Part A

Analytical review on the A2’s financial statements

In order to overview and evaluate the company’s situation, the essay will conduct ratio analysis
and trend analysis as below.

Ratio Analysis
In the ratio analysis, the essay will focus on five basic types of ratios including profitability,
liquidity, activity, debt, and market in order to comprehensively grasp the company situation
such as its growth, debt and outstanding issues. Based on each issue found, the essay will point
out the concerned areas and its impact on the relevant accounts and assertions, specifically as
follows:

Profitability ratio

Table No.1: Profitability ratio based on the financial statement of the A2 Milk Company in the
fiscal year 2019-2020

Ratio Result References

Net Profit Margin 20.29% Appendix No.1
17,95% I. Profitability
Ratio No.1
Return on Assets (ROA) 23.28% Appendix No.1
25,13% I. Profitability
Ratio No .2
Return on Equity (ROE) 3.82% Appendix No.1
1.76% I. Profitability
Ratio No.3

Based on the calculation on the profitability ratio, net profit margin of the A2 Milk Company
in 2020 compared to the period year, specifically, the result in 2019, in general view, the
company has highly increased in its net profit margin, 3%. Also, in comparison of this ratio with
the milk industry in Australia, the industry’ average net profit margin was around 19,23% in the
fiscal year 2020 (Appendix No.3). Having said that, the company in the year has net profit
margin in general was in positive advantage in the milk industry in Australia. Other important
ratios are ROA and ROE. Another note for the result of ROA of the A2 Milk Company in 2020
was decreased compared to in 2019. More importantly, the milk industry in Australia in 2020
was 2,07%. It seems to be the company’s return on equity was in good position for the
company’s development. However, in the reality, an acceptable ratio for an investor to consider
for a return on equity for the long term of S&P is about 14% (Jason, 2021). Compared to this
number, this area will be a concern of the company in the next stage of development.

 The concerned areas

In overall, based on the detail analysis on the profitability ratio, to sum, the A2 company’s
profitability situation earned high net profit margin, however, the return on equity was big
question for the company. Related to the return on equity, net income from capital shares was
still limited by the company. The cash flows related shares and capital were only limited to 2-3
categories (The A2 Company Annual Report, 2020).

Another concern was the company’ ROA. In 2020, this number was slightly decreased
compared to 2019. It means that the company’s asset turnover ratio and incomes by assets stated
in the asset lists are limited.

Liquidity ratio

Table No.2: Liquidity ratio based on the financial statement of the A2 Milk Company in the
fiscal year 2020

Ratio Result References

Current Ratio 3.69 Appendix No.1
3.15 II. Liquidity
ratio No.1
Quick Ratio 2.13 Appendix No.1
1.40 II. Liquidity
ratio No.2
Based on the result of liability ratio, both last year and the base year, current ratio and quick ratio
was increased and greater than one. The result showed that the possibility for the company which
had a liquid assets enable to cover current liabilities was extremely high. However, based on the
liquidity ratio was not enough to define that the company was just a short-term liquidity or long-
term solvency. Because of its dependence on account receivable ratios or other receivable ratios
of the company, which decide when the company able to its return and income ratio.

Activity ratio

Table No.3: Activity ratio based on the financial statement of the A2 Milk Company in the fiscal
year 2020

Ratio Result References

Accounts Receivable Turnover 6.37 Appendix No.1 III. Activity Ratio
5,47 No.1

Asset Turnover Ratio 1.53 Appendix No.1 III. Activity Ratio

2.55 No.2

Based on the result of the company’s activity ratio, the company’s accounts receivable
turnover was increased since 2019. It means that along with liquidity ratio, the company
certainly has a possibility to cover liability and high return for investment. However, the asset
turnover ratio was decreased since 2020. The result showed that the company’s income from
assets had a problem while in general, it seems to be that the company’s financial situation was
in good condition, with higher net profit margin and liability ratio.

Debt ratio

In 2020: 0,632

In 2019: 0,459

Based on the debt ratio above, the result from 2019-2020, the company was in the debt
ratio less than 1, which means that the company’s assets have greater than its debt. However, the
result showed that the debt ratio seems to be increased. It related to the financial risk accounts.
The problem was that the company’s share capital and investment list were limited, while the
financial risk tended to increase. It can be impacted by inventories or liquidity ratio of assets.

Market ratio

Table No.4: Market ratio based on the financial statement of the A2 Milk Company in the fiscal
year 2020

Ratio Result References

Price to earnings 10.47% Appendix No.1 V. Market Ratio No.1
9.75%
0,21 Appendix No.1 III. Market Ratio No.2
PEG Ratio
0,25

Along with the increase in the milk industry’s price, with the A2 milk Company, the price to
earnings ratio also increased. On the one hand, PEG ratio was less than 1. It seems to be that the
shares of the company in the market was undervalued. The problem based on the market ratio
was the same as the issue of net income by share capital mentioned in the profitability ratio part.

