Advanced Accounting Assignment 1: Financial Audit of Comvita Limited

This report presents an analysis of the audit engagement for Comvita Limited, a company listed on the New Zealand Stock Exchange. The report begins with an introduction outlining the context of the audit, including the firm's interest in acquiring the client and the importance of assessing engagement risk. The report proceeds to detail the materiality levels based on various financial metrics of Comvita Limited. The core of the report consists of audit workpapers that summarize key aspects of the company's business, including its industry, key indicators, compliance with regulations, key customers, competitors, management structure, related party transactions, financing sources, investments, and accounting policies. Each workpaper provides a concise description of the relevant information and identifies areas of potential risk. The report highlights the company's strengths, such as its experienced management and compliance with financial reporting standards, while also acknowledging potential risks stemming from competition, internal control weaknesses, and the use of accounting estimates and judgments. Finally, the report concludes by referencing relevant literature and emphasizing the need for a thorough understanding of the business and its risks to ensure a successful audit engagement.

Advanced Accounting
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Introduction.................................................................................................................................................2
Audit workpapers........................................................................................................................................3
References...................................................................................................................................................4
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Introduction
In the given report, Brien and Associates, Chartered accountants is one of the audit firms based out of
Auckland, New Zealand, whose Managing Partner Mr. Brien is considering to grow the firm’s audit and
assurance assignments and looking at the extensive experience of the partners’ of the firm in FMC
reporting entities, he has identified one of the prospective clients named Comvita Limited, listed on the
New Zealand Stock Exchange (Fay & Negangard, 2017). The independence confirmations have been
taken for all the partners, there is no threat, and now the engagement risk of acquiring the audit needs
to be assessed through identification of the risk factors, the inherent risks and through performance of
assessment procedures and gaining the understanding of business of entity. The various steps in this
process have been covered below in the analysis. The materiality can be taken based on the below limits
specified in the table.
(Amt in NZ $)
Comvita Limited
Quantitative estimate of materiality
Criterion Base Amount Materiality level/range
0.5% of gross revenue Gross Revenue 178,493 892.47
0.5%of the total assets Total Assets 318,567 1,592.84
2% of the gross profit Gross Profit 73,195 365.98
1% of the shareholders's equity Equity 189,692 948.46
5% of the net profit Net profit 11,139 55.70
Audit work papers
The audit work papers have been shown below along with the reference numbers.
Work
paper Ref.
No.
Description
1 Comvita Limited is one of the oldest producers of raw, wild and unpasteurized, non
GMO, Manuka Honey from the pristine and very old forests in New Zealand. It belongs
to the food products industry and there has been heavy competition in the given
industry off late in New Zealand. The key indicators are the growth parameter like the
profits, the capital structure, the ratios, etc. (Grenier, 2017). As per the trends, the
company has grown both in terms of profitability as well as the sales but the constraint
here is that the product wise split is now available and the other internal processes and
structure is not available.
2 The company has already considered the impact the impact of changes in the interest
and the inflation rates through appropriate hedging policies. The company uses the
forward exchange contracts to hedge the net receivables (Belton, 2017).
3 The company has been in compliance with all the regulatory and the legal requirements
and the same is vindicated from the auditor’s report and the Director’s Declaration
where they have mentioned that the company has followed New Zealand International
financial reporting standards and has prepared financial statements based on the same
(Vieira, O’Dwyer, & Schneider, 2017).
4 The key customers of the business include regions like Asia, Australia, New Zealand, and
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Northern America. The company has local as well as international operations. The
suppliers are generally local from New Zealand and therefore there is minimal risk of
foreign currency payments in this respect. The major competitors in the market include
New Zealand Honey and Manuka Health New Zealand (Knechel & Salterio, 2016).
5 The company is having a competent and well skilled management in the form of
directors and the various committees like those of remuneration committee, the audit
and risk committee, etc. As per the sustainability report of the company, meeting are
held regularly and important and critical matters are discussed in the board meetings.
They maintain utmost level of integrity and the company has been working on a
number of innovations and automation projects which shows that the working culture
and the operating style is dynamic but that poses a risk that the system constraints and
inefficiencies and chances of errors are more and therefore the same needs to be
checked thoroughly (Farmer, 2018).
6 There are no such external advisors to the company but it takes non audit services and
consultancy services from both KPMG as well as Day Smith Hunter (Kuhn & Morris,
2016).
