Audit Assignment

The report evaluates and analyses the business risk in A2 Milk Ltd. It identifies the major areas of risk such as fair value, liquidity, customer and market risk for the serious threat for the company. The report sheds light on the four areas of business risks and four areas of risk of material misstatements. It also includes additional three areas of risk of material misstatements. The report concludes with the importance of auditors to shed light on the aforementioned areas.

Running head: AUDIT ASSIGNMENT
Audit Assignment
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The overall findings of the study have considered for major business areas which are at risk for
A2 Milk Ltd. The important findings have been able to reveal that major areas of risk such as fair
value, liquidity, customer and market risk for the serious threat for the company. Therefore, it is
the role of the auditors to a certain such risks are considered for evaluating if they are having any
material impact on the financial statement.

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Table of Contents
Introduction......................................................................................................................................3
Client Business overview, Operations and Industry........................................................................3
Four Areas of Business Risks..........................................................................................................4
Four Areas of Risk of Material Misstatements................................................................................5
Additional Three Areas of Risk of Material Misstatements............................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
In general, the process of audit is considered as a methodical and systematic process for
checking whether the financial statements of the company are free from material misstatements.
During the process of performing audit operations, the auditors need to take into account the
significant areas of business risk which may lead to risk of material misstatements in the
financial statements. Due to this, it is the responsibility of the auditors to identify the areas of
doubt as per the risk of transaction, assertions and the balances which may lead to material
misstatement. The report aims to provide the relevant evaluation and analysis of business risk in
A2 Milk Ltd. This is necessary for the purpose of reporting on the business and operations area
of a particular company for gaining an insight of the company (Louwers et al., 2015).
Client Business overview, Operations and Industry
Business Operations: A2 is seen to be listed under ASX 200 and primary operations of the
business is recognized with commercialization of intellectual property associated to A2 Milk.
The establishment of the company was made in the year 2000 and its headquarter was situated in
Sydney, Australia. The established of A2 Milk Ltd was focused with a strong growth pertaining
to well established Australian market. The product availability may be further depicted among
six major supermarkets situated in Australia and the gross value of the market share was further
seen as 10% approximately. The launch of a2 Platinum has become a leading formula for the
infant brand with a total market share of 32%. In 2018, the company had continued to make
strong investments pertaining to all the brands and it was able to spend the highest amount in
brands pertaining to categories of infant formula and fresh milk. In the same year A2 Milk Ltd

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had accounted contiguous growth by launching their new product known as a2 Platinum
premium stage 4 milk drink for juniors (Griffiths, 2016).
Industry: it needs to be declared that A2 Milk Ltd mainly operated in food processing industry
across Australia. As per the declining manufacturing situation in various sectors of Australia, the
food processing industry may be identified as a stand out performer and contribute more than $
25 billion as per value added in 2014 to 2015. In the last ten years the average growth rate in
Australia was 8.5%. A strong growth is discerned from the industry in the coming years. This is
relevant to the growth in the consumer demand pertaining to wellness and health pertaining to
food safety, products and naturalness in the growing middle class in Asia. Therefore, as per the
stated discussion it can be stated that A2 Milk Ltd is categorized under such an industry which
has shown a progressive growth in the recent years (Knechel & Salterio, 2016).
Four Areas of Business Risks
As per the depictions from the annual report of the company published in 2018, the
company is exposed to severe risks which are listed as follows:
Customer Credit Risk: It may be depicted that the company is exposed to a significant nature of
customer credit risk and risk associated to individual customer characteristics. A significant
portion of the sales of the company relates to the major retailers recognized with credit
worthiness and minimal default level. The sales pertaining to other areas are based on cash on
delivery. The analysis made by the company may be inferred with new customers pertaining to
the credit worthiness at the same time considering the available credit ratings, previous trading
along with several types of other factors. The important assessment of the customer made with
the aging profile of the debtors. The company has recognized the different provision for the

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impairment as per the assessment of the lifetime expected credit loss (Mubako & O'Donnell,
2018).
Market Risk: The market risk of A2 Milk Ltd is depicted with the changes pertaining to the
market price which will be having an impact on the income statement of the company and value
of the holdings in the financial instruments. The various forms of the business activities
pertaining to A2 Milk Ltd is exposed to various levels of foreign currency exchange risk and
finance risks. The A2 Milk Ltd holding is considered as a listed investment which is considered
to be exposed to number of risk pertaining to pricing risk. The management of the company
monitors the risk performance in a continuing basis (Simon, Smith & Zimbelman, 2018).
Liquidity Risk: This risk can be depicted to pose a serious threat for A2 Milk Ltd. Liquidity risk
can make the company incapable for meeting its obligations at the time they are due. The
management of such a company takes risk in terms of setting minimum target for the liquidity
level thereby ensuring effective management of regular commitments which are associated with
making forecast on cash inflows. Due to this, A2 Milk Ltd is able to manage difficult cash
reserve for adhering to the ongoing commitments made by the company (Cassell et al., 2016).
Fair Value Measurement Risk: This particular risk measurement can be considered as another
important parameter which poses business risk for A2 Milk Ltd. The company is depicted to face
several concerns which are based on estimations of fair value of assets and other financial
instruments. At present, the company follows a specific process for including fair value
measurement.

