Case Study On Audit Reports And Financial Statements Of Two Hong Kong Listed Companies

Background of the Report

The report has been prepared on the 2 listed companies in Hong Kong namely Cathay Pacific and China Overseas Land and Investment Limited (Coli). Both the companies have been analysed w.r.t. to audit and the financial statements for the year 2017. The nature and the core business of the company has been explained in brief and then the financial statements of both the companies has been compared with the respective industries in which they are working for performance evaluation. The differences in presentation of financial statements has also been highlighted.

China Overseas Land and Investment Limited (Coli) is one of the subsidiaries of China State Construction Engineering Corporation Limited which was incorporated in Hong Kong in the year 1979 and is engaged in the construction and contracting, property and infrastructure development sector with most of the operations in China and Hong Kong (Belton, 2017). The company is listed on the Hong Kong Stock Exchange. The company’s main business line is thus real estate which includes property development, property investment, infrastructure and other operations including property management, logistic operations, consultancy services etc. 

On the other hand, Cathay Pacific Airways Limited also known as Cathay Pacific is the flag carrier of Hong Kong. The company has a history of 72 years and employs over 32000 employees. The company’s main operations include airline services catering over 190 destinations in 60 different countries. It has a wide variety of fleet consisting of Airbus A330, Airbus A350 and Boeing 777 equipment with the total fleet size of 153 (Alexander, 2016). The company is 10^th largest airline in the world in terms of sales and ranked 14^th in terms of market capitalization. In the year 2010, it became world’s largest international cargo airline with Hong Kong airport being the world’s busiest airport in terms of cargo handling (Jefferson, 2017).

The financial performance of both the companies has been analysed through ratio analysis.

1. Liquidity Ratios Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
	Current Ratio = Total current assets/ Total current liabilities	2017	2016
	Total current assets					501,790,506	474,913,305
	Total current liabilities					206,542,566	199,604,474
	Result							2.43	2.38
	Liquid ratio /Quick Ratio = (Total current assets – Inventory – Prepaid expenses)/ Total current liabilities	2017	2016
	Total current assets – Inventory – Prepaid expenses		128,128,505	187,689,120
	Total current liabilities					206542566	199604474
	Result							0.62	0.94

2. Debt Management Ratios
	Debt ratio = (Total Debts / Total Assets) or ((Total assets- total owners’ equity)/total assets)	2018	2017
	Total Debts						147,814,640	133,534,250
	Total Assets						645,404,785	571,289,277
	Result							23%	23%
	Debt to Equity Ratio = (Total Debt/Total owners’ equity) or ((Total assets- total owners’ equity)/total owners’ equity)	2018	2017
	Total Debts						147,814,640	133,534,250
	Total owners’ equity					273,543,430	227,423,359
	Result							54%	59%

3. Profitability ratios
	Profit Margin / Net Profit ratio = Net income / Sales	2017	2016
	Net income						42,142,115	38,390,776
	Sales							163,972,170	158,716,981
	Result							25.70%	24.19%
	Operating Margin ratio = Operating Profit/Sales	2017	2016
	Operating Profit						62,874,375	57,905,305
	Sales							163,972,170	158,716,981
	Result							38.34%	36.48%
	Return on Equity = Net income/total owners’ equity	2017	2016
	Net income						42,142,115	38,390,776
	Total owners’ equity					273,543,430	227,423,359
	Result							15.41%	16.88%
	Return on Assets = Net income/total assets	2017	2016
	Net income						42,142,115	38,390,776
	Total Assets						645,404,785	571,289,277
	Result							6.53%	6.72%

The ratio analysis for COLI has been shown above. From the above it can be seen that the company has a very healthy current ratio which indicates that the company will be able to pay off its current liabilities on time. However, the liquid ratio which is the measure of liquid assets with the company to pay off the short term obligations is on lower side and has deteriorated in 2017 due to substantial decrease in the liquid assets. In terms of the solvency ratios, the company has a debt ratio of nearly 23% and the debt equity ratio of 54% which is healthy when the same is compared with the industry as the overall industry is operating at 1:1 debt equity ratio (Linden & Freeman, 2017). It indicates that there is minimal dilution of ownership and that the company can make use of low cost capital in future. Lastly in terms of profitability, the company is again performing good as the net profit margin is at 25% and operating profit margin is at 38% which is in line with the industry. The return on equity is at 15.4% in 2017 which has dropped and the return on assets is at 6.5% which is again a cause of worry for the company. Thus overall it can be said that the company has performed well as compared to the competitors and has also improved as compared to the last year except a few indicators (Fay & Negangard, 2017).

