Draft Report

To : The Board of Directors,

ABC Limited.

From : XYZ & Co.

Chartered Accountants.

Date : Exam Date

Subject: The Evaluation of business performances, expansion scheme, strategic planning and
other associated issues involved in the ABC Limited.

Private & Confidential

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 ABC Limited

Table of Contents

Reference Contents Reference Page

No
Chapter-01 Terms of Reference (TOR) 03
Chapter-02 Executive Summary 04
Chapter-03 Response to requirements No-(a) 12
Chapter-04 Response to requirements No-(b)(i) 20
Chapter-05 Response to requirements No-(b)(ii) 23
Chapter-06 Response to requirements No-(c) 27
Chapter-07 Appendices 30

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 CHAPTER-1
Terms of Reference (TOR)

We prepared the report based on the information provided to us by the management. No attempt
has been made to verify the authenticity of the information. Necessary adjustments have been made
to present the financial statements fairly and perform the analysis of data for economic decisions
making purposes.

The report covers the following aspects:

01. Executive Summery;

02. Evaluation of financial & non-performance, assessment the viability of business expansion
plan with best financing options;
03. Evaluation the strategic planning, SWOT analysis and justifying the expansion of business;
04. Advice regarding the appointment of external auditor and other issues;
05. Assessment of environmental, economic and social impacts and evaluation of ethical
issues.

Assumption made:

We have used several assumptions at time of analysis & applied judgment where needed.

Disclaimer:

This report has been produced for the use of Board and should not be distributed to any third parties
without of our written consent. No liability can be accepted in any such event.

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 CHAPTER-2
Executive Summary
ABC is a private Limited Company/family own business engaged in providing healthcare service in
domestic market. Currently it hold 30% market share in this sector and delivering superior service to
its stakeholders. The company has experienced with the excellent growth since its incorporation
except from the year 2019 due to impact of CORONA virus and other regional chaos. In order to
increase the market share ABC want to acquire XYZ Limited or setting up own branch in Dhaka. But
the company have to face several challenges and minimize risk related to the business.
We have evaluated the expansion plan, financial option and other associated matters as advisor is
appointed by the company, considering overall strengths, opportunities and socio economic
obligation. The expansion plan is very much appreciable as it is viable for the company.

2.1 Performance analysis after restating the financial statements and evaluation the viability of
expansion plan with best alternative financing option.

2.1.1 Restatement of financial statements:

Financial Statements have been restated by considering adjusting events of inventory, changes of
depreciation on PPE and impairment of assets which is attached in Appendix-7.1. The adjusted net
profit after tax shows Tk. 35.25 million for the year 2021 which resulted EPS has fallen to 0.99 from
1.20.
Conclusion:
01. Restatement of financial statement made based on applicable financial reporting framework;
02. Regulatory body will penalize the company if financial statements does not comply with
IAS/IFRS.
Recommendation:
ABC & Co. should follow the applicable financial reporting standard and make arrangement of
training for reporting team at regular interval.
2.1.2 Evaluation of Financial Performance:

Growth
Revenue has grown tremendously by 23% to Tk. 23,050k which is good performance given potential
impact of recession.
Gross profit and operating profit both risen by 5.13% and 4.30% respectively over the period due to
efficient cost control by the management.
ABC & Co. current ratio has improved to 2 times from 1.5 times where quick ratio has also improved
which indicates robust liquidity position.
Gearing ratio has fallen to 17% this signifies there is room for increasing debt. Interest cover ratio is
healthy 2.5 times that donates the company has enough profit to serve its debts.

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Cash operating cycle has reduced to 40 days form 50 days where the company can get short term
financial benefit.

Cash balance has increased to Tk. 22 million over the period that can be used to business expansion
plan.

Decline
The revenue has fallen significantly by Tk. 22 million to Tk. 550 million due to restated business as a
result of COVID-19 pandemic from early December 2019 globally.

The gross profit and operating profit of the company has surprisingly fallen by Tk. 20 million (34%)
and Tk. 10 million (68%) respectively in 2021 form 2020 because of higher service and hygiene cost
arises from COVID-19 pandemic and higher inflation in economy.
The current ratio and quick ratio both are reduced to 1.20 times and 0.90 times respectively which
indicates frail liquidity position.

Gearing ratio has risen to 19% from 17%, higher the gearing greater the possibility of bankruptcy.
Interest coverage ratio has gone down to 1.5 times in 2020. This means that there are little profits to
service debt.

Cash operating cycle has gone up to 50 days form 40 days which indicates money is tied up in working
capital.

For the purpose of simplicity WPPF and Tax has not been adjusted.

2.1.3 Evaluation of Non-Financial Performance:

01. Producing high quality product;
02. Demand of the product increasing since incorporation;
03. Strong customer base;
04. Significant business growth within short period of time;
05. Satisfactory/unsatisfactory work environment;
06. Fastest delivery system;
Conclusion:

01. The financial performance is growing better day by day. It has sound strategy and technique
to grow organically; or

02. Overall performance of the company is good enough though the company faces some
inherent issues;
Recommendation:
01. We recommended that the management should control its cost with maintaining good quality
of product and should manage its working capital more efficiently. Or

02. We recommended the company to diversify its business and review the existing plans to
improve profitability system, re-engineering the collection process and introduce efficient
inventory management system to reduce the working capital cost.
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Conclusion & Recommendations:

01. The overall performance of the company is satisfactory. However, the company should
comply with the rules and regulations of IFRS and guidelines issued by the regulators; or
02. The company should focus on its cost. It should consider economic of scale through
outsourcing of the administrative works. The company strongly think about alternative use of
ideal capacity to boost export globally; or
03. The overall performance of the company is not attractive but the company could be
sustainable and go for the expansion based on potential and future economic growth of the
country.

2.1.4 Undertaking business expansion project:

ABC Limited is planning to expand its business by acquiring XYZ limited or setting up own branch.
Though taking further loan will lay the company in more risker but having own tannery will create
opportunity to maximize profitability and further market share.

Conclusion & Recommendation:

ABC should undertake the project considering long term sustainable business.

2.1.5 Evaluation the viability of expansion plan:

As a part of business expansion strategy the board have decided to acquire XYZ or establish of new
branch in Chottogram. We evaluate the strategy plan by calculating Net Present Value (NPV) of future
cash flows using discounted cash flow technique that shows in appendix 7.3. Our suggestion is to go
acquisition/ establishing new branch because it have higher positive NPV of Tk. 125 million. Such
large amount of NPV will certainly maximize the wealth of shareholder. The management will also be
intended to undertake the project being less risky as it is related expansion. Moreover the expansion
is fit with its current strategic position. From the expansion the company will get the synergy benefit
also.
Assumption:
01. Cost of fund and tax rate will remain same during project period;
02. For NPV 5 years have been considered;
Conclusion:
01. The project is viable with promising potentiality; or
02. The project is benefited both the financial and strategic terms subject to risk and uncertainty;
Recommendation:
The expansion plan should be undertaken after the sensitivity analysis, feasibility study and
considering liquidity factors.

2.1.6 Justification for selection the project:

Both the options are in strategic fit for ABC as these will help to increase profitability as well as
shareholder wealth. But the company is currently not in a position to implement both. Calculation

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shows that acquisition/establishing of new branch will generate higher NPV and therefore it should
be selected for implementation.
Conclusion & Recommendation:
Considering return and other factors it has been suggested that acquisition/setting up own branch
will be mere benefited.

2.1.7 Calculation of NAV per share and EPS per share (basic & diluted):
We have calculate the NAV per Share and EPS based on the given information with some assumption
that is shown in appendix 7.6 and appendix: 7.8. As per our calculation the NAV per share for the year
ended 2026 will be 29.50 and EPS (Basic & diluted) stands 3.02 and 2.29 respectively.

Conclusion and Recommendation:

ABC should implement the strategic plan with strong monitoring control as it will increase
profitability and shareholder wealth.

2.1.8 Financing of expansion plan:

Based on our evaluation Net Asset Value per share of ABC is Tk. 15 and average value per share is Tk.
25 which is more than the expected premium of 20%. On the other hand Bank loan/sale of lease
back/issue of subordinate bond would be attractive option if liquidity position were strong and
operative cash flows were reasonable.

