You are the senior auditor for Dalby Logistics Limited (DLL). Your audit firm has carried out the audit of DLL for several years but this is the first time you have been assigned as the lead auditor. DLL is a bulk cargo and logistics conglomerate, founded in 2010 through the merger of two companies, primarily involved with the transport of iron ore, mineral sands and forestry products. Grain (agricultural products), oil and gas, coal, manganese, and lithium are examples of other products they transport. DLL also provide warehousing services and are currently building a large ‘hub’ complex in Sydney. On completion, this facility will be leased to various exporters and importers. DLL has over 20 subsidiary companies and significant investment in five other companies (associates). The largest associate is Pilkington Ports Limited which gives DLL access to 4 ports across Australia. They have access arrangements with a further 15 ports across Australia (including Darwin), New Zealand, and a port presence in Malaysia and Singapore. There are a further 15 logistic centres in metropolitan and regional areas in NSW, Victoria, South Australia, Western Australia and Queensland. DLL's operations are divided into three divisions: Ports, Logistics, and Infrastructure & Property. The CFO, Wayne Green, advised that they have had a successful year with a remarkable increase in profit, despite lower grain volumes and two large mine contracts ceasing due to the mines reaching their end of life. All states, except NSW, experienced an increase in revenue. The group also acquired another subsidiary, for $46.15 million, which added $16.05 million to assets and $5.8 million to liabilities. Goodwill was $35 million. Wayne Green also provided details about the following related party transactions: • paid to Associates: $6.85 million for stevedore service As it is your first time leading an audit team the audit partner has asked that you report back to him with your preliminary assessment of the client and your understanding of the industry they operate in. Required: Prepare a report for your audit partner that includes: 1. Key background information, including industry details. (4 marks) 2. An assessment of the going concern assumption, based on the background and financial analysis. (4 marks) 3. Three (3) account or account areas you consider most at risk of material misstatement, and whether those accounts are likely to be over or understated, with suitable justifications based on the financial analysis and the background information. (12 marks)
The client Dalby Logistics Limited is a bulk cargo and logistics conglomerate. It was founded in the year 2010.It was founded through the merger of two companies. DLL is primarily involved with the transport of iron ore, mineral sands and forestry products. Grain (agricultural products), oil and gas, coal, manganese, and lithium are examples of other products they transport. DLL also provide warehousing services.
DLL has over 20 subsidiary companies. DLL has five associates, that is, it has significant investment in five other companies.
Like most other industries, transportation and logistics (T&L) is currently confronting immense change; and like all change, this brings both risk and opportunity. New technology, new market entrants, new customer expectations, and new business models. There are many ways the sector could develop to meet these challenges, some evolutionary, others more revolutionary.
There is no other industry where so many industry experts ascribe a high importance to data and analytics in the next five years than transportation and logistics – 90% in T&L compared to an average of 83%.
Labour is a critical element of any logistics operating model, and up till now there’s always been a trade- off between service levels and costs. But automation breaks down this equation, allowing firms to offer better service and save money at the same time. Some of the industry’s most labourintensive processes are on the way to being fully or partially automated, from warehousing to last-mile delivery.
Major players from other industries may have even more potential to shake up the industry’s competitive dynamics. Autonomous vehicles are one possible example: technology players, or technology-automotive collaborations may enter the industry, especially with ideas like self-driving lockers, or machine-to-machine parcel-station loading for last-mile delivery. Crowdsharing platforms may also emerge from autonomous vehicle development, or independently. As car-sharing increases, so may the use of the storage space available in these vehicles as a flexible way to expand capacity.
The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party.
We must consider the following items in deciding if there is a substantial doubt about an entity’s ability to continue as a going concern:
In DLL’s case the company has over 20 subsidiaries and has recently acquired another subsidiary for $46.15 million. There has been remarkable increase in the profit in the year despite lower grain volumes and shutting down of a two large mine contracts due to end of their life. All states except New South Wales experienced an increase in the revenue.
The trends in operating results do not seem to be negative. There were no major defaults. There is no information to the contrary of going concern. Therefore the company is a going concern.
Since the company DLL has over 20 subsidiaries and has acquired a new subsidiary in the current year, there is a huge amount in Goodwill account. There is a high risk of it being over or understated due to various impacts. Also, it has to be calculated at each Balance sheet date with the latest available information.
DLL has over 20 subsidiary companies. It has also paid $6.85 million to its associate. There is a possibility of transactions with subsidiaries and associates not being at arm’s length price. It has to be evaluated very carefully. It is an area of high risk.
Again, due to high number of subsidiary companies and associates there is a risk of material misstatement.
You are the senior auditor for Dalby Logistics Limited (DLL). Your audit firm has carried out the audit of DLL for several years but this is the first time you have been assigned as the lead auditor....