- 2013.12 AUSNUTRIA
Company Name: AUSNUTRIA DAIRY CORPORATION LTDStock Code: 01717Year end: December 31, 2011
Basis for Disclaimer of Opinion
During the course of our audit, we noticed, among other matters, certain irregularities in the accounting records of a wholly-owned subsidiary of the Company, Ausnutria Dairy (China) Co., Ltd. (“Ausnutria China”). These irregularities mainly related to certain sales transactions and related accounts, including but not limited to, revenue, cost of sales, trade receivables, inventories and other payables (collectively referred to as the “Unresolved Issues”). The Unresolved Issues raised our concern over the authenticity of Ausnutria China’s accounting records and supporting documents, including those relating to sales transactions in the amount of approximately RMB123 million (RMB143.5 million inclusive of value-added-tax) recorded in the month of December 2011.
The Unresolved Issues mainly included the following.
• there were inconsistencies between goods delivery documents and the accounting records for certain sales transactions in December 2011, and replies from distributors (who are customers of the Group) to supplementary confirmation procedures initiated by Ausnutria China regarding the December 2011 sales transactions revealed further anomalies;
• there were discrepancies during 2011 between the quantity of inventories sold in the accounting records and the quantity of inventories delivered to the distributors in summary delivery records provided by the Group’s logistic service provider; and
• data in the old sales order system, which should have ceased to be used from October 2011, had been manually altered after that time, and data in the inventory barcode system had been manually altered without reasonable cause.
We reported the Unresolved Issues to the board of directors of the Company (the “Board”) in March 2012. This led to the establishment by the Board of a special review committee of the Company (the “SRC”) on 29 March 2012, whose findings cast doubts over the completeness and authenticity of certain records and documents of Ausnutria China and over the reliability of the information and explanations provided to us by certain members of management of Ausnutria China.
As further explained in note 2.1 to the financial statements (note 2 to the financial statements in this announcement), at the request of the SRC, the chief financial officer of the Company and several senior managers of Ausnutria China (the “Management”) performed certain procedures to quantify the financial impact to the financial statements for the year ended 31 December 2011 and prior years. The Management, the SRC and the Board considered that the best available information on hand for the purpose of quantifying the financial impact was the order books (the “Order Books”) maintained by the staff in the sales accounting department to keep track of the sales order status of, and cash receipts from, distributors.
After their investigation and after giving consideration to the quantification by the Management, the SRC and the Board concluded that errors due to the early recognition of sales before delivery had occurred in Ausnutria China since October 2009. Accordingly, the Company has also restated the comparative figures for the years ended 31 December 2010 and 2009 in the consolidated financial statements for the year ended 31 December 2011. As further explained in note 2.5 to the financial statements (note 6 to the financial statements in this announcement), the revenue for the years ended 31 December 2010 and 2009 were restated downwards by approximately RMB65 million and RMB78 million, respectively, while the profit for those two years was restated downwards by approximately RMB50 million and RMB40 million, respectively.
For reasons described below, we were not able to satisfy ourselves on the validity, completeness and accuracy of the adjustments made by the Company for the years 2011, 2010 and 2009 as a result of the above investigation and quantification. In particular, the procedures to restate the revenue amounts by the Company were primarily based on the Order Books, which recorded the monetary amounts of sales orders, dates of orders received and dates of cash receipts using computer spreadsheets, but did not contain any information on the inventory type, quantity, unit price nor date of delivery. In addition, the Order Books were not part of Ausnutria China’s financial reporting system, were not subject to the process of internal controls, and had not been reconciled with any other accounting-related documentation such as warehouse records or delivery documents. The Company estimated the revenue in each year using the total monetary amounts of sales orders received as recorded in the Order Books, after adjusting for those orders received around the respective year end dates to allow for the estimated timing of delivery to distributors. Due to the break down of the computer hard disk hosting the old sales system and lack of back-up data, there was no practical way for us to verify the authenticity and completeness of the sales order information in the Order Books and the sales cut-off estimates at the respective year end dates, as well as assessing whether the restated revenue amounts appropriately reflected the goods sold and delivered in the respective years.
Regarding the cost of sales and inventories adjustments, the Company separately estimated the average gross margin rates which it considered to be reasonable for the years 2011, 2010 and 2009 respectively, and then deduced the amount of adjustments needed for each of the respective years. However, we have not been provided with sufficient documentation and explanations to support such estimates of average gross margin rates to our satisfaction. Accordingly, the adjustments made to cost of sales might not have the appropriate correlation to the above revenue adjustments, and the resulting gross profit might not have properly reflected the results of sales transactions for the respective years. In addition, the corresponding adjustments made to inventories, trade receivables and other payables might not reflect the amounts of inventories held and amounts due from and due to distributors at the respective year end dates.
In summary, there were no practicable audit procedures that we could perform to satisfy ourselves on the reliability of information originated from the Order Books and estimates used in the determination of sales transactions and related accounts and consequently, we could not obtain sufficient appropriate audit evidence that the adjustments made to the financial statements for the year ended 31 December 2011 and for the years prior thereto as disclosed in note 2.5 to the consolidated financial statements (note 6 to the financial statements in this announcement) (the “Adjustments”) are complete and accurate in all material respects.
Any adjustments to the financial statements line items affected by the Adjustments found to be necessary would have a consequential effect on the Group’s net assets as at 31 December 2011, 2010 and 2009, its profit for the respective years then ended, the related elements making up the consolidated statements of changes in equity and the consolidated statements of cash flows and the related disclosures thereof in the consolidated financial statements.
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraphs, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the consolidated financial statements as to whether the consolidated financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2011, 2010 and 2009 and of its profit and cash flows for the years then ended in accordance with International Financial Reporting Standards and as to whether they have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.