Financial Statement Analysis and Risks

This assignment delves into a comprehensive analysis of Billabong's financial statements to pinpoint potential risks. The analysis scrutinizes key ratios such as debt-equity ratio, current ratio, and inventory turnover to assess the company's financial stability. The document highlights concerns related to high debt levels, low profitability, inefficient working capital utilization, and slow inventory turnover. It concludes by emphasizing the importance of accurate financial reporting and the potential consequences of material misstatements in decision-making.

Running head: AUDITING AND ASSURANCE
Auditing and assurance
Name of the student
Name of the university
Author note

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Table of Contents
Executive summary....................................................................................................................2
(a) Company’s background..................................................................................................3
(b) Ratio analysis..................................................................................................................4
(c) Areas of audit risk or business risk for the company......................................................6
(d) Material misstatement.....................................................................................................8
References................................................................................................................................10

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Executive summary
Audit is basically a target exam and investigation of the money related affirmations of an
enterprise that can verify that the records of the firm are solid. The present report helps in
understanding the matter of the customer Billabong International together with the business
in which the firm works. Moreover, the present investigation likewise helps in increasing the
profound knowledge into the critical business chances and also reviews the risks of the firm.

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Billabong International Limited
(a) Company’s background
Business overview
Billabong International Limited deals in retailing and wholesale of surf, sports
apparel, snow, skate, hardware, accessories and trademark licensing of the company for
specifying the world’s region. The segment of the company involves Americas, Asia Pacific,
Europe and the rest part of the world. However, the primary business of the company is the
clothing business and it carries out the activities of suitable distribution, marketing under
retailing as well as whole selling of the garments, swimsuits, hard goods, eyewear and
various other products (Billabongbiz.com 2017).
Industry overview
Billabong works in the garments business in Australia with extraordinary introduction
to the surf business. The operations incorporate wholesaling and retailing of items, for
example, surf, predominant quality skate, both snow and games clothing alongside
embellishments and equipment. Examination of the business in which Billabong works
uncovers that there is solid rivalry in the overall surf skate and also the garments
(Billabongbiz.com 2017).
The business evaluation of Billabong uncovers that the organization gets supports
from the government. National strategies assisted country building, production of work,
industrialisation, continuous governments set approaches of exchange to guard local apparel
and also materials. The easy-going way of life in Australia and reasonable atmosphere guides
Australians to use less on especially dress than people in generally similar to Western
markets. During the year 2005 and 2006, turnover from the retail business in especially

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'Apparel Retail' stores was approximated to be AUD 10.1 billion, suggesting expansion of
garments deals in Department stores.
(b) Ratio analysis
Calculation of ratio
Ratio 2016 ($’000) 2015 ($’000)
Industry
Average
Current Ratio
Current Assets 464,454 523,753
Current Liabilities 197,932 236,768
2.35 2.21 2
Debt to Equity Ratio
Debt 185,206 113,521
Equity 259,289 281,584
0.71 0.40 1
Gross Profit Margin
Gross Profit -23,739 2,552
Total Sales 1,103,535 1,056,130
-2.15 0.24 60%
Inventory Turnover
Cost of Goods Sold 542,373 495,308
Average Inventory 185,556 187,125
2.92 2.65 4 times
Trade Receivable Turnover
Net Credit Sales 1,103,535 1,056,130
Average Accounts Receivable 171,644 164,504
6.43 6.42 6 times
Analysis of company’s performance through the ratios
The current ratio states whether the company is able to pay off their short term
obligation efficiently. It further states whether the company is efficiently using its working
capital or not. It can be identified from the above calculation that the current ratio of the
company for the year ended 2015 was 2.21 and that for the year ended 2016 was 2.35 and
both the year’s current ratio was better as compared to the industry average of 2. However, it

