ADVANCED AUDITING

DERRIMON TRADING COMPANY LIMITED

AUDITING PROCESS F/Y 2020/2021

Contents
AUDIT ENGAGEMENT LETTER......................................................................................................................3
Documentation Submission Request.........................................................................................................13
Understanding the Client Business............................................................................................................17
 Background............................................................................................................................................17
History...................................................................................................................................................18
Products................................................................................................................................................20
Corporate Information..........................................................................................................................22
Industry.................................................................................................................................................24
Business Operations and Processes.......................................................................................................25
Corporate Governance..........................................................................................................................27
Code of Conduct....................................................................................................................................29
Objectives and Strategies......................................................................................................................31
MISSION.............................................................................................................................................31
OUR VISION.......................................................................................................................................31
OUR VALUES......................................................................................................................................31
Strategic Planning Audit Checklist.........................................................................................................32
Measurement and Performance...............................................................................................................34
Risk............................................................................................................................................................36
Operational Risk....................................................................................................................................36
Economic Risk........................................................................................................................................37
Commodity Price risk.............................................................................................................................39
Currency risk..........................................................................................................................................39
Interest rate risk....................................................................................................................................41
Credit risk..............................................................................................................................................41
Liquidity risk..........................................................................................................................................43
Reputational Risk...................................................................................................................................44
Preliminary analytical procedures.............................................................................................................45
Ratio Analysis for Derrimon Trading Limited.........................................................................................46
Liquidity Ratios..................................................................................................................................46
Activity Ratio......................................................................................................................................48
Solvency Ratio...................................................................................................................................55
Profitability Ratio...............................................................................................................................57
Gross Profit Ratio...............................................................................................................................58
Return on Assets Ratio.......................................................................................................................59

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Materiality.................................................................................................................................................61
Setting Qualitative materiality...............................................................................................................63
Setting Quantitative Materiality............................................................................................................65
Setting Performance materiality............................................................................................................66
Audit Budget..............................................................................................................................................67
References.................................................................................................................................................70

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Audit engagement letter

AUDIT ENGAGEMENT LETTER

L’DOCA & ASSOCIATES

25 Pines Plaza
Portmore, St. Catherine

November 28, 2020

The Directors,
Derrimon Trading Company Limited
235 Marcus Garvey Drive
Kingston 11

Re: Audit engagement for the financial year 31 December 2020

The purpose of this letter is to confirm our understanding of the terms or our arrangement to

provide audit to the financial statements of Derrimon Trading Company for the year ended 31

December 2020.

Our audit will be conducted on the company’s balance sheet as of 31 December 2020, statements

of income, retained earnings, and cash flow for the year with the intention of expressing an

opinion on them. The audit will be conducted in accordance with the International Standard on

Auditing (ISA). ISAs require the auditor to obtain reasonable assurance about whether the

financial statements as a whole are free from material misstatement, whether due to fraud or

error. Reasonable assurance is a high level of assurance. It is obtained when the auditor has

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obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the

auditor expresses an inappropriate opinion when the financial statements are materially

misstated) to an acceptably low level. However, reasonable assurance is not an absolute level of

assurance, because there are inherent limitations of an audit which result in most of the audit

evidence on which the auditor draws conclusions and bases the auditor’s opinion being

persuasive rather than conclusive. 1(International Standard on Auditing 200)

Any significant deficiencies relating to internal control over financial reporting identified during

our audit will be communicated to management and the board of directors in a management

letter at the conclusion of the audit.

Management responsibilities

The financial statements of Derrimon Trading Company Limited are the responsibility of the

management. That is, management is responsible for proper bookkeeping and for establishing

and maintaining internal control sufficient to permit the preparation of financial statements in

conformity with International Financial Reporting Standards (IFRS). Management is responsible

for adjusting the financial statements to correct material misstatements aggregated by us during

the current engagement and pertaining to the year ended 31 December 2020 are immaterial, both

individually and in the aggregate, to the financial statements taken as a whole. Management is

also

1
https://www.ifac.org/system/files/downloads/a008-2010-iaasb-handbook-isa-200.pdf

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responsible for identifying and ensuring that the company complies with the laws and regulations

applicable to its activities.

It is also Management’s responsible to provide to us all the company’s original accounting

records and related information and company personnel to whom we may make direct inquiries.

The ISA require that we exercise professional judgment and maintain professional skepticism

throughout the planning and performance of the audit and, among other things:

 Identify and assess risks of material misstatement, whether due to fraud or error, based on

an understanding of the company and its environment, including the company’s internal

control.

 Obtain sufficient appropriate audit evidence about whether material misstatements exist,

through designing and implementing appropriate responses to the assessed risks.

 Form an opinion on the financial statements based on conclusions drawn from the audit

evidence obtained.

Auditing standards also require that we obtain written representations covering audited financial

statements from certain members of management. The results of our audit tests, the responses to

our inquiries and the written representations comprise the evidential matter we intend to rely

upon in forming our opinion on the financial statements.

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Our responsibilities and limitations

The objective of an audit is the expression of an opinion on the financial statements. We will be

responsible for performing the audit in accordance with applicable auditing standards. These

standards require us to plan and perform the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement. In addition, the audit will include

examining on a test basis, evidence supporting the amount and disclosure in the financial

statements, assessing accounting principles used and significant estimates made by management,

in order to evaluate the overall financial statement presentation.

We will consider the Company’s internal control over financial reporting solely for the purpose

of determining the nature, timing, and extent of auditing procedures necessary for expressing our

opinion on the financial statements. This consideration will not be adequate to allow us to

provide assurance on the effectiveness of the internal control over financial reporting. However,

any significant deficiencies relating to internal control over financial reporting identified during

our audit will be communicated to management and the board of directors at the conclusion of

the audit.

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The audit will be designed to obtain reasonable, assurance about whether the financial statements

as a whole are free from material misstatement, whether due to fraud or error, thereby enabling

the auditor to express an opinion on whether the financial statements are prepared, in all material

respects, in accordance with an applicable financial reporting framework; and to report on the

financial statements, and communicate as required by the ISAs, in accordance with the auditor’s

findings.

In all cases when reasonable assurance cannot be obtained and a qualified opinion in the report is

insufficient in the circumstances for purposes of reporting to the intended users of the financial

statements, the ISAs require that we as auditor disclaim an opinion or withdraw (or resign) from

the engagement, where withdrawal is possible under applicable law or regulation.

It is important to recognize that there are inherent limitations of an audit together with the

inherent limitations of internal control, there is an unavoidable risk that some material

misstatements may not be detected, even though the audit is properly planned and performed in

accordance with ISAs.

Audits are based on the concept of selective testing of the data underlying the financial

statement, which involves judgment regarding the areas to be tested and the nature, timing,

extent, and results of the tests to be performed. Audits are, therefore, subject to the limitation that

material errors or fraud or other illegal acts having a direct and material financial statement

impact, if they exist, may not be detected. Based on the characteristics of fraud, particularly

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those involving concealment through collusion and falsified documentation (including forgery),

an audit designed and executed in accordance with ISA may not detect a material fraud. Further,

while effective internal control reduces the likelihood that errors, fraud, or other illegal acts will

occur and remain undetected, it does not eliminate that possibility and for these reasons we

cannot guarantee that

any errors, fraud, or other illegal acts, if present, will be detected. However, we will

communicate to you, as appropriate, any illegal act, material errors, or evidence that fraud may

exist identified during our audit.

The process of our audits is intended to benefit the company. The audit will not be planned or

conducted in contemplation of reliance by any third party or with respect to any specific

transaction. Therefore, items of a possible interest to a thirds party will not be specifically

addressed and matters may exist that would be assessed differently by a third party, possibly in

connection with a specific transaction.

Staffing and Timing

The audit will be led by Engagement Partner Ms. Latoya Johnson, while Concurring Partner Ms.

Delinda Murray will act as the Quality Control Partner. The audit team will also include Audit

Manager Ms. Oshin Crosdale, Senior Auditor Andre Francis and Semi-senior Auditor Ms.

Cristol Steele and four (4) other junior auditors.

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We anticipate that audit planning will commence January 11, 2021. Fieldwork will commence

February 1, 2021.

Given that all requested schedules are made available to us in a timely manner, we expect to

finalize the engagement and issue our audit report within Six (6) weeks of commencing of the

audit fieldwork.

Completion of our work is subject to and among other things:

i) Appropriate cooperation from the company personnel which includes the timely

preparation of all necessary schedules.

ii) Timely responses to our queries and,

iii) Timely communication of all significant accounting and financial matters.