7 The company has identified a number of related parties and has also shown the
transactions with them through disclosures in the annual report. The company has
given loan to related parties like Gan Enterprises Ltd (Nga Pi) and Casa Base Trustees
(Putake). The company has disclosed director fees, Short term employee benefits,
KiwiSaver employer contribution and share based payments as part of the related party
transactions. Brett Hewlett received $ 10000 as consulting fees (Sithole, Chandler,
Abeysekera, & Paas, 2017).
8 The financing source is primarily in the form of loans and the equity and the related
agreements are in place. The company has took loan from Secured bank loan – Westpac
NZ and Multi option credit line – Westpac NZ and the Comvita Group is in agreement
and compliance with the banking covenants. All the debt availed from Westpac NZ is
secured by the way of registered first and exclusive Composite Debentures and a
General Security Agreement over all the assets, uncalled capital and undertakings of all
group companies. Therefore, there is no risk of misrepresentation (Bizfluent, 2017). The
documents to be checked and reconciled here is the loan repayment schedule and the
interest payments.
9 The company has extensively shown the investments in the entities, the equity and the
debt capital of others. Some of them are investment in China Joint Venture, Investment
in equity accounted investees and how have these been valued and what are the
impairment conditions and method (Marques, 2018).
10 The key accounting policies of the company have been explained in the notes of
accounts and all the relevant risks have been stated in the disclosures. Some of the
examples include revenue, share capital, financial instrument, foreign currency,
property, plant and equipment, employee benefits, impairment, intangible assets and
goodwill etc. (Kangarluie & Aalizadeh, 2017).
11 There are many areas in the annual report where the accounting estimates and
judgements have been used and the proper explanation for the same has been given in
the annual report. Some of them useful live estimation for the PPE, fair valuation of the
financial assets, the existence of impairment conditions or indicators, etc.
12 All the areas of risk have been covered in the annual report more or less but the
internal control effectiveness and efficiency needs to be checked by the auditors. There
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can be other risks as well like those from competition, the climate change risk, sourcing
risk and risk from other external factors which needs to be analysed (Md Khokan Bepari,
2014).
13 With respect to the nature of business plans, it needs to be studied and checked if the
company has forecasted the possible internal and external risks and what are the plans
that have been undertaken to counter the same. This can be explained by directors and
the management of the company which should have a document in place for the same.
14 The auditor also needs to include in the scope of audit the changes to the company’s
structure, if any. There can be plans of acquisition or disposal of entity in future or the
launch or discontinuation of few of the products. The relevant base documentation, the
related risks and the viability of the same needs to be checked and validated.
15 The auditor also needs to see if the management of the company has planned for any
huge capital expenditure investment or in investment of any new entity, what are the
expected synergies and what will be the risks going forward.
References
Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd. Retrieved from https://www.routledge.com/Competitive-Strategy-Creating-
and-Sustaining-Superior-Performance/Belton/p/book/9781912128808
Bizfluent. (2017). Advantages & Disadvantages of Internal Control. Retrieved december 07, 2017, from
https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
Farmer, Y. (2018). Ethical Decision Making and Reputation Management in Public Relations. Journal of
Media Ethics, 1-12.
Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud.
Journal of Accounting Education, 38, 37-49.
Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), 241-256.
Kangarluie, S., & Aalizadeh, A. (2017). 'The expectation gap in auditing. Accounting, 3(1), 19-22.
Knechel, W., & Salterio, S. (2016). Auditing:Assurance and Risk (fourth ed.). New York: Routledge.
Kuhn, J., & Morris, B. (2016). IT internal control weaknesses and the market value of firms. Journal of
Enterprise Information Management, 30(6).
Marques, R. P. (2018). Continuous Assurance and the Use of Technology for Business Compliance.
Encyclopedia of Information Science and Technology, 820-830.
Md Khokan Bepari, S. F. (2014). Firms' compliance with the disclosure requirements of IFRS for goodwill
impairment testing: Effect of the global financial crisis and other firm characteristics. Journal of
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Accounting & Organizational Change, 10(1), 116-149. Retrieved from
https://doi.org/10.1108/JAOC-02-2011-0008
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), 220. Retrieved from
http://psycnet.apa.org/buy/2016-21263-001
Vieira, R., O’Dwyer, B., & Schneider, R. (2017). Aligning Strategy and Performance Management Systems.
SAGE Journals, 30(1).
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