Assumption:

01. NAV is adjusted with unresolved issues;

02. Market value is discounted by 40% for unlisted;
OR
EPS and dividend payout ratio of the company is remarkably low for the last five years. Earning based
valuation technique provides lower value of shares therefore the company may not get 20% premium
over face value in offering shares to the public through IPO. So, Bank loan or issue of subordinate
bond will be better option as it is cheaper and lower compliance than IPO.
Conclusion:

Considering overall benefit issuing of share in stock exchange is better than Bank loan/sale of lease
bank/subordinate bond.
OR
We concluded that the company must proceeds with the IPO considering long term benefit and debt
serving capacity;

Recommendation:
ABC should enrich its liquidity position and apply to BSEC for approval of IPO at a premium of Tk. 15
to finance the project and should comply with rules and regulations.

Conclusion and recommendation:

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It is recommended that equity finance should be avoided and the company may go for debt financing
with Subordinated bond or bank loan to finance the scheme.

2.1.9 Advice on the financing options

Management was considering financing options between bank loan and convertible debenture.
Analysis shows in Appendix: 7.4 that NPV of both financing option is positive. However, as the
debenture financing shows higher amount of NPV, it has been suggested to issue debenture to
finance the project.

Conclusion and recommendation:

Management should issue debenture as it is long term and generate higher NPV than Bank loan.

2.1.10 Franchising:

Franchising gives a way to reach the customers easily and gives a way to raising further market share.
But fees should be paid and customer’s data might be at risk. Moreover the company may lose
control on the quality of the product produce by the franchises.
Conclusion:
Business with suitable structure can enjoy the benefit of franchising.
Recommendation:
It is appropriate to go franchising in a limited way with monitor strictly to ensure quality.

2.1.11 Feasibility of using Sukuk Bonds.

ABC has plans to raise fund though newly introduced Sukuk bonds. Appraisal of the Sukuk bond
shows that it will create much higher NPV than the project for setting up own tannery with 8% bond.
However, it will be very challenging to attract investors for Sukuk bond as it is very new concept. But
Government has offered various incentives like tax and vat exemptions to draw interest for the
investor.
Conclusion and Recommendation:
ABC may finance the project by issuing Sukuk bond and should focus on the benefit declared by
Government.

2.2 Strategic Planning, SWOT analysis with justification for expansion based on SWOT

2.2.1 Evaluation of strategic planning:

The CEO and chairperson think that the company has fair prospect to grow in short as well as long
term. The company currently manufacture/providing service to the people in the area of Dhaka City.
In order to increase its market share the company want to introduce/acquire XYZ Company.
Diversification strategy of the company will assists to achieve the business growth. The company
should focus on the corporate customers from whom it can maximize revenue. Financing strategies
are either bank loan, IPO or issue of subordinate bond.
Conclusion:

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 01. ABC have a dynamic strategy to achieve its mission. Or
02. The strategic planning are positive, prospective and supportive with its current business
model;

Recommendation:
Recommended to go further analysis of:
01. Product life cycle with marketing mix;
02. Gap analysis to identify the gap in the market;
03. Porter generic strategy;

2.2.2 Evaluation of strategic options:

Evaluation shows that it would be theoretically or strategically worthwhile for ABC to continue the
Regal coffee within Real brand and acquiring food delivery company XYZ. Acquisition of XYZ will be
related diversification which will create synergy benefit, reduce delivery cost and will create
additional revenue stream for ABC.

Conclusion & Recommendation

After careful evaluation it appears that acquisition of XYZ may be worthwhile for ABC restaurants as it
will created synergy benefit and ABC should:
 Introduce technology in preparation and serving foods.
 Take long term loan to increasing gearing and to finance the acquisition.

2.2.3 Benefit and challenges of strategic options:

Benefits and challenges of both option is analyzed below:
Benefits of expansion of ABC Express outlets by spinning off ABC Coffee
 Management can focus on ABC express which will maximize revenue;
 This will increase management efficiency;
Challenges of expansion of ABC Express outlets by spinning off ABC Coffee
 Employees reaction is uncertain;
 Spin off of ABC Coffee may impact the “ABC Express” brand.
Benefits of acquiring roadster
 Related diversification of business will create new revenue stream.
 More control over food delivery business.
 Synergy within the group.
Challenges of acquiring roadster
 Require expertise which existing management don’t have.
 Challenges of integration after acquiring the business of Roadster.
Conclusion and Recommendation:

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There have both advantage and disadvantage for implementation the option but considering the
overall situation acquisition of XYZ will be mere beneficial.

2.2.4 SWOT Analysis

Strengths:
The company is well established and operating its business throughout the country. The company has
large operating capacity, experience resources pool, large market share and strong brand image.
Weakness:
The board of director could not make professional judgment and the corporate management is very
poor. Besides this accountants are not qualified professional to face the future challenges. Further
the company have no clear strategies for Research and Development and books and accounts are not
maintained properly.

Opportunities:
Economic situation and market condition indicates that the company has great opportunities for
sustainable business growth. Due to globalization and its scope for dissemination of information and
communication there arises possibilities of making the business more attractive.

Threats:
Like any other business there are threats to the business. Key threats is increasing competition in
terms of product quality and service. However non-compliance with rules and regulations, exchange
rate fluctuation and interest rate increase may create enormous threats for the company.
Conclusion:

Strategy needs to be developed to convert weaknesses into strengths and threats into opportunities
in order to successful in market. or
Though the company faces some inherent issues it has a great prospect to run the business under
strict control and on forward basis.

Recommendation:
ABC should go for related and unrelated diversification to grow and should focus on weakness and
threats to avoid any penalty.

2.2.5 Justification
The company has magnificent strengths and opportunities to overcome the weaknesses and threats
to take the company go ahead and grow.

Conclusion & Recommendation:

The company should undertake the expansion plan base on strengths and opportunities they have.

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2.3 Advice regarding the appointment of External Auditor and other issues:

2.3.1. Advice on the appointment of PQR & Co. as a second auditor:

The company management want to appoint PQR & Co. as a second auditor in order to get an
approval of IPO prospectus at premium, compromising compliance of accounting and reporting issues
which is threat to the fundamental principles of ethics. As per company Act 1994, auditor must be
appointed in Annual General Meeting (AGM) by the shareholders. Since no decision has been taken in
AGM regarding the appointment of second auditor, the company management at subsequent stage
cannot appoint PQR & Co.
Conclusion & Recommendation:
Due to above non-compliance the company management cannot appoint PQR & Co. as 2 nd auditor
but ABC can appoint the firm as advisor or financial consultant under a separate terms of reference
for non-audit service.
2.3.2. Advice on the appointment of Joint auditor:
As per section 210 of companies act 1994 auditor is appointed in the AGM. Since AGM has already
done EGM is necessary to appoint joint auditor beside this ABC & Co. need permission from the
existing auditor.
Conclusion & Recommendation:
Before appointment of any new auditor quality of the work & experience knowledge must me
ensured with appropriate fees.
2.3.3. Advice on the appointment of third auditor:
The directors of ABC Company wanted to appoint a third auditor PQR & Co. Chartered Accountants.
But the partner of the firm is indebted to ABC by Tk. 200,000/=. As per Companies Act an indebted
person to the client above Tk. 1,000/= cannot be auditor of that company. Moreover, indebted
auditor need prior consent from existing auditor.

Conclusion & Recommendation:

PQR & Co. is not eligible to appoint third auditor. If the director really feels to appoint a third auditor
they can appoint other audit firm but fees need to be increased.

2.3.4 Comment on the Bank’s objection to the dividend remittance:

As per Companies Act and BSEC guideline no company can pay dividend out of its capital and as per IT
ordinance, tax should be deducted at source before remittance the dividend. So Bangladesh Bank
have correctly raise the question which will be threat for the company.

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Conclusion & Recommendation:
The company should dealt Bangladesh Bank objection with more professional way and comply the
rules of regulatory body.