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Four Areas of Risk of Material Misstatements
As per the discussions made above the four areas of business risk for A2 Milk Ltd. can be
identified with specific areas of material statement which are stated below as follows:
I. Firstly, the customer credit risk shows 36% of sales in 2018 were incurred from to
customers which amounted to $332,047. This figure is 36% of total sales of achieved in
2018. Due to this, it can be stated that assertion of occurrence is at risk. This is stated
with the transactions which is recognised as per the financial statements of A2 Milk Ltd.
The significant implications in the company shows that this particular amount of sales is
still receivable by the company. Moreover, in case one of the three customers defaults in
paying the sales amount, there can be a major risk pertaining to material misstatement in
the financial statement of the company.
II. Secondly, the income of A2 Milk Ltd may be hampered in case there is any change in
market price pertaining to the rate of foreign currency. For instance, $304,351 can be
identified as a total comprehensive income earned by A2 Milk Ltd in 2018. The
associated assertion at risk can be depicted with completeness which can be recorded
with the transaction which is recognized in the financial statements. In instance of
decrease in the foreign currencies can have an impact on comprehensive income of the
company which may further lead to concern of material misstatement (Hussin et al.,
2017).
III. Thirdly, the liquidity risk for the company is evident with paying off the various
obligations pertaining to the business. As per the inference is made from the annual
report of the company, the total current liabilities were $166,749 in 2018. This may lead

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to risk assertion related to existence. Moreover, in case the company fails to be of the
current liabilities this will also lead to significant problem of material misstatement.
IV. Fourthly, the fair value measurement risk is considered as per errors in using off
assumption and methods to determine the fair value of $186,862. The relevant risk of
material misstatement can be used with the assumption of determining the fair value of a
particular asset of the company. Therefore, the important assets at risk in the given case
can be identified with equities, assets and liabilities which are being appropriately valued
as part of financial statements.
Additional Three Areas of Risk of Material Misstatements
In addition to the aforementioned four risk areas associated with Additional Three Areas
of Risk of Material Misstatements, some of the other risk are listed as follows:
It is worthwhile to be noted that, based on the financial information, the impairment of assets for
A2 Milk Ltd can consist of significant concern for material misstatement in the annual report.
Based on the depiction of annual report published by the company in 2018, the total CGU of
goodwill leading to impairment testing was $10,209 in 2018. The impairment regulation is
further subject to use of specific key assumption which relates to terminal growth rate, discount
rate which can be clearly seen to be applied by the company. Due to the presence of such
judgements it can be considered a significant matter or auditor test assets as per an instance of
material misstatements.
Customer discount and rebates pertaining to sales revenue of A2 Milk Ltd can be considered as
another important area of material misstatement. A2 Milk Ltd recognises revenue from sales in
case the risk and reward are moved. In this case, it is recognised as the net after a discount and

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volume rebates pertaining to the customers. The total amount of sales relating to selling of
different products generated a total revenue of $922,354 in 2018. Therefore, this may have a
significant impact on material of the company as part of complex contractual agreements made
for the customers (Griffiths, 2016).
A significant area of risk can be applied to material misstatement during the evaluation for the
inventory of the company. The total amount of inventory amounted to $64,101 in 2018. It needs
to be noted that the inventory valuation by A2 Milk Ltd. is subject to important estimates along
with judgements which are dependent on significant future turnover of the inventory’s which are
being held for sale as per future selling price. Therefore, the presence of such an intricate
estimate may have a negative impact on material misstatement in the financial statements. Due to
this, the risk assertion can be depicted with valuation of equities, assets and liabilities which are
needed to be valued at an appropriate rate in a certain period.
Conclusion
The discussions of the study have identified significant business risk for A2 Milk Ltd
which are associated to material misstatements. As for the discourse, A2 Milk Ltd is one of the
pioneering companies operating in the food dispensation industry of Australia. The discussion
also shows the major areas of risk such as fair value, liquidity, customer and market risk. The
discussion has also included several aspects which can lead to material misstatement as a result
of failure in payment of current liabilities, improper inventory valuation and customer credit for
sales. It is essential for the auditor to shed light on the aforementioned areas.

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References
Cassell, C., Myers, J., Myers, L., & Seidel, T. (2016). Does Auditor Tenure Impact the
Effectiveness of Auditors’ Response to Fraud Risk?.
Griffiths, P. (2016). Risk-based auditing. Routledge.
Hussin, S. A. H. S., Iskandar, T. M., Saleh, N. M., & Jaffar, R. (2017). PROFESSIONAL
SKEPTICISM AND AUDITORS'ASSESSMENT OF MISSTATEMENT RISKS: THE
MODERATING EFFECT OF EXPERIENCE AND TIME BUDGET
PRESSURE. Economics & Sociology, 10(4), 225-250.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C.
(2015). Auditing & assurance services. McGraw-Hill Education.
Mubako, G., & O'Donnell, E. (2018). Effect of fraud risk assessments on auditor skepticism:
Unintended consequences on evidence evaluation. International Journal of
Auditing, 22(1), 55-64.
Simon, C. A., Smith, J. L., & Zimbelman, M. F. (2018). The Influence of Judgment
Decomposition on Auditors' Fraud Risk Assessments: Some Trade-Offs. The Accounting
Review, 93(5), 273-291.