Fees

Our fee estimates are based on the time required by the individuals assigned to the proposed

engagement. Hourly rate varies per person according to the responsibility assign and in addition

to the experience and skills that is required.

The estimated fees to conduct the audit will be $10,845,420.00 and for the filing of the

company’s tax will cost an estimate of $3,250,000. These amounts do not include any out-of-

pocket expenses or any money to be reimbursed for travel expenses. If schedules are not

provided in a timely manner and will cause the audit to be behind schedule and for any

additional hours will be discuss with the management and will exceed that estimate.

The Audit fee is broken down as follows and excludes GCT:

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 (1) One third (1/3) of the money is due upfront on the commencement of the audit.

(2) Another one third (1/3) is due halfway the audit.

(3) Finally, the final payment is due on submission of first draft of the report.

The submission of all invoices is due and payable upon receipt of same. In addition, if we are

unable to complete the audit due to any negligence of the company then an invoice will be issued

for the work completed.

Other matters

The auditing standards entail reading any Annual Report that contains our audit report. The

purpose of this procedure is to consider whether other information in the annual report, including

the manner of its presentation is materially inconsistent with information appearing in the

financial statements. We assume no obligation to perform procedures to corroborate such other

information as part of our audit.

Oral and written management representations to an effective audit is deemed very important, the

company releases and indemnifies L’DOCA & Associates and its personnel from all claims,

liabilities, costs, and expenses attributable to any knowing misrepresentation by management.

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In no event shall L’DOCA & Associates be liable to the company, whether a claim be in tort,

contract or otherwise, for any consequential, indirect, list profit or similar damages relating to

L’DOCA & Associates’ services provided under this engagement letter, except to the extent

finally determined to have resulted from the willful misconduct or fraudulent behavior of

L’DOCA & Associates relating to such services.

If for any reason additional services requested and we agree to provide same, then this will be the

subject of separate written arrangements.

In the event our present is requested or authorized by you or required by government regulations,

subpoena, or other legal process to produce our working papers or our personnel as witness with

respect to our engagement for you, you will, so long as we are not party to the proceeding in

which the information is sought, reimburse us for our professional time and expenses, as well as

the fees and expenses of our counsel, incurred in responding to such a request.

The Company agrees that it will not, directly, or indirectly, agree to assign or transfer any claim

against L’DOCA & Associates arising out of this engagement to anyone.

This engagement letter reflects the entire agreement between us relating to the services covered

by this letter. It replaces and supersedes any previous proposals, correspondence, and

understandings, whether written or oral. The agreement of the company and L’DOCA &

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Associates contained in this engagement letter shall survive the completion or termination of this

engagement.

If you have any questions or require any clarifications, please contact Ms. Latoya Johnson at

876-576-1800.

If the services outlined herein are in accordance with your requirements and if the above terms

are acceptable to you, please sign in the space provided below and return same to us.

Yours truly,

LJohnson
Engagement Partner, L’DOCA & Associates

Acknowledge on behalf of Derrimon Trading Company Limited by

…………………………………… …………………………

Name and Title Date

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 Documentation Submission Request

L’DOCA & ASSOCIATES

25 Pines Plaza
Portmore, St. Catherine

December 01, 2020

The Directors,
Derrimon Trading Company Limited
235 Marcus Garvey Drive
Kingston 11

Dear Sirs:

Re: Interim Request of Schedules for the financial year ended 31 December 2020

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To aid in the planning and subsequent performance of our audit of the financial statements for

the company, for the year ended December 31, 2020 we are requesting the following document

listed below for our review for the period January 1, 2020 to November 30, 2020 by December

15, 2020.

All schedules provided must be reconciled to the general ledger trial balance. If there are any

discrepancies that may arise, an investigation and the necessary adjustment should be done prior

to the commencement of our fieldwork exercise and it must be investigated and adjusting entries

made prior to the start of our field work exercise on February 15, 2021.

Bear in mind that this list given is preliminary and at any time throughout the audit process other

documents may be requested. In addition, in order to complete the audit of the financial

statements we require the timely presentation of documents requested and the cooperation of

your team:

Management Accounts

 Complete set of financial statements including trial balance for the period January-

December 2020

Reconciliation Statements

 Intercompany and Bank reconciliation statements for the financial year.

Sub ledger accounts to General Ledger

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Property, Plant & Equipment

 Fixed Assets Register

 Schedule of additions and disposals (include supporting documents of sales and

purchases)

 Analysis of repairs and maintenance account

 Gain/loss on disposals of fixed assets; and

 Schedule of insurance coverage (NBV of the asset and insurance cover as per insurance

schedule).

Accounts Receivable & Prepaid Expenses

 Analysis of prepaid expenses

 Aged accounts receivable as at December 30,2020

 List of debts that are considered doubtful per client.

 Analysis of prepayments

Statutory Payments and taxes

 Analysis of payroll deductions payable

 Analysis of Withholding Tax

 Details of taxes paid to date.

Revenue

 Analysis of revenue and other income

 Inter-company revenue

Expenses

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  Schedules showing general and administrative expenses, the date of the transaction, the

payee, the nature of the transaction and amount.

 Analysis of director’s emoluments.

 Analysis of donations

 Staff costs and number of employees.

Other Income & Expenses

 Analysis of gain/loss on foreign exchange

 Analysis of dividends and interest income

If you have any queries or require clarification on our request, please contact us promptly to

avoid delays that could adversely impact the audit exercise.

Yours sincerely,

_DMurray
Delinda Murray (Ms.)

Quality Control Partner,

AGREED & Sign: ............................................

Date: ..................................................................

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Understanding the Client Business

Understanding the client’s business and industry

Background

Derrimon Trading Company Limited was incorporated as a private company limited by shares

on December 21, 1998. In 2013, a special resolution was passed the Company converted from a

private to a public company and adopted new Articles of Incorporation consistent with the

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requirements of the Jamaica Stock Exchange (JSE). The Company’s Ordinary Shares were listed

on the Junior Market on December 17, 2013.Derrimon Trading Company Limited primarily

earns revenue from the distribution and retail of bulk goods and the manufacturing, wholesale,

retail and distribution of flavors and fragrances. Its registered office is located at 233 and 235

Marcus Garvey Drive Kingston 11. Furthermore, the company has three subsidiaries:

• Caribbean Flavors and Fragrances Limited (62.02% owned)

• Woodcats International Company Limited (100% owned)

• Select Grocers Supermarket (60% owned)

The company distributes consumer goods including products from prominent brands such as

Nestle, Sun Powder, Blue Powder, and Golden Brand. In 2018, Derrimon Trading established an

agreement with SM Jahleel and Company Limited, a Trinidad based manufacturing company, for

the resale of beverages such as Busta and children friendly drink brands such Kool Kidz.

The wholesale and retail division comprises of Sampars Cash and Carry chain as well as two

Select Grocers Supermarkets which Derrimon Trading owns and operates under a joint venture

arrangement with the Jamaica Property Company Limited. Additionally, the manufacturing

division includes the other two subsidiaries: Woodcats International (WI) which was acquired in

September 2018, and Caribbean Flavours and Fragrances (CFF) owned. Woodcats presently

provides a full range of pallet solutions including manufacturing pallets for export and

warehouse storage. CFF delivers high quality flavours and fragrances to the major beverage

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manufacturers in Jamaica and provides fragrances to local manufacturers of household and

personal care products. In addition, CFF exports flavours and fragrances to Canada and the wider

Caribbean

History

Derrimon Trading Company Limited is an exceptional company, with impressive performance

and an incredibly bright future in store. The company was founded in 1998 by Derrick and

Monique Cotterell and grew from modest beginnings. The company commenced its’ business

operations first as a distributor of commodities in the Kingston area. In 2002, Nestlé, the world’s

leading

nutrition, health, and wellness company was changing its market strategy. The company wanted

to give greater focus to a few select accounts, and have its remaining accounts handled by

regional sub-distributors. Mr. Cotterell sought out this business opportunity, and after

consultations with Nestle, the recently formalized and relatively unknown company, Derrimon

Trading was selected to be one of Nestlé’s four regional sub distributors in Jamaica. Derrimon

received responsibility for the Kingston, St. Andrew, St. Catherine, and St. Thomas markets. The

business began to grow in intensely in 2002, after the appointment as regional co-distributor of

Nestlé Jamaica Limited.