2.3.5 Probable disciplinary action for unethical practice:

PQR & Co. signed two separate sets of accounts and issued a certificate for payment of divided based
on incorrect remittable profit. For this reason following disciplinary actions may be taken:
 ICAB may withhold the practicing license;
 Bangladesh Bank, BSEC, FRC or other regulatory body may also impose penalty;
Conclusion:
Unethical issues have a great impact on the reputation of the audit firm.
Recommendation:
Auditor should act integrity and independently to avoid any penalty and to increase the professional
reputation.
2.3.6 Non-compliance with auditing and ethical issues and their consequences:
PQR & Co. is non-compliant to Auditing Standards as the partner fail to sign the audit report as
required by new standard. Moreover the auditor could not to follow the audit procedures for
inventory valuation. Beside this the auditor not being independent and work for the interest of
management made a departure from the ethical standard too.
Conclusion:
Noncompliance with above issues is conflict with the fundamental principal of ethics penalty from
regulatory bodies.
Recommendation:
PQR & Co. should not compromise the ethical issues and should follow proper audit procedure.
The consequences for non-compliance might lead to getting the IPO approval from BSEC and penalty
from the regulatory bodies. The Auditor will penalized by the IDC committee of ICAB.
2.3.7 The observation on corporate governance issues:
If chairman and Managing Director hold the same person, the company will face the following
problem:
 Chairman will review and approved the activity of the company and give advice for
correction and Managing Director do the business related functions. If the same person do
the both work it may hampered;
 BSEC written regulation prohibits this;
 One person may impose more power;
 Other director will be unable to do this responsibility;
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Conclusion:
By considering the above situation, Chairman and Managing Director should be separate personnel.

Recommendation:
We recommend that company should appoints Chairman and Managing Director separate person for
compliance and smooth operation of the business.
2.3.8 Consequences for re-opening of tax files:
The company prepared two sets of financial statements for the same year. One for tax authority and
other for profit remittance and other business purpose. Tax authority may re-open the tax files within
5 years from the initial assessment order.
Consequences for re-open the tax files;
 Tax authority may impose penalty up to the amount of tax concealed;
 The company may face reputational problem;
Conclusion:
The concealment of income has a significant impact on the reputation of the Company.
Recommendation:

The company should give more attention on their taxation issues to avoid penalty
2.4 Assessment four pillars of sustainability

ABC is focusing on all four areas of sustainability i,e human, social, economic and environmental, of
sustainability.
As part of human sustainability, ABC ensures that its employees wear safety gears when working at
the fields and the dairy house. Employees were always given training on regular basis. ABC produces
vegetables with limited quantity of pesticides considering its negative impacts in human body.
The company is actively performing its social responsibility by generating new employment
opportunities, helping underprivileged people for improving their living standard and support health
related activities.
To ensure economic sustainability, ABC earn profit by supplying foods to consumers. By being
profitable, ABC ensured that it could continue its business. It also contributing to national GDP.
As part of Environmental sustainability, ABC encourages recycling wastage produces and avoids using
plastic material. ABC is still disposing the cattle wastage in open land which causing air and water
pollution.

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2.4.1 Economic, Social, Environmental and Ethical issues:
The company has been paying income tax and value added tax (VAT) to the government for last 5
years and it is expected that the amalgamated company will pay more. It help to increase the export
and earn foreign currencies.
The company is actively performing its social responsibility by generating new employment
opportunities, helping underprivileged people for improving their living standard and support health
related activities.
ABC greeneries its premises by planting trees but disposing solid waste to open fields causes discomfort
and sickness to nearby people. ABC is also planning to set up a tannery without an ETP plant.

ABC is a company with good prospects but having some ethical issues like contingent fees, self-review
threat, influence from political exposed persons might impair the reputation of the company and
conflict of interest. Even such issues may create difficulties to get BSEC approval regarding capital
raising.

Conclusion:
The company is very much committed to improve the economy as well as society. But ethical issues
may hampered its reputation.
Recommendation:
The company should comply with the ethical issues and should follow the rules and regulations of the
country and try to be more environment friendly.
Integrity issues must be taken care as per ICAB code of ethics.

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 CHAPTER-3
MAIN REPORT

Response to requirement (a):

The overall result have been promising for the company with an impressive growth in revenue even if
pandemic is inflecting high and raising human cost. Worldwide requiring isolated, lockdown for
longer period to prevent the wide spread of CORONA virus which have massive impact on global as
well as national economy.
We restated the financial statements after giving the following adjustment where net profit has been
significantly dropped to Tk. 225 million form Tk. 350 million.

Accounting adjustments:
01. As per IAS 2 inventory is to be valued at lower of cost and net realizable value thus COGS is
adjusted by 5.00 million and inventory is increased by the same amount;
02. As per IAS 16 depreciation is to be profit and loss account and deducted from PPE by Tk. 3.00
million;
03. Impairment loss of Tk. 1.00 million on intangible assets charge in profit and loss account and
deducted from goodwill;

(For detail please see Appendix-7.1)

Assumption:

01. Only current year financial statements have been restated;

02. For the purpose of simplicity WPPF and tax has not been adjusted;

Conclusion:
01. The revised financial statements reflect true and fair view of its performance; or
02. ABC & Co. is not preparing its financial statements as per IAS & IFRS and hence not complying
the requirements of BSEC too.

Recommendations:
01. ABC & Co. should prepare its financial statements in compliance with IFRS;
02. Reporting team should be more conscious about related compliance;
03. Arrange training for employees to provide knowledge about IFRS and regulations;

3.2 Evaluation of financial performance for the year 2021-22.

Based on the (Revised) financial statements provided by management, the performances of company
have been analyzed using ratio and trend analysis which is attached in Appendix- 7.2.

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Revenue:
Growth:
The company has been experiencing a superb growth in terms of revenue by Tk. 66.00 million (53%)
to 343 million due to increase of market share, produce high quality product, strong brand image,
appointing new ambassador, introducing of new product thereby produce more option to customers.

Decline:
The company is suffering dramatically decrease of revenue by Tk. 66.00 million (53%) to 343 million
compare to last year because the industry is highly affected by COVID-19 pandemic where the
demand of the product has been significantly dropped and adjustment for recognition of loss from
fire damage, recognition of liability for employee overtime expenses, legal expense and higher charge
of financing expense, reduce market share, deteriorated market quality etc. The company
management is trying their best to capture global business for reviewing their present condition. The
company is negotiating with RHL for merger or construction of new branch in the same city.
Profitability:
Growth:
Gross profit has been increase by Tk. 2.00 million (7%) compare to last year most likely reason of
management inefficient control over direct cost that reduce the COGS. On the other hand operating
profit has also increased by 27 million because of strictly control of operating, selling and distribution
cost.

Decline:
Gross profit has been declined to 34% in compare to previous year due to decrease of sales and
increase of COGS. In this business supply chain has been unable to negotiate cost efficiently.
Operating profit has also decreased during the year by 40% most probably increase of operating
expenses and outbreak of COVID-19 pandemic.

Return on Equity:
In 2022 return on equity has increased to 6.6% in 2022 compared to 2.3% in 2021. This massive
increase is due to significantly increase in net profit for the year. This rate of return is very low
compared to government risk free rate.

Liquidity:
Growth:
Both the current and quick ratio have improved during the year with 1.2 times and 1.09 times in
compare with 1.06 times and 1.01 times of previous year respectively. It indicates the company has
enough current assets to meet up its current obligation.

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Decline:
Both the current and quick ratio have decreased during the year with 0.95 times and 0.70 times in
compare with 1.50 times and 1.30 times of previous year respectively. It indicates the company have
limited capacity to meet the demand of its current obligation.

Solvency:
Growth:
Gearing ratio has increased to 17% from 15% that represent debt repayment capacity has fallen day
by day. Interest cover ratio have down size to 11 times from 13 times which indicates the company
may face problem to pay off the loan and face bankruptcy.

Decline:
Gearing ratio has fallen to 15 times from 17 times that shows debt repayment capacity improving day
by day. Interest cover ratio has increased to 13 times from 10 times which indicate profitability of the
company has declined to cover its debt.

Efficiency:
Receivable turnover period has increased to 75 days as well as inventory holding period has
deteriorated this shows the company is getting inefficient at inventory management. However
payable falling from 59 days to 50 days, this suggest that the company is not efficient at working
capital management.

Receivable days and inventory days has increased significantly but payable days has been double
which indicates risk of bad debts and obsolescence of inventory.

Receivable turnover period has increased during the year to 44 days from 37 days. No improvement
has occurred in case of payment to suppliers. It shows poor management capacity to negotiate with
the suppliers and institutional customers for improving the working capital and finance cost of the
company.

Cash conversion cycle increased to 50 days from 40 days. It denotes that DBCL must finance its
inventory and account receivables for a longer period of time, possibly indicating a need for a higher
level of capital to fund current assets.

Cash conversion cycle declined to 40 days from 50 days showing ABC has successfully developed its
structure to release money from being tied up in inventory and accounts receivable.

