Auditing and Assurance: Planning Audit Engagement for Murray River Organics

The main purpose of this report is to undertake the analysis of different aspects for the planning of audit engagement for 2019 of Murray River Organics (MRG). This report undertakes the analysis of areas of business operation and business risks of the company. After that, this report determines three accounts at the risk of material mistsement in the company. Compliance of the company with the ASX corporate governance principles and recommendation is also considered here. Lastly, this report shows the determination of planning materiality in the company.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The main purpose of this report is to undertake the analysis of different aspects for
the planning of audit engagement for 2019 of Murray River Organics (MRG). This
report undertakes the analysis of areas of business operation and business risks of
the company. After that, this report determines three accounts at the risk of material
mistsement in the company. Compliance of the company with the ASX corporate
governance principles and recommendation is also considered here. Lastly, this
report shows the determination of planning materiality in the company.

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Table of Contents
Introduction...................................................................................................................3
1. Areas of Operation....................................................................................................3
2. Three Business Risks...............................................................................................4
3. Three Accounts at the Risk of Material Misstatements............................................5
4. Compliance with Principle 4.....................................................................................6
5. Doubts on the Ability to Continue as a Going Concern............................................7
6. Planning Materiality..................................................................................................8
Conclusion....................................................................................................................9
References.................................................................................................................10

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Introduction
The auditors have the responsibility of considering certain aspects in the audit
planning stage for developing the audit engagement plan. This includes gaining
knowledge of the client’s business operations, identification of business risk,
identification of material accounts balances, assessment of compliance with
corporate governance principles, assessment of going concern status and
determination of planning materiality (Chui and Pike 2013). The aim of this report is
to undertake the analysis of all the above-mentioned aspects for the audit
engagement for 2019 of Murray River Organics (MRG).
1. Areas of Operation
MRG is considered as one of the leading Australian company involves to
grow, process, manufacture and sell organic and better-for-you products. The aim of
the company is to make organic, healthy and sustainable food for its consumers in
Australia as well as around the world (murrayriverorganics.com.au 2019). It implies
that the principal business activities of MRG is producing, manufacturing, marketing
and selling certified organic, natural and better-for-you products. The operation of
MRG can be seen in 4,900 hectors of farmlands in the Sunraysia region that
includes the largest organic driven vine fruit properties in Australia. Apart from the
farming assets and processing plants in Mourquong NSW, the company also
operates a facility to manufacture as well as distribute foods in Dandenong South,
Victoria. This particular site involves in packing as well as distributing wide variety of
organic and better-for-you foods products under MRG’s own brands and or other
retailers. The customers of MRG includes domestic retail, wholesale and industrial
customers along with the customers who use the drive vine fruit of the company in

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their products (murrayriverorganicsinvestors.com.au 2019). Therefore, it can be seen
from the above analysis that MRG has a large business operations in different
Australian regions and other regions outside Australia.
2. Three Business Risks
The business operations of MRG are exposed to certain business risks and
three of those risks are discussed below:
Customer Risk and Competition – The top ten customers of MRG included
approximately 80% of the sale in 2018. The company has short-term customer
contracts with supply periods of one season or one year; and the price in which its
products are sole is subject to fluctuations based on the level of supply and demand.
In addition, the company has operations in highly competitive geographic and
product markets in the presence of its competitors that may have more innovative
products. All these aspects create material negative impact on the financial
performance of MRG (murrayriverorganicsinvestors.com.au 2019).
Adverse Movement in Exchange Rate – The business operations of MRG are
exposed to foreign exchange risk due to the import of commodities and export of
produce to different customers. There can be material adverse effect on the financial
performance of MRG due to the unfavourable movement in the foreign exchange
rates between Australian dollar and other currencies like US dollar. This is a major
business risk of MRG that the management needs to consider in the international
trade (murrayriverorganicsinvestors.com.au 2019).
Horticultural Risk – There are number of factors that affect yield of MRG because
of the nature of viticultural crop. When MRG takes initiatives for minimizing the
annual variations in yields and production, there can be difference in yields from vine