1. Liquidity Ratios
	Current Ratio = Total current assets/ Total current liabilities	2017	2016
	Total current assets					32,835	31,392
	Total current liabilities					41,278	44,092
	Result							0.80	0.71
	Liquid ratio /Quick Ratio = (Total current assets – Inventory – Prepaid expenses)/ Total current liabilities	2017	2016
	Total current assets – Inventory – Prepaid expenses		30,455	29,847
	Total current liabilities					41278	44092
	Result							0.74	0.68

2. Debt Management Ratios
	Debt ratio = (Total Debts / Total Assets) or ((Total assets- total owners’ equity)/total assets)	2018	2017
	Total Debts						73,008	66,423
	Total Assets						188378	177421
	Result							39%	37%
	Debt to Equity Ratio = (Total Debt/Total owners’ equity) or ((Total assets- total owners’ equity)/total owners’ equity)	2018	2017
	Total Debts						73,008	66,423
	Total owners’ equity					61,272	55,526
	Result							119%	120%

3. Profitability ratios
	Profit Margin / Net Profit ratio = Net income / Sales	2017	2016
	Net income						(888)	(274)
	Sales							97,284	92,751
	Result							-0.91%	-0.30%
	Operating Margin ratio = Operating Profit/Sales	2017	2016
	Operating Profit						(1,449)	(525)
	Sales							97,284	92,751
	Result							-1.49%	-0.57%
	Return on Equity = Net income/total owners’ equity	2017	2016
	Net income						(888)	(274)
	Total owners’ equity					61,272	55,526
	Result							-1.45%	-0.49%
	Return on Assets = Net income/total assets	2017	2016
	Net income						(888)	(274)
	Total Assets						188,378	177,421
	Result							-0.47%	-0.15%

Discussion and Analysis

The above analysis is w.r.t. Cathay Pacific. It can be seen that the company has a very lower current ratio of 0.80 times and a liquid ratio of 0.74 times which indicates that the company has not got enough of current assets to meet the current liabilities on time, indicating weaker liquidity status. In terms of debt management, the company is having the ratio of 39% for debt to asset and 119% for debt equity (Heminway, 2017). The debt is on higher side as compared to equity but it is still below the industry trend of 1.5-2 times which is a positive indicator for the company. In terms of profitability ratios, the company has been incurring losses in both the years 2016 and 2017, the net loss and operating loss being 0.91% and 1.49% respectively. The return on equity as well as the return on assets has both been negative indicating that the company has been in operational loss (Goldmann, 2016).

When the audit report of the 2 companies is being compared we can see that the annual report and the financial statements of Cathay Pacific have been prepared as per Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and that the financial statements reflect a true and fair view as per Hong Kong Companies Ordinance as confirmed by the auditor KPMG. Similarly the annual report of COLI has been prepared as per HKFRSs and has complied fully with HKCO as confirmed by the auditors (Knechel & Salterio, 2016). The screenshot of the audit report of both the companies has been attached below. Some of the differences which were seen in presentation was the use of revised HKAS by COLI considering the type of business it is in – like the amendments in disclosure initiative (HKAS 7), classification and measurement of share based payment transaction (HKAS 2), Revenue with contracts from customers (HKAS 15), leases (HKAS 16) and sale or contribution of asset between the investor and the joint venture/associate. All these amendments were not applied by Cathay Pacific (Raghupathi & Wu, 2018). Similarly, differences are there in way the leases are being treated by both the companies under new accounting standard as Cathay Pacific values the liabilities on the fair value basis whereas COLI has used the simplified transition approach and has not restated the comparative amounts (Choy, 2018).

 

(Source: Annual report, Cathay Pacific, 2017, pp. 57)

 

(Source: Annual report, COLI, 2017, pp. 132)

Conclusion

From the above discussion and analysis, it can be said that COLI has been profitable in the long run and has been performing well as compared to its peers and has also improved as compared to the last year but Cathay Pacific has not been profitable. It has been in losses in both the years under review. However, in terms of accounting policies and standards, both the companies have been consistent and has complied the applicable financial accounting framework. 

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, 2(1), p. 145.

Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.

Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, 5(2), pp. 1-35.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Raghupathi, W. & Wu, S., 2018. The Strategic Association Between Information and Communication Technologies and Sustainability: A Country-Level Study. IGI Global, disseminator of knowledge, 1(1), p. 26.