Evaluation of non-financial performance

01. ABC is able to create huge demand from both corporate customers and young adults;

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 02. Since its starting with Banani Outlet, ABC restaurants now has 9 outlets this is significant
growth for fast food company in such short time;
03. ABC was not only operated at full capacity but also generated significant growth in revenue;
04. It also partnered with food Delivery Company which helped ABC outsource the food delivery
while concentrating on Food business. This is an excellent move by ABC Restaurants.
05. ABC has received reward for outstanding performance;

Assumption:

01. All sales are credit sales ;

02. Year consider 365 days;
03. Don’t consider year end issue

Conclusion:
01. Overall performance of ABC & Co. is quite thrilling with a remarkable revenue growth despite
of falling profitability triggered by increase of expenses; or
02. Overall performance of the company appears to be satisfactory with steepen growth in
revenue, sound liquidity position, ideal capacity structure and efficient management; or
03. The overall performance of the company is terms of probability was not attractive but the
company could be sustainable based on its potentiality and future economic growth of the
country; or
04. The overall performance of the hospital is to be said satisfactory considering the global Covid-
19 pandemic situation the hospital performance has fallen during the year;
05. Overall performance of the company is poor but it has good growth prospect as it is increasing
its market share driving out the competitors through price cut with quality service.
Recommendations:
ABC & Co. should:
01. Control its operating cost/ focus on cost minimization;
02. Push online revenue as better margins and lower fixed cost required;
03. Explore new source of finance;
04. Diversify its product;
05. Explore market in local as well as in abroad;
06. It should attract foreign investment to raise equity which will decrease its gearing;
07. Identify the value driver;
08. Make better efforts to manage working capital;
09. Measures performance with balance scorecard;
10. Improve supply chain management;
11. Identify the critical success factor;
12. Ensure optimum utilization of resources;
13. Take initiative to increase revenue by digital marketing and selling online;
14. ABC management should introduce more item in the beverage line items which has
higher profit margin to increase its profitability;
3.3 Undertaking the business expansion project;

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ABC Limited is planning to have its own tannery and currently choosing between acquiring existing
businesses and setting up own tannery. In order to undertake these business expansion projects, ABC
will need to take further loan which will further increase company’s gearing ratio. Company is already
having high amount of debt and financing expenses. Taking new loan might put the company in even
risker position. However, having own tannery would put ABC limited in better position to maintain a
sustainable source of raw materials. This will decrease the cost of materials and help ABC Board to
make proper business decision and financial forecasting. Also, it will support its long-term growth
strategy. In addition, selling excess raw materials to other footwear companies would create new
revenue stream which in turn could help ABC limited in lowering the gearing ratio.
Conclusion:
Undertaking business expansion projects could help the company to lowing cost, generating new
revenue stream and making the business sustainable.
Recommendations:
The board should undertake the project if could service the debt and manage the high level gearing.

3.4 Evaluation the viability of expansion plan;

The Board have decided to acquire XYZ or establish new branch in Chottogram. We evaluated the
viability of expansion plan by using suitability, acceptability and feasibility framework and calculate
Net Present Value by using discount rate determine by CAPM model for financial analysis:
For details calculation of the expansion plan please see (Appendix: 7.3)

Suitability:
Health and Pharmaceutical is a growing industry and ABC is also grow with its superior
product/service quality. In order to maintain the consistency of growth and keeping pace with
industry ABC must invest and expand its current business. Our advice is to acquire the XYZ as it will
increase the existing market location. So it can be said that the expansion plan is fit with its current
strategic position.

Acceptability:
The Net Present Value (NPV) of the proposed plan is around Tk. 125 million which maximize the
shareholder value. Hence shareholder as well as management will agree to accept the project.

Feasibility:
The expansion plan will be finance either by issuing share or by sale of lease back or issue of bond or
bank loan arrangement. Beside this ABC has competent human resources who can utilize their
expertise as it is related expansion.

Hence the company should go for acquisition because of increase in market shares and revenue
generation along with the following synergy impacts:

01. Revenue synergy- 10 percent revenue will increase over the years;

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 02. Cost synergy – The overhead costs of the amalgamated company may be reduced because of
the economies of scale.
03. Operational efficiency –The Company has good network with foreign customers particularly in
the USA and the Middle East whereas RHL has staff experienced in negotiation and
communication skills.
04. Economic of Scale;
Assumptions:
We have used the following assumptions:
 For NPV calculation 5 year have been consider;
 After 5 years Terminal Value have been calculated considering 10% growth;
 No inflation will be in future;
 Cost of capital is 11% using CAPM method and will not change in future;
 Tax rate is 25% and will remain same in project period;
 Depreciation is considered based on 5 years;
Conclusion:
Acquisition of XYZ seems to be more financially viable as it has positive Net Present Value of Tk. 125
million. Moreover the plan is feasible as resources required are available to the company. But other
non-financial factors should be considered.
Recommendations:
ABC should acquire XYZ as it generates higher NPV and should:
01 Perform due diligence work before investment;
02 Assesses the stage of product life cycle;
03 Ensure the availability of technical resources;
04 Analysis the critical success factor;
05 Make a market survey;
06 Perform value chain analysis;
07 Analysis competitor position;
08 Perform sensitivity analysis;
09 Implement the strategic risk analysis to access and mitigate the risk;

3.5 Justification to the board the best investment option to be executed for increasing shareholder
wealth and return:

The board have decided to expand its business by setting up own branch or acquisition of XYZ.
Analysis shown in appendix: 7.3 that both the projects are strategic fit which will increase
shareholder wealth and return. But due to limitation of available of fund the company is currently not
in a position to implement both project at a time. To justify the best option we have calculate NPV by
using discount cash flow technique and noted that acquisition of XYZ/ setting up own branch will
generate higher return which will significantly maximize shareholder wealth.

Conclusion and Recommendation:

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ABCL should acquire XYZ as it will generate higher return and maximize shareholder wealth.

3.6Calculation of NAV per share and EPS per share (basic & diluted):
Based on the provided financial information, a forecasted statement of profit or loss has been
prepared for FY2022 to FY2026 in appendix 4. Furthermore, based on the forecasted statement of
profit or loss, NAV per share and EPS per share has been calculated as at 31 December 2026 in
Appendix 5.

As per our calculation in Appendix 4 and 5, NAV per share of ABC at 31 December 2026 stands at 29.5
taka per share. Basic EPS has been calculated at 3.02 taka whereas Diluted EPS has been calculated as
2.29. For the purpose of calculation, deferred tax has not been considered.
Conclusion & Recommendation
ABC should acquire XYZ as it will generate positive NPV and should implement the strategy plan as it
will increase EPS and NAV after the year end 2026.

3.7 Financing options for business expansion plan;

To finance the project ABC have the following options:
A) Bank Loan;
B) Subordinate Bond;
C) Sale and Lease back;
D) IPO/FPO/Right Share;

A) Bank Loan:
Bank loan is easiest and cheapest way of finance and the interest is tax deductible that cause
the effective interest rate to 6.75%. Though it have lower compliance than IPO/ subordinate
bond but it creates extra burden on debt.

B) Subordinate Bond:
The company may raise fund through issue of Subordinate Bonds. It is easier to arrange and
comparatively a cheaper source of finance than equity. It has no dilution impact on EPS and
the interest is tax deductible but the company have to comply several rules and regulations of
BSEC.

C) Sale and lease back:

The company may also finance the project by sell the existing building and machinery to ULC
Finance Ltd. and the same assets will immediately be leased back from the finance company.
It is also a cheaper option because interest is tax deductible but will increase the gearing level.

D) IPO/FPO/Right Share:
Rising fund through IPO will give the company access to wider pool of finance and there have
no obligation to pay dividend immediately. But it have to comply more rules and regulations
and the process cost is also so high.

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 To calculate the indicate price offer we apply four different types of method as given in BSEC
public issue rules 2015 which is summarized below:

Method: 1 Net Asset Value per Share Tk. 15.00

Method: 2 Value based on Market P/E Tk. 20.50
Method: 3 Average Market Price of similar company Tk. 25.80
Method: 4 Average NAV of similar company Tk. 28.37
Average Value per share Tk. 22.42
(For details calculation please see Appendix: 7.4)
Assumptions:
01. Net Assets Value assume to be same as Fair Value;
02. Net Assets Value is adjusted with unresolved issues;
03. Sector P/E ratio is considered as lower;
04. Market value is discounted by 40% for unlisted;
Conclusion:
01. Under the current position of ABC rising fund through IPO should be better at a price from
15.00 to 25.80 or average price Tk. 20.43 which is more than expected. Or
02. The company can finance from IPO/right issue where it can avoid interest payment in each
year and provide pool of finance with relatively low cost;
03. Expansion must proceeds with IPO along with premium of 20%, since bank
loan/subordinate bond will be excessive costly in long run and further it deteriorate debt
serving capacity.