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This moment was pivotal to the success of Derrimon Trading Company Limited, this was just the

beginning of successful acquisitions and partnerships. In 2009, the company acquired the

business of well-known Sampars Cash and Carry, one of the largest wholesale businesses

in Kingston. The Company’s retail operations have been expanded since then to include seven

(7) Sampars locations in: Kingston, Saint Andrew, Saint Catherine, Manchester, and Saint Ann.

In addition to Sampars Cash and Carry, Derrimon also acquire Select Grocers Supermarket

which is located in Upper Manor Park Plaza in Saint Andrew In order to increase the portfolio of

products supplied by the Company and therefore extending its market reach. Presently, this one

of the best strategic moves made by the management team of Derrimon Trading. This strategy

enabled the company to be front and center to their target market. Subsequently, Derrimon

Trading was not just only the distributor and now the company was also the retailer.

Derrimon was on the path of phenomenal success, the company was on an intensified path of

growth which includes sales and physical expansion, growth in staff and management. The next

milestone was joining the Jamaica Stock Exchange Junior market as a publicly listed company.

Additional, Derrimon later introduced its own line of exclusive branded products under the

“Delect” name. This range of products include rice, canned mackerel, tomato ketchup, vegetable

oil, cornmeal, and other products, and is designed to provide customers with premium quality at

a competitive price point. Therefore, providing much need competition to Grace, Lasco and Eve.

Products

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Derrimon Trading prides itself on being innovators and pioneers in everything they offer and is

consistent in recognizing the unmet needs of the Jamaican consumers for higher quality, more

affordable foods, which has led the company to create its own unique brands. Derrimon success

as a retailer and distributor can be contributed to the fact that this company provides a wide

range of products and services to their consumers. Derrimon is a leading distributor of cold

storage products second to none, due to the quality cold storage products and excellent customer

service. Their cold storage items include: Beef Liver, Oxtail, Beef Kidney, Mutton, Turkey

Neck, Sea Trout, Chicken Back, French Fries etc.

Derrimon is the number one distributor of Nestle products in Jamaica. Nestle is the world’s

leading nutrition, health, and wellness company. Nestlé products includes cereals, shakes, milk,

condense milk, baby foods and formulas, Milo, nutriment bars and drinks, and so many more.

Derrimon Trading Company Limited is well-known and sought, for the reliable distribution of

the highest quality rice in Jamaica, over their competitors. Derrimon is a leading distributor of

rice in

Jamaica, supplying stores island-wide. Derrimon supplies long grain Suriname white rice which

is one of the premium rice types produced in the Caribbean and South America. It is customary

that every year, the company select the best white rice available for distribution. This is then sold

in grocery stores and supermarkets across Jamaica.

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Derrimon carries an assorted range of products including all the major dry goods that Jamaicans

consume daily. Dry products include: Cornmeal, Parboiled Rice, Round Red Peas, Kidney

Beans, Salt, Codfish, Sun Powder Detergent, Blue Power Soap, etc. Additionally, Derrimon has

its own flagship brand called Delect. As captured in the name, Delect products are wholesome,

mouth-watering, and delectable treats. The incredible offer Delect provides to the Jamaican

consumer is more value for money than all other brands. Delect offers premium products, at

unbeatable affordable prices. Included in the Delect family of foods are rice, canned mackerel,

ketchup, vegetable oil, cornmeal.

Corporate Information

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BOARD OF DIRECTORS
EXECUTIVE DIRECTORS REGISTERED OFFICE BANKERS

Derrick Cotterell, M.B.A., B.Sc. (Hons) Derrimon Trading Company Limited Bank of Nova Scotia
Chairman & Group Chief Executive Officer 235 Marcus Garvey Drive 86 Slipe Road
Monique Cotterell, B.Sc. Kingston 11, Jamaica, W.I. Kingston 5, Jamaica W.I.
Company Secretary & Group HR Director Tel: (876) 937-4897-8
Ian Kelly, CPA, M.Sc., B.Sc. (Hons) Tel: (876) 901-3344 National Commercial Bank
Group Chief Financial Officer & Divisional Fax: (876) 937-0754 37 Duke Street
Director - Sampars Email: info@derrimon.com Kingston, Jamaica W.I.
Website: www.derrimon.com
NON-EXECUTIVE DIRECTORS Sagicor Bank
ATTORNEYS-AT-LAW 17 Dominica Drive
Alexander I.E. Williams, LL.B (Hons) C.L.E Kingston 5, Jamaica W.I.
Earl Richards, CD, M.B.A, BA.Sc. Alexander Williams & Company
Winston Thomas, B.Sc. Unit 6A, Seymour Park,
Paul Buchanan, BAA 2 Seymour Avenue
Tania Waldron-Gooden, M.B.A., B.Sc. Kingston 6, Jamaica W.I.
Mentor to the Board
REGISTRAR & TRANSFER
AUDITORS AGENTS
SENIOR OFFICERS
L'DOCA & Associates Jamaica Central Securities Depository
Derrick Cotterell, M.B.A., B.Sc. (Hons) 40 Harbour Street
Chairman & Group Chief Executive Officer Kingston, Jamaica W.I.
Monique Cotterell, B.Sc. PRIOR AUDITORS
Company Secretary & Group HR Director
Ian Kelly, CPA, M.Sc., B.Sc. (Hons) McKenley & Associates
Group Chief Financial Officer & Divisional Unit 11, Seymour Park,
Director - Sampars 2 Seymour Avenue
Craig Robinson, M.B.A., B.Sc. (Hons) Kingston 6, Jamaica W
Commercial Manager Sampars Cash and
Carry
Sheldon Simpson, M.B.A., B.Sc. (Hons)
Divisional Manager - Derrimon

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TOP (10) SHAREHOLDERS AS AT DECEMBER 31, 2020

Name Number of Shares Held

Derrick Cotterell 1,113,797,633

Mayberry Jamaican Equities Limited 435,130,974
Monique Cotterell 400,000,000
Ian C. Kelly 157,373,169
Estate of E. Cotterell (Deceased) 100,000,000
Winston Thomas 72,351,180
JCSD Trustee Services A/C Barita Unit Trust :
Capital Growth Fund 64,648,942
Sharon Harvey-Wilson 29,163,580
Sagicor Pooled Equity Fund 27,756,920
Sagicor Select Fund – (‘Class C’ Shares)
Manufacturing & Distribution 22,600,000

SHAREHOLDINGS OF DIRECTORS
AS AT DECEMBER 31, 2020

Name Number of Shares Held

Derrick Cotterell 1,113,797,633

Monique Cotterell 400,000,000
Ian C. Kelly 157,373,169
Winston Thomas 72,351,180
Earl Anthony Richards 5,325,000
Alexander I.E. Williams 500,000
Paul Buchanan 300,000

SHAREHOLDINGS OF SENIOR OFFICERS

AS AT DECEMBER 31, 2019

Name Number of Shares Held

Sheldon Simpson 2,539,728

Craig Robinson 145,000

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Industry

Derrimon Trading core function as previously stated is based on the distribution and retail of

bulk goods and the manufacturing, wholesale, retail and distribution of flavors and fragrances.

Presently in 2020, the world is facing a pandemic Covid-19 which created a new normal that is

practicing social distancing since the traditional customs and methods no longer exist or in fact

been affected. The ritual of going to supermarkets and markets are now being limited,

governments setting restrictions in regard to curfews, having individuals being quarantined,

elderly individuals over specified ages are mandated to stay home in this pandemic and a

stipulated number of persons to be in gatherings or an institution at a given time. The business

environment as differently change therefore now is the best opportunity for an online grocery

store. Therefore, Derrimon through its Sampars platform has been a significant player in

facilitating online purchases of groceries. The COVID-19 pandemic has accelerated the adoption

of digitization by local consumers. Derrimon can expect that a significant percentage of

consumers are likely to turn to digital mediums to purchase their essentials. Based on data

reviewed and received from The Statistical Institute of Jamaica for the period 2012 to 2017 the

growth for the number of households in Jamaica that have access to internet at home grew from

24 % in 2012 to 53% in 2017 this is a 122.5% increase. In essence more Jamaican are gaining

internet access due to work from home as well as children attending schools online therefore,

Derrimon is poised for exponential growth. The Pandemic has impacted the prices of many

assets to contract. Against this background, Derrimon is always seeking new opportunities and

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acquisition company is presently evaluating two (2) potential acquisitions in the United States of

America. If these potential acquisitions are consummated

Derrimon is likely to realize significant synergies from vertical integration of those businesses

with its existing business lines. However, the pandemic as affected the consumers over the world

and Jamaicans are no exception, based on data received from the Statistical Institute of Jamaica

stated the consumer price index for December 2020 was 6.4 in comparison to February 2020

which was stated as 0.7. The cost of items is increasing, therefore eroding the consumes’ ability

to purchase items. This can seriously impact Derrimon business operations as the consumers

purchasing power is being reduce.

