Financial Statement Auditing Report: Murray River Organics, BAO3306

This report provides an in-depth analysis of the financial statements of Murray River Organics Group Limited, identifying five material items and assessing their impact on the audit. It begins with an executive summary, followed by an introduction to the company's background and the agreed-upon audit terms, including the audit fee. The report computes the level of materiality based on publicly available financial information and uses the audit risk model to identify significant accounts. It examines the potential outcomes of misstatements in these accounts and concludes with an overall interpretation of the financial health and audit considerations. The report covers key aspects such as the auditor's responsibilities, assessment of significant accounts like inventories, trade receivables, plant, property and equipment, borrowings, and sales revenue, and the planning materiality based on quantitative and qualitative aspects. The report follows Australian Auditing Standards (ASA) and considers relevant regulations and laws impacting the financial report.

ASSIGNMENT
BAO3306 AUDITING
REPORT

Semester 2, 2018
1. Executive summary
The main purpose of the report is to analyse the financial statement of Murray River
Organics Group Limited to identify 5 material items from the financial statement of the
company. The report will focus on the background of the company and agreed audit terms of
the auditors with regard to audit engagement. It will compute the level of materiality based on
the publicly available financial information of the entity. Based on the level of materiality
and audit risk model the report will identify various significant accounts associated with audit
risk. The report will further focus on the possible outcome of misstatement regarding
identified accounts. Finally the report will provide the conclusion based on the entire analysis
and interpretation.

2. Introduction
Murray River Organic is the leading producer manufacturer, seller and marketer for
the certified natural, organic and ‘better – for – you’ products of foods. The company survive
healthy, natural and organic food as well as the snacks market all over the world. Basically
the entity’s customers include retail customers like organic food stores, supermarkets, mass
market, convenience stores and e-commerce retailers. On the other hand, the industrial
customers of the entity include bakeries, confectionary manufacturers and cereal
manufacturers. Further, the entity operates in international as well as domestic market all
over 18 countries. The company plants, harvest, grows, packs, processes and supplies the
vine fruits those are dried organically like seedless raisins, sultanas, currants, Muscat raisins
and clusters. Previously the entity was known as Murray River Organics Pty Ltd and was
incorporated in the year 2009. The entity operates as the subsidiary of Murray River Organics
Group Limited. For analysing the materiality and audit risk the report will consider the
publicly issued annual report of the company for the year ended 2017 (Organic Foods | 3175 |
Murray River Organics 2018).

Key information
a) Our understanding of the client
ASA 210 that deals with the responsibilities of the auditor regarding agreeing with the
terms of audit engagement with the management. The objective of the auditors is accepting
the audit engagement if only the basis on which the audit is to be carried out is agreed upon.
One of such basis is audit engagement and audit fee (Legislation.gov.au 2018). As per the
given information it is found that the audit fee for this particular audit is $ 170,000 and the
same is communicated to the audit client through engagement letter. Hence, it can be
assumed that the audit will be carried out by the auditor and they have been agreed upon the
terms of the audit engagement.
The financial statement of the company includes the consolidated profit or loss
statement, consolidated financial statement position statement, and consolidated changes in
equity statement and consolidated cash flow statement. The entity is for-profit entity with
regard to preparation of consolidated financial statement. The accounting standards used
while preparing the financial statements included the AAS (Australian Accounting Standards)
and is complied with the IFRS (International Financial Reporting Standards). Further, the
company used historical cost approach except for the agricultural produce, financial
instruments and some non-current assets (Ryoo et al. 2014).
As per ASA 230 regarding audit documentation the term means record of the audit
procedure carried out, relevant evidence obtained related to audit and the conclusions reached
by the auditor. The auditors are required to prepare the audit documentation on timely
manner. Audit documentation depends on the nature, extent and timing of performed audit
procedures for complying with the AAS (Australian Auditing standards). Further, the audit is
required to document the discussions regarding significant matters discussed with the
management and those who are charged with the governance (Auasb.gov.au 2018). Various
documents those will be documented by the auditor while performing the audit for Murray
River Organic are confirmations from the client, engagement letter, correspondence,
memoranda, audit programs, schedules and representation letter.
AUASB issued ASA 250 for considering the regulation and laws while auditing the
financial report. The regulations and laws to which the company is subject to have direct
impact on its financial report for determining the disclosures and amounts reported. Other
regulations and laws shall be complied by the management. The auditors are responsible to
obtain the reasonable assurance that financial report is free from all types of material
misstatement including errors or frauds. While carrying out the audit the auditor shall
consider the applicable regulatory and legal framework. However, due to inherent limitations
some unavoidable material misstatement risks are there that may not be detected by the
auditor even if audit is performed with proper planning. Hence, the auditor shall analyse the
regulatory and legal framework applicable to the company and the industry under which it
operates (Auasb.gov.au 2018). The auditor shall further evaluate the way in which the
company is company is complying with the required framework. It is identified that the while
preparing the financial statements the company entity prepared those in compliance with the
requirement of Accounting Standards and Interpretations, Corporation Act 2001 and other
laws applicable to the company.