Recommendations:
We recommend that ABC should go IPO and should;
01. Maintain proper books of accounts;
02. Improve liquidity position;
03. Communicate with issue manager;
04. Comply with rules and regulations;
05. Maintain peaking order theory and consider other source of finance such as venture
capital, factoring to minimize the WACC.
OR
Conclusion & Recommendations:
Given the unutilized debt capacity of the company, it is recommended that equity finance should be
avoided. However, the company may raise funds either by issuing subordinated bonds or taking bank
loans.
3.8Advice on financing options available:
Management is considering to financing the acquisition by taking bank loan and issuing
redeemable convertible bonds. For the purpose of calculation, it is assumed that there will not be
any delinquent charge or additional coupon payment.
As ABC management wants 15% return, acquisition of Roadster will generate following cash
flow as return on investment:
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 2022 E 2023 E 2024 E 2025 E 2026 E
Unlevered Free Cash Flow 5,906 6,299 6,521 6,831 7,054
(As per provided information)
Add: terminal value - - - - 66,692
(4% growth @ 15% discount rate)
Total free cash flow 5,906 6,299 6,521 6,831 73,746
Financing through bank:
If acquisition is financed through bank loan, ABC will borrow 6 crore (60,000 thousand) at 9%
from bank. Loan tenure is 5 year any annual payment is made at the end of the year.
Therefore, cash flows from financing though bank will be:
2022 E 2023 E 2024 E 2025 E 2026 E
Roadster project cash Flow 5,906 6,299 6,521 6,831 73,746
(15,426 (15,426 (15,426) (15,426 (15,426
Less: Payment of bank loan
) ) ) )
Undiscounted cash flows (9,520) (9,127) (8,905) (8,595) 58,320
Discount factor 6% 0.9434 0.8900 0.8396 0.7921 0.7473
Present value (8,981) (8,123) (7,477) (6,808) 43,583
Net present value of the investment is Tk. 12,194 thousand.

Assumptions:
01. Annual payment (including interest and principal) will be = 60,000 x 9% x
(1.09^5)/((1.09^5)-1) = 15,426 thousand per annum;
02. Because of the borrowing, ABC would get tax shield on the borrowing rate. Hence
Effective discount rate would be 9% x (1-0.3) = 6.3% . For calculation purpose let us
assume the discount rate is 6%.
Financing through participatory convertible bond:
The company may also raise fund by issuing 7% cumulative redeemable participatory and
convertible debenture for an amount of Tk. 6 crore with face value of 100 taka.

In case of redeemable bond, following redemption and payment trend will be followed:
2022 E 2023 E 2024 E 2025 E 2026 E
Outstanding of bonds 60,000 51,000 42,000 33,000 24,000
Coupon on outstanding (4,200) (3,570) (2,940) (2,310) (1,680)
bond Redemption (9,000) (9,000) (9,000) (9,000) (24,000)
Total payment (13,200) (12,570) (11,940) (11,310) (25,680)

Therefore, Net free cash flow from convertible bond is as below:

2022 E 2023 E 2024 E 2025 E 2026 E
Roadster project cash Flow 5,906 6,299 6,521 6,831 73,746
(13,200) (12,570 (11,940 (11,310 (25,680)
Less: Payment of bank loan
) ) )
Undiscounted cash flows (7,294) (6,271) (5,419) (4,479) 48,066
Discount factor 6.3% 0.9434 0.8900 0.8396 0.7921 0.7473
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 Present value (6,881) (5,581) (4,550) (3,548) 35,920

Here net present value of the return cash flow from roadster is 15,360 thousand.
Assumptions:
01. Because of the tax shield effective discount rate would be 7% x (1-.3) =4.9%. For the
purpose of simplicity in calculation, let us assume that the discount rate is 5%;
02. Similar to bank loan, relevant cash inflows from Roadster project will be based on 15%
required rate of return by management;

Conclusion & Recommendation:

Both bank loan and debenture financing generate positive cash flows from the investment.
However, if ABC management is determined to acquire Roadster at 6 crores, it should finance
through bond as it will generate higher NPV of Tk. 15,360/=.

3.8 Franchising options for business expansion plan;

Franchising is a method of expanding business with lower capital. In franchising business the
franchisees not only pay a lump sum capital but also bear some running cost of new outlets. For
suitable business it is as alternative strategy to raising extra capital for growth.
Advantage:

01. It gives a way to reach the customers easily;

02. Reduce capital requirements;
03. Reduce management resources required;
04. Lower cost than IPO and Bank Loan;
05. Benefit of specialization because each party concentrate on their own area;
06. Penetration of other market;

Disadvantage:
01. Lack of control over franchisees;
02. Profit are shared between franchiser and franchisees;
03. Problem of inconsistent quality;
04. Risk of reputation;
05. Potential conflict;
Conclusion:
01. Franchising is the best idea as the company wants to grow with their full potential;
02. Franchising can be an option but giving them control in all operating locations will not be a
wise option;
Recommendations:
01. Develop acceptable criteria for selecting candidates;
02. Design and implement internal control to protect confidentiality;
03. Develop standard operating procedure and policy;
3.9 Feasibility of using Sukuk Bonds:
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A Sukuk is an Islamic Financial Certificate like Treasury bond and structured to generate return in
compliance with Islamic Shariah Principles. Under this Sukuk program, ABC will open a new company
as Special Purpose Vehicle (SPV). The SPV will act as a trustee and will sell certificate which will allow
investors to have equity right to assets. With the collected fund SPV will set up the tannery and rent
out the facility to ABC for a fixed annual rent of Tk. 1800K for next 10 years @ 5% coupon rate.
Financial Analysis:
An appraisal has been performed in Appendix: 7.5 considering 5% coupon rate and projected cash
flows of setting up own tannery. As per our calculation the NPV will be Tk. 27,000K which is much
greater than setting up own tannery.

Benefit:
01. Issue of Sukuk bond is comparatively cheaper and lower compliance than IPO;
02. Government has offered various benefit like exemption of VAT and withholding tax;
Challenges:
As it is very new concept investor will not be interested to invest in Sukuk bond issued by Non-
Government Organization.
Conclusion and Recommendation:
ABC may set up the tannery by issuing Sukuk bond and promote the investor about the benefit
declared by the Government.
CHAPTER-4

Response to requirement (b) (i):

4. Comment on strategic planning and evaluation of SWOT with justification
4.1 Comments on the strategic planning of the business
The company has been providing number of screening services to the customers and achieving
substantial growth till 2019. But Covid-19 pandemic has unfortunately pulled down the growth of the
business and its performances. However, Bangladesh has great opportunities in the healthcare
industry and therefore the company can expect to have better business prospects in future. In this
regard the company has undertaken some strategic business decisions to bring back its business in a
positive platform which are:
1. Purchasing of XYZ Hospital Ltd., a health care hospital.
2. Negotiating with the international health care hospital for its patient.
 3. Referring patients to take superior treatment abroad.
 4. Keeping hospital firmly & resources healthy at all the time.
 5. Preserving high quality services. and
 6. Delivering superior financial performance, etc.

Conclusion:

25 | P a g e
 01. ABC have effective business strategy to fulfill its business objective and to achieve its
mission; or
02. With the above mentioned strategy plans the company is presuming to reach its goal and
achieve its objective; or
03. Based on the current strategy of the company it can be concluded that expansion plan is
best suited/highly suited with the current strategic planning ;

Recommendations:
01. ABC should concentrate on long term strategy to deliver shareholder value;
02. Perform market research ensure to enough demand/supply for this product and market;
03. Focus on changing environment to fit its strategy planning;
04. Focus on niche market to boost up business;
4.2Evaluation of strategic options:
ABC management is considering strategic options between “Expanding ABC Express by divesting
ABC Coffee” and “Acquisition of XYZ”. If management expands ABC express by divesting ABC
Coffee, management can put more concentration on Fast-food business and increase operational
efficiency and simplicity. However, this will significantly decrease the business portfolio as 48%
of the current revenue is generated form ABC Coffee. If ABC opens two outlets in Chittagong and
Sylhet, it might be able to make up for the lost 48% revenue from divested ABC Coffee.
Furthermore, selling off one major business unit might create dissatisfactions between existing
customers and employees. As a result, there might be loss of further revenue.
On the other hand, acquisition of roadster will require separate concentration from
management. This may hamper existing business operation. But it will create synergy for ABC
restaurants as it will be now control delivery of the foods on more systematic method while
reducing or controlling the delivery cost. ABC will not have to maintain its own delivery channel
and increase efficiency. Furthermore, serving other business will be able to generate additional
revenue for ABC restaurants.
Conclusion & Recommendation
After careful evaluation it appears that acquisition of XYZ may be worthwhile for ABC
restaurants as it will created synergy benefit and ABC should:
 introduce technology in preparation and serving foods.
 take long term loan to increasing gearing and to finance the acquisition.
 continue to operate coffee business as it generates more than 48% of revenue.

