Audit Assignment Analysis of Murray Organic River Annual Report

This assignment analyses the annual report of Murray Organic River, an Australian company that deals with the production, manufacturer and marketer for organic food products. The report identifies five accounts that might have chances of being materially misstated and discusses the overall risk associated with them. The materiality level is also considered in the analysis. The audit report is an important document on which the investors depend to state whether the books of the company have been presented in the best manner and if there are any misstatement in that and if the management has function effectively and has done all their duties as was required from them as per the auditing and accounting standards.

Audit Assignment

1
By student name
Professor
University
Date: 30th Sep 2018.
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Contents
Part 3...........................................................................................................................................................3
Conclusion...................................................................................................................................................8
References...................................................................................................................................................9
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Part 3
a. Murray Organic River is a company that is established in Australia and that which deals
with the production, manufacturer and marketer for organic food products that are made from
natural sources and which are healthy for the people. It has been certified by the government to
indulge in this business. It has 4.400 hundred acres of farmland that produces organic products
along with that they are the largest fully integrated producer of dried vine fruit in Australia and
the largest vertically integrated organic dried vine fruit in the world. The company provides
services to the customer around the globe given its great line of products and facilities that it has.
It has offices around the globe that includes Sydney, Europe, USA, Japan etc (Alexander, 2016).
Thus, we see that the company has been able to spread it business around the world. The aim of
the company is to grow sustainably along with implementation of better and sound business
practices and manufacturing processes that would help in serving the customer sound the glue
along with promoting the concept of healthy and clean eating that is very much required in
today’s time. In this assignment an analysis of the annual report of the company is done, to shed
some light on important accounts that might be materially misstated and the overall risk that
might be associated with them (Arnott, et al., 2017).
b. The annual report of the company has been downloaded for look for five accounts that
might have chances of being materially misstated. Misstatement occurs on part of the
management or the employees when they fail to show the current value of the accounts of the
company given the fact that they are trying to under-state or overstate the financials for their
selfish reasons. In case of Murray, the company is having operations all around the globe, given
that the volume of transactions is so high, it is possible that some of the key accounts might be
misstated. Being an auditor of the company, it is a responsibility to look for such areas in which
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the level of risk association is high and in which the management needs to make certified
changes so that the financial statements are correctly stated and there is no loophole (Belton,
2017). Ongoing through the annual report of Murray Limited there are five accounts which are
having very high chances of being materially misstated which includes:
• Property Plant and Equipment – These are the fixed assets of the company and holds the
highest value in this category of assets, there are high chances that these might be overstated by
the management to show the company is in a better financial position. In 2017, the company had
a fixed asset of $82,240,620 which is a relevant amount and hence it can be considered as an
account in which high misstatement is there and the management needs to control that.
• Intangible assets – The assets that do not have any physical existence like goodwill,
trademarks, patents etc comes under the category of intangible assets. The valuation of intangible
assets involves high assumptions made on part of the management and is a complex process, the
company had intangible asset of $10,749,272 in 2017 while in 2016 the company had nil
intangible assets so they need to look in that contest also, thus it is an important account that
needs discretion on part of the management and so has been selected as a key account for
auditing purposes (Coate & Mitschow, 2017).
• Provisions – provisions are the amounts that the companies set aside for certain
unforeseen future circumstance and that is under the heading of current liabilities. There is a lot
of assumption involved on part of the management based on which they are making provisions
for specific items. It is necessary that companies should follow the relevant auditing and
accounting standards when they are making these provisions else they might financial position of
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the company because of that. Thus, we feel that it is an important account that must be
considered from the purpose of auditing.
• Inventories – inventories are the current assets of the company that can be used for day to
day operations for the company and forms an important part of the financial statements of the
company. It is important that inventories should be correctly valued and proper policies should
be followed for their valuation like cost or NRV whichever is lower (Gullet, et al., 2018). In the
given case also, the company has huge operations that are spread all over the world, and since
they are dealing in organic products there are high chances that their inventories are perishable,
hence the management needs to take care of this fact. They need to value their inventories
correctly and in case of Murray the company is having an inventory balance of $27,068,584 in
the current year which makes it significant and hence has been considered as an important
account for scrutiny.
• Business acquisitions – The company in the year gone has indulged in acquiring
businesses and that has affected their non-controlling and controlling rights and thus have an
impact on their annual statements as it effects the other comprehensive income or loss that the
company is earning. Hence, we see that there are many areas in which the management needs to
work and follow various policies when they indulge in such business-related activities and hence
it can be considered as a key event for the company and the auditor needs to analyse the same in
their audit report (Sithole, et al., 2017).
c. Materiality can be considered as a parameter that the auditors set within the company
when they are analysing the books of the company and materiality can be considered as a
parameter based on which the companies can check their books of account and comment on
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them. In case of pre-estimation of the materiality level, the auditors need to keep the maximum
