Operations of AMP ltd
The objective of this report is to develop a decision for an audit tender for AMP ltd which is engaged in the business in financial sector. The annual report of the company for the year 2017 is to be considered to identify the risks and appropriateness of disclosures which are shown in the financial statement of the business. In the coming paragraphs, business risk which are associated with the business are to be identified and also their respective accounts are also to be considered for this report. Moreover, the assessment will also be analyzing the case of AMP ltd and how the same has an impact on the decisions of the auditor whether to take the audit or not.
The company AMP Ltd is engaged in the business of providing financial products and financial services to the clients. The company mainly serves in Australia and New Zealand gathering maximum customers which can generate the income of the consumer. The company came into being in 1949 in Australia with another name for the company.
The main activities which are undertaken by the management of the company for day to day operations of the business includes superannuation, insurance scheme, financial advertisement and investment product. The profit and loss statement which is prepared by the management of the company shows that a major portion of expenses of the business is due to this time (Annualreports.com. 2018). The business is also engaged in providing loan services and also provides an option to the clients for savings account. The company belongs to financial sector and therefore offers financial products to the customers.
The laws and regulations which are applicable on a business affects the overall operation of the business (Business.gov.au. 2018). The most common regulation which every business is required to follow are taxation rules which are maintained by ATO and Corporation Act 2001. In the case of AMP ltd, there are certain rules and regulations which are applicable on the business and the same are discussed below in details:
- Superannuation Regulations: The superannuation legislation is applicable to the business of AMP Ltd as the management of the company provides superannuation products to the customers of the business. The regulations require the business engaged in providing superannuation products to register under the act and follow all the rules and regulations which are cited under the act(Austrac.gov.au. 2018). Superannuation Industry (Supervision) Act 1993 clearly sets out the payment regulations and also the audit and reporting obligations of Superannuation entities. In addition to this, all revisions and amendments which are issued under Australian Prudential Regulation Authority (APRA).
- General Insurance Regulations:The business of AMP ltd also provides general insurance products to the clients of the business and therefore the different acts which are issued and regulated by Australian Prudential Regulation Authority (APRA) needs to be followed. As per Insurance Regulations 2002, the contracts which are insurance contracts and the businesses on which insurance contracts are not applicable are clearly specified in the regulations (Legislation.gov.au. 2018). In addition to this, regulations there are several other regulations and legislations which needs to be followed by the management of AMP ltd in order to ensure that business is conducted as per the rules and regulations of the business.
- Competition and Consumer Act 2010:This is one of the regulations which are applicable to most of the businesses in Australia and covers all of markets such as the suppliers, wholesalers, distributers and final consumers. The act aims to provide assurances to the businesses that the trade structure of Australia will be fair and without any anti-competitive pressures thereby ensuring the survival of most of the businesses (Business.gov.au. 2018). The act also covers consumer law in this legislation that deals with unfair practices towards consumers, misleading of consumers, product safety and information and any kind of frauds as well (Australia.gov.au. 2018). The provisions of this act are also applicable to the business of AMP ltd which is engaged in financial sector.
- Environmental Regulations:The environmental regulations which are established in Australia are applicable to most of the businesses and the management of AMP ltd needs to ensure that such regulations are effectively followed. Some of the common regulations which are set up in Australia relates to control over carbon emission, reduction of greenhouse gases, reduction in waste generation and disposal (Amp.com.au. 2018). The management of AMP ltd needs to adhere to such regulations in order to operate its business in Australia.
The financial statement is important aspect which shows the performance of the business during the year. The financial statements are prepared by businesses following a general accepted format showing all relevant items relevant to the business. As per the income statement which is prepared by the business of AMP ltd clearly shows that items are different from the usual items which are shown in income statement of a manufacturing concern. As per the income statement which is prepared by AMP ltd, the primary income source of business is through life insurance contract revenue and fees which is collected for services provided by the business. The revenue generated by the business for the year 2017 from life insurance contract is shown to be $ 2,997 million and the same is shown to have increased significantly from previous year estimate which is shown to be $ 2,883 million. The fees which is collected by the business for providing services and financial advice to the clients have also increased which suggest that there is an increase in the overall scale of operations of the business and thereby the revenue of the business has also increased during the year. The profits generated by the business during the year as shown in the income statement of the business is $ 873 million in comparison to previous year’s profits of the business which is shown to be $ 192 million. The increase in the profits of the business signifies that there have tremendous improvements in profit generating capacity of the business and also the overall revenue of the business has also increased significantly during the year (Ongore and Kusa 2013). The earning per share of the business during the year is also shown to have in the income statement of the business is shown to be in positive which is a favourable sign and the same indicates that the management of the company meets the expectations of the shareholders effectively.