4.3Benefit and challenges of strategic options:

ABC management is currently considering between two strategic options. First option is to divest
ABC Coffee and expand ABC Express outlets in Chittagong and Sylhet. Another option is to
acquire a delivery company called roadster.
Benefits and challenges of both option is analysed below:
Benefits of expansion of ABC Express outlets by spinning off ABC Coffee

 Management can focus on ABC express which generate higher percentage of revenue.

26 | P a g e
  Management can increase profitability by focusing more on ABC express generates
higher margin.
 This will increase management efficiency.
 ABC will operate only the “ABC Express” business. It will simplify the business model
and operation will be less complex.
Challenges of expansion of ABC Express outlets by spinning off ABC Coffee

 Customer behaviour pattern in Chittagong and Sylhet is different from customer

behaviour pattern in Dhaka.
 Operation in Chittagong and Sylhet may not be as successful as Dhaka operation.
 Reaction of employee for ABC Coffee spin off is uncertain and may lead legal actions.
 Spin off of ABC Coffee may impact the “ABC Express” brand.
Benefits of acquiring roadster
 Related diversification of business.
 New revenue stream and increase profitability from new business.
 More control over food delivery business.
 Controlling delivery cost of ABC Express and ABC Coffee as ABC may outsource the
delivery to ABC for a fixed fee.
 More control over human resource deployed for food delivery.
 Serving other restaurants which would generate more revenue.
 Synergy within the group.
Challenges of acquiring roadster

 Management will have to pay additional concentration on Roadster.

 Require expertise which existing management don’t have.
 Challenges of integration after acquiring the business of Roadster.
 Reaction from existing employees of Roadster on new management.
Conclusion and recommendation:
Both the options have benefit and challenges but acquisition of Roadstar will generate higher
return and will increase current market level.

4.4 Evaluation of SWOT for expansion plan:

SWOT analysis provides a good overview whether the overall situation is fundamentally healthy to do
sustain in the business growth prospect. We review the overall prospect and noted the following
aspect:

Strengths:
ABC has some strategic strength which are listed below:

01. Founders of the business are actively involved with management and operation;
02. ABC has strong financial position;;
03. ABC is award-winning company;
04. Demand of the product is increasing in export market;
27 | P a g e
 05. Long term sustainable customers relationship;
06. Long understanding in the industry;
07. Large market share and good infrastructure;
08. Strong brand name and image;
09. Strong competitive barriers;
10. Outstanding revenue growth over last year;
11. ABC is successful in serving both online and offline customers.
12. It has good feedback on social media;
13. ABC uses various technology in its operation to boost up its productivity;
14. Addressed health and safety concerned;

Weaknesses:
Along with strength ABC also has some weakness which are outline below:
01. No clear strategy for Research and Development;
02. Unsatisfactory culture and attitude;
03. Poor management control;
04. Weak management information system;
05. Market perception about some new product is unknown;
06. Not maintaining proper books of accounts;
07. Formal audit committee was not held;
08. No barrier to entry;
09. No internal audit committee;
10. Unsound debt to equity ratio;
11. Inappropriate accounting policy;
12. Narrow product lines relative to rivals
13. Small product portfolio;
14. Over dependency on a single product;
15. Weak liquidity position;
16. Pending tax litigation;
17. Decreasing GP margin;
18. Inefficiency in cost control;
19. CFO is not professional qualified Chartered Accountants;

Opportunities:
ABC enjoys some advantage from its environment which should be considered as opportunities:
01. Steady growing economy;
02. Further opportunities for related and unrelated diversifications in future;
03. Has opportunity to raise finance through IPO, Bank loan etc.
04. Political stability of the country is good enough;
05. Develop infrastructure facility in the region;
06. Growing middle income based customers;
07. Easy access to customers;
08. Achieving sustainable development goal;
09. Highest per capital GDP growth in south region;
28 | P a g e
 10. Rapidly raising export;
11. GDP growth of 7.1% expected to grow more;
12. Demand for fast food items is increasing exponentially and contributing more and more to
national GDP;
13. ABC may acquire some of the business which had popularity but greatly impacted because
of the pandemic;
14. ABC may try to introduce technology like Robot and RPAs for cost control and better
customer service;
15. Opportunity to raise finance through bond market;
16. Implementing forward or background linkage

Threats:
There are also some disadvantages from external environment which can be threats for the company:
01. Risk of 4th wave of CORONA virus;
02. Several impact on economy due to COVID-19;
03. Threats of new entrants;
04. Threats of substitute products/ services;
05. Limited number of suppliers
06. Volatility in foreign exchange risk;
07. Political instability in the country;
08. No patent, trade mark and license agreement;
09. Violence macro-economic situation;
10. Increasing fierce competition among rivals;
11. Govt. imposing tax tariff on an increasing rate;
12. The regulatory body may take action for noncompliance of accounting and audit Standard;
13. 20% new poor created for COVID-19;
14. Key dependency on a single suppliers of raw materials;
15. Penalty risk for environmental issue’
16. Restrictive trade policies on the part of foreign govt.
17. Costly to comply new regulatory requirement
Conclusion:
01. Despite having some of the weakness and threats the company is expected to convert the
weakness into strengths and threats into opportunities; or
02. ABC have tremendous strengths and opportunities to move the company further but
weakness and threats to be address too; or
03. ABC have positive and progressive strategy with many strengths and opportunities to
grow and has potentials to improve weakness and challenges threats;
04. From the above analysis, we can conclude that the company has immense potentiality of
growth. However, the company has some external threat and internal weakness also.
Recommendation:
01. The company have to take immediate steps to reduce the treats to an acceptable level;
02. Address the risk associated with the weakness and threats;
03. Comply with regulatory guideline;
29 | P a g e
 04. New technology should be adopted to keep the business up to date;
05. Improve the quality of corporate governance
06. Evaluate the competitors before going into new business strategy

4.5 Justification for expansion and modernization based on SWOT:

ABC has some magnificent strengths and opportunities to take the company ahead and grow. They
have the potential to overcome the weakness and faces the threats with the strengths and
opportunities they have.
Conclusion and Recommendation:
ABCL should go ahead with the expansion plan based on the strengths and opportunities as discussed
in the SWOT analysis.
CHAPTER-5
Response to requirement (b) (ii):

5. Advice regarding the appointment of PQR & Co. Chartered Accountants and other issues;
5.1 Advice on the appointment of 2nd auditor:
The company management is intended to appoint PQR & Co. as a second auditor of the amalgamated
company after holding Annual General Meeting (AGM) in order to achieve the following:
 PQR & Co. Chartered Accountants will prepare the IPO prospectus after fulfilling certain
requirements to get an approval of the prospectus at premium even at lower EPS and
dividend pay-out ratio.
 PQR & Co. has agreed to compromise the compliance of reporting issues.
 PQR & Co. being an expert in taxation services, has suggested to release the deferred tax
liabilities
The above matters are threats to the fundamental principles of ethics. Therefore, the appointment of
PQR & Co. would be illegal because the previous auditor has already accepted the appointment for
the next year and submitted Form 23B to RJSC. Every company should appoint an external auditor in
accordance with section 210 of Company Act 1994 and Section 31 of the Financial Reporting Act
2015. Moreover, as per Companies Act, auditor must be appointed in annual general meeting (AGM)
where the auditor has to get approved by the shareholders. Since no decision was taken in AGM
regarding the appointment of second auditor, the company management cannot appoint ABC & Co,
as a second auditor for next year.
Conclusion:
The appointment of 2nd auditor is threats to the fundamental principles of ethics and non-compliance
of laws. So, PQR & Co. is not eligible to appoint 2nd auditor of the company.
Recommendation:
The appointment of PQR & Co. is illegal but the company can appoint the firm as an advisor or
financial consultant.