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indicates that the company may not be using their working capital efficiently (William,
Glover and Prawitt 2016).
If the debt equity ratio of the company is considered, it can be recognized that for
both the years the debt equity ratio of the company is lower than the industry average of 1
and for 2015 the ratio was 0.40 and for the year 2016 it was 0.71. Therefore, the ratio is
indicating that the risk of raising finance through debt as compared to equity is increasing. It
will expose the company with the risk of interest payment (Richard 2014).
Gross profit margin ratio indicates the profitability ratio and it compares the gross
profit of the company with regard to the net sales of the company. To be more specific, it is
the mark-up percentage on the products and services from the cost. While considering the
gross profit margin of the company, it is identified that gross profit margin of the company is
significantly lower as compared to the industry average. Further, the company was not able to
generate a positive margin during the year ended 2016. Therefore, the ratio indicating that the
company is exposed to the profitability risk. There is further indication that the company I
losing the sales on different products which is not a desirable condition for any business.
The inventory turnover ratio is the efficiency ratio and it indicated the efficiency of
the company regarding the management of its inventory. This reveals how efficiently the
company’s turnover is sold or turned during the specific period. This ratio is crucial as it
considers two major item regarding performance. The 1st one is the purchase of stock and the
2nd one is the sales. If the stock is purchased at higher level, the company is to sell more to
achieve the required turnover ratio. While the inventory turnover of the company is taken into
consideration, it is identified that the inventory turnover ratio of the company for 2015 is 2.65
and for 2016 is 2.92 and for both the year the ratio is lower as compared to the industry
average of 4. It indicates that the company is not efficient in managing their inventory.

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Account receivable turnover ratio is the efficiency ratio that computes the time for
which the business is turning the receivable into cash during the particular period. This ratio
measures the times for which the business can collect the average accounts receivable for the
period under consideration. While considering the turnover with regard to trade receivable, it
is identified that the turnover is better as compared to the industry average. Whereas the
company’s receivable turnover r is 6.42 and 6.43 respectively for 2015 and 2016, the industry
average is 6 times.
(c) Areas of audit risk or business risk for the company
The risk management approach of the company states that the company is not risk
averse. Apart from this, the management is concerned about identification, management and
discussion regarding the risk. Identified risks with regard to the company is as follows –
 Translation Risk – it is inferable from a significant portion of the group’s operations
that is outside the range of Australia, the group is fundamentally presented to certain
money conversion standard risk. For this situation, this risk happens when the income
related to offshore of the whole group and variances of advantage/assets are
pronounced in Australian dollars. The section data of the group for the earlier period
is essentially displayed on a steady cash basis using the present time frame normal
trade rates on a month to month basis to change the past period’s foreign earning. This
is basically attempted to expel the impact of foreign trade activities from the
execution of the whole group.
 Risk related to audit - audit risk of the firm basically happens due to inaccuracy in the
financial statement opinion. The evaluators of the firm may neglect to recognize the
risk of debt obligation. Failure on the part of the firm to act as per the association's
money related contracts made by an extensive reduction in income or else profit or

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material adjustments in the AUD against USD swapping scale may require the
organization to look for changes, waivers of pledge recognition or substitute getting
courses of action (Arens et al. 2014).
 Company's assessment issues – this may results into the operational risk with regard
to tax in every country. This may have unfavourable effect by adjustments in both
financial or else administrative summon, differences in clarification of the
neighbourhood assess controls of those countries, and changes to introduce political,
legal or else managerial techniques identified with charge. Proficient accountant of
the firm may neglect to comprehend the expense undertakings and this may prompt
material error (Houghton and Campbell 2013).
 Failure to recognition of social risk - Management of the company additionally
neglects to distinguish the social dangers encompassing the matter of the firm and
consolidate the impacts of social dangers in the financial declarations of the
partnership. The organization sources particular merchandise that are made in
countries, for example, China in which there remain dangers rotating wellbeing of
working environment, support of wellbeing and security benchmarks.
 Material risk – material risks are able to influence the entire financial aspects of the
company. various material risks that have an impact on the company are as follows –
1. Social risk: the company is associated with the risks like safety and health standards
and workplace related risks. Further, the accounting experts may not be able to focus
strongly on these types of risks in the audit report as they are too concerned about
finance matters.
2. Competition: the company faces strong competition that has an impact on the
earnings of the company. Further, the strategies and performance of the competitors
has an adverse impact on the company. For example, if the competitor sells their

