Financial Performance and Auditing - Waterco Limited and Saferoads Holdings Limited - Case Study Example

Financial Performance and Auditing Report Comparison Name: Instructor: Institution: Date: Introduction The audit analysis in this study will consider two companies both located in Australia and trades on the Australian Stock Exchange (ASX). These companies are Waterco Limited and Saferoads Holdings Limited. The two firms operate in two different industries. Waterco Limited Waterco Limited is a public company established in 1981 which deals with the manufacturing of the service industry machinery. The company is located in Rydalmere in the New South Wales of the Australian state (Murray, Pham, and Singh 2016). The company has over 15 other branches or subsidiaries businesses located in the various state of the world under its name. The primary responsibility of the company has been the provision of fresh water for human consumption and other related usage as well as treatment of waste water in the markets they serve. The company’s operational environment requires the firm to be taken into consideration the cognizance of environmental concerns and factors. The industry within which the company operates in has an extreme regulatory inspection by agencies which deals with environmental protection as well as the Public Environmental Advocacy individuals. The water provision service industry in the Australia is extensively mechanized process centered and thus over the years technological aspects of machines to deliver the process has been used significantly to gain a competitive edge. Thus over the years, the basic economic issues of Waterco Limited have been in line with investments in its personnel as well as the technological innovations to modernize their service while keeping close watch of their competitive edge. Management of the firm is made of a board of management which consists of the chairman who is the CEO, supported by some directors, as well as other professionals from the fields of accounting, marketing with a wide range of expertise with proven operational, technical, commercial and financial skills and experience in the field. Saferoads Holding Limited Saferoads Holding Limited is an Australian based company that deals with the provision of road safety goods and solutions. The company was started in 1992, and it is headquartered in Drouin, Victoria. Apart from Australia, the company expanded its operations to other nations like New Zealand making it be among the growing global firms. The company supplies its products to its local councils, government departments and road constructions firms with services and products manufactured and designed to protect, inform, illuminate and direct the general groups of road users on safety issues while on the roads (Murray, Pham, and Singh 2016). The management of the company just like in Waterco Limited comprises of a CEO who makes up the executive director supported by two non-executive directors, and a chief financial officer (CFO) who is also the company secretary. The management board of the company are from diverse fields with extensive experience in finance, venture capital, corporate strategy as well as the general knowledge and working of the industry which have been importance to the success of the company over the years. The industry is highly competitive. Thus new entrants are minimally reduced. Thus has offered a competitive edge to companies like Saferoads Holding Limited in that they have been able to compete favorably with the major firms in the industry since the market share is moderately shared amongst them. The increasing threats the players in this industry faces is the increasing costs of labor which has significantly increased the company’s cost of productions as well as the changing government regulations and policies which has impacted negatively on the operations of firms in this industry. Moving forward, the companies in the industry have an opportunity of taking advantage of the growing economies, venture capital, and technology to foster their productivity and improve their general profitability levels. This in return will enhance their market sustainability and competitive advantage. Financial Performance The financial performance analysis will capture how the two companies performed in the 2015 financial year in terms of profit levels recorded and how their shares performed in the exchange market. A cross comparison will be done against the two companies as well as the general performance in their respective industry. Waterco Limited Waterco Limited recorded a net profit after tax of $1.55 million in the 2015 Financial Year which was a significant progress compared to the after-tax net profit of $0.97 million recorded in 2014 Financial year. The basic Earning per Share of the company also improved significantly between the two years with 2015 recording a growth of 4.1 % and 2014 recording growth of 2.6%. In 2015 FY, the revenue generated from sale proceeds by the company was $ 80.89 million which was approximately 46 times higher than the $1.74 million average sales made by all players in the service industry of machinery producers. As a result, Waterco Limited was ranked among the top ten best performing firms in the industry in terms of sales revenue generated. Other related companies in the industry like Nubian Water Group Pty Limited, Koex Pty Limited and Bulbeck Envirosolutions Pty Limited recorded revenue levels of $10.5, $3.07 