Financial Statement Audit Risk Analysis: Blackmores Company

This report analyzes the audit risks associated with Blackmores, an Australian health supplements company. The report focuses on detection risk, examining areas such as revenue recognition, other income, raw material expenses, inventory write-downs and increases, selling and marketing expenses, professional and consulting expenses, foreign exchange fluctuations, and increases in trade receivables. The analysis considers potential misstatements and the impact on the financial statements, emphasizing the need for auditors to conduct intensive audit procedures to minimize detection risk. The report also highlights the importance of analyzing related-party transactions and the valuation of assets and liabilities. The goal is to identify areas where the auditor might fail to detect errors, and to provide a strategic approach to minimize such risk.

Analysis of Audit Risk of Black Mores
Background
Blackmores is an Australian health supplements company which was founded in 1930.The
company is listed on Australian Stock Exchange and has a market capitalisation of
approximately $ 2 Billion as on date. The company was founded by Maurice Blackmore and
it marks its presence both in Australia and abroad. Blackmore has its headquarters in New
South Wales, Australia and has more than 1400 employees in its hold.
Purpose of Report
The report seeks to analyse the financial statement of the company and identify major audit
risk area excluding the area of inherent risks and control risk which are majorly common to
all the companies listed on the Australian Stock Exchange.
The area which has been harped upon is the detection risk which is the area which the auditor
may fail to detect the error during the course of audit. This area which has been left
undetected is known as audit risk and auditor needs to design the audit in a strategic manner
to minimise such risk.
Detection risk
Control risk control is outside the hands of the auditor while detection risk can be minimised
by the auditor based on sound auditing practise, appropriate materiality level, thorough audit
procedures etc. For detection risk to be low, auditor is required to carry out intensive audit
procedures assuming that internal management of the company is weak and the control risk is
high. (M. V. Kali Prasad, 2019)
On the basis of above, the auditor shall analyse the following areas very intensely to reduce
the detection risk:
(a) Revenue Recognition: The auditor shall keenly focus on the revenue recognition aspect
of the company. The auditor needs to understand whether all the invoices/ sales have
been duly recognised in the books of company. The auditor needs to understand the
rationale for increase in sale. In case of Blackmores, the sale for 2018 has increased
from 552,160 to 601,136 (in thousands), the auditor needs to understand whether the
sale has been real or is on account of channel stuffing. Further, one needs to consider
the year end sales.
In addition to above, one need to understand the sale incoterms of the company. Also,
the terms on which sale is made to resellers as company can increase or reduce sale by
treatment of stock with the reseller. The said risk can increase the sales of the company,
thereby impacting the profits of the company. Majority of accounts impacted includes:
 Sales Account;
 Accounts Receivable;
 Cost of Goods Sold;
 Inventory;
 Profit and Loss Account
Also, the auditor needs to analyse whether the sales have been made to any related
party and whether the said sale is at fair value.

(b) Other Income: The other income of the company has increased by approximately 40%
from $545 to $ 718 (in thousands) and one needs to understand the rationale for such
increase of non-operating income. The said risk can increase the other income of the
company, thereby impacting the profits of the company;
(c) Raw material Expenses: There has been a decline in the raw material consumption
despite increase in sales of the company. The raw material expense has declined from
237,495 to 232,274 (in thousands). One needs to understand the rational for such
decrease and the change in consumption of material ratio. Also, one needs the analyse
the quantity of goods sold along with the method of valuation of inventory. The said
risk can increase the profits of the company and reduce cost of the company. Majority
of accounts impacted includes:
 Cost of Goods Sold;
 Inventory;
 Profit and Loss Account
Also, the auditor needs to analyse whether the purchase has been made from any related
party and whether the said purchase is at fair value.
(d) Inventory write down & increase: As per the financial statement of 2018, there has been
an inventory write down of $11,611 (in thousands), one needs to analyse the rationale
for same and the method of valuation of inventory followed by the company. Further,
there are three categories of inventory in the books of company (i) raw material, (ii)
ingredient and (iii) finished goods. Also, one needs to understand whether the closing
stock includes the goods lying with the reseller has been included in the closing stock
of the company. The said risk can increase/decrease the profits of the company and
reduce/increase cost of the company. Majority of accounts impacted includes:
 Cost of Goods Sold;
 Inventory;
 Profit and Loss Account
Also, there has been significant increase in the closing balance of the inventory of the
company from 84,794 to 103,965 (in thousands).
(e) Selling and marketing expenses: The company has a drastic increase in selling and
marketing expense in comparison to 2017. The figures have changed from 51,306 to
59,229. Accordingly, one needs to analyse the commission agreements changes, year
end commission paid, unpaid expenses etc. The said risk can increase/decrease the
profits of the company and reduce/increase cost of the company. Majority of accounts
impacted includes:
 Selling and Marketing Expense;
 Profit and Loss Account
(f) Professional and Consulting Expenses: The auditor needs to understand the rationale
for such a sharp increase in the professional consulting fees as the figures have changed
from 8,923 to 11,647 (in thousands). Accordingly, one needs to analyse whether the
expense has been on account of increased litigation, advisory on new projects or other

related matter. Also, the auditor needs to analyse whether the consultancy has been
taken from any related party and whether the said payment is at fair value. Also, the
auditor may evaluate whether such advisory has been taken by Blackmore. The said
risk can increase/decrease the profits of the company and reduce/increase cost of the
company. Majority of accounts impacted includes:
 Professional and consultation Expense;
 Profit and Loss Account
(g) Foreign Exchange Fluctuation: The auditor needs to understand whether appropriate
provision has been made for foreign exchange fluctuation and the computation has been
made in a correct manner in accordance with AASB as there has been a sharp increase
in provision from (1922) to 2625. Accordingly, it is one of the major area of concern.
The said risk can increase/decrease the profits of the company and reduce/increase cost
of the company. Majority of accounts impacted includes:
 Foreign Exchange Fluctuation;
 Profit and Loss Account
(h) Increase in trade receivables: There has been a sharp increase in trade receivables of the
company from 132,146 to 150,778. Accordingly, one needs to understand the rationale
for the same or some accounts have been falsified. Further, one needs to understand the
sales made to related party during the year and the outstanding balance from them. The
said risk can increase/decrease the profits of the company and reduce/increase cost of
the company. Majority of accounts impacted includes:
 Sales Account;
 Accounts Receivable;
 Cost of Goods Sold;
 Inventory;
 Profit and Loss Account
Also, the auditor needs to analyse whether the sales have been made to any related
party and whether the said sale is at fair value. (blackmores.com.au, 2019)
Other than above, the auditor shall analyse the goodwill in the books of company and
also make confirmation of trade receivables and trade payables of the company.
References
blackmores.com.au. (2019, October 7). Annual Report 2018 BlackMores. Retrieved from
www.google.com: https://www.google.com/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=2ahUKEwitlZnyqInlAhU1g-
YKHTrSBQ8QFjAAegQIAxAC&url=https%3A%2F%2Fwww.blackmores.com.au%2F-%2Fmedia

%2Ffiles%2Finvestor-centre%2Fannual-and-half-yearly-reports%2Fblackmores-annual-
report-201
M. V. Kali Prasad. (2019, October 7). The components of audit risk. Retrieved from
www.thehindubusinessline.com:
https://www.thehindubusinessline.com/news/education/The-components-of-audit-risk/
article20399923.ece#