30 | P a g e
5.2 Advice on the appointment of Joint auditor:
Every company shall appoint external auditor as per Section 210 of the Companies Act: 1994.
 The company’s existing auditor has already been approved as statutory auditor and
accordingly necessary papers have been submitted to RJSC on time. Before appointing 2 nd
auditor/Joint auditor the company must obtain permission from existing auditor;
 The cost of the audit will rise because fess cannot be shared;
 An EGM is necessary to appoint a second/joint auditor;

Conclusion:
Joint auditor cannot be appointed without permission of existing auditor.
Recommendation:

01. Assess the resources of the Joint auditor;

02. Obtain permission from the existing auditor;
03. Comply companies act and FRC regarding appointment of Join auditor;

5.3 Advice on the appointment of Third auditor:

The director of ABC Company have desired to appoint a third auditor in addition to the existing two
auditors. But the appointment of existing two auditors have been extended with the approval of
shareholders at AGM. Such appointment is also communicate to the RJSC. Beside this before
appointing any new auditor prior consent of existing auditor must be obtained. Moreover, the
proposed third auditor is indebted to the company for Tk. 200,000/= and as per Company Act 1994
which is one of the disqualification for being an auditor.
Conclusion:

Because of such no-compliance PQR & Co. cannot be appointed an auditor of ABC.

Recommendation:

If required the director of ABC may appoint any other auditor at AGM after taking prior permission
from the existing auditor. It is necessary to increase the audit fees proportionately.

5.4 Comment on the Bank’s objection to the dividend remittance:

Rules of BSEC regarding dividend declaration to the Shareholder:
 Dividend must not be declared out of the capital reserve account or any unrealized gain or out
of profit earned prior to the incorporation of the company;
 The guideline also stated that no dividend would be paid other than out of profit of the year
or any other undistributed profit;

31 | P a g e
Conclusion:
Declaration of the dividend from the capital and remittance without tax deduction are the violation of
Bangladesh Bank guideline.
Recommendation:
01. Dividend should not be declared out of capital;
02. Tax should be deducted while remitted the divided outside the country;

5.5 Probable disciplinary action for unethical practice:

PQR & Co. signed two separate sets of accounts with different profit for the same year. Not only that
the firm issued a certificate for payment of dividend which is not based on correct remittable profit.
For this unethical practice following disclipanry action may be taken:
 ICAB may withheld the practicing license of the auditor;
 Bangladesh Bank may delist the audit firm for conducting Bank audit;
 Other regulatory body such as BSEC, NBR or FRC may also impose penalty;
Conclusion:
Disciplinary actions may be significant for the audit firm for their unethical practice.
Recommendation:
01. The audit firm should act independently and objectively to enhance the reputation of the
profession;
02. ABC should not influence the auditor to get clean CIB report;

5.6 The non-compliance with auditing and ethical standard with their consequence:
Overall scenario, we have found some non-compliances of auditing standard and ethical codes.
Non-compliance with auditing standards:
 PQR & Co. signed the audit report in the name of the audit firm but audit report should be
signed by the partner name as per new auditing standard;
 The audit procedure for the inventory is not done according to the audit standard;
 The auditor has not qualify the audit report although as per auditing standard it is needed to
qualify the report;
Non-compliance with ethics:
 The auditor is not independent;
 The auditor has not maintained the objectivity and professional competence in performing
audit procedure;
32 | P a g e
Consequences for non-compliance:
Management is responsible for the preparation and fair presentation of the financial statements of
the company in accordance with relevant accounting standard and applicable laws and regulations.
Auditor is responsible for conduction the audit in accordance with auditing standard.
For any non-compliance both the parties will be penalized by the regulatory bodies’ i.e BSEC, ICAB,
FRC.
Conclusion:
Non-compliance with the above issue may create a great problem for ABC as well as auditor.
Recommendation:
The auditor should act ethically and ABC should prepared the accounts in compliance with relevant
accounting standard.
5.7 Comment on the observation on corporate governance issues:
As per corporate governance guideline and BSEC requirement Chairman and Managing Director will
be the separate personnel. Chairman is responsible for reviewing the activity of the company and
Managing Director is responsible to run the business operation smoothly. If chairman and Managing
Director hold the same person, the following issues may arise:
 Chairman is reviewing his own work;
 Chairman advisory position is not maintained;
 Other board members does not play this role;
 Independent Directors will be inactive;
 Unfettered power is concentrated into one pair of hand;
Conclusion:
The above issues indicates that Chairman and Managing Director will not be the same person.
Recommendation:
ABC should appoint separate person for the position of Chairman and Managing Director to comply
BSEC notification.
5.8 Consequences for re-opening of tax files:
The company maintain two sets of Financial Statements for the same year showing different net
profit which are not justified as per applicable Law. Taxation authority can re-open the tax files within
5 years from the date of initial assessment order. If the assesse escape or conceal income and
erroneous assessment where Govt. losses tax on income.
The Company may faces the following consequences;
 Company must pay escape assessment tax under Section-93;
 The Company will face reputational problem as legal action will be taken by tax authority;

33 | P a g e
  Bank’s will reluctant to accept the Financial Statements and sanctioned further loan;
 Tax authority will fine the company and demand tax on arrear tax liability;
Conclusion:
Preparation of two sets of financial statements is great violation of Laws where tax authority may
impose penalty that will damage the company reputation.
Recommendation:
Company should prepare single set of accounts for tax and other purpose.

CHAPTER-6

Response to requirement (c):

6 (A). Assessment four pillars of sustainability:

In order to be sustainable in future, an entity need to focus on four areas of sustainability i.e Human
Sustainability, Social Sustainability, Economic Sustainability and Environmental.

Human Sustainability:
Aims of human sustainability is to maintain and improve the human capital in society by investments
in the health and education systems, access to services, nutrition, knowledge and skills. As part of
human sustainability, Zenith takes the following steps:
 The company have focus on employee safety;
 Employees were always given training on regular basis;
 Zeniths has employed more than 80 people to maintain a healthy number of human
resources:
 Zenith avoids injecting steroids and hormones to its cattle that are harmful for human
consumption;
 Zenith is also training village women about rearing cattle. These initiatives show Zenith’s
dedication for human sustainability;

Social Sustainability:
Social sustainability aims to preserve social capital by investing and creating services that constitute
the framework of our society. Zenith has undertaken following initiative as a part of corporate social
responsibility:

 Produce pesticide and GMO-free green vegetables;

 It has focused on reducing wastage and packaging from recycled materials;
 Zenith provided dry manure to local people so address their fuel crisis in cooking;
 Zenith is creating jobs which is also creating social value;
 Zenith conducting is business complying with the local and national laws and regulations, this
created a compliance environment with strengthen social sustainability;

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Economic Sustainability:
Economic sustainability aims to maintain the capital intact. It refers to the efficient use of assets to
maintain company profitability over time.
 As the business is profitable and continuously growth it contribute to our national GDP;
 It can create many job opportunities which can address unemployment problem in the
society;
 Zenith and other Agro businesses will be earn foreign currencies for Bangladesh. This will
boost up national economy;
 Positive role in achieving government goal;

Environmental Sustainability:
Environmental sustainability aims to improve human welfare through the protection of natural
capital (e.g., land, air, water, minerals etc.). Initiatives and programs are defined environmentally
sustainable when they ensure that the needs of the population are met without the risk of
compromising the needs of future generations.
 Zenith is producing vegetables and fishes using natural resources;
 As the agro produces are quickly perishable, Zenith tries to make these available for
consumers for their quick consumption;
 It also encourages recycling wastage produces and avoids using plastic material as much as
possible to reduce negative impact to the environment;
 Zenith disposes the cattle wastage in open land which causing air and water pollution;
 Cattle farming is one of the largest contributors to greenhouse gases, thus being a major
cause of climate change;
 Cattle waste contains a lot of nitrogen and ammonia, which can contaminate water sources
around farms over time. Furthermore, it is causing difficulties for nearby people to live in with
bad smell;
Conclusion:
Zenith is focusing on all four areas of sustainability which indicates the company is sustainable in
future and have the ability to achieve its strategic objective.
Recommendation:
01. Zenith should address to manage cattle waste with top priority;
02. Zenith should try recycling its wastes in more efficient manner;
03. Management should avoid using illegal pesticides and insecticides;
04. Management should pay overtime to its employees as per labour law