Business Operations and Processes

Derrimon Trading Co. Ltd. business mix has allowed the company to both reduce risk and

incorporate multiple revenue streams. DTL operates in three segments, two thirds of the

company’s operations (retail and distribution) are exposed to similar risks as both companies sell

household and grocery items. The third segment is manufacturing, includes both CFF and

Woodcats which makes flavours and fragrances and wooden pallets, respectively. Against this

background, this decreases the company’s revenue concentration risks. Derrimon’s diversified

earning streams played a vital role during the financial year of 2020, the pandemic as lead to an

erosion in beverage profits due to mandated schools’ closures was effectively offset however by

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the growth in Sampars’ online based services. The company indicates continuous commitment to

revenue diversification through acquisition of value-enhancing businesses.

Derrimon is set on Warehousing expansion: The 105,000 square-foot facility located on Marcus

Garvey drive will be leased for 20 years from Tank-Weld metals, a construction company. This

new facility is expected to facilitate growth in the present portfolio through economies of scale

and allow for the distribution of new, strong brands. The potential acquisitions that the company

has entered into agreements to acquire 80% share in two entities in North America in an area

with a large African, Caribbean, and Jamaican diaspora. The executive management indicated

that these opportunities were brownfield in nature therefore supporting the prospects for the

immediate optimization and integration with their current operations. Ultimately, if these

acquisitions are successful, the company stands to benefit from vertical integration as well as

exposure to new markets since these companies already have established market presence in the

United States. The company projects an injection of approximately J$7.10B in revenues in FY

2021 if these acquisitions are successful. This will have significant impact on Derrimon Trading,

and its present operations, the business operations will expand too international. The company

will now be required to adhere to new compliance issues and regulations that will be determined

by the United States. The objective of the audit is to determine whether the internal controls of

the business, such as the policies and procedures, are sufficient to produce an optimum level of

efficiency and effectiveness. This is crucial for businesses, because a lack of efficiency and

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effectiveness typically impacts sales and revenues as well as operational costs, which can

ultimately impact the business ability to be competitive and the viability of the business. Other

organizations may use an audit to determine whether an entity is following specific laws, such as

legislations and regulations required for their industry. The audit team of L’DOCA & Associates

will be conducting a

substantial testing on the organization’s business operations and processes by carrying out the

following procedures.

Corporate Governance

The Board of Directors of Derrimon Trading Company Limited represents the welfares of its

owners in guiding management towards the growth and success of the business. The directive of

the Board of Directors includes optimizing long-term financial returns, increasing market share

and market capitalization, lowering the cost of capital and operating expenses. Derrimon Trading

Company Limited’s long-term performance and success is due to its achievement of the highest

standards of corporate governance and corporate social responsibility, as well as the on-going

commitment of this Board. The Board’s principal responsibility is to ensure that the management

team at Derrimon Trading Company Limited and its subsidiaries operates in a manner in which

the results are not only beneficial to the shareholder but also adds value to all stakeholder groups.

28 | P a g e
Currently, at Derrimon Trading there is constant monitoring and evaluation of the management

practices of the Company, this is inclusive of its policies and decision-making processes and

execution of corporate strategic objectives that will ensure that the financial trajectory of the

company is sustained. Board members are selected based on their levels of expertise in the areas

of the Company’s business and as such are ideally capable to advise and act in the interests of all

stakeholder groups. As stipulated the number of Executive Directors should at no time exceed

50%

of the total number of Directors. Additionally, Derrimon Trading has implemented a conflict of

interest or Disclosure policy which stipulates that all transactions involving the Company’s

shares entered by any Director, must be promptly reported to the Company Secretary who is

obliged to disclose such information on a regular basis to the Jamaica Stock Exchange. Presently,

Derrimon Trading Company Ltd. board has two (2) committees. Audit Committee and Human

Resources and Compensation Committee. Furthermore, the key responsibilities of the DTL’s

Board of Directors are as follows:

• Corporate Governance

• Compliance with laws, regulations, and the Company’s Code of Conduct

• Corporate Citizenship

• Strategy and operational plans

• Business development, acquisitions, and expansions

• Finance and Treasury

29 | P a g e
 • Appointment and removal of directors

• Remuneration of executive and nonexecutive

• Directors

• Risk management

• Financial reporting and auditing

• Succession planning for its Executive Chairman and other senior executives.

• Technical - supply chain management, sales and marketing, customer service,

• trade and retail sales

• Industry Experience - logistics, distribution,

• international trade, foreign exchange leveraging.

It is imperative that a corporate governance audit is done as it accesses the management’s

attitudes on principles outlined. The reason being is that organizations tend to implement policy

and practices that management overrides that can possibly lead to breaches of their own policies

and principles. The audit will have a questioning mind as to the level of assessments, the

treatment of these irregularities and how they were addressed by management. The focal point

will be, what were the recommendations made, sanctions imposed and what measures were

implemented to avert such occurrences in the future by the oversight (audit) committee.

30 | P a g e
Code of Conduct

The Board expects all Directors, as well as officers and employees, to always act ethically and to

adhere to all codes and policies that describes the values and principles of Derrimon Trading

Company Limited, namely:

• Respect and dignity

• Trust

• Communication

• Teamwork and appreciation

• Professionalism

• Good Value

• Group pride

For the audit of the code of conduct will be examined as a violation of ethical standards can

breakdown the bond of trust that is crucial to a profitable relationship between a business and its

customers. Preserving that bond of trust is imperative to an organization's viability, so it is

essential for management to develop procedures for measuring and quantifying compliance with

ethical standards. The most.

The audit will evaluate whether or not the code addresses all the business practices of the

organization as well as the standards of behavior employees are expected to adhere. The auditors

31 | P a g e
must check to see if the code has been communicated to everyone within the organization, and if

there is a protocol for employees to formally acknowledge they have received and understood the

requirements outlined in the code. This audit will determine if the organization’s leadership has

made a commitment to enforcing ethical behavior from the top of the company down to the

lowest levels of the organization. The audit determines if leadership has accepted responsibility

for the creation of a culture that insists on ethical behavior from every employee. Leadership's

commitment to ethics can be measured by surveys from customers and other stakeholders. An

ethical company culture creates value when customers perceive they will be treated with dignity

and integrity.

Objectives and Strategies

Derrimon Trading Company Ltd.’s Mission, Vision and Values

MISSION

To provide a wide portfolio of products and services that will add value for our customers and

suppliers. We will accomplish this through the empowerment of our staff, encouraging

innovation and rewarding productivity in our drive to become a world class company.

OUR VISION

Through God’s guidance to become a major company with world class performance standards,

demonstrating the highest levels of integrity in all business practices and interactions with

customers, suppliers, employees, and the society at large.

32 | P a g e
OUR VALUES

 Our Word is our bond.

 We go the Extra Mile for all our stakeholders with a spirit of Love.

 We are always Transparent.

 We work Together to achieve our goals.

 We accept Responsibility.

 We always display the highest Ethical Standards.

 We strive for Excellence in all that we do.

The audit of the objectives and strategies of Derrimon Trading Company Limited, will evaluate

the business management environment. Hence the audit will commence with assessing the

strategic planning of the management team. Business strategic planning identifies the mission,

goals, and values of the organization, and how the organization will achieve these as well as to

determine how it should act in order to reach the destination. Auditing the strategic planning

allows the audit team of L’DOCA to garner an insight into the company’s top-level goals and

expectations and then compare the current status of the goals with the plans. In essence, Strategic

Business Planning is a consistent and continuously evolving process of determining a company’s

long-term objectives and then developing or selecting the best approaches for achieving those

objectives. The purpose of this process is to set the direction for the company’s future activities

33 | P a g e
and operations and outline a plan of actions to move the company towards success. The process

entails creation of a business plan that specifies a route map for leading the company in the

desired direction.

Strategic Planning Audit Checklist

The audit team will utilize our check list to assess how well the management team of Derrimon

Trading Company Ltd. is determined to achieve these desired objectives stated above.

• Mission Statement. Is there a clearly written and unambiguous mission statement of the

business.

 Management Objectives. Assess if the management team has a clearly written statement

of strategic objectives that are critical to the organization’s performance? Are they SMART

(Specific, Measurable, Achievable, Relevant and Time-scaling?

