Analyzing Financial Report For Audit Planning Decisions

Application of Analytical Procedures and Ratio Analysis

The study is segregated into three section. The first excerpt aims to apply different types of analytical procedures implemented by Blackmores Limited using ratio analysis for the last three years by using annual report published in 2018, 2016 and 2017 respectively. The overall depictions are stated how the analytical assessment will influence decisions pertaining to audit plan for the latest financial year. The second part of the study has identified the risk of material misstatement or the different types of inherent risk present at financial reporting level for Blackmore’s limited. This section of the study has discussed about the inherent risk with five factors namely integrity of management, unusual pressure, experience of management, business entities nature and factors influencing the industry in which the entity operates. The latter part of the study has shown a significant risk pertaining to material misstatement. This portion of the study has been further identified with the reasons why the account balance of the companies is at significant risk for material misstatement, he assertions for non-validity of risks, substantive audit procedure and application of practical internal control to mitigate such risks (Louwers et al., 2015).

Simple Comparison

Based on the assertions of balances pertaining to total assets and total liabilities in the last three years it can be observed that Blackmore’s limited have shown a linear growth in terms of total assets. However, there is also a subsequent increase in the total liabilities of the company. Henceforth this fluctuation in the balances will have a negative repercussion on audit assessment (Chen, Srinidhi & Su, 2014).

Ratio Analysis

The comparison of the results with analytical procedures using ratios is identified with including profitability ratios, liquidity ratios, financial leverage ratio, efficiency ratio and market value ratio.

The assertions made as per the profitability ratio shows that the overall trend of profit made by the company is fluctuating in nature over the last three years. Therefore, wide range of fluctuations in the profitability will lead to significantly decreased reliance on audit planning and decision-making capability (Zamboni & Litschig, 2018).

The important depictions as per the liquidity ratio is depicted with an increasing trend among Cash ratio, quick ratio and current ratio. Therefore, it is evident that Blackmore’s limited is consistent in increasing its cash for operating activities. This will have a positive impact on audit assertions.

The evaluation of information as per financial leverage ratio clearly identifies that over the years company has not been able to reduce its dependency on long-term borrowings. This will have a greater divergence among investors assessment and lead to negative repercussions on auditing (Park et al., 2015).

Inherent Risks at the Financial Report Level

Similarly, in terms of efficiency ratios such as total asset turnover ratio, fixed asset turnover ratio and receivable turnover ratio Blackmore’s limited is identified with the fluctuating trend. This will lead to reduced integrity of audit assertions.

The overall predictions based on market value ratios can be identified with the consistency in growth in terms of dividend payout ratio and price to earnings ratio. This will positively influence the decisions pertaining to auditing in the later years.

a) Integrity of management

The group is depicted to undertake several transactions which involves foreign currency risk. As per ASA 315.A24. Such risks are categorized under financial reporting risk. In addition to this, the company also face of interest rate risk as it borrows considerable funds on a floating interest rate. These risks are generally categorized as per external factors impacting an entity under ASA 315.A22 (Legislation.gov.au, 2018). The group is also depicted to be exposed to counterparty credit risk during trade and other receivables. The categorization of this risks is evident under ASA 315.A47. Although the risk can be identified under ASA.A121 pertaining to risk of fair value measurement. This is mainly seeming to affect the integrity as a director consider carrying amounts of financial liabilities and financial asset at amortized cost which gives a approximate estimate of fair values (Ifac.org, 2018).

b) Director experience, changes and knowledge

Some of the most notable directors of the company can be identified with Richard Henfrey with having experience of more than eight years with Blackmore’s. The changes pertaining to his experience can be identified with his tenure in Telstra Corporation as a technical sales person. Professor Lesley Braun will presently hold the position of director of Blackmore’s Institute has experience of holding research position at the Alfred Hospital. She was also the VP of National herbalists Association. This change in sectors among the directors can pose a significant challenge to the audit assessment of a company which deals in consumer staples (Botez, 2015).

c) Unusual pressure on directors

The present assertions made by the directors are seen to be consistent with the Blackmore’s philosophy of maintaining a unified culture and goal for STI planning and incorporation of strategic measurement components pertaining to net sales performance. However, the present hurdles are also seen with the company struggling to maintain a positive NPAT growth percentage. This is a mandatory requirement and comes prior to addition of STI to the senior executives (Ackermann & Marx, 2016).

d) Nature of Blackmore’s business

Blackmore’s is considered as one of the pioneering natural health entities operating in Australia. Some of the main range of products is recognized with nutritional supplements, vitamins, minerals and herbal products. The group has shown a leading capability in terms of bioceuticals, PAW, Blackmore’s Institute and global therapeutics (Blackmores.com.au, 2018). 