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product at lower price or introduce new product lines or paying more to the
employees, manufacturing and develops alternative supply channels it will
significantly hamper the business of Billabong (Entwistle 2015).
3. Risk related to fashion: the risk associated with the fashion is that the company will
fail to develop innovative and unique designs for apparels or the company will not be
able to deliver the product as per the customer requirement.
4. Risk related to brand: this risk will expose the company with the risk that will have a
impact on the brand as a whole. For instance, the company minimized these risks
through maintaining various customers’ data, making innovation in the product and
managing the brand (Dalnial et al. 2014).
5. Macro-economic environmental risk: this risk have an impact on the financial
performance of the company as the various aspects under this risk takes into
consideration the inflation rate, interest rate, foreign exchange rate, capital market
situation and others. Further, the monetary as well as fiscal policies, governmental
policies, investor’s sensitivity and the product pricing may affect the entire financial
status of the company.
(d) Material misstatement
Contingent upon figuring’s of major financial ratios, it can be therefore said that the
organization confronts higher debt risks and it is evidential from the fact that the company
has a higher level of debt equity ratio. Apart from that –
 The organization confronts low income (negative profit) reflecting dangers of
operations. For this situation, the risk may be identified with failures on the part of the
accounting expert of the firm to recognize the dangers of various small scale and full
scale financial elements reflected through the decrease in the profit and asset

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 The major risk aspects identified with material error incorporate the debt obligation.
Consequences of investigation of money related affirmations of the firm demonstrate
that there is parcel of weight to do obligation financing (There is prerequisite to have
obligation value proportion to be under 1 and it is seem to be under 1. The necessity
may prompt withdrawal of advance that thus can have an aggressive impact on
business activities (Cohen and Simnett 2014).
 Again, the current ratio is more noteworthy as compared to the industry average of 2.
In this manner, there exists a likelihood that it indicates that the company may not be
using their working capital efficiently and that led at the level of 2 or above (Arens et
al. 2015).
 The inventory turn of the organization is additionally lower than the business standard
reflecting lower ability of the partnership to transform inventories into money. The
expert bookkeepers additionally may control the stock of the firm that can prompt
unsafe practice. Along these lines, there exists likelihood that the stock of the firm
may be changed by uncovering included stock amid the time of entry.
 There is additionally enhancement of the financial risk of the enterprise as is clear
from the related risks that should be broke down in an offered to evaluate whether the
confirmation are given in the monetary proclamations.

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References
Arens, A.A., Best, P., Shailer, G., Fiedler, B., Elder, R.J. and Beasley, M., 2015. Auditing
and assurance services in Australia: an integrated approach. Pearson Education Australia.
Billabongbiz.com. 2017. Billabong Biz : Behind the Brand - Investors - Investors Home.
[online] Available at: http://www.billabongbiz.com [Accessed 15 Sep. 2017].
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing:
A Journal of Practice & Theory, 34(1), pp.59-74.
Dalnial, H., Kamaluddin, A., Sanusi, Z.M. and Khairuddin, K.S., 2014. Detecting fraudulent
financial reporting through financial statement analysis. Journal of Advanced Management
Science Vol, 2(1).
Entwistle, G., 2015. Reflections on Teaching Financial Statement Analysis. Accounting
Education, 24(6), pp.555-558.
Houghton, K. and Campbell, T., 2013. Ethics and auditing (p. 354). ANU Press.
Richard, P., 2014. The Role of the Accounting Rate of Return in Financial Statement
Analysis. The Continuing Debate Over Depreciation, Capital and Income (RLE
Accounting), 67(2), p.235.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.