 Target Market. Does Derrimon Trading know where their products and services are meant

to serve or benefit? Is there a written description of the company’s target market?

 Customers. Do you know who your customers are, what their characteristics are, and

whether they want to purchase from you?

 Competitors. Evaluating if Derrimon Trading Co. Ltd has a thorough strategy to keep their

company ahead of the competition? Is the company aware of what makes the organization

34 | P a g e
 competitive? Basically, what are strengths and weaknesses of the company? You should

define the competitive edge and then identify possible ways for maintaining it through

effective planning.

 Guiding Policies. Are there written policies and guidelines that the senior management as

well as employees can use in strategic/tactical decision making and problem solving? Can

you provide evidence your workers follow the policies?

 Business Opportunities. As Derrimon Trading Co. identifies any strategy and how they

can exploit these potential opportunities? For example, there can be opportunities for

increased sales and profits, developing new products, capturing new markets, others.

Furthermore, is the company capable and ready to exploit such opportunities?

 Threats. What are the threats faced by Derrimon Trading Co. Ltd. and are they clearly

defined? Auditors will examine if there is an approved plan of actions to address any issues

or risks related to the business existence? Can the company say that top-level personnel use

the action plan to efficiently respond to threats and uncertainties?

 Forecasting. The audit team will determine if the management team of Derrimon Trading

have any plans intended for the foreseeable future and predict future activities of the

company? Do you use forecasting as a method of strategic business planning? Do your

managers use the method to avoid surprised and unforeseen changes in the working

environment?

35 | P a g e
Measurement and Performance

Derrimon Trading Company reported exponential revenue growth during the past five year,

however the growth was achieved in 2018 and 2019 due to the acquisition of Woodcats

International Company as well as a distribution arrangement with SM Jahleel and Company

Limited established in 2018. Derrimon reported revenues for the financial year ended 2019

$12,649,017 in compassion to the financial year ended 2020 $12,777,464 this is a percentage

increase of 1.02%. While overall the Gross Profit Margin has increased from 13.2% in 2015 to

18.0% in 2019. Despite the challenges with Covid 19, Derrimon Trading was still able to achieve

growth in their gross profit for financial year ending 2020 achieving 8.94% increase in

comparison to financial year ending 2019. The operational profit for the financial year ending

2020 grew by

17.61%. The Derrimon Group’s Cost of Sales was J$10.37 billion for the 2019 Financial Year

compared to J$7.61 billion for the 2018 financial year. This represents a year-on-year increase of

approximately 36.23% which is in-line with the increase in Revenue. The Derrimon Group’s

Gross Profit for the 2019 Financial Year was J$2.28 billion, which is an increase of

approximately 34.76% from the 2018 Financial Year when the Derrimon Group recorded Gross

Profit of J$1.69 billion. Additionally, total asset for the company grew by 27.15% for the

financial year ending December 2020. The management team of Derrimon Trading Company are

making the best strategic business plan for their company to ensure the outcomes are beneficial

36 | P a g e
and add value to all their stakeholders. Derrimon is poised for further exponential returns once

the acquisition in North America is successful. These acquisitions are expected to cost around

$1.1 billion or 31.7% of the proceeds from the APO. These companies operate within the food

industry supplying not only the Jamaican diaspora, particularly in North East America, but

members of the entire Caribbean and African diaspora. While the US ethic foods market was

said to only grow by an average rate of 3% in the last five years (2015 – 2020), growth is said to

accelerate because of a change in the consumer demographic, consumer preferences and an

increase in immigration to the US. The entry of younger consumers to the market across all

ethnic groups represent a growing target demographic and have allowed ethnic food distributors

to thrive. In addition, consumers are seeking foods that have a higher nutritional value and

unique taste. Growth is anticipated from the increasing migration to developed markets among

the world population for personal and professional reasons. These acquisitions will allow for

geographic diversification of Derrimon’s

earnings from 100% being earned in Jamaica to an approximate ratio of 60% local and 40%

overseas earnings.

Risk

Operational Risk

37 | P a g e
Derrimon Trading (DTL) is one of the fastest growing distribution companies in Jamaica. The

company plans to expand its operations by continuing its acquisition streak by expanding its

operations into the North American market. Derrimon Trading is expected to record significant

growth from this inorganic growth opportunity as well as realize synergies from it to aid in its

organic growth strategy through the expansion of its Delect brand and distribution operations.

Nevertheless, there are risks associated with such a transaction which may negatively impact the

company’s expected growth, along with external pressures from market competition. It is

estimated the Derrimon Trading’ s future value will be gained from its North American

acquisitions. DTL faces the possibility of risk of loss in goods produced and distributed due to

both internal and external events. Internally, there could be spoilage of goods while externally,

there could be fire or flooding to the business. Due to the multiple acquisitions that DTL has

undertaken, there is increased risks of having failed or inadequate internal processes which could

lead to financial loss/and or reputational damage. Covid 19 impacts the operations of the

company due to the implementation of the disaster risk management act the disaster risk

management (enforcement measures) (no. 12) order, 2020. The enforcing of work from order,

early closure of business, supermarkets can have severe impacts on the business operations as

well as sales revenue as the pandemic continues. The return to normality is presently

unpredictable.

Economic Risk

Covid-19 has impacted the world and Jamaica significantly with different challenges; therefore,

companies have learned to pivot during these difficult times especially since the number of

38 | P a g e
infectious cases are still increasing daily. This has lead governments and countries throughout

the world to implement different Monetary Policy Decision to stimulate growth and to offer

financial assistance to its citizens. The Bank of Jamaica has decided to hold policy rate at 0.50

per cent per annum. The decision to hold the policy rate unchanged is based on our continued

assessment that the current monetary policy stance is generally appropriate to support inflation

remaining within the Bank’s target of 4% to 6% over the next two years. The current inflation

rate for the year 2019 as stated by the Statistical Institute of Jamaica, is 5.7%. The Bank of

Jamaica expects that the headline consumer price inflation will trend 5 - 6% in March 2021. This

near-term inflation forecast is largely being influenced by:

 a deceleration in agriculture and processed food price inflation.

 higher imported inflation.

The outlook for higher imported inflation is largely because of our projection for higher oil

prices, which should contribute to increased domestic energy and transport-related prices. The

projection of a slowdown in the pace of increase in food prices is mainly related to an expected

normalization in supply conditions, following the early onset of drought conditions since the start

of the year. In addition to these factors, there could be some adjustments in regulated prices,

which would affect inflation in the near-term. Over the next two years, inflation is projected to

remain in the 4% to

6% band Risks to the Forecast The risks to the inflation forecast over the near term are mainly

skewed towards a higher outturn.

39 | P a g e
Impact of COVID-19 on the Jamaican Economy the Bank has updated its view of the impact of

the COVID-19 pandemic on the domestic economy. Our current projection is for the contraction

in FY2020/21 to be greater than previously anticipated, in the range 7 – 10 percent. This is above

our earlier forecast for a contraction in the range of 4 – 7 percent. This worsened outlook is

largely associated with the resurgence of the virus in major trading partner countries as well as

updated assessments of the impact of the crisis on some sectors of the Jamaican economy.

Between June 2020 and March 2021, we expect weaker performances within Transport, Storage

& Communication, Electricity & Water, Construction and Hotels & Restaurants. The revised

outlook for Transport primarily relates to lower than anticipated demand for public

transportation, 5 given lockdown measures and work-from-home arrangements. For Electricity &

Water, the revision is associated with a reduction in demand arising from the general decline in

business activity, while the decline in Hotel & Restaurants is consistent with a more pessimistic

outlook for US GDP growth. The Bank is expecting that partial economic recovery will

commence in FY2021/22, with GDP growth anticipated in the range of 3 - 6 percent.

Notwithstanding the expectations for growth, the Jamaican economy is not expected to return to

pre-COVID-19 levels before FY2022/23.

Commodity Price risk

Price risk is the risk that the value of a financial instrument will fluctuate as a result of

40 | P a g e
changes in market prices, whether those changes are caused by factors specific to the

individual instrument or its issuer or factors affecting all instruments traded in the market.

The Company is exposed to price risk principally relating to the importation of rice. The

Company enters into commodity contracts in respect of the anticipated future usage

requirements and the price on imported rice is tracked and purchased in advance, when

necessary, if the price on the international market is increasing. This strategy is used to

mitigate this risk.

Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will.

fluctuate because of changes in foreign exchange rates.

The Group is exposed to foreign exchange risk, due to fluctuations in exchange rates on

transactions and balances that are denominated in currencies other than the Jamaican dollar.

