Audit Planning Memorandum for ECL Chemical Organisation

This document outlines the audit planning memorandum for ECL Chemical Organisation, a chemical manufacturing company facing various operational, environmental, inventory management, employee welfare, and competitive risks. The memorandum analyzes legal and regulatory considerations, identifies major risk areas, and examines financial ratios to assess the company's financial health. It highlights the need for compliance with Australian legislation, including environmental regulations, fair trading laws, and accounting standards. The document also discusses the importance of addressing operational risks associated with chemical handling, environmental risks due to hazardous substances, inventory management risks related to theft and misuse, employee welfare risks associated with chemical exposure, and competitive risks in the industry. The analysis of financial ratios reveals concerns regarding profitability, interest coverage, and the need for further investigation into the company's financial performance.

Section I: Planning the audit
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Contents
a) Audit planning memorandum.............................................................................................3
i) Legal and other consideration.........................................................................................3
ii) Major risk areas...........................................................................................................3
References..................................................................................................................................6
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a) Audit planning memorandum:
i) Legal and other consideration:
In Australia, there are number of legislations which have to be considered by a chemical
manufacturer or chemical industry. Australian government (commonwealth) legislation
majorly governs the chemical industry. Apart from this regulation, the other regulations such
as industrial chemicals, medicines and pharmaceuticals chemicals, agricultural and veterinary
chemicals and other chemicals. Apart from the chemical regulation, other legislations related
with competition, consumer protection laws and fair trading laws.
 Since, it works in highly competitive environment; it has to comply with the fair
trading laws and competition laws provisions.
 Since, the organisation maintains the accounting functions through payroll, inventory
records, petty cash of its main office and other sales branches as well. The
organisation must comply with the AASB and IFRS accounting standards.
 Since, ECL is a big chemical organisation which is currently undergoing
investigation from environmental protection agency. The organisation needs to
comply with the environmental regulation act. It need to maintain industrial chemical
(notification and assessment) act, 1989 and such other acts.
 Since, the organisation has lost some of its inventory and there is no possible
solution for the same. There is need to comply with the Australian inventory of
chemical substances. It needs to comply with the ASA 501 which is specifically
formulated for Audit evidence- specific consideration for inventory and segment
information (Razzaghmanesh, et. al., 2014).
ii) Major risk areas:
The major risk areas which need to be considered for ECL chemical organisations are as
listed below:
Operational risk: ECL which is a chemical manufacturing concern processes with
chemicals and such thing. The operational processes of the organisation need to be assessed
as it contains large amount of risk and also must be informed with regard to.
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Environmental risk: Chemical manufacturing organisation has large amount of hazardous
substances which are processed or re-processed. Environment risk is quite high which is due
to the factor that the organisation is implementing chemicals and hazardous substances in the
organisation.
Inventory management risk: Chemicals inventory is also quite hazardous and need to be
maintained so that the chemicals does not get misused or get theft. In the current case study
as well, there is substantial theft of chemicals which has led to resignation of few persons in
the company.
Employee’s welfare risk: the employees in the chemical organisation are subject to health
risk. Employees health gets adversely affect due to effect of hazardous chemicals.
Competitive risk: There is large competition risk as well. Since, it works in competitive
environment; there is requirement to maintain dignity of market (Deegan, 2012).
Ratios analysis:
Organisation data:
Particulars 2018 2017 2016
Gross profit 2460000 2520000 2280000
Sales 12600000 8280000 7920000
Operating income (EBIT) 180,000 720000 720000
Interest 378,000 246000 228000
Current assets 6,780,000 5040000 4380000
Current liabilities 4296000 3174000 3060000
Particulars 2018 2017 2016
Gross profit ratio 19.52 30.43 28.79
Operating ratio 1.43 8.70 9.09
Interest coverage ratio 2.10 0.34 0.32
Current ratio 1.58 1.59 1.43
The above ratios are calculated considering the profitability concern, interest service ratio
and current ratio analysis.
Gross profit analysis: the gross profit analysis provides that there is large reduction in the
gross profitability of an organisation since 2016.
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Operating ratios: there is also reduction in profitability ratio which presents that the
company has low operating income.
Interest coverage ratio: though, the interest coverage ratio determines that the organisation
is unable to fulfil its obligations for more than 1 time.
Current ratio: though the current ratio is quite good which presents that the company is able
to fulfil its current assets obligations (Higgins, 2012).
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References:
 Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
 Deegan, C., 2012. Australian financial accounting. McGraw-Hill Education Australia.
 Razzaghmanesh, M., Beecham, S. and Kazemi, F., 2014. Impact of green roofs on
stormwater quality in a South Australian urban environment. Science of the Total
Environment, 470, pp.651-659.
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