BAO3306 Auditing Report: Financial Statement Analysis of MRO Group

This auditing report for BAO3306 examines Murray River Organics Group Limited's financial statements, focusing on revenue recognition, accounting policies, and associated business risks. The report assesses the company's reporting entity status, key information, and significant accounts, employing analytical procedures to identify potential material misstatements. It also identifies a level of planning materiality and assesses what could go wrong concerning these misstatements. Key areas of concern include revenue overstatement, inaccurate valuation of raw materials and finished goods, and improper inventory and property, plant, and equipment valuations. The report emphasizes the impact of these misstatements on decision-making users of the financial statements and provides a comprehensive analysis of the company's financial health.

ASSIGNMENT
BAO3306 AUDITING
REPORT

Semester 2, 2018
1. Executive summary
The main purpose of this assessment is concerned with the purpose of Murray river
Organics Group Limited in making decisions regarded to allocating the scarce
resources of the company. It discusses the accounting policies in relation to measuring
the performance of the firm,, especially revenue of the organisation. It measures the
business risks that are associated with the firm. It also uses analytical procedure to
identify accounts that are identified with the material misstatements of the company.
It identifies material misstatements of the company and identifies a level of planning
materiality that significantly affects the firm. It also identifies the things that can go
wrong in respect of the planning materiality.

2. Introduction
In the above case study. the first part deals with the company Murray river Organics
group limited and its preparation of general purpose financial statements to help the
users in making economic decisions. It also discusses the company MGR as one of
the main competitors in the farming industry. It assesses whether this company MGR
has prepared this report in a true and fair manner or not. It assesses whether the
revenue has been measured in a manner that is consistent with the accounting policies
or not. The company can recognise revenue only when it can make things reliable.
The business risks have been analysed with respect to certain geographical anamolies
and certain market risks that have been associated with the company MGR. In the
second part the assignment deals with the use of analytical procedure in identifying
material misstatements that are associated with the company MGR. The figures of
material misstatement are compared to last year and then analysed as to how these
material misstatements impact the financial statements of the company.

3. Key information
a) Our understanding of the client
SAC 1 of AASB stated that an entity is a reporting entity if there are some
external users that dependent on general purpose financial reports to make their
decisions. An entity is considered to be a reporting entity if there are separation
between managers and owners of the company with an economic interest or
political influence of that company stated by Deegan (2014).
Our client is a listed company on the ASX and there is a greater separation of
management and owners and other users with an economic interest. Therefore,
Murray River Organics Group Limited is expected to produce GPFRs for the users
in making decisions in regard of allocating their scarce resources to the company.
The MGR is one of the main competitors in farming industry. It controls 4,447
acres of certified organic farmland in the region of Sunraysia of Australia and
holds furthermore 2,069 acres of planted vineyards. This makes it the biggest
dried vine producer and marketer in Australia and possible biggest vine producer
in the world (Morgans n.d.). Based on these factors client has a significant impact
on external stakeholders and MGR generated revenue of 48.5 million in 2017
according to Murray River Organics Investors 2017. The client has tremendous
amount of shares so it is expected that the financial statements of this client have
impact on others. Murray River Organics is considered to be a reporting entity and
therefore is expected to produce GPFRs to its users of their financial statement.
The entity is required to comply with the Corporations Act 2001, ASX Listing
Rules, AASB and other accounting requirements.
Accounting policies is when an organisation chooses a particular accounting
standard to measuring their performance. The most critical accounting policy for
MRG is considered to be revenue account. This because is part of their daily
operation activities of the business. Revenue is a gross profit of economic benefits
that come from an ordinary activities of a business as form of inflow (AASB
2009, p. 10). Murray River Organics Group Limited prepares that annual report
based on historical costs, they use is measurement because it represent a true and
fair view of their financial reports (MROG 2017).
As we studied MRG Consolidated Financial statement we realised that they
measured revenue using fair value once goods are delivered or title passed on.
Revenue is recognised by MRG base on an estimated return of customer, rebates,
discounts similar allowances (MROG annual report). The company recognises
revenue only if they can measure it reliable.
MROG main objective is to be a leading company in providing high quality of
dried vineyard to customers and be globally recognised company in the world.
The company has introduced a new organic nutrition such as better-for-you food.
The company’s strategy is to sell natural, healthy and organic products to its
customer and this is one of their main strategies. Continuing with its expansion of
current assets and vineyards and by acquiring assets and businesses to expand its
products and brand. The Group focuses on having products that will have multiple
purposes in the near future. Able to provide innovation ways of packaging in the
future and convenient ways of doing it (Morgans n.d.).
‘Business risk is a risk that an entity’s business objectives will not be attained as a
result of internal external factors, pressure and forces brought to bear on the

