MAA303 Audit and Assurance

Question:

Use professional and ethical judgement in applying relevant legal and professional pronouncements to all stages of a given assurance engagement.

Answer:

Answer to Requirement A: 

The analytical procedure are carried out as the overall review of the financial statements following the end of the audit in order to determine to considered whether the organization is consistent with the views of the auditor (Scott 2015). The analytical review refers to the auditing process that is based on the ratios among the accounts and makes an attempt to identify the significant changes, restricted review in order to provide some kind assurance to the interested parties relating to the reliability of the financial data.

As evident in the present situation of Biotechnology Ltd the company is looking forward to expand its future in order to maintain the regular daily operations. To review the financial performance of the Biotechnology Ltd an analytical review is carried out with the help of ratio analysis (Schaltegger and Burritt 2017). The gross margin ratio is computed to understand the gross profit in terms of dollars generated based on the net sales of Biotechnology Ltd. As evident from the gross profit ratio Biotechnology Ltd over the last three financial year have reported a relatively strong gross profit margin.

The gross profit of the company stood positively by using historical information of 2016 and 2017 while the forecast information of 2018 reported a positive gross profit margin of 51.5%. This represents that Biotechnology Ltd has lower costs of goods sold than the revenues reported (Warren and Jones 2018). The net profit margin though stood negatively for Biotechnology Ltd as in 2017 the net profit margin stood -25.92% while the forecasted period 2018 of -35.14%. The primary reason for negative net profit margin is because of unfortunate venture and the expansion expenditure that contributed negatively to net profit margin of Biotechnology Ltd.

The cash flow margin is regarded as the most commonly used profitability ratios. The ratio helps in measuring the sum of money that is generated from the operations based on every dollar of sales bought in. Healthy and mature companies usually report positive EBITDA and operating cash flow (Henderson et al., 2015). A negative cash flow reported by Biotechnology Ltd does not represents that the company financial performance is poor. Evidences obtained from analytical review explains that Biotechnology Ltd is required to take steps in order to administer the cash or to access the cash from other sources. The liquidity ratio is used to measure between the liquid assets and the liabilities of Biotechnology Ltd.

The current ratio for Biotechnology Ltd stood 0.26 and0.12 in 2016 and 2017. The current ratio analytically provides the reflection of the company’s ability to meet its short term debt current stands low as the current liabilities stands proportionally higher than assets reported by Biotechnology Ltd (Hoyle, Schaefer and Doupnik 2015). To review the solvency debt to equity ratio is performed. Biotechnology Ltd reported a negative debt to equity ratio of 0.20 for the year 2016 and in 2017 the ratio stood 0.28. The ratio stood relatively weaker and it can be stated that Biotechnology Ltd may face challenges in meeting its long term obligations and may potentially struggle in future.

The market performance ratio is conducted to analytically review the market value of Biotechnology Ltd shares prices. The ratio stood negatively during the historical cost situations with the forecasted period too reflected a lower market value of shares (Williams 2014). This may reflect that the investors may in future may not intend to pay for the shares. This is because the share price of the company have been declining sharply to stand at $0.20. The price earnings ratio is performed to have an analytical gauge into the financial statements of Biotechnology Ltd. The ratio although stood negatively to stand at -6 but the investors anticipations suggest that the share prices of Biotechnology Ltd might gain in near future.

The analytical review conducted suggest that Biotechnology Ltd may suffer to meet its short term and long term debt obligations as the company is facing shortfall in operational cash. Additionally, the claiming of injected cash also did not materialize for Biotechnology Ltd which have led to falling share prices in the market.

Answer to requirement B: 

The evaluation of an organization ability to continue in the form of going concern is based on the responsibility of the organizations management (Henderson et al., 2015). The going concern ability is based on the Biotechnology Ltd management ability along with the correct use of the management assumptions as the going concern. According to the ISA 570 the auditor is required to take account of going concern in the initial stages during the audit and should assess the situations or relevant business risks that may cast uncertainty over the ability of the company as the going concern.

Evidences from the case study provides that Biotechnology Ltd has failed to materialize the positive injection of cash flow to the business that ultimately forced the decline in the share prices. Additionally, the cash flow margin ratio has significantly declined with constantly reporting of loss over the span of three financial year (Macve 2015). Based on the evidences obtained from the audit it can be stated that Biotechnology Ltd that the company does not appears to be in the situation of carrying on the business as the going concern. The ability of the company to continue as the going concern cast severe doubts as the events or the situations of immaterialised deal of cash injections have already been recognized in the audit process.

On performing the work of audit the preliminary assessment of risks suggest that the management of Biotechnology Ltd does not have appropriate plans to address them. There is a lack of management perception of going concern assumptions since it involves making a judgement at the particular point of time (Williams 2014). As a general term the extent of uncertainty over the cash is related with the outcome of the event that is significantly increasing the future of the judgement regarding the ability of Biotechnology Ltd as going concern. On a conclusive note it can be suggested that Biotechnology Ltd does not have the ability to continue as the going concern as the company lacks functional cash and the conditions of its business is effected by the degree of external factors.

Reference List: 

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.

Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.