Sustainability Reporting In Nordic Real Estate Companies – Analysis Of Ridley Corporation Limited

Risks associated with companies operating in finished animal feed and feed ingredients

This report will be focused towards the analysis of the Ridley Corporation Limited operating in the Food, beverage and tobacco industry. The report will also analyse the key business risks associated with the company focusing in Inherent and control risk. It will evaluate risks in three categories such as low, medium and high risk. The next part of the report will analyse the financial position of the company for the past three years with the use of the financial ratios to measure financial performance of the company.  This will also help to identify the various account balance that are considered as ‘material’ for Ridley Corporation and will provided the reasons for the materiality of the various accounts. Thereafter, material accounts were selected that consists of five liabilities and assets. Finally, sampling plan is developed for complete the audit process of each material account.

There are a number of risks associated with the companies that are operating in the field of finished animal feed and feed ingredients. In case the risks are not identified in timely manner then it will lead to significantly impact the business and profits of the company. The various risks involve operational risk, regulation and process risk, quality and financial risk in accounting. The major operational risks identified for Ridley Corporation are as under:

Cyclical fluctuations: The demand of the nutrition products for animals is fluctuating continuously. The company is offering packaged and rendering products. It is also offering poultry, Pig, dairy, Aqua and sheep which are having negative correlation that leads the company to diversify the risk due to non-dependency on single business sector (Ridley, 2018).  

Domestic grain harvest: There is risk of fluctuations in the raw material prices that is associated with the world harvest and domestic cycles through the proper management procurement practice this issues is overcome.  

Impact of natural pasture in supplementary feed decision making: it is difficult to control the availability of the natural pasture and company believes that it is needed to compelling the commercial justification for supplementary feeding in various sectors of operations (RIDLEY, 2016).

Impact of domestic and export markets in the event of event of disease outbreak: It is a significant risk due to the product contamination across various species. The organization has tried to functions at different geographical locations to overcome form the issues of infection such as Avian Influenza leading to closure of almost all the export markets of poultry and meat products.

Audit risk model

Risk of regional consideration and customer concentration: the company is focusing towards the long term contracts and relations within the suppliers so that it assures them the surety towards volumes of products for procurement and supply chain in short term and capital expenditure programs (Louwers, et al., 2015).  

The other risks involve surplus property holding and corporate risk arise due to large amount of property needs and failure to realize the surplus land assets (RIDLEY, 2017). So the company is making efforts towards engaging the state government and developing partner to secure appropriate redevelopment to optimize shareholders value. 

The organisation is commencing a number of diversified activities and has to deal at different geographical locations that lead to some of the financial risks. The main identified risks are market risk such as currency fluctuations, commodity, interest rate and liquidity risk. It is determined that the group is having focus towards minimising the potential adverse effects of the unpredictability of the financial markets to overcome the adverse effect on the financial performance of the company (RIDLEY, 2016). The organization is also discussing with the board and management evaluates and tries to hedge the financial risks. There is also a written approval system for the overall risk management that covers areas of mitigating foreign exchange, credit risks, interest rate and investing excess liquidity (RIDLEY, 2017).

There is presence of a model that supports auditors to identify the critical impact of the various types of the risks associated with the audit. It not only helps to identify the associated risks but also provides assistance to manage the possible obstacles. In the absence of proper attention and due diligence there is possibility that some of the risks remains unidentified that may possibly lead to under stated or overstated financial statements (Louwers, et al., 2015).

The audit risk can be identified by identifying three major risks such as control risk, detection risk and inherent risk. Control risks are the risks that are caused in case the incorrect financial statements. On the other side, detection risk is the risk that is caused when auditors fails to detect an important mistake in final accounts (Griffiths, 2016). There is one more risk associated to audit model, inherent risk is the risk that arise due to error or omission of recording of a complex event or transaction.

The above calculations indicate that the current ratio of the company is slightly lower in comparison to year 2015 indicating little complex condition of the company. The industry average is 2.28 so it is needed that the company must control on liabilities and better management of the working capital is needed to match industry average (Reuters, 2018). In addition to this, the same trend is analyzed in terms of quick ratio the industry average of quick ratio is 1.74.

