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.