Trend Analysis
The objective of trend analysis is to identify and evaluate the amount change and percent change
of the company measured in quarters by 2020.

Income Trend Analysis

Based on the data mentioned in the Appendix No.2, Table No.1, Income Trend Analysis (2019-
2020), profit of the years tended to increase, specifically, greater than 24%, total comprehensive
income also increased greater than 33%. These numbers show the increasing trend of the
company from sales activities. Especially foreign currency translation profit shows that the
exports of the company tend to increase.

Equity Trend Analysis & Financial Trend Analysis

Based on the data mentioned in the Appendix No.2, Table No.2 &3, Equity trend and Financial
Trend Analysis (2019-2020), the company’s foreign currency translation, and share capitals and
total equity tended to increase. The company’s assets and liabilities were both increased,
therefore, nothing was considered here.

Analytical Review- Justify answer Assertions and Audit Procedure/Task

Area Of Concern Ledger Accounts
Identified Impacted
Return on equity The rate of ROE was C5 Intangible assets Inspection of tangible
& low compared to the C6 Other financial assets
Return on assets average number of assets Inspection of
trust investment, 14% D1. Capital documentation and
The rate of ROA was management records related to
decreased while the D5. Share capital intangible assets
trend analysis was the D4. Cash flow Analytical procedures
rate of asset and information Enquiry
capital was increased.
Beginning Asset, The company’s asset B2 Revenue Inspection of tangible
Ending Asset, and turnover ratio, net C1 Trade and other assets
Total Sales. income by assets was receivables Inspection of
decreased while the C2 Inventories documentation and
company has high C3 Trade and other records related to
liquidity ratio and net payables intangible assets
profit margin. C4 Property, plant & Analytical procedures
equipment Enquiry
C5 Intangible assets
C6 Other financial
assets
Financial risks, The debt ratio seems C2 Inventories Recalculation
inventories, and to be increased, D2 Financial risk Inspection of
liquidity of assets. which means management documentation and
 financial risks were D1 Capital records related to
high, while trend management financial activities
analysis in financial D2 Financial risk Enquiry
situation showed the management
financial advantages D3 Cash and short-
and limited share term deposits
capitals and D4 Cash flow
investments’ information
categories

Part B

1. The A2 Milk Company has a corporate governance and close relationship with each other
in governance. In the figure No.1, the governance relationships are closely and influenced
to each other. That is the reason why it directly impacts on the process of auditing.
Figure No.1 The A2 Milk Company’s corporate governance

Source: The A2 Milk Company, 2020, ‘Annual Report’

Specifically, in the company’s annual report, 2020, the company has an internal audit
implemented independent assurance. Therefore, as an external auditor, when conducting an
inspection on documents and records related to the company, it can be seen that we will work
with independent assurance to collect these data, supporting for assets and equity’s auditing. On
the other hand, in case of conducting operations and daily operation results on assets, we come to
Executive Committee to implement enquiry. Therefore, having said that, depending on the
auditing acitivities’ types and documents or records required for auditing, we have to define
which departments or governance parts related to the issue and collect the necessary information
and require actions if required.

2. The A2 company has an independent assurance which conducted internal audits and
external audits.

Along with that, audit committee includes both CEO, executive committee and board of
directors and committees. As shown in the Figure No.1, they reserve the right to initiate special
investigations where they suspect or perceive problems in accounting and personnel practices,
and for each department, which will take different roles from accounting and reporting activities.
And then, CEO and executive managements will observe and have a decision for auditing.

According to CFA institute, the audit committee activities should base on the flow: review
issues from accounting, reporting, pronouncements whether financial information is correct by
both external and internal auditing. The Effective April 2003 the Securities and Exchange
Commission (SEC) also mentioned that audit committee has a right to engage advisors and
oversee independent accountants. That is the reason why the company’s audit committee was the
correct composition.

3. In my opinion, the establishment of audit committee in the company is a huge advantage

for the company because of the following reasons.

Firstly, the company can assign audit committee into different groups belonging to different
functional departments as the A2 company. Therefore, for accounting and recordings, the
information are also categorized and controlled to perform accurately. Secondly, the company
can establish independent assurance to work with external and internal auditors, therefore, the
company enable to resolve a lot of unexpected cases from fraud. Lastly, the company can have a
consistent decision based on the oversee of CEO and executives.

References
The A2 Milk Company, 2020, ‘Annual Report’, The A2 Milk Company, <viewed:
https://thea2milkcompany.com/results>

SEC, ‘The Effective April 2003 the Securities and Exchange Commission (SEC)’, CFA
Institutes, <viewed: https://www.cfainstitute.org/en/advocacy/issues/audit-committee-role-
practices>