b) Our assessment of significant accounts
By going through the financial statement of entity for the year ended 30th June 2017
and analysing various items assessed as material are as follows –
 Inventories – inventory represent the available goods for the purpose of sale and the
raw materials used for the producing the goods available for the purpose of sale. It is
considered as one of the most crucial asset under any business as the inventory
turnover represents the primary source for the creation of revenues which in turn
provides earnings for the shareholders of the company. It is recorded as the current
asset under the balance sheet of the company and it is considered as the buffer among
the producing and fulfilment of order. When the inventory is sold the carrying cost of
the item is transferred to cost of goods sold recorded in the income statement. It is
identified from the annual report of the company that the inventory has been increased
to $ 27,068,584 from $ 10,894,400 (Wild 2017).
 Trade and other receivables – in the ordinary course of business trade receivable is
amount of bill raised to the customer for the delivery and sale and of services.
However, in accounting the trade receivable sometimes is referred as the account
receivable. In business context, trade receivables are considered as one of the larger
assets of any entity that is carried on in the balance sheet under current assets. Trade
receivables are the current assets as they are considered as monetary amount
receivable by the business from the customers that are collectible within the time
frame of two to three months from the date of sale (Gorondutse, Ali and Ali 2016). It
is identified from the annual report of the company that the trade receivables has been
increased to $ 88,91,091 from $ 42,35,160.
 Plant, property and equipment – It is the long-term or the non-current assets that is
included under the asset section of the balance sheet. Generally, it includes building,
machinery, vehicles, office equipment, fixtures and furniture those are used for the
business operation. Asset recorded under plant, equipment and property are
considered as tangible long lived asset. They are also represented as plant assets or
fixed asset. Generally, PPE are reported at cost after deducting the amount of
depreciation and impairment loss, if any. It is identified from the annual report of the
company that the PPE has been increased to $ 82,240,620 from $ 48,486,749.
 Borrowings – borrowings represents the money borrowed from the banks that is
secured by the registered mortgage over the buildings and lands. It also includes the
liabilities related to hire purchase secured for the assets included under hire purchase.
Further, the lease obligation of the company is secured by underlying assets that had
carrying value amounting to $ 21,819,609 (Edgley 2014).
 Sales revenue – sales revenue being the major source of income is material by its
nature irrespective of the amount involved. As the operating expenses of the company
are met from the sales revenues and management’s bonus and incentives are
sometimes dependent on the revenue level of the company, this item is susceptible to
misstatement. It is identified from the annual report of the company that the revenue
has been increased to $ 48,521,720 from $ 11,957,553 (Huang, Marquardt and Zhang
2015).