and $5.98 million respectively. The share performance of Waterco Limited has been growing significantly over the period something worth to attract investors (Murray, Pham, and Singh 2016). Even though it is not among the top performing companies in the industry but its growing EPS coupled with good performance revenue and profit generated, the firms stand a better chance to be a future prospect for investors. Saferoads Holding Limited The total revenue made by the company from the sales proceeds for the 2015 FY was $ 15.14 million which was down from the $ 16.27 million recorded in 2014 FY. For the two-year period that is 2014 and 2015, the company recorded significant net loss but with $930978 in 2014 FY and $72228 in 2015 FY. Similarly Earning per Share (EPS) of the company was greatly affected. For the same two years, the EPS recorded were negative 3.58% and 0.23% for 2014 and 2015 financial years. Even though the performance of seems to improve between the two years, they were still unattractive to potential investors. A cross comparison of other peer companies provided some important information. For the same years, peer companies like Silver Chef and Seven Group recorded better results specifically in their shares. In 2014, the two companies recorded and EPS growth of 0.31 and 0.22 respectively while in 2015 FY only Seven Groups recorded a positive EPS growth of 0.0049 (Murray, Pham, and Singh 2016). From this, it is evident that 2015 FY proved a difficult year for multiple firms in the industry. From the two analysis of financial performance of the two companies, Waterco Limited looks to have performed better over the two years than Saferoads Holding Limited. To investors, Waterco Limited looks a better prospect to invest in than Saferoads Holdings. Key Business and Inherent Risks Inherent risk is risks associated with the complexities of transactions as well the circumstances that need a high degree and accuracy of judgments concerning projections of financial estimates. For the purpose of this study, key business will capture the available opportunities the two firms can invest. Waterco Limited Waterco Limited is vulnerable to a range of risks. Some of the most pronounced risks the group is exposed to in their daily operations include liquidity risks, interest rate risks, price fluctuations risks, foreign currency risks, and credit risks (Murray, Pham, and Singh 2016). Each one of the risks mentioned above offers substantial threats to the survival of the business in the industry. It should be noted that the company trades in derivatives to raise additional capitals as well as to hedge the company from threats that originate from both external and internal sources. The company has been made significant efforts to manage the above risks especially credit risks via the maintenance of procedures and processes in relations to the granting, approvals and renewal of credit boundaries, monitoring, and control of vulnerabilities against this limits as well as the financial stability of crucial customer base. Key business prospects available to business includes venture capitals and new business prospects. Saferoads Holding Limited The company uses various financial instruments to raise additional capitals. Some of these instruments include commercial bills, short-term deposits and hire purchase contracts, trade debtors, and trade creditors as well as derivative instruments. These instruments come with significant risks to the firm some of these risks includes liquidity risks, interest risks, market price risks, foreign currency risks (Murray, Pham, and Singh 2016). The company just like Waterco Limited has made significant efforts to put the risks under control. For liquidity risks, for instance, the Saferoads Holding Limited has pursued a goal of striking a balance between flexibility and endurance of funding via the application of bank loans, and the existing working capital. Just like Waterco Ltd, the strategic business prospects Saferoads has is venture capital and new product developments. From the two analysis, it is evident that both firms seem to be facing almost the same risks in their various business operations. This can be significantly attributed to the usage and application various instruments the two firms have been using to raise finance as well as maintaining their existing capital base. Audit Strategies and Audit Tests for the Two Companies Audit strategies give the overall approach an auditor of a company will pursue to conduct the audit. It gives the scope that is understanding the business entity under consideration, its risk levels, the legal environment it operates in and the financial reporting standards applicable among others. Also, audit strategies enable an auditor to determine the resources to deploy in specific audit areas, the amount required, when the resources should be deployed and the general management, supervision, and coordination of the deployed material. Audit tests are procedures and processes performed by an auditor to analyze the accurate levels of various financial statements affirmations. The most common applicable audit tests are tests of internal controls and substantive tests (Coram 2014). Both are useful and thus applied to both the internal and external auditors so as for reach and conclude an established audit objective. Internal control test focuses on basic internal control practices that are developed and designed to detect and prevent possibilities of material