Analysis of liquidity ratios

While analysing the profitability position it is identified that the gross margin remains almost stable and the same time the profit margin ratio of the company is having inclined trend over the time the profit margin ratio of RCL was 2.836 in year 2015which has improved to 2.981 in 2016 and again improved to 3.027 in 2017 (Noreen, et al., 2014). The company is generating fewer margins in comparison to industry average of 28.69. The return on the assets is also stable during the period but it is far below the industry average of 3.71 (Reuters, 2018).

The debt to equity ratio indicates that the company has able to control liabilities and has able to increase capital to control it from 1.073 in years 2015 to 0.888 in years 2017. At the same time, the company has able to generate higher equity ratio indicating better leverage position from 0.482 to 0.530 in years 2015 to 2017 respectively.

The inventory ratio indicates that the company has failed to rotate the inventory in efficient manner as it has performed in year 2015 which was 10.159 times. The inventory turnover ratio is 9.123 in year 2017. Similarly, the debtors turnover ratio is also declined indicating that the company failed to collect the payment from the debtors in significant manner (Noreen, et al., 2014).

The disclosure of the information whether it will lead to negative impact on the image of the company but it is needed to be communicated to the stakeholders and audience is the materiality concept. It ensures that the firm will not withhold critical details from the owners, investors or lenders (Griffiths, 2016). First of all it is needed that the auditor must have to go through the financial statements of the organisation as it will support to familiar with the activities and status of the company which helps to build an estimate of the audit program.  

Substantive approach is needed to gather information in an accurate, valid and complete manner. Since the company is offering diverse kind of cattle feed and live stock so it is needed to maintain high level of quality and standards as per the food and safety authority (Louwers, et al., 2015). There revisions in the accounting standards are also having no specific material impact in the company towards the disclosure and future period statements. AASB 9 dealing with financial instruments is also needed to be accessed although it is considered that it will be having no material effect (RIDLEY, 2017). It indicates that auditor is needed to apply different classes for the purpose of testing. This includes sampling testing of the transactions, stock audit, asset counting and numbering, disclosure and implications of the changes in accounting standards (Harris, et al., 2017).  It is also needed that the internal and external audit activities are to be planned in such as manner that the all the financial aspects are covered it will include exchange transactions, depreciation and taxes on the assets and income, valuation of the physical inventory, accounts payable and receivables and validity of the expenses and revenue with the evidences such as inward and outward register (Ghanbari, and Sarfia, 2016). It is also needed that the internal auditor’s report is to be consulted for the purpose of identifying the materiality of the accounts (Louwers, et al., 2015). It is also needed that the subordinates will cross check all the information with the available evidences to provide true and fair picture of the company.

The overall steps that are to be taken or audit programme for the audit of the Ridley Corporation Limited will start from planning phase. In this stage, the auditor and its subordinated will analyse the various fields that are to be analysed and audit team is provided with the responsibility of the areas that are to be covered by them at the time of commencing the audit of the company. The auditor is also needed to inform the management about the audit program (Harris, et al., 2017). It is also needed to analyse the possible risks so that the auditor will be able to maintain the audit and objectives to manage the effectiveness of the audit plan.

The next step in the process is entrance meeting where the statutory auditor will meet with the internal auditor and management regarding the functional areas of audit. Ridley Corporation Limited will be provided with the scope and objectives and they are also be communicated the possible risks and audit limitations and the time for the audit program and submission of the audit report (Miglani, et al., 2015). Thereafter, audit is carried out which is also called field work where audit staff is involved in the audit of the various heads such as financial statements, inventory, assets and other heads such as tax, foreign exchange, loans and standard operating procedures.  After collecting and verifying the various heads some of the evidences are collected audit report is drafted consisting of the outcomes of the audit and suggestions for the management (Andon, et al., 2015). The management go through the report and take corrective decisions with in stipulated time frame to avoid any consequences and implement procedures to avoid such issues at the organisation. There after auditors provide final audit report and it is provided to the management and the stakeholders.

Audit sampling is an audit procedure where auditors choose a representative population for at the time of commencing an audit which is less than the 100% of the accounts that are to be verified. Although, it limits the accuracy and materiality of the audit program but it is a powerful and extensively used approach that is applied at the time of auditing. For the audit of Ridley Corporation Limited, this approach is also useful in case the numbers of transactions are large in number and auditor is having no special knowledge about the transactions (Knechel, and Salterio, 2016). Along with this, in case the auditor is having confidence that the particular accounts are having no misstatements then this method is saves time and resources that can be utilised to verify the material accounts.