Identification of Specific Account Balances at Significant Risk of Material Misstatement

e) Factors influencing the Australian health supplements industry

As per the report published by IBIS world, the different factors influencing the Australian health supplements industry needs to be identified with a strong performance over the last five years through 2017-18. The growth in the industry have shown an increasing trend among the consumer expenditures pertaining to strong export opportunities, consumer expenditure on vitamins and supplements. The real factors influencing the changes in the consumer are depicted with health consciousness factor, stock maintained by other retailers and real household discretionary income level (Habib, Jiang & Zhou, 2015). The factor affecting the vitamin and supplement manufacturing is also based on downstream demand pertaining to food and other retailers which are depicted to stock the industry’s products. The industry threats are derived from one number of competitive services for health-conscious individuals (Ibisworld.com.au, 2018).

Conclusion

The overall assessment as for the ventilation of analytical procedures have shown that total assets and total liabilities in the last three years have shown a linear growth in terms of total assets. However, there is also a subsequent increase in the total liabilities of the company. Henceforth this fluctuation in the balances will have a negative repercussion on audit assessment. The predictions as per analytical procedure pertaining to ratio analysis is not seen to be in favor of the company. It can be identified that the profitability ratio shows that the overall trend of profit made by the company is fluctuating in nature over the last three years. Therefore, wide range of fluctuations in the profitability will lead to significantly decreased reliance on audit planning and decision-making capability. Similarly, various types of other ratios are identified is fluctuating trend which will not favor the auditing decisions. This will also question on reliability of audit statements in the future financial reporting periods. The depictions made from concerns of inherent risk at financial reporting level has been identified under several guidelines given under Risk of Material Misstatement as per ‘ASA 315.25(a), ‘ASA 315.A105 and ASA 315.A109. Furthermore, the group is depicted to undertake several transactions which involves foreign currency risk. As per ASA 315.A24. Such risks are categorized under financial reporting risk. In addition to this, the company also face of interest rate risk as it borrows considerable funds on a floating interest rate. These risks are generally categorized as per external factors impacting an entity under ASA 315.A22. It needs to be also identified that during the preparation of financial statement by Blackmore’s, the individual entities have to go through functional currency which are recognized as per the rates of exchange prevailing on the date of transaction (1.3). Such monetary transactions are included under deferred tax balances which can be considered in AB no. 2.5.2. The group is exposed to the nature of use of hedging instruments which are included under the derivatives and non-derivatives pertaining to the foreign currency risk.

References

Ackermann, C., & Marx, B. (2016). Internal Audit Risk Management in Metropolitan Municipalities.

Blackmores.com.au. (2018). About Blackmores. [online] Available at: https://www.blackmores.com.au/about-us/company-information/about-blackmores [Accessed 22 Sep. 2018].

BOTEZ, D. (2015). Study Regarding the Need to Develop an Audit Risk Model. Audit financiar, 13(125).

Bullen, J. (2017). A closer look at Australia’s most popular supplements. [online] ABC News. Available at: https://www.abc.net.au/news/health/2017-02-13/a-closer-look-at-australias-most-popular-supplements/8265840 [Accessed 22 Sep. 2018].

Chen, C. J., Srinidhi, B., & Su, X. (2014). Effect of auditing: Evidence from variability of stock returns and trading volume. China Journal of Accounting Research, 7(4), 223-245.

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Habib, A., Jiang, H., & Zhou, D. (2015). Related-party transactions and audit fees: Evidence from China. Journal of International Accounting Research, 14(1), 59-83.

Ibisworld.com.au. (2018). Vitamin and Supplement Manufacturing – Australia Industry Report | IBISWorld . [online] Available at: https://www.ibisworld.com.au/industry-trends/specialised-market-research-reports/consumer-goods-services/vitamin-supplement-manufacturing.html [Accessed 22 Sep. 2018].

Ifac.org. (2018). [online] Available at: https://www.ifac.org/system/files/downloads/a017-2010-iaasb-handbook-isa-315.pdf [Accessed 22 Sep. 2018].

Legislation.gov.au. (2018). ASA 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment – October 2009 . [online] Available at: https://www.legislation.gov.au/Details/f2009l04079 [Accessed 22 Sep. 2018].

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

Park, J. S., Oh, Y. C., Yoo, J. G., Shin, Y., & Kim, J. B. (2015). A Study on Audit Information Systems Improved Model based on Public Internal Audit Paradigm Shift. International Journal of Security and Its Applications, 9(8), 231-242.

Wainman, D., Hughes, S., Rose, C., Hefkey, J., & De Waard, J. (2017). U.S. Patent Application No. 14/800,428.

Zamboni, Y., & Litschig, S. (2018). Audit risk and rent extraction: Evidence from a randomized evaluation in Brazil. Journal of Development Economics, 134, 133-149.

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