(a)

Gross profit margin decrease from 67.05% to 61.06% in 20X8 although having higher revenue of 28.41%.
There is further fall in the operating profit from 4.6m to loss of 2.2m, due to significant increase of other
operating expenses of 600%, indicating increase in provision. This will cast doubt on Daley’s Co going
concern ability as Daley Co may not afford to pay the expenses in the short term.

Additionally, revenue is forecasted to increase by 25% in 20X9. It may not be possible after legal actions
been taken by the largest customers. The customers may shifted to other new competitor if Daley Co is
confirmed to breach the domestic regulations. Daley Co may not be able to increase its sales in the
future, resulting in further loss.

Daley appears to be dependent on obtaining new bank finance which may improve Daley’s current
finance position if they are able to obtain it.
Daley will have to meet its existing liabilities first if the finance is obtained and it is doubtful that the
finance will be enough for the proposed expansion.

Besides, the cash flow forecast seems unrealistic as it stated that the revenue will grow by 25%.
The management may be too optimistic when preparing the forecast without considering possible
threats for the company such as the new competitor in the industry.

Projected receivable days of 60 days seems unlikely to be achieved based on historic ratios identified,
currently 120 days on average.

Management forecast that the company will return to a positive cash position based on the assumption
that they will obtain new bank finance.
However, it seems impossible for the company to obtain the finance from the bank considering the
financial position and performance of Daley.

The inventory turnover days have increased from 465 days to 481 days. This indicates that there is a
slow moving stock, and thus the stocks can be obsolete. Daley Co may unable to generate sales and
incur loss on the obsolete stocks, resulting in increase cost and reduce the profit. This may cast doubt on
the Daley Co’s ability of going concern.

Trade receivables
There is significant increase in trade receivables turnover days from 108 days to 120 days. This shows
that Daley Co may have recoverability issues as customers take longer time to pay the debt. Hence,
Daley Co would not having cash inflows in the near future.
Cash and bank overdraft
Cash at bank and in hand has reduced significantly from $0.6mil to Nil amount, and currently Daley Co is
having overdraft of $1.8mil. This indicates that Daley Co may facing liquidity issue.
In addition, by having overdraft, Daley Co having an increase in finance cost. This could put more
constraint on the cash flows and cast doubt of its GC.

Daley Co’s gearing increase significantly from 2.26 to 6.39. This means they are not being able to finance
its business properly. There is decrease of long-term borrowings, however, finance cost increase
significantly by 114.3%. It may be due to increase of bank overdraft which is one of the expensive
method of financing a business. There is possibility of Daley Co not being able to repay the overdraft as
there is lack of cash and retained earnings which will further increase the finance cost. Plus, interest
cover reduce significantly from 6.57 times to 1.47 times. Bank may be reluctant to provide new bank
finance in January 20X9 as per expected by Daley Co. This will cast doubt on Daley Co’s ability to
maintain a good position in financing the business.

(c)

The directors may wish to exclude the uncertainties disclosure because Daley Co is in the negotiation of
loan $5mil from the bank. If disclose the uncertainties, there is possibility that Daley Co may unable to
get the loan to finance the new warehouse.

In addition, Daley Co’s reputation may be tarnished, the shareholders may get worried and sell their
shares. This may result in reducing market share price of Daley Co.

The going concern uncertainties disclosure is material by nature.

If Daley Co do not disclose the uncertainties, auditor found material misstatement in FS such as
complete omission of disclosure.

auditors need to modify the opinion on the grounds of FSCMM and this issue is material not pervasive if
it does not affect the whole FS and not affect shareholder’s understanding of the whole FS.
Hence, a qualified opinion will be issued and a qualified opinion paragraph which is “except for the non-
disclosure on uncertainties” and subsequently update the basis for qualified opinion paragraph after the
qualified opinion paragraph to explain the matter in more detail to shareholders.

If the issue is material and pervasive, an adverse opinion will be issued “the FS does not show true and
fair view” and adverse opinion paragraph. Subsequently, update the basis for adverse opinion paragraph
after the adverse opinion paragraph to explain the matter in more detail to shareholders.

FSCMM

Depending on the pervasiveness of the issue, non-disclosure of MURGC may

If MXP , QE4

Basis for QO para inserted after the QO para.