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to vine from harvest to harvest that can impact the financial performance of the
company. Moreover, climate change or extended period of adverse weather can
affect the agricultural productivity of the company that can lead to reduced
availability or less favourable pricing for specific commodities that are essential for its
products. This is a major business risk that the management of the company needs
to consider (murrayriverorganicsinvestors.com.au 2019).
3. Three Accounts at the Risk of Material Misstatements
On the basis of the above-risk analysis along with the nature of the business
environment of MRG, there are several accounts that are at the risk of material
misstatements’ and three of these accounts are discussed below along with the
associated key assertions at risk.
Revenue – In the presence of customer risk and competition, the revenue account
can be at the risk of material misstatement since the management of MRG could
manipulatively overstate the revenue amount for demonstrating good financial
performance (Lobo and Zhao 2013). It can be seen from the 2018 Annual Report of
MRG that the revenue of the company increases from $48,522,000 in 2017 to
$68,539,000 in 2018 (murrayriverorganicsinvestors.com.au 2019).
The main assertion related to this revenue account is existence and
occurrence; and this assertion states that all the revenues that have been recorded
in the books of MRG has existed and taken place. Since this assertion is related to
the revenue account of MRG, this assertion can be considered at risk (Kharisova
and Kozlova 2014).
Trade and Other Receivable – Since the top ten customers of MRG is responsible
for 80% of the sales of the company and the customer contracts of the company are

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short-term, the trade and other receivable amount can be at the risk of material
misstatements because accounts receivable could be manipulated to increase the
value of total revenue (murrayriverorganicsinvestors.com.au 2019). As per the 2018
Annual Report of MRG, value of trade other receivables has decreased from
$8,891,000 in 2017 to $6,729,000 in 2018; and this indicates that the value of trade
and other receivable could have been reduced manipulatively to increase the value
of sales (Czerney, Schmidt and Thompson 2014).
The associated assertion with this account is existence that helps the auditor
in the assessment of the fact that the value of trade and other receivable exists.
Therefore, this assertion is at risk (Kharisova and Kozlova 2014).
Inventories – Due to the presence of horticultural risks and the impact of climate
change as well as adverse weather on MRG’s production, the inventory account of
MRG can be at the risk of material misstatements
(murrayriverorganicsinvestors.com.au 2019). This is because there could be wrong
valuation of inventories. The value of inventories has decreased from $27,069,000 in
2017 to $16,194,000 in 2018; and it indicates that there could be understatement of
inventories due to theft or other fraudulent reasons (Johnstone, Gramling and
Rittenberg 2013).
The applicable assertion related to inventory in MRG is existence that
assesses the fact that whether the inventory is actually present. Therefore, this
assertion is at risk (Titera 2013).
4. Compliance with Principle 4
Principle 4 of the ASX Corporate Governance Council’s Corporate
Governance Principles and Recommendations states that a listed business

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organization should have suitable processes for verifying the integrity of its corporate
reports. There are three recommendations that need to be complied with by MRG for
ensuring complying with this principle. As per the 2018 Annual Report, Corporate
Governance section, the company has partially complained with the first
recommendation as it has an Audit and Risk Management Committee that the Audit
and Risk Management Committee Charter governs (asx.com.au 2019). The
committee has three non-executive directors whose majority portion is independent
directors. MRG has partially complied with this principles because the Chair of the
board is also the Chair of this committee which is against recommendation 4.2 (a)
(2). However, other two recommendations are fully complied by MRG because it is
the responsibility of the Audit and Risk Committee to ensure the fact that the external
auditors attend the annual general meeting and is available for answering the
questions from the shareholders; and the same committee ensures the fact that
MRG has compliance with its legal obligations that includes assisting the CEO and
CFO to provide declaration regarding the financial statements of the company as
required by the Corporations Act 2001 (Cth), Section 295A and Recommendation
4.2 (murrayriverorganicsinvestors.com.au 2019).
5. Doubts on the Ability to Continue as a Going Concern
There are two events that may cash significant doubt on the ability of MRG to
continue as a going concern; and they are as follows:
1. MRG has incurred a net loss of $59,607,000 in the current year. At the same
time, the total current liabilities of the company exceeds its total current assets
by $25,062,000 million. This needs to be considered as significant event that
casts major doubt on the ability of the company to continue as a going
concern (murrayriverorganicsinvestors.com.au 2019).