The Group is exposed to foreign exchange risk, arising primarily with respect to the US

dollar, from commercial transactions such as the importation and sale of bulk rice that

represents a significant percentage of the Group’s overall purchase figure. To manage

currency risk on imported rice, the Group enters into short and medium-term arrangements

41 | P a g e
with millers and producers at agreed terms primarily in producing countries.

Foreign currency bank accounts are maintained at levels which will meet foreign currency

obligations and management also have access to purchase foreign currencies at market or close

to market rates thereby reducing or mitigating the Group’s exposure to sudden exchange rate

fluctuations. The Group manages its foreign exchange risk by ensuring that the net exposure

in foreign assets and liabilities is kept to an acceptable level by closely monitoring currency

positions. The Group further manages this risk by maximizing foreign currency earnings and

holding foreign currency balances.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument

will fluctuate due to changes in market interest rates. Floating rate instruments expose the

Group to cash flow interest risk, whereas fixed interest rate instruments expose the Group to

42 | P a g e
fair value interest risk.

The Group invests excess cash in short-term deposits and maintains interest-earning bank

accounts with licensed and reputable financial institutions. Short-term deposits are invested

for periods of three (3) months or less at fixed rates and are not affected by fluctuations in

market interest rates up to the date of maturity. Since interest rates on the Group’s short-term

deposits are fixed up to maturity and interest earned from the Group’s interest-earning bank

accounts is immaterial, management is of the opinion there would be no material impact on

the results of the Group’s operations as a result of fluctuations in interest rates.

Credit risk

Credit risk is the risk that one party, which includes customers, clients and counterparties, to a

financial instrument will fail to discharge an obligation and cause the other party to incur a

financial loss. Credit risk is an important financial risk for the Group’s business, and therefore

management meticulously manages the Group’s exposure to this risk.

The Group faces credit risk in respect of investment activities and its receivables from

customers.

 Cash, deposits and investments

43 | P a g e
Credit risk for cash, deposits and investments is managed by investing in mainly liquid

securities and maintaining these balances with licensed financial institutions considered to

be reputable and stable. Accordingly, management does not expect any counterparty to fail

to meet its obligations. The Finance Director, along with the Board of Directors, performs

monthly reviews of the investments and securities held as a part of their assessment of the

Group’s credit risk.

The maximum credit risk faced by the Group is the total of these balances reflected in the

financial statements. No provision for impairment is deemed necessary.

 Receivables

Credit risk for receivables is mitigated by stringent credit reviews and approval of limits to

customers as well as regular credit evaluation of customers. Appropriate credit checks,

references and analyses are undertaken in order to assess customers’ credit risk profile prior

to offering new credit or increasing existing credit limits. Many of the customers who are

experiencing cash flow difficulties and are exceeding their credit limits are identified, and

the appropriate actions are taken. Key Performance Indicators are reviewed regularly,

including cash collected, average debt collection period, percentage of customers with

overdue balances and debts deemed uncollectible. Credit limits for all customers inclusive of
44 | P a g e
 payment history and risk profile are reviewed annually before the renewal of credit facilities.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they

fall due. The Group manages its liquidity risk by maintaining an appropriate level of resources in

liquid or near liquid form to meet its liabilities when due, under both normal and stressed

conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group’s liquidity management process, as carried out within the Group and monitored by

the Finance Director and Board of Directors, includes:

i. Monitoring future cash flows and liquidity on an ongoing basis. This incorporates an

assessment of expected cash flows and the availability of high grade collateral which

could be used to secure funding if required.

ii. Maintaining a portfolio of highly marketable assets that can easily be liquidated as

protection against any unforeseen interruption to cash flow.

iii. Maintaining committed lines of credit.

45 | P a g e
 iv. Managing the concentration and profile of debt maturities while optimizing cash

returns on investments.

Reputational Risk

The Group is engaged in a business that principally distributes basic food items and flavours to

the general consuming population, and its reputation is critical within the market. place. The

Group’s management endeavours at all times to be ethical and adopt international best practices,

especially with regard to bulk frozen meats and other bulk commodities such as rice and red

kidney beans.

The Group also ensures that the necessary sanitary standards are maintained to guarantee that

regular audits by the Bureau of Standards are successfully undertaken. In addition, customer

audits are undertaken to facilitate continuous improvement and efficient customer delivery

services. Customer complaints are promptly and properly investigated and appropriately

assessed, and transparency is maintained, where necessary customers are promptly compensated

if they have suffered a loss. Management considers the Group’s reputation secured as they

ensure that events that may damage its reputation are immediately investigated. The appropriate

action taken to deal with the matter in a manner that satisfies the complainant.

46 | P a g e
Preliminary analytical procedures

47 | P a g e
Ratio Analysis for Derrimon Trading Limited

Liquidity Ratios

Current Ratio

The Current Ratio can be derived by dividing Current Assets by Current Liabilities.

2020 2019
$'000 $'000
Current Assets 4,778,397 3,678,509

Current Liabilities 2,208,121 1,713,683

Current Ratio 2.16 2.15

Quick Asset Ratio

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The Quick Ratio is calculated as Current Assets less Closing Inventory, divided by Current

Liabilities.

2020 2019
$'000
$'000

Current Assets- Inventory 2,591,837 1,686,335

Current Liabilities 2,208,121 1,713,683

1.1 0.9
Quick Ratio
7 8

The current ratio is a test of the company’s liquidity. That is the extent by which it is able to

convert assets into cash in order to service its current liabilities or obligations. It is a situation

where assets can be converted into cash within the time frame of less than one year (Business

Plan Hut, 2009). Given the current ratio results for Derrimon 2.16 and 2.15 for 2020 and 2019

respectively, this is an indication that the company is in good standing in terms of their ability to

pay its debts. Derrimon continue to meet its short-term obligation as seen in the results.

The calculation and outcome of the quick ratio is also indicative of this same position, which is

1.17 and 0.98 for 2020 and 2019, respectively. Based on the result of the quick ratio there was

49 | P a g e
an increase over 2019 which indicates a positive outlook. The ideal quick ration is a 1:1 which

would indicate that a business has enough assets that can be easily liquidated to pay it current

liabilities.

Activity Ratio

Receivables Turnover

Receivables Turnover is Sales divided by average Accounts Receivables.

2020 2019
$'000
$'000

Sales 12,777,464 12,649,017

Receivables 1,874,810 1,033,069

6.8 12.2
Receivables Turnover
2 4

This ratio tests the speed at which the company is able to collect outstanding balances from its

clients throughout the accounting year (Business Plan Hut, 2009). This ratio is also an indicator

of the company’s financial and operational performance and can be used to ascertain whether

there are difficulties collecting for sales and or services provided to its clients. The results of this

50 | P a g e
ratio for the Derrimon Trading are 6.82 and 12.24 for 2020 and 2019, respectively. This

represents a 44.34% reduction.

Day’s sale outstanding

The Days Sales Outstanding Ratio is calculated as days in the year (365) divided by the

Receivable Turnover.

2020 2019
$'000 $'000
Days in year 365 365
6.8 12.2
Receivables Turnover
2 4

53.5 29.8
Day’s sales outstanding
6 1

Throughout the financial year, Derrimon took approximately 54 days in 2020 and 30 days in

2019 to collect from its customers. Therefore, Days Sales Outstanding decreased by

approximately 24 days in 2020. This indicated that debtors are taking a longer time to pay.

Inventory Turnover Ratio

Inventory Turnover is calculated as Cost of Goods Sold divided by Average Inventory.

51 | P a g e
 2020 2019
$'000 $'000
Cost of Goods Sold 10,294,801 10,370,183
Inventory 2,186,560 1,992,174

Inventory Turnover 4.71 5.21

Inventory turnover measures how fast a company sells inventory and how analysts compare it to

industry averages. A low turnover implies weak sales and possibly excess inventory, also known

as overstocking. It may indicate a problem with the goods being offered for sale or be a result of

too little marketing.

A high ratio implies either strong sales or insufficient inventory. The former is desirable while

the latter could lead to lost business. Sometimes a low inventory turnover rate is a good thing,

such as

when prices are expected to rise (inventory pre-positioned to meet fast-rising demand) or when

shortages are anticipated.

Derrimon inventory Turnover for 2020 was 4.71 times and for 2019 was 5.21 times. This shows

that there was a slight increase of 0.50 in 2020.

Average Days Inventory

Average Days in Inventory is calculated as days in year (365) divided by the Inventory Turnover.