Laws and Regulations Applicable to AMP Ltd
The balance sheet of the company shows the figures for total assets of the business for the current year is shown to be $ 148,085 million and the same is shown to be higher than the assets figures which is shown in previous years. The increase in the assets of the business is a positive sign and suggest that the business is improving significantly (Ruozi and Ferrari 2013). The liabilities of the business for the year 2017 is shown to be $ 140,802 million and the same has also improved in relation to previous year figures. The assets of the business are shown to be higher than the liabilities of the business which shows that the current positions of the business are appropriate in financial terms. The capital structure of the business is shown to be made up of both borrowed capital and equity capital. The borrowed capital is used in a much higher proportion by the management as shown in the balance sheet which suggest increase in the level of borrowings of the business. The equity capital of the business is shown to have reduced significantly during the year.
An analysis of the cash flow statement shows the cash position of the business and consist of cash from operating activities, cash from investing activities and also cash from financing activities of the business. The cash flow from operating activities and cash from investing activities of the business is shown to be negative which shows that the cash outflows of the business is more than the cash inflows of the business. The cash from financing activities of the business is portrayed to be $ 2,771 million which has increased significantly in comparison to previous year. The cash and cash equivalent of the business has reduced in relation to previous year as shown in the cash flow statement of the business.
The risks which affect the earning capacity or revenue generating capacity of a business is known as business risks which the auditor needs to consider while conducting an audit of the business (Reason 2016). The businesses which can be identified from the analysis of the financial statement are listed below in details:
- Increase in costs of the Business: The costs of the business are shown to have increased significantly for the business of AMP ltd as per the annual report of 2017. The changes in policyholder’s liabilities in relation to life insurance contracts and investments contracts are demonstrated to be $ 1069 million and $ 7,158 million respectively and the figure has significantly increased during the year(Johnstone, Gramling and Rittenberg 2013). This increase in costs of business needs to be considered by the business for ensuring that the profitability of the business stays intact.
- Decrease in Liquidity: The liquidity position of the business is an important consideration as on the basis of this, it can be estimated whether the business is in the position to make investments for different activities or not. In the case of AMP ltd, the liquidity position of the business is shown by the cash flow statement results(Distinguin, Roulet and Tarazi 2013). Both cash from operations and cash from investing activities are shown to be in negative which suggest that the cash outflow of the business is significantly more than the cash inflows of the business. Therefore, there is a serious risks of liquidity crisis which can affect the business if the same is not improved as per the annual report which is shown for 2017.
- Investments of the business: The balance sheet which is prepared by the company for the year 2017 shows that the management has invested significant amounts in financial assets. In this case, there is a risk that the accounts of the business might be manipulated in order to show a favourable asset balance of the business and thereby also show an ideal balance sheet. The investments which is shown in the balance sheet of the company is of material amount and therefore there is always a risk of presence of material misstatement in the same. In this case, the auditor needs to apply audit procedures in order to confirm the balances which is shown in the annual report of the business during the year(Earley 2015).
- Risk relating to External Environment: There are certain risks which the management of the company faces such as the scandal which was discovered recently relating to AMP ltd where the management of the company has misled regulators(Kagan, Thornton and Cunningham 2017). Such incidents affect the reputation of the business and in such situations the general public loses their confidence in the business which in turn results in decline in valuation of the share price of the business. Such risks directly affect the revenue generating ability of the business.
The annual reports which is prepared by the management for the year 2017 shows certain balance which can eb materially misstated. The identification and assertions for such account balances are shown in the discussions below:
- Revenue from Fees and Life Insurance Contract: The major source of revenue for the business is shown to be revenue from fees and life insurance contracts. The figure of revenue which is generated from operations seems to have improved in comparison to previous year analysis. The balances of revenue generated can be materially misstated which needs to be considered by the auditor of the business (Lobo and Zhao 2013). The scandal in which the company was involved in related to the fees revenue which the company recorded without providing any services for the same. Therefore, the revenues of the business can be impacted by such an activity which in turns impact the profits of the business.
- Investments in Financial Assets and Investment Properties: The investments of the business are depicted in the balance sheet of the company. There is a chance of material misstatement in the valuation of investments which will have the affect of affecting the entire financial position of the business. The investments of the business is shown to have increased during the year which needs to be investigated by the auditor in order to ensure that the same is showing true and fair view.
- Interest Bearing Liabilities: The borrowings amount which is shown in the balance sheet has increased significantly during the year and therefore the same needs to be investigated as most of the times businesses tend to manipulate the figure of borrowings in order to show appropriate annual reports. The auditor can confirm the value of debt by reviewing relevant documents of the business. The figure not only affects the balance sheet of the company but also the income statement due to the interest on borrowings which are shown in the annual report of the business.
