Analysis
The AAD has been very concerned about the eligibility of the Society to repay the loan, given the bad news reports about the Society, amongst everything else. As such, the AAD, assisted by the Australian government, have launched an investigation process to review the real background of the Society.
The investigation conducted by the AAD is a reactive inquiry given that it was launched in reaction to the bad news reports that has been surrounding the Society. This conclusion was reached because a pro-active inquiry is usually part of a standard process. For instance, ask this question, Is this the standard procedure whenever the AAD conducts financial checks The information in the case did not provide such data hence, the assumption is that the AAD has launched a more strict investigation in response to the notorious repute of the Society.
Planning
The launch of the investigation is due to the fact that the AAD is concerned about the Societys financial and legal background that would directly influence its capabilities in paying back a loan that is being currently requested. There are a lot of aspects to check including the Societys major stockholders, top management and Board of Directors. It must be emphasized that should the Society be proven to engage in illegal operations, amongst other things, the Society will not be tried or prosecuted in Australia as Australia has no legal jurisdiction over the Society. The AAD, however, will not extend a loan to the Society should the latter be fraudulent and proven to be a bogus company.
As early as the planning stage, the AAD can look into the most basic of information. For instance, the Society has a registered address at 12 The Boulevarde, Vanijiville, Vaniji, an address the same as the Societys auditors. Already, this information is raising doubts about the genuineness of the Society as it seems to be closely associated with its auditors, breaking the principle of Independence in External Auditing. Given some initial investigation, results indicate that the Society has no office. It has a physical address that is devoid of furniture. No member of the board can be found.
Additionally, the Society classifies itself a non-profit organisation under the jurisdiction of Vaniji. According to the Forensic Report, Vaniji politicians are partners of the Bank of Pacific Islands that is under the laws and regulations of Mongo and as such, under Mongo criminal jurisdiction. The Bank of Pacific Islands is relevant because the bank has extended credit to the Society. In the planning stage, all these must be put into consideration.
The Management Plan
To investigate the case of the Society, a Chartered Accountant must be hired to fully understand the financial statements of the Society. A Chartered Accountant, more than anyone else, can see anomalies in financial reports and his or her knowledge would be extremely valuable to AAD.
In addition, hiring computer professionals would also give light to the matter especially if such computer professionals worked hand in hand with the chartered accountant. Together, they can analyse and interpret data more efficiently.
As for being covert or overt, the investigation is both. Covert in the sense that it aims to find information about the Society while overt at the same time because it is exposed. It will try and find information from parties related to the Society.
Discussion
a. Review the Statement of Financial Position (Balance Sheet) and give an opinion as to what it appears to be saying about the state of the Society.
Looking at the Balance Sheet of the Society, it appears that it is in a strong liquidity position. The Working Capital (Current Assets-Current Liabilities) of the Society is amounting to 114,500. Though this is a good indication that the company is liquid, the figure is not by any means remarkable. Sure, the Society at this moment can fend off its most pressing creditors, but, with 114,500 as spare cash, can it even pay off even the annual interest on a loan of 5,000,000
b. Consider the results of the FITs investigation and comment on how each of the points raised in the report can affect the Statement of Financial Position as presented by the Society.
The FITs report has reconciled the Cash item of the Society. The report has not uncovered anything different about Cash. The loan amount however is another story. The Society reported a loan amounting to 40,000 but the actual amount of loan it owes is 300,000. The difference is 86.67 (300-40)300 and this is indeed quite a material difference. Additionally, the balance sheet reports 2 vehicles amounting to 65,000 while the FIT only finds the value of such vehicles to be 4,000. The balance sheet overstated it by 93.65 (65-4)65. Furthermore, there is actually no furniture in the office. The balance sheet actually reported an amount of 10,000 there. Lastly, the balance sheet reported an Unpaid Rent amounting to 2,000. This is grossly understated, by 80, in fact.
c. Prepare, as best you can, a new Statement of Financial Position based on the results of the financial investigation. (Note that you will have to make some assumptions when doing this, such as revised estimates of value. You will need to include notes underneath the Statement of Financial Position explaining the assumptions that you have made and why. If you believe that you cannot legitimately make an assumption on a certain issue, then say so and indicate why. In real-life investigations this is what happens.)
Exhibit 1Pacific Development Society
Statement of Financial Position (Balance Sheet)
As at 30 June 2009Current AssetsCurrent LiabilitiesBank75,000Unpaid Rent10,000Accounts Receivable25,000Unpaid Wages4,000Short term investments20,000Petty Cash500Total Current Assets120,500Total Current Liabilities14,000Non-Current AssetsNon-Current Liabilities2 Motor Vehicles4,000Long term Loan (Bank of Vaniji)300,000Office Premises (Palmtown)900,000Furniture0000Goodwill750,000Total Non-Current Assets SUM(ABOVE) 1,654,000Total Non-Current Liabilities300,000Total Assets1,774,500Total Liabilities314,000Owners Equity 1,460,500OLD Assets (1,845,500) Liabilities (46,000) Owners Equity (1,799,500)
NEW Assets (1,774,500) - Liabilities (314,000) Owners Equity (1,460,500)
Assets (1,774,500) Liabilities (314,000) Owners Equity (1,460,500)
Old Total AssetsNew Total assets Overstatement1,845,5001,774,5003.85
Old Total LiabilitiesNew Total Liabilities Understatement46,000314,50085.37
Old Total Owners EquityNew Owners Equity Overstatement1,799,5001,460,50018.83
Results
The AAD should not extend a loan to the Society. From the result of the investigation, it appears the Societys office has closed, being without furniture. Additionally, the balance sheet they have submitted for investigation is not quite accurate. Lastly, being in operation in another country, the AAD will not have much legal courses of action available to it if in case the Society flatly refused to pay the loan in the future.
If the company took this loan, almost all of its capital structure will be tied-up in debt. Assuming the company may be legit, granting it the loan will put it in a bad financial condition as the interest expenses alone from the loan will eat up whatever revenue it receives from its operations.
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