c) Our planning materiality
Audit materiality is one of the most crucial concepts for the auditors. Misstatements
that may include omissions are regarded as material if in aggregate or individually they are
likely to influence the user’s economic decisions on the basis of the financial statements. In
audit, the term materiality includes quantitative as well as qualitative aspects. In quantitative
aspect, the auditor shall consider the below mentioned 5 steps –
 Setting the preliminary judgement for materiality. It is basically done at the audit
planning stage. However, generally it is considered as 5% of net income or revenue.
 Considering the performance materiality on the basis of line items like inventories or
account receivable.
 Projecting the misstatement in the account or cycle
 Projecting total misstatement in aggregate
 Comparing step 4 with step 1 to determine if the overall financial statements are
misstated materially (Mock and Fukukawa 2015).
However, the audit materiality is not only quantitative by nature. Various qualitative
factors are there to be considered under materiality. For, instance, if sufficient disclosures are
not provided by the entity while disclosed the transactions related to related party or
contingent liabilities, it may be considered as material. Apart from that, inaccurate
description regarding accounting policy may also be considered as material if the entity chose
to amortize the asset over 50 year’s period; however, in the disclosure note it is mentioned as
10 years only (Eilifsen and Messier 2014).
Various types of materiality are there mentioned as below –
 Identified misstatement – it is the actual misstatement that can arise from
representative sample ( IMR) or other than the representative samples (IMO)
 Likely misstatement – it is the projected or extrapolated impact of the IMRs
 Likely aggregate misstatement – it is the sum of IMO and likely misstatement
 Further possible misstatement – it is the likely misstatement owing to the non-
sampling risk as well as the sampling risk.
 Maximum possible misstatement – it is the sum of likely aggregate misstatement and
further possible misstatement (Byrnes, Brennan and CFE 2015)
Preliminary estimate for the materiality at financial level are called as planning
materiality. It is the maximum amount at which the auditors think that the financial statement
can be misstated through unknown or known fraud or error and will not have the impact on
decisions of the reasonable users of financial statement. However, the clarified auditing
standards require quantification of the level of materiality that is estimated for guiding the
decision of the auditors. This estimate will only guide and it is not the specific determination
of what is or what is not material under audit. Generally, a single base like highest of total
revenue of total asset is chosen for establishing the materiality level in financial statement
(Kharisova and Kozlova 2014). Once the base for materiality is determined the amount is
normally multiplied by the percentage factor that is sometimes determined to be the base for
determining the allowance for unknown as well as known fraud and error that will be taken as
a whole in the financial statement. In next step, the percentage factor on the basis of risk
involved in the financial statement is multiplied by the planning materiality for determining
the tolerable misstatement or the performance materiality. It is the maximum amount of

known error that can be accepted the by the auditor in financial statement without making
any adjustment (Legoria, Melendrez and Reynolds 2013).
General range for planning materiality is 50% to 75% and it depends on the moderate
risk involved in the financial statement. It is commonly used for calculating the tolerable
misstatement level at level of financial statement. Significantly low risk can enable the
auditor for calculating the tolerable misstatement at high level for instance 80% to 90%.
However, lower risk at level of financial statement will lead to fewer individually significant
items that will be required to be audited 100%. When the risk is high at the level of financial
statement the lower level for the tolerable statement is generally resulted using the factor for
instance, say 10% to 30%. This will lead to lower limit for individuals significant items and
will gather more evidence from auditing the account balance with smaller amounts, unusual
transactions or general journal entries. All percentage factors mentioned here are based on
professional judgement of the auditor's resulted from the assessment level of risk at financial
statement level (Legoria, Melendrez and Reynolds 2013). However, none of the factors are
mentioned in the auditing standards. Here, in the case of Murray River Organic Group
Limited, materiality will be established at 0.5% of total revenue. From the annual report of
the entity for the year ended 30th June 2017 it can be identified that the amount of revenue
was $ 48,521,720. Hence, the amount of materiality will be (0.5% * $ 48,521,720) = $
242,609. If the tolerable misstatement is established at 75% of materiality, the tolerable
misstatement will be amounted to ($ 242,609 * 75%) = $ 181,957.