- Deferred Tax Assets and Liabilities:The deferred tax assets and liabilities are shown in the balance sheet of AMP ltd and the same represent any past tax related payments which are being carried forward until the same are set off. The nature and complexity of the items make such items to be material and subjected to manipulations which needs to be considered by the auditor of the business. Moreover, he auditor also needs to check whether the balances are appropriately carried forward from previous year.
AMP ltd is engaged in financial sector of Australia serving the needs of customers by providing financial products such as superannuation, insurance and even provides access for loans and saving bank account options. The company has been involved in a scandal which can impact the overall reputation and operations of the business. Royal commission identified the scandal and highlighted the same. Royal Commission is an association which was established for the purpose supervising the businesses engaged in financial sector and ensure that there is no misconduct.
Analysis of Financial Performance of the Business
As per the scandal, the management of AMP Ltd has systematically misled the regulators and have been engaged in misconduct which relates to charging fees from the customers and not providing services for the same. In addition to this, the company has reported the profits and revenues of the business significantly lower than the actual figures. This misconduct has been carried on by the business for a period of more than 2 years and has duped the regulators for almost 20 times since 2017 (Amp.com.au. 2018). The steps which have been taken against the company is strict as the Royal Commission removed the executives of the business from the company and has also imposed for criminal charges against the company.
Thus, considering the present situation of AMP ltd, the auditor should not accept the audit engagement as the company is already convicted for unethical activity and fraud behaviour. In addition to this, the possibility of misstatement is also high in the company.
The auditor should not accept the audit tender as the company is involved in serious misconduct and the auditor might not be able to carry out his duties as an auditor if the auditor accepts the audit engagement. On the basis of nature of the company and the recent scandal which is revealed for the business, the previous year’s financial statement might also not bee appropriate and therefore the work of the auditor will be much more than conducting the audit for the current as the auditor cannot rely on past year information and thereby making the scope of audit difficult. In addition to this, the scandal which the company is related to will also affect the integrity and reputation of the auditor in case any audit risks appear. Therefore, it would be a good choice not to accept the audit engagement.
Reference
Amp.com.au. 2018. [online] Available at: https://www.amp.com.au/content/dam/corporate/shareholdercentre/files/reports/2018/Investor_and_annual_reports/2017_towards_sustainability_report.pdf [Accessed 15 Sep. 2018].
Amp.com.au. 2018. AMP & the Financial Services Royal Commission | Customer apology & actions. [online]. Available at: https://www.amp.com.au/news/2018/may/AMP-and-the-Royal-Commission [Accessed 15 Sep. 2018].
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Austrac.gov.au. 2018. AML/CTF Act | Australian Transaction Reports and Analysis Centre (AUSTRAC). [online] Available at: https://www.austrac.gov.au/businesses/legislation/amlctf-act [Accessed 15 Sep. 2018].
Business.gov.au. 2018. Financial and insurance services industry fact sheet. [online] Available at: https://www.business.gov.au/planning/templates-and-tools/industry-factsheets/financial-and-insurance-services-industry-fact-sheet [Accessed 16 Sep. 2018].
Business.gov.au. 2018. Legal essentials for business. [online] Available at: https://www.business.gov.au/planning/new-businesses/legal-essentials-for-business [Accessed 15 Sep. 2018].
Distinguin, I., Roulet, C. and Tarazi, A., 2013. Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks. Journal of Banking & Finance, 37(9), pp.3295-3317.
Earley, C.E., 2015. Data analytics in auditing: Opportunities and challenges. Business Horizons, 58(5), pp.493-500.
Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to conducting a quality audit. Cengage learning.
Kagan, R.A., Thornton, D. and Cunningham, N.A., 2017. Motivating management: Corporate compliance in environmental protection. In Crime and Regulation (pp. 203-230). Routledge.
Legislation.gov.au. (2018). Insurance Regulations 2002 . [online] Available at: https://www.legislation.gov.au/Details/F2018C00192 [Accessed 16 Sep. 2018].
Lobo, G.J. and Zhao, Y., 2013. Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements. The Accounting Review, 88(4), pp.1385-1412.
Ongore, V.O. and Kusa, G.B., 2013. Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), pp.237-252.
Reason, J., 2016. Managing the risks of organizational accidents. Routledge.
Ruozi, R. and Ferrari, P., 2013. Liquidity risk management in banks: economic and regulatory issues. In Liquidity Risk Management in Banks (pp. 1-54). Springer, Berlin, Heidelberg.
Australia.gov.au. 2018. Financial regulation | australia.gov.au. [online] Available at: https://www.australia.gov.au/information-and-services/money-and-tax/financial-regulation [Accessed 16 Sep. 2018].
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