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2. In order to be continued as a going concern, MRG must complete the
proposed equity raise of $30 million while agreeing an extension to its debt
facility. NAB provides the company with major support to turnaround its
business. However, MRG may need additional funding in future for the
completion of the present turnaround strategy. This incident creates a risk that
MRG may not be able in accessing debt or equity funding from the capital
market or from its existing lenders on positive terms. Therefore, this incident
creates significant doubt on the ability of MRG to continue as a going concern
in near future (murrayriverorganicsinvestors.com.au 2019).
6. Planning Materiality
Certain steps need to be followed for the determination of materiality level and
they are discussed below:
1. It is needed to select an appropriate base for the determination of materiality
level and the selection of this base depends on the nature of the company
and the nature of the industry in which it operates (Eilifsen and Messier Jr
2014). For the companies like MRG, the largely used base are profit before
tax, total assets, total income and others. For MRG, total assets is considered
as the appropriate base that is $102,289,000.
2. It is needed to select the appropriate percentage that needs to be charge on
the base to get the planning materiality level. As per AASB 103 Materiality,
either of the two quantitative thresholds can be used by the auditors; they are
an amount more than or equal to 10% of the base or an amount that is less
than or equal to 5% of the base (aasb.gov.au 2019). This selection depends
on the professional judgments of the auditors. In case of MRG, 5% is
selected.

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3. Planning Materiality of MRG = Total Assets × 5%
= $102,289,000 × 5%
= $5,114,450
Conclusion
The above discussion indicates towards the fact that the recognition of
business risks and nature of business operations provides the direction to identify
the accounts that are at the risk of material misstatements. Determination of the
assertions at risk is also required. It can be seen from the above discussion that the
determination of planning materiality requires appropriate justification for the
selection of base and percentage. In addition, compliance with the corporate
governance principles helps in maintaining the integrity of financial reporting.

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References
Aasb.gov.au. 2019. Materiality. [online] Available at:
https://www.aasb.gov.au/admin/file/content102/c3/AASB1031_9-95.pdf [Accessed
13 Sep. 2019].
Asx.com.au. 2019. Corporate Governance Principles and Recommendations.
[online] Available at: https://www.asx.com.au/documents/asx-compliance/cgc-
principles-and-recommendations-fourth-edn.pdf [Accessed 13 Sep. 2019].
Chui, L. and Pike, B., 2013. Auditors' responsibility for fraud detection: New wine in
old bottles?. Journal of Forensic and Investigative Accounting.
Czerney, K., Schmidt, J.J. and Thompson, A.M., 2014. Does auditor explanatory
language in unqualified audit reports indicate increased financial misstatement
risk?. The Accounting Review, 89(6), pp.2115-2149.
Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public
accounting firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based
approach to conducting a quality audit. Cengage learning.
Kharisova, F.I. and Kozlova, N.N., 2014. Applying the category of «Assertions (or
preconditions)» In audit of financial statement. Mediterranean journal of social
sciences, 5(24), p.180.
Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report
misstatements: Evidence from quarterly and annual restatements. The Accounting
Review, 88(4), pp.1385-1412.

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Murrayriverorganics.com.au. 2019. [online] Available at:
https://www.murrayriverorganics.com.au/about-us [Accessed 13 Sep. 2019].
Murrayriverorganicsinvestors.com.au. 2019. ANNUAL REPORT 2018. [online]
Available at:
https://www.murrayriverorganicsinvestors.com.au/resources/pdf/16778%20MRO
%20Annual%20Report%202018_FA_WEB.pdf [Accessed 13 Sep. 2019].
Titera, W.R., 2013. Updating audit standard—Enabling audit data analysis. Journal
of Information Systems, 27(1), pp.325-331.