It is identified that the increase in the net debts by $10.5 million is a material movement. In addition to this, increase in receivables by $5.1 million it includes non-payments of $17.7 million Huon debts. There is a reduction in the inventory by $4.0 million indicating efforts to reducing the ageing inventory items. It is analysed that the accounts are accurate and are recorded in stipulated accounts so there is no material misstatement in these accounts (Miglani, et al., 2015). It is also identified that, $22.6 million increase in property, plant and equipments

There are various methods for sampling it may be random or non-random sampling. it depends upon the level of materiality, tolerance level, expected fraud and confidence level of the auditor towards a particular head (Rashidfarokhi, et al., 2018).

For instance there are 15465 entries in the foreign exchange transactions due to large number of transactions it is not possible to check each transaction so the transactions amounting to more than $1500 are checked 100%. On the other side the transactions with the suppliers are tested on random basis by checking each 25^th voucher or bills.  

After identifying and selecting the sample it is needed to verify the various accounts as per the samples and cross verify them with the evidences and supportive materials for accuracy (Miglani, et al., 2015). There material accounts are needed to be verified with due diligence and the findings are needed to be recorded with the audit evidences to discuss with the respected managers.

The various findings are discussed with the respective management and the misstatements are tried to overcome and in case it is not possible to mitigate the discrepancies and mistakes then they are reported in the audit report. Material misstatements are definitively shown in the report.  

Conclusion

It can be concluded that auditing is an essential element for developing and maintaining a transparent image of the organisation among the society and stakeholders. Ridley Corporation Limited is operating in cattle feed and other activities and following accounting standards appropriately as it is also listed at Australian stock exchange. The auditor is required to rely only on the available resources and evidences for the purpose of identifying the misstatements and frauds in the books and procedures of the organisations. It is identified that the company is fulfilling all the requirements and there are no material misstatements recognized while analysing the three years financials of the company.

References

Andon, P., Baxter, J. and Chua, W.F. (2015) Accounting for stakeholders and making accounting useful, Journal of Management Studies, 52(7), pp.986-1002.

Ghanbari, M., and Sarfia, E. (2016) Journal of Advanced Research In Accounting And Auditing, Journal of Advanced Research In Accounting And Auditing, 1, pp. 8-15.

Griffiths, P. (2016) Risk-based auditing. UK: Routledge.

Harris, M. K., Eastwood, L. C., Boykin, C. A., Arnold, A. N., Gehring, K. B., Hale, D. S., and Woerner, D. R. (2017) National Beef Quality Audit–2016: Transportation, mobility, live cattle, and carcass assessments of targeted producer-related characteristics that affect value of market cows and bulls, their carcasses, and associated by-products, Translational Animal Science, 1(4), pp. 570-584.

Knechel, W. R., and Salterio, S. E. (2016) Auditing: Assurance and risk. UK: Routledge.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., and Thibodeau, J. C. (2015) Auditing & assurance services. Australia: McGraw-Hill Education.

Miglani, S., Ahmed, K. and Henry, D. (2015) Voluntary corporate governance structure and financial distress: evidence from Australia, Journal of Contemporary Accounting & Economics, 11(1), pp.18-30.

Noreen, E. W., Brewer, P. C., and Garrison, R. H. (2014) Managerial accounting for managers.  USA: McGraw-Hill/Irwin.

Rashidfarokhi, A., Toivonen, S. and Viitanen, K. (2018) Sustainability reporting in the Nordic real estate companies: empirical evidence from Finland, International Journal of Strategic Property Management, 22(1), pp.51-63.

Reuters (2018) Ridley Corporation Ltd (RIC.AX). [Online]. Available at: https://www.reuters.com/finance/stocks/financial-highlights/RIC.AX (Accessed: 20 September 2018).

RIDLEY (2016) ANNUAL REPORT 2016. [Online]. Available at: https://www.ridley.com.au/wp-content/uploads/2014/10/16-RIDLEY-ANNUAL-REPORT.pdf  (Accessed: 20 September 2018).

RIDLEY (2017) Nutrition. Performance. Growth. ANNUAL REPORT 2017. [Online]. Available at: https://www.ridley.com.au/wp-content/uploads/2017/12/Ridley-Annual-Report-2017.pdf   (Accessed: 20 September 2018).

Ridley (2018) Ridley Corporation. [Online]. Available at: https://www.ridley.com.au/about/ridley-corporation (Accessed: 20 September 2018).

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