Question
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
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 3
- Emms Ltds going concern, with reference to the ratios and the other information provided.
- Other audit techniques Tyrone can use to indicate whether Emms Ltd has a going concern problem.
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