amount by which they feel that these statements can be misstated and all their audit procedures
should be related to this level altogether. Materiality can be because of any risk or fraud and
there are still chance that up to the level of materiality the financial statements will not get
affected (Kim, et al., 2017). As per research studies and reports, most of the auditors follows the
rule of thumb and considers the materiality level to be five to ten percent of the revenue and that
can be considered in this case also and hence the materiality levels can be set at 0.5% of total
revenue, i.e. 0.5% of total revenue of $48 million = $48 million x 0.005 = $24,260. , and the aim
of the auditor would be to see that the accounts do not cross this level of materiality, in case of
Murray the company has incurred loss in the current year and thus that has been considered as a
level for determining the materiality level for the company by the auditor.
d. Audit Risk Assessment.
There can be many things that can go wrong in the analysis of these key accounts and few of
such aspects are stated below:
• Property Plant and Equipment
In case of property plant and equipment the companies should value them at their depreciable
value which might be than their current fair value assumptions so there are chances that the
management is not able to do that accordingly. There are different kinds of method for
depreciation and between companies follow different methods hence it is important to see
whether the method that the company is apply is correct or not and suited to the fixed assets of
the company (Werner, 2017). There are chances that the depreciable assets are under stated
because of the method of depreciation that the company has adopted so it is important that
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auditors should check that and state in their auditor report whether the company has valued the
PPE correctly and whether they have given proper disclosure with respect to that. In case there is
any change in the policy of depreciation than that should also be stated and highlighted
accordingly as per the needs of the management of the company, so that investors are aware.
There might be inherent risk involved in this as PPE valuation is a complex topic and the auditor
might fail to recognise any misstatement which is not due to lack of control.
Intangible Assets – They are valued at the fair value basis of accounting and there are a lot of
assumptions that goes in their valuation as it is not possible to directly co relate the income that
is generated by them to their cost. Thus, the need is that the companies should hire valuation
specialists which can help them in valuation of the assets and the job of the auditors is to check
whether they are correct or not (Trieu, 2017). There might e control risk associated with this as
lot of management discretion is involved.
Provisions – Provisions are the account that are created at the sole discretion of the management
of the company and if they feel they can allocate some amount to provision and if not, they
don’t. The main concept here is that the management can often under state and overstate the
provisions to show that the company is making less amount of profit and thus they do not need to
pay taxes. Thus, we see that on all aspects the management can take undue advantage of this
account. So, the auditor needs to check that proper provisions have been followed by the
management in preparation of the said account and whether it is ethical as per the law and check
the accuracy of the statement in that regards (Abdullah & Said, 2017). Since provsions are based
on a lot of assumptions the auditor might face inherent risk in the same which is not due to lack
of control.
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Inventories – Inventories are an important part of the financials of the company and it is
necessary that companies should follow the principle of valuing them in cost or net realizable
value whichever is lower and in this case also the inventories should be correctly valued else it
end up giving a wrong assumption to the shareholders that the books are free from all kind of
errors. Thus, inventory valuation should be considered as a key matter by the auditor even in
case of Murray as they have inventory which is highly replevisable. There may be audit risk of
detection where the auditor might fail to judge whether or not all the inventories are valued
accordingly because of the volume of the same.
Business combination
Whenever the companies indulge in such type of corporate acquisition where the acquire any
business then they to see that they are making disclosure of them and are accounting them in a
correct manner (Charles H, et al., 2015). There are high chances that the management might not
be able to correctly calculate the value of the assets and liabilities that have been acquired and
hence the need arises that it should be highlighted as a key event and all the transactions related
to this should be analysed thoroughly (Epstein, 2018). The auditor might face control risk in this
regard here the internal controls of the management may not be sufficient enough to support such
business integration.
Conclusion
Based on the overall analysis it can be said that financials of the Murray Company have
been prepared with great precisions but there are certain areas where the company can fail and in
those situations the auditor needs to put their analysis to work and find that all the accounts are
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properly presented and there are no misstatements. The materiality level can be considered but
post that in case any of the accounts are found to be materially misstated then that should be
stated in the audit report of the company. The audit report is an important document on which the
investors depend to state whether the books of the company have been presented in the best
manner and if there are any misstatement in that and if the management has function effectively
and has done all their duties as was required from them as per the auditing and accounting
standards. The financial statements should be a clear picture of what the company stands for and
there should not be any mistake in that all kinds of assumptions should be accurately disclosed in
the annual report of the company.
References
Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations.
Decision Support Systems, Volume 97, pp. 58-68.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the more things
change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-35.
Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in
Social Responsibility. s.l.:s.n.
Epstein, M., 2018. Making Sustainability Work. London: Routledge.
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Gullet, N., Kilgore, R. & Geddie, M., 2018. USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF
EARNINGS. Academy of Accounting and Financial Studies Journal, 22(2).
Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry
Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality &
Tourism Administration, , 18(1), pp. 23-40.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, Volume 93, pp. 111-124.
Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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