6. Assessment of Economic and Social and Environmental impact and evaluation of ethical issues:
6.1 Economic Aspects:

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 01. The company has direct contributes to GDP. Presently the sector contributes Tk. 4.4
billion;
02. Contributing to National Exchequer by paying tax and VAT;
03. Development of capital market;
04. Helped the economy to get the foreign investment. / contributed to increase foreign
currency;
05. Boosting economic growth by penetrating into new market;
06. It will help to change the society and living standard of the people;
07. Increase per capita income;
08. Enriching the basket of exporting product/ contributed to boost up the export of the
country;
09. Earnings economic development/Overall economic development;
10. Creating employment opportunities. / More employment and ensuring women
empowerment;
11. Exports earn foreign exchange;
12. Positive role in achieving government goal;
6.2 Social Aspects:

01. Advising people on health and safety issues and carrying out of the other social works;
02. The company has some CSR activities I.e. donation program/ adopting CSR policy;
03. Create new employment opportunity to the people;
04. Social integration and public awareness;
05. Increase education and literacy laree;
06. Capital infrastructure;
07. Respecting environment and encouraging sustainability;
08. Arranging health and fire awareness seminar;
09. Driving value-based culture;
10. Manufacture quality and health product;
11. Helping under privileged people for improvement of their living standard;
12. Aiding for medical treatment;
13. Helps to increase disposal income;
14. Charity and social works that improves the society;
6.3 Environmental impact:
ABC has its focus to be environment friendly business and take the following steps:
01. It has greeneries inside and outside of its premises;
02. It has installed solar panel to generate sufficient power to light and heat its factory premises;
03. Trying to reduce carbon foot print and plans to be carbon negative in future;
04. The company has been dumping its solid waste in the open field, which is speeding toxic
chemicals to the land and air;
05. The entity could not build up its own ETP for its waste management;
06. Deforestation by the entity directly and indirectly;
07. Bad impact on Bio-Diversity;
08. Increase sound and noise pollution;

Conclusion:

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 01. ABCL should continue its voluntary activities for the society and also keeps contribution to the
economic development of the country. Or,
02. ABCL has vital contribution to the company and is well aware of the well-being of the society;
03. The company contributes in economic development through providing indirect taxes and
social development through employment, improving standards of living. The ethical issues
may affect negatively to the reputation of the Company;

Recommendation:
The company must expand business in such a way so that the adverse impact on economy will
reduce.

Ethical Issues:
Lack of professional independence or objectivity:
01. Lack of independence among auditors;
02. Contingent Fees- Fees are both evaluation business plan as well as obtaining IPO approval
or issuing Sub-Ordinate Bond;
03. Financial support Tk. 10,000 per student in addition to audit fees;
04. CC students getting employment at ABCL after competition of article ship;
05. Two juniors are keen to join the company which might influence their decision;
06. The auditors compromised its independence;

Conflict of interest among stakeholders:

01. Conflict of interest may arise if intendant director comprise the duty of responsibility as he is
close friend of the chairman;
02. Lack of independence in the independent director;
03. Redundancy among employees to maintain profit;
04. Related party transitions;
05. Abuse of close personal contract for commercial gain;

Doubtful accounting or commercial practice

01. Preparing financial statement by not following BSEC requirements;
02. Breach of laws and regulations;
03. Money laundering;
04. Company issues 20% shares to a Politically Exposed Person;
05. Company paid donations where one of the directors is a trustee;
06. It has followed inappropriate accounting and commercial practices violating rates tax
guidance of appropriate laws and regulations;

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 07. The company donates money in the sales where it will get benefit;
08. The company misstated its financial position and performance;
09. Company has not maintained proper books of accounts;
10. Lack of professional competences in the finance manager;

Inappropriate pressure to achieve a reported result.

01. Management will pressurize consultants to obtain clean CIB report for bank loan;
02. Unethically tried to empty / appoint ABC & Co. Chartered Accountants as a second auditor at
the same fees;
03. Lobbying with Bangladesh competition commission to protect new entrant;
04. The CFO is alumni of the audit firm, thus raising risk of favorable position being shown in the
accounts;
05. The auditor may be compelled to get unexpected higher premium (100%-400%) approval
from BSEC through personal influence or using unethical practices;
06. Existing pressure on auditors for share premium;
07. Bribed to inspector of Bangladesh Food Safety Authority (BFSA) to get A+: Excellent grade.

Compliance of local laws and regulations

01. Ineffective audit committee;
02. Non-compliance of ITO-84 regarding remittance of profit;
03. Non-compliance with BSEC guidelines;
04. Employing child workers;
05. The company has failed to submit its withholding tax return a yearly basis;
06. The company does not have a formal audit committee to review its accounting and related
issues ;
07. Salary and customers bill paid without deducting VAT & Tax;

Conclusion:
Although the company has good prospects but the ethical issues might be so significant which could
have negative impact on ABC and these might result in reputational damage and loss of customers.
OR
The company has great impact an economy and society but ethical issues may impair reputation.

Recommendation:
ABCL should-

01. Not recruit child labor;

02. Comply with all the laws and regulation;
03. Ensure professional independence of audit
04. Make audit committee effective.
05. Avoid conflicts of interest.
06. Keep contribution to the economy and society;
07. Better working environment for women should be insured;
08. Proper wages must be paid to worker as per Labor Law;
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 09. Auditor findings should be considered with due care;
10. ABC should make awareness among the employees about the ethical concern;
11. ABC should find alternative to and stop using single-use-plastics;
12. ABC should try recycling its wastes;
13. Integrity issues must be taken care of as per the code of conducts issued by ICAB;

Chapter: 7
Appendices

7.1 Restate of Financial Statements for the year 2022;

ABC Limited
Statement of Financial Position (Restated)
As on 30 June 2022
Amount in Million
Assets As on 30 June Debit Credit Revised
2022
Non-Current Assets
Current Assets
Total:

Equity and Liabilities

Shareholders' equity

Non-current liabilities

Current Liabilities

Total

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 ABC Limited
Statement of Profit or Loss and Other Comprehensive Income
For the year ended 30 June 2022 (Restated)
Amount in Million
Assets ended 30 June Debit Credit Revised
2022
Sales
Less: Cost of Sales
Gross Profit
Less: Operative expenses
Net operating profit
Less: Finance Charges
Add: Non-Operating Income
Profit before WPPF & Tax
Less: Provision for WPPF
Profit before Tax
Less: Tax Expenses
Profit for the year
Other Comprehensive Income
Total Income:
No. of Shares
EPS

Note:

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7.2 Analysis of Financial Performance;

a) Trend Analysis:
2021 2022 Change in Change (%)
Taka
Revenue
Gross profit
Net Profit

b) Ratio Analysis:

Formula 2021 2022 Change

Profitability
GP ratio GP/Sales*100
OP ratio OP/Sales*100
Return on Equity NP(NPAT)/ Equity*100

Liquidity
Current Ratio CA/CL
Quick Ratio CA-Inventory/CL

Solvency
Gearing Ratio Total Debt (interest
bearing/ Equity*100
Interest Cover EBIT/Interest

Efficiency
Receivable Receivable/Sales*365

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 collection period
Inventory Holding Inventory/Purchase*365
Period
Payable payment Payable/Purchase*365
period
Cash Operating
Cycle

7.3 Evaluation of Business expansion plan;

NPV calculation:
Figures in Million

Particulars Year-1 Year-2 Year-3 Year-4 Year-5

Sales
Less: COS
Less: Operating
Expenses
Less: Other Expenses
Less: Deprecation
PBT
Less: Tax
PAT
Add back deprecation
Cash Flow
Discount Factor
Present Value

Net Present Value of the project:

Present Value for 5 years

Add: Terminal Value( CF Y5*growth rate)/Ke-growth rate*DF Y5
Total Value:
Less: Initial Investment/Purchase consideration
Net Present Value

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Note:
01. Purchase consideration:
Total assets- total liabilities= Net assets

02. Cost of Equity:

CAPM=Rf+β(Rm-Rf)

7.4 Calculation of indicative price offer;

Method 1: NAV per share

Figures in Million

NAV (as per revised FS)

Less: Intangible assets/Goodwill
NAV
No. of outstanding shares
NAV per share

Method 2: Earnings Based Valuation:

Lower of sector or Market P/E 13.25

Company EPS (Revised) 2.5
Value per share
33.15

Method 3: Average Market Price of similar company:

Value of share = (34+75.93+18.71+15.87+35.32)/5= Tk. 35.85 per share

Method 4. Average NAV of similar company:

NAV = (49.63+93.25+45.85+30.80+55.20)/5= Tk. 54.945 per share

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