misstatement that may end up compromising the accuracy of financial statements. Substantive audit tests, on the other hand, are used to validate the balances shown in the financial statements. The auditors of the two companies used an audit approach that was in line the standards sets by the financial reporting frameworks given by the Australian accounting standards and the Corporation Act of 2011. The two firms seem to have expanded their operations outside Australian market, and this implies that their operations and transactions keep on expanding. Therefore, in the executing auditing of the company, both substantive tests, and tests of internal control would be highly used to obtain enough evidence worth to conclude an audit report. The usefulness of the two test and thus its materiality is of great important to understanding the importance attached to various financial entities of the two firms. Concluding an Audit Reports and Opinions of the Two Companies The conclusion of an audit task of the financial statement is followed by the writing of a report by a firm’s audit company over which an opinion is provided regarding the financial statements of the company. Audit reports provide a written opinion of the company’s auditor concerning the firm’s financial statements. Audit reports are written using a customary format as mandated and outlined by the Generally Accepting Auditing Standards (GAAS) (Coram 2014). The external auditors for Waterco Limited for the 2015 financial year were RSM Bird Cameron Partners while for Saferoads Holding Limited was Grant Thornton Audit Pty Limited for the same period. RSM Bird Cameron Partners and Grant Thornton Audit Pty Limited opinions regarding the audited remuneration reports of these two companies under consideration indicated that they had complied with section 300A of the Corporation Act 2001. The implication these opinions have is that the respective auditors’ for the two companies have assessed the financial reports of the two companies and they have agreed that the reports have been prepared and reported in accordance with the stipulated standards and thus they have no reservations to the company’s compliance thus providing an unqualified opinion. Limitations of the audit reports to users To an auditor, the limitation of usage and thus the level of liability placed to him by users of the audit report established should be the consequences of their own actions. The wide notion user of auditor’s report on the ability to pay instead of the level of fault is something policy makers needs to revisit and make possible amendments where possible. The limitations users on the reliance of the audited report are limited within the confines of the auditor's judgment which is established and developed based on the set standard, auditors experience and independent levels awarded. While auditor owes user of their audit report duty to care it is critical that some exemptions should be outlined to minimize the extent of which an auditor might be liable to third parties as well as the intended users of the report. Examining the two reports, the two auditors (RSM Bird Cameron Partners and Grant Thornton Audit Pty Limited) of the companies did not place any discharges in their audit report an issue that tends to intensify the user’s reliance and thus possible litigations that can be directed to the two audit firms suppose something contrary happens while third parties rely on the various analysis made regarding the financial statements. Auditor’s Responsibilities in the Two Companies External independent auditors have a solemn responsibility of giving an independent opinion on whether the financial statements of a company are fairly presented regarding all material aspects and in accordance with the stipulated financial frameworks and standards. The opinion formed considers the Generally Accepted Auditing Standards (GAAP) as well as the relevant ethical standards and requirements (Coram 2014). For opinions to be made, auditors are required to collected that are deemed suitable that will be used as evidence to observe test, compare and confirm until an assurance that can be considered reasonable is developed. It’s after such process that an auditor of a company can come up with an independent opinion on whether the financial statements are free from material misstatement that may originate from error or fraud (Coram 2014). For both Waterco Limited and Saferoads Holding Limited, the stipulated responsibility of the Auditor as indicated in the audit reports for the two firms is to audit the various financial reports of the company and give an opinion based on the various assessments and evaluations made on whether the two firms have complied with the postulated accounting standards that are recognized within Australia nation as well as those that are globally recognized. It is the responsibility of the two audit firms to seek enough evidence that will help them draw an appropriate conclusion concerning the financial reports of the two companies. Among the available techniques used to collect audit evidence to draw an audit report and thus to make an audit opinion is the use of audit tests of substantive tests and test of controls that were discussed earlier. Work Cited Coram, P., 2014. Audit reports. Murray, H., Pham, T.P. and Singh, H., 2016. Latency reduction and market quality: The case of the Australian Stock Exchange. International Review of Financial Analysis, 46, pp.257- 265. Read More