d) Our assessment of what can go wrong
Various audit risk involved with the item considered as significant for material
misstatement are as follows –
 Inventories – various risks involved with inventories are as follows –
 Susceptibility to theft – theft is the biggest risk involved with inventory control,
particularly the high value inventories.
 Loss of inventories – tight control for inventories in combination with the well
trained personnel assist in preventing the losses. Inventories are recorded as asset
under the balance sheet of the company. Whenever the inventories are written off
owing to loss it will reduce the amount of equity technically as equity = asset –
liabilities. Loss can take place in various forms including physical loss and errors
at the time of receiving the product (Brasel et al. 2016).
 Complexity involved in the process of recording closing inventories – another risk
factor involved with inventory is the complex process of recording the year end
inventories. When the inventory management audit is carried out for the client
past year’s data shall be checked to identify whether any misstatement exists.
Misstatement can be caused due to changes in the valuation procedure of
inventories like FIFO, LIFO or average method
 Trade receivables – various risks involved with inventories are as follows –
 Occurrence or existence – existence is considered as a major risk for receivables as it
comprises of various small accounts. To confirm the balance the auditor is required to
send the confirmation to the customers for verifying the due amount. However, for the
unreturned confirmations any alternative procedure like phone or e-mail shall be
applied.
 Completeness – it involves the risk that the amount due on account of receivables may
not have been recorded in full. The reason is that the auditor cannot verify the
transaction that is not recorded through looking into the cut-off transactions.
However, this risk can be mitigated through assessing the procedures of sales and
analysing the entity’s ability with regard to the procedures for transaction.
 Valuation – valuation risk is the major risk associated with receivables for various
companies. As the receivables shall be recorded at net realizable value the entity shall
estimate the amount of collectability after deducting the amount allowed as doubtful
debt. The auditor is required to determine whether the method used by the entity is
reasonable (Adu 2013).
 Plant, property and equipment – audit risk involved with PPE are as follows –
 Completeness and existence – it involves the risk that the amount on account of PPE
may not have been recorded in full. Further risk involved with PPE is that the account
balance for the assets actually exists on the balance sheet date.
 Valuation and rights – the valuation risk is that the assets may not have been valued
properly and depreciation and impairment has not been provided appropriately.
Further risk involved with PPE is that the company has rights on the assets it has
recorded in the balance sheet and the obligation for the assets has been recorded
properly.
 Borrowings – various risks associated with borrowings are procedures of borrowings
and lending, internal control and the system related to forecasting the cash flows,
counterparty selection, interest calculation and recognition of borrowing in the
accounting system. Further, risk associated with the arrangement of security and
access.
 Sales revenue – various audit risks involved with the sales revenue are as follows –

 Classification – the classification assertion involved with revenue is that the
transactions related to revenues are recorded under correct account balance.
 Completeness and cut-off – completeness risk states that the company recorded the
business events to which it is subjected to. Further, the cut –off risk is that the
transaction related to sales revenues have been recorded under the correct period of
accounting (Chou, Wang and Lin 2017).

3. Conclusion
From the above discussion and analysis it is concluded that some accounts of the
company were found as subject to misstatement. These accounts are – inventories, trade and
other receivables, plant, property and equipment, borrowings and sales revenue. However, the
audit risk associated with the mentioned accounts can be mitigated as follows –
 Inventories – the auditor shall physically verify the inventories to confirm that the
inventory balance recorded in the balance sheet actually exists.
 Trade and other receivables - To confirm the balance the auditor is required to send
the confirmation to the customers for verifying the due amount
 Plant, property and equipment – balance of PPE shall be verified with the physical
existence
 Borrowing – balance shall be confirmed with the creditors
 Sales revenue – balance shall be confirmed with the sales transactions and sales
registers.

4. References
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