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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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