2020 2019

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 $'000 $'000
Days in year 365 365
4.7 5.2
Inventory Turnover
1 1

77.5 70.1
Inventory Days
2 days 2 days

Between 2020 and 2020, there was an increase of 7.4 days in the company’s Inventory days.

Therefore, Derrimon cleared its stock much quicker in 2019 than in 2020.

Payables Turnover

Payables Turnover is the Cost of Goods Sold divided by Average Accounts Payables.

2020 2019
$'000
$'000

Cost of Goods Sold 10,294,801 10,370,183

Account payable 718,109 976,846

Account payables
14.34 times 10.62 times
Turnover

53 | P a g e
The accounts payable turnover ratio measures the speed at which a company pays its suppliers. A

decreasing turnover ratio indicates that a company is taking longer to pay off its suppliers than in

previous periods. The rate at which a company pays its debts could provide an indication of the

company's financial condition. A decreasing ratio could signal that a company is in financial

distress. Alternatively, a decreasing ratio could also mean the company has negotiated different

payment arrangements with its suppliers.

When the turnover ratio is increasing, it is an indication that the company is paying off suppliers

at a faster rate than in previous periods. An increasing ratio means the company has plenty of

cash available to pay off its short-term debt in a timely manner. As a result, an increasing

account

payable turnover ratio could be an indication that the company managing its debts and cash flow

effectively. (Chris B Murphy, 29th June 2020)

The Payables Turnover for 2020 is found to be 14.34times and 10.62 times in 2019.

Representing a 35% increase over the financial year 2019.

Payables Days

Payables Outstanding Days is calculated by dividing the days in year (365) by the Payables

Turnover.

2020 2019
$'000 $'000

54 | P a g e
 Days in year 365 365
14.3 10.6
Payables Turnover
4 2

25.4 34.3
Payables Days
6 days 8 days

The payables outstanding days turn shows the number of days the payables remain unpaid.

Based on the results shown above the company was taking a longer time to pay their suppliers as

in 2020 the company was taking a little over 25 days to pay and in 2019 a little over 34 days.

This could

be attributable to the 26% decrease in accounts payables compares to the 1% decrease in cost of

goods sold.

The results of the ratio are also an indication of how well the company manages its cash

(Business Plan Hut, 2009).

Asset Turnover

Asset Turnover can be calculated as Net Sales divided by Total Assets.

2020 2019
$'000 $'000

55 | P a g e
 Nets Sales 12,777,464 12,649,017
Total Assets 7,415,814 5,782,684

Asset Turnover 1.72 times 2.19 times

The Asset Turnover for 2020 was 1.72 times and for 2019, 2.19 times. There was a decrease of

0.47 over the corresponding period (2019). This indicates that assets are not turning as fast as in

the prior financial year. This ratio decreases any further there would be a cause for concern as

asset management would seem not effective.

Solvency Ratio

Debt to Equity Ratio

The Debt-to-Equity ratio is found by dividing Total Liabilities by Shareholders’ Equity.

Dec'31 Dec'31
2020 2019
$'000
$'000

Total Liabilities 5,811,877 4,449,172

Shareholders’ Equity 1,425,702 1,178,668

4.0 3.7
Debt to Equity
8 7

56 | P a g e
The company’s Debt to Equity ratio for 2020 1s 4.08 and 3.77 for 2019. This shows an increase

of 8%. This indicates that the company is highly leveraged, as there is more debt financing than

equity financing.

Time Interest Earns

The Times Interest Earned ratio is calculated as the Earnings Before Interest and Taxes divided

by the Interest Expense.

Dec'31 Dec'31
2020 2019
$'000
$'000

EBIT 355,189 345,726

Interest Expense 236,891 204,636

Times Interest Earned 1.50 Times 1.69 Times

57 | P a g e
The time interest earns ration is a measure of a company’s ability to meet its debt obligations

based on its current income. The Times Interest Earned for 2020 was 1.50 times and 1.69 times

for 2019, depicting a decrease of 0.19 in 2020. This means that the company’s earnings could

cover its interest expenses 1.50 times in 2020 and 1.69 times in 2019. Though the ratio has

decreased, the company is still in a good position to pay its interest expenses with its earnings.

Profitability Ratio

1. Net Profit margin ration

The Net Profit Margin is calculated as Net Income divided by Net Sales.

2020 2019
$'000
$'000

Net Income 311,089 302,708

Net Sales 12,777,464 12,649,017

0.0 0.0

Net Profit Margin 2 2

2% 2%

58 | P a g e
Net profit margin ratio measures how much of each dollar earned in revenue is translated to

profit.

There was no in the net profit margin ratio over the financial year 2019 and the ratio stood at 2%

this indicates that the company did not translate any addition income to profit between the two

years.

Gross Profit Margin

The Gross Profit Margin is calculated as Gross Profit divided by Sales.

2020 2019
$'000 $'000
Gross Profit 2,482,663 2,278,834
Sales 12,777,464 12,649,017

Gross Profit Margin 19.43% 18.02%

Gross Profit Ratio is a profitability ratio that looks at the relationship between gross profit and

total net sales revenue. It is the percentage by which gross profits exceed production costs This

ratio serves to assess the operational performance of the company, that is, it speaks to the

59 | P a g e
company’s profitability at a fundamental level and the extent to which the resources of the

company utilize its resources in an efficient manner (My Accounting Course.com, 2020).

Generally, a higher ration is considered better.

The result for the company shows that there is a 19.43% and 18.02% in the 2020 and 2019,

respectively. This shows an increase of 1.41% point. This indicates that the company was more

profitable in 2020 than they were in 2019.

Return on Asset ratio

Return on Assets can be found by dividing Net Income by Average Total Assets.

2020 2019
$'000
$'000

Net Income 311,089 302,708

Total asset 7,415,814 5,782,684

Return on Assets 0.04 0.05

Return on Assets Ratio measures the net income produced by total assets during a period by

comparing net income to the average total assets (My Accounting Course.com, 2020). In other

words, the return on assets ratio or ROA measures how efficiently a company can manage its

assets to produce profits during a period. Additionally, the ratio speaks to the efficiency of the

company in the use of its assets to generate after tax profits (Business Plan Hut, 2009).

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In 2020 and 2019, the company’s return on assets is 0.04 and 0.05, respectively. This means, for

everyone dollar ($1.00) spent on purchasing assets only 0.04 and 0.05 generated in after tax

profits was generated in the financial year 2020 and 2019, respectively.

Return on Equity ratio

The Return on Equity is calculated as Net Income divided by the Shareholders’ Equity.

2020 2019
$'000
$'000

Net Income 311,089 302,708

Shareholders’ Equity 1,425,702 1,178,668

Return on Equity 0.22 0.26

The Return on Equity ratio measures how well a company is using owner's investments to

generate net income (Business Plan Hut, 2009). The Return on Equity for 2020 and 2019 is .22

or 22% and 0.26 or 26% respectively for the financial years. Essentially, this means that for

every one dollar invested by the owners of the company, a profit of 22 cents and 26 cents is

generated.

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Earnings Per Share

The Earnings Per Share (“EPS”) is computed by dividing the profit attributable to stockholders

of the parent of $279,834,000 (2019: $290,744,000) by the weighted average number of ordinary

stock units in issue during the year, numbering 2,733,360,670 (2019: 2,733,360,670).

Dec'31 Dec'31
2020 2019

Net Income (Less Non-Controlling

279,834,000 290,744,000
Interest
2,733,360,67 2,733,360,67
Ordinary Shares Outstanding
0 0

$ $
Earnings Per Share ($)
0.102 0.106

The Earnings per Share in 2010 was $0.102 and $0.106 in 2019. There was a decrease of

$0.0040 in 2020, depicting that the company made less earnings per outstanding ordinary share

than it did in 2019. This is due to a 4% lower profit being attributable to shareholders.

Materiality

The notion of materiality is more than just a calculation, it is a determination of what will or will

not impact the decision of a well-informed investor given a specific set of circumstances related

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to the fair presentation of the companies’ financial statements. “Materiality is applied by auditor

both in the planning and performing the audit, and in evaluating the effect of identified

misstatement on the audit and of uncorrected misstatements, if any on the financial statements

and in forming the opinion in the audit report” (IFAC 2009). “To establish a level of materiality,

auditors rely on rules of thumb and professional judgement” (Thompson Greenspon 2018).

It is essential to determine the company’s materiality, to achieve this a benchmark must be

established. Benchmarking is a method of calculating the materiality level, which involves

choosing a benchmark, based on the industry, for determining materiality for areas of focus such

as but not limited to the total revenue, total equity, gross profit.