entity’ (Gay and Simnett 2018, pp.214). The risks that will affect Murray River
Organics Group’s financial report will be as follow:
 Yields and climate
Almost with every viticultural crop there is a various number of risks may affect
yields. This will have a massive impact on Murray River Organics group’s
performance. The profit will differ from year to year. Climate has a direct impact
on Group’s performance due to not meeting their target. Poor weather condition
has negative effect on agricultural productivity and leads to decrease in
availability of certain goods.
 Water-supply
Water is a crucial part of MROG’s ability to grow crops and risk of water that
runs from Murray and Darling River will always be salty and not good for
growing crops.
 Uncontracted sales arrangements
The group currently dependent on a high level of maintaining its current and
futures customers though a customer relationship. The group may not be able to
keep its entire customer and there are no obligations to keep buying goods.
 Regulatory risk
The Group is required to comply with a various laws and regulations such as
OH&S, tariff tax and employment safety.
 Market risks – currency and interest rate risks
Because the group trades globally there may be a risk of financial loss when
converting foreign currencies to Australian dollars because Australian dollars is it
main currency. The group is exposed to interest rate risk, this because it will
borrow cash from a foreign country and rates will verify (MROG 2017).
 Loss of operations at one of the Group’s facilities
A loss of a facility by the group could result in delay of productions of goods
which can decrease profit and the group will have to find other alternatives to
cover for this cost (Morgans n.d, p. 100).
b) Our assessment of significant accounts
For the purpose of this assignment we are going to use analytical
procedure – simple comparison to identify accounts that are mostly at
risk of being materially misstated by Murray River Organics Group
Limited. Simple comparison is comparing two different amounts
which can be done by comparing current year to last year amount
(Gay & Simnett 2015, p. 227). After we have compared Murray River
Organics Group Limited’s current and previous year we believed the
following accounts are most at risk of being misstated by the Group.
 Revenue
 Raw material and finish goods consumed
 Inventories
 Property, plant and equipment
 Trade and other payables

c) Our planning materiality
The preliminary estimate of materiality at the financial statement level is called
financial materiality. It is the maximum amount by which auditors can estimate
how much of their material misstatements are being materially misstated. These
misstatements does not affect the decision making of reasonable financial decision
making users. These statements are supposed to guide the decision making users
and design of auditing standards(Rydin 2013). This estimate is not a guide but a
specific determination of what is material and what is not material in an audit.
In the above case the company Murray river Organics group Limited has
identified a set of material misstatements that need to be assessed whether this
level of planning materiality can affect the decision making users of financial
misstatement. The material misstatements relate to the following items that
include revenue, planning materiality and finished goods consumed, inventories ,
property,plant and equipment and trade and other payables. These material
misstatements have been identified in respect of auditing the financial statements.
In auditing the financial statements, it is clear that these material misstatements
could have an impact on the decision making sers(Audsabumrungrat,Pornupatham
and Tan 2015) . These decision making users need to properly analyse the
financial statements before making any investment related decisions. These
material misstatements significantly affect the decision making users of the
financial statements . if material uncertainty exists. The users of the financial
statements will make improper decisions related to investment if planning
materiality exists(Edgley 2014.). Hence the material misstatements will
significantly affect the users of the financial statements in a negative way. Hence,
determining a level of planning materiality is important so that the users of the
financial misstatements will not get affected by the material misstatements that
exists in the financial misstatement(Simpson 2013).

d) Our assessment of what can go wrong
The material misstatements that can go wrong are mentioned in the previous section .
These material misstatements are assessed in relation to the comparison of different
figures at the end of the two years. A comparison of two years is done and on the
basis of that the material misstatements are identified. The company makes an
assessment of some of the things that can go wrong in the material misstatements that
are identified as follows:
 Revenue- The company’s revenue is the main source of income. Hence if any
material uncertainty exists, it will significant affect the most important aspect
of the business, which is profitability. The revenue may be overstated , in a bid
to mislead investors to make more investments in the company . This
materiality uncertainty will mislead a lot of investors in robbing them of their
hard earned money(Legoria, Melendrez. and Reynolds 2013).
 Raw material and finish goods consumed- The raw material and finishing
goods consumed is another part of the financial statements . The comapny can
make in accurate valuation of raw material and finishing goods consumed.
This would affect overall sales figures and make improper estimations of
manufacturing costs.
 Inventories- The inventories are an important item in the asset side of balance
sheet. The inventories need to be assessed in relation to the provisions of
AASB and its valuation in respect of fair value of inventories. The valuation in
respect of inventories need to be assessed whether the company has done the
valuation in a manner that is relevant to the valuation that is mentioned in
the provisions of the Australian Accounting Standards Board( Vasarhelyi and
Romero 2014).
 Property, plant and equipment – The property, plant and equipment is a very
important valuation item in the balance sheet. It is a significant item that
determines the valuation of the business and estimates the overall asset base of
the company. The property, plant and equipment needs to be assessed whether
the same has been valued in relevance to the auditing accounts standard board.
It needs to be checked as per the valuation principles. The existence of the
item needs to be considered. Further the ownership of the item needs to be
verified(Pilcher et al. 2013) .
 Trade and other payables- The trade and other payables is another important
item in the balance sheet. It is an important component that determines the
liability valuation of the business. The business may undervalue the value of
trade payables so as to reduce the liability estimation if the business. This will
be material misstatement as it will reflect a highly irregular valuation of the
business. This will also induce investors to invest more because they will be
lured by the low liability estimation of the business.

4. Conclusion
From the above analysis it is clear that the company Murray river organics investors
have material misstatements that affect a lot of decision makers that are involved in
the financial statements. The company has a tremendous amount of shares so it is
expected that the financial statements of the client will have impact on other financial
statement users. It makes an assessment of whether the provisions of AASB have
been followed in respect of the particular case study or not . The material
misstatements have been analysed in respect of the financial statements of the
company. A further discussion has been made in respect of the impact of material
misstatements and how they can be misinterpreted in respect of misleading investors.

5. Appendix

6. References
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Deegan, C., 2014, Financial Accounting Theory, 4th edition, McGraw-Hill, Australia
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Edgley, C., 2014. A genealogy of accounting materiality. Critical Perspectives on
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Simpson, P., 2013. Ecologies of experience: materiality, sociality, and the embodied
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