoing concern, with reference to the ratios and the other information provided.
• Other audit techniques Tyrone can use to indicate whetherEmms Ltdhas a going concern problem.