According to the IFAC (2009), “factors that may affect the identification of an appropriate

benchmark include the following:

 the elements of the financial statements (for example, assets, liabilities, equity, revenue,

expenses).

 whether there are items on which the attention of the users of the entity’s financial

statements tends to be focused (for example, for the purpose of evaluating financial

performance users may tend to focus on profit, revenue, or net assets).

 the nature of the entity, where the entity is in its life cycle, and the industry and

economic environment in which the entity operates.

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  the entity’s ownership structure and the way it is financed (for example, if an entity is

financed solely by debt rather than equity, users may put more emphasis on assets, and

claims on them, than on the entity’s earnings).

 the relative volatility of the benchmark” 2

Accounting Scholar (n.d) an audit never provides 100% assurance only reasonable assurance,

taking for example the overstating of a company’s revenue by $5 million when the total revenues

are $4 billion. In this case the $5 million is considered immaterial, however, if the company’s

total revenues were only $ 50 million, then the $5 million overstatement would have been

considered material.

Derrimon Trading Company Limited (DTL) materiality will be based on the professional

judgment of the senior managers on the engagement. As shown below, in determining

materiality for DTL the benchmarking method was used, where a percentage to be applied to a

chosen benchmark involves the exercise of professional judgment . Elements that were taken into

consideration were the industry in which DTL operates, the level of experience of our audit team

and the company itself.

2
(IFAC 2009, 7-8).
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 Setting Qualitative materiality

Qualitative information tends to be contextual and used to complement the quantitative

assessment of materiality. However, qualitative factors deserve attention separately. Reputation

for example, is an intangible asset that senior executives every so often cite as the most

important driver for their sustainability investments. Qualitative factors considered range from

enterprise specific cases of compliance and business ethics to operating environment.

The following are qualitative factors that can affect the materiality for Derrimon Trading

Company Limited and has formed an important part of our auditing team planning phase.

 Disclosure of contingency liabilities – The non-disclosure or disclosure of any

contingency liabilities that could lead to materiality.

 Working capital as required by the bank or other lending agencies.

 Stock market pressure

 Factors affecting the organization’s social and legal license to operate.

 Factors matters affecting reputation and credibility such as regulatory infringements,

sensitive factors like fatalities.

 Management incentives

 The possibility of fraud, illegal acts, conflicts of interest and politically sensitive material

that may cause quantitatively immaterial items to be determined as material.3

3
http://www.materialitytracker.net

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Setting Quantitative Materiality

The following are quantitative factors used to calculate material Derrimon Trading Company

Limited.

2019 2020
Extract of DTL Financial Results
$'000 $'000
Revenue 12,649,017 12,777,464
Gross Profit 2,278,834 2,482,663
Net Profit 302,708 311,089
Total Asset 5,782,684 7,415,814
Total Equity 1,333,512 1,603,937

Overall Materiality based on 2020 balances above

Possible
Typical Percentage
Materiality Basis Planning
Percentages applied
materiality

Gross Profit 1 to 2% 2% 49,653

Net Profit 5 to 10% 10% 31,109
Gross Revenue 0.5 to 1% 1% 127,775
Total Assets 1 to 2% 2% 148,316
Equity 2 to 5% 5% 80,197

Based on the above considerations, document the overall planning materiality amount is $30,000

Billion. The Net Profit base was chosen to determine the materiality of DTL, because it is a

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profit-oriented company, which means that it could allow for more risk. Net profit has been set in

the direction of the upper level as no challenges have been encountered in the past and such, it is

deemed to be important indicators in our judgement in the business. Additionally, given the

profit-oriented nature of the industry, net profit would be a very critical basis point for the

investor to decide as to whether or not they invest.

Setting Performance materiality

The auditing team determines performance materiality for reasons of assessing the risks of

material misstatement and determining the nature, timing, and extent of additional audit

procedures. Planning the audit merely to detect individually material misstatements ignores the

fact that collective individually immaterial misstatements may lead to the financial statements

being materially misstated, leaving no margin for possible unnoticed misstatements.

Performance materiality is therefore set to reduce to an appropriately low level the probability

that the aggregate of uncorrected and undetected misstatements in the financial statements

exceeds materiality for the financial statements as a whole. The determination of performance

materiality involves the exercise of professional judgment and not just a simple mechanical

calculation. It is affected by the auditor’s understanding of the entity, updated during the

performance of the risk assessment procedures; and the nature and extent of misstatements

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identified in previous audits and thereby the auditor’s expectations in relation to misstatements in

the current period.4

4
https://www.ifac.org/system/files/downloads/ISA_320_standalone_2009_Handbook.pdf
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Audit Budget

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  Cumulative Time Analysis    
   
Derrimon Trading
Client Name:
  Company Limited  
Budge Budgete Actual over/Under
    Variance Total
t d Hours Hours Budget
               
Scope            
PLANNING

Identifying and

Assess Risk            
Design Audit

Response            
Property Plant

and Equipment            
Investment

Properties            
Investments            
Inventories            
EXECUITION

Receivables            
Cash and Bank            
Payable            
Taxation            
Deferred Tax            
Related Parties            
Long Term

Liabilities            
Equity Capital            
Revenues            
Cost of Sales            
Expenses            
Financial

Statements

Preparation            
Subsequent
COMPLETION

Events            
Going Concerns            
Consolidation            
Minutes and

Registers            
Management

Representation            
Data Integrity            
Fraud            

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References

Accounting Scholar. (n.d) Three Steps to Determine Materiality. Retrieved from:

https://www.accountingscholar.com/determine-materiality.html

“How Materiality Is Established in an Audit or a Review.” Thompson Greenspon CPA, May 2,

2018. retrieved from:

https://www.tgccpa.com/2018/03/how-materiality-is-established-in-an-audit-or-a-review

ICAW. (2019). ISA 320 Materiality in planning and performance an audit. Retrieved from:

https://www.icaew.com/library/subject-gateways/auditing/isa-320

“Materiality in Planning and Performing an Audit.” IFAC. April 2009.

https://www.ifac.org/system/files/downloads/ISA_320_standalone_2009_Handbook.pdf

71 | P a g e
Determine Materiality in Audit. Retrieved from:

https://accountinguide.com/

International Standard on Auditing 200 Overall Objectives of The Independent Auditor and The

Conduct of An Audit in Accordance with International Standards on Auditing Retrieve From:

https://www.ifac.org/system/files/downloads/a008-2010-iaasb-handbook-isa-200.pdf

Business Plan Hut, 2009. Ratios Analysis - Comparing Ratios to the Industry. Accessed March

26,2021. Retrieved from:

http://businessplanhut.com/ratios-analysis-comparing-ratios-indusrty

My Accounting Course (2020) Return on Assets Ratio – ROA. Accessed March 26,2021.

Retrieved from:

https://www.myaccountingcourse.com/financial-ratios/return-on-assets

Account payable turnover accessed March 26, 2021. Retrieved from:

https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounts-payable-

turnover-ratio

Murphy, B CHRIS, June 29, 2020, Accounts Payable Turnover Ratio Definition, Accessed

March 26, 2021.

https://www.investopedia.com/terms/a/accountspayableturnoverratio.

Consolidated Audited Financial Statement Derrimon Trading Company December 31, 2020.

Retrieved from:

https://www.jamstockex.com/wp-content/uploads/2021/03/Consolidated-Audited-

Financial Statements-Derrimon-Trading-Company-Limited-31-December-2020.pdf

Derrimon Trading Company Limited Annual Report December 31, 2019. Retrieved from:

https://www.jamstockex.com/wp-content/uploads/2020/08/DERRIMON-Annual-Report-

2019.pdf

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Audit Procedures for Ethical Behavior By Kenneth V. Oster

https://smallbusiness.chron.com/audit-procedures-ethical-behavior-60555.html

Strategic Business Planning and an Audit Checklist By DANIEL LINMAN · AUGUST 8, 2011

https://mymanagementguide.com/strategic-business-planning-and-an-audit-checklist/

Statistical Institute of Jamaica

https://statinja.gov.jm/Trade-Econ%20Statistics/CPI/NewCPI.aspx

Bank of Jamaica publications

http://boj.org.jm/publications/publications_show.php?publication_id=2

APO Analysis: Derrimon Trading Co. Limited (DTL) VMWM Research | December 30,2020

https://vmwealth.vmbs.com/wp-content/uploads/2021/01/Derrimon-Trading-Co.-Limited-APO-

Analysis.pdf

Scotia Investments Derrimon Trading APO Analysis Q3 2020

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