Issues with Property Plant and Equipment
Murray Organic River is a company that is established in Australia and that which deals with the production, manufacturer and marketer for organic food products that are made from natural sources and which are healthy for the people. It has been certified by the government to indulge in this business. It has 4.400 hundred acres of farmland that produces organic products along with that they are the largest fully integrated producer of dried vine fruit in Australia and the largest vertically integrated organic dried vine fruit in the world.
The company provides services to the customer around the globe given its great line of products and facilities that it has. It has offices around the globe that includes Sydney, Europe, USA, Japan etc (Alexander, 2016). Thus, we see that the company has been able to spread it business around the world. The aim of the company is to grow sustainably along with implementation of better and sound business practices and manufacturing processes that would help in serving the customer sound the glue along with promoting the concept of healthy and clean eating that is very much required in today’s time. In this assignment an analysis of the annual report of the company is done, to shed some light on important accounts that might be materially misstated and the overall risk that might be associated with them (Arnott, et al., 2017).
- The annual report of the company has been downloaded for look for five accounts that might have chances of being materially misstated. Misstatement occurs on part of the management or the employees when they fail to show the current value of the accounts of the company given the fact that they are trying to under-state or overstate the financials for their selfish reasons. In case of Murray, the company is having operations all around the globe, given that the volume of transactions is so high,
- it is possible that some of the key accounts might be misstated. Being an auditor of the company, it is a responsibility to look for such areas in which the level of risk association is high and in which the management needs to make certified changes so that the financial statements are correctly stated and there is no loophole(Belton, 2017). Ongoing through the annual report of Murray Limited there are five accounts which are having very high chances of being materially misstated which includes:
- Property Plant and Equipment – These are the fixed assets of the company and holds the highest value in this category of assets, there are high chances that these might be overstated by the management to show the company is in a better financial position. In 2017, the company had a fixed asset of $82,240,620 which is a relevant amount and hence it can be considered as an account in which high misstatement is there and the management needs to control that.
- Intangible assets – The assets that do not have any physical existence like goodwill, trademarks, patents etc comes under the category of intangible assets. The valuation of intangible assets involves high assumptions made on part of the management and is a complex process, the company had intangible asset of $10,749,272 in 2017 while in 2016 the company had nil intangible assets so they need to look in that contest also, thus it is an important account that needs discretion on part of the management and so has been selected as a key account for auditing purposes(Coate & Mitschow, 2017).
- Provisions – provisions are the amounts that the companies set aside for certain unforeseen future circumstance and that is under the heading of current liabilities. There is a lot of assumption involved on part of the management based on which they are making provisions for specific items. It is necessary that companies should follow the relevant auditing and accounting standards when they are making these provisions else they might financial position of the company because of that. Thus, we feel that it is an important account that must be considered from the purpose of auditing.
- Inventories – inventories are the current assets of the company that can be used for day to day operations for the company and forms an important part of the financial statements of the company. It is important that inventories should be correctly valued and proper policies should be followed for their valuation like cost or NRV whichever is lower(Gullet, et al., 2018). In the given case also, the company has huge operations that are spread all over the world, and since they are dealing in organic products there are high chances that their inventories are perishable, hence the management needs to take care of this fact. They need to value their inventories correctly and in case of Murray the company is having an inventory balance of $27,068,584 in the current year which makes it significant and hence has been considered as an important account for scrutiny.
- Business acquisitions – The company in the year gone has indulged in acquiring businesses and that has affected their non-controlling and controlling rights and thus have an impact on their annual statements as it effects the other comprehensive income or loss that the company is earning. Hence, we see that there are many areas in which the management needs to work and follow various policies when they indulge in such business-related activities and hence it can be considered as a key event for the company and the auditor needs to analyse the same in their audit report(Sithole, et al., 2017).
- Materiality can be considered as a parameter that the auditors set within the company when they are analysing the books of the company and materiality can be considered as a parameter based on which the companies can check their books of account and comment on them. In case of pre-estimation of the materiality level, the auditors need to keep the maximum amount by which they feel that these statements can be misstated and all their audit procedures should be related to this level altogether.
- Materiality can be because of any risk or fraud and there are still chance that up to the level of materiality the financial statements will not get affected(Kim, et al., 2017). As per research studies and reports, most of the auditors follows the rule of thumb and considers the materiality level to be five to ten percent of the revenue and that can be considered in this case also and hence the materiality levels can be set at 0.5% of total revenue, i.e. 0.5% of total revenue of $48 million = $48 million x 0.005 = $24,260. , and the aim of the auditor would be to see that the accounts do not cross this level of materiality, in case of Murray the company has incurred loss in the current year and thus that has been considered as a level for determining the materiality level for the company by the auditor.
- Audit Risk Assessment.
There can be many things that can go wrong in the analysis of these key accounts and few of such aspects are stated below:
- Property Plant and Equipment
In case of property plant and equipment the companies should value them at their depreciable value which might be than their current fair value assumptions so there are chances that the management is not able to do that accordingly. There are different kinds of method for depreciation and between companies follow different methods hence it is important to see whether the method that the company is apply is correct or not and suited to the fixed assets of the company (Werner, 2017).
There are chances that the depreciable assets are under stated because of the method of depreciation that the company has adopted so it is important that auditors should check that and state in their auditor report whether the company has valued the PPE correctly and whether they have given proper disclosure with respect to that. In case there is any change in the policy of depreciation than that should also be stated and highlighted accordingly as per the needs of the management of the company, so that investors are aware. There might be inherent risk involved in this as PPE valuation is a complex topic and the auditor might fail to recognise any misstatement which is not due to lack of control.
Inherent Risk Involved with PPE Valuation
Intangible Assets – They are valued at the fair value basis of accounting and there are a lot of assumptions that goes in their valuation as it is not possible to directly co relate the income that is generated by them to their cost. Thus, the need is that the companies should hire valuation specialists which can help them in valuation of the assets and the job of the auditors is to check whether they are correct or not (Trieu, 2017). There might e control risk associated with this as lot of management discretion is involved.
Provisions – Provisions are the account that are created at the sole discretion of the management of the company and if they feel they can allocate some amount to provision and if not, they don’t. The main concept here is that the management can often under state and overstate the provisions to show that the company is making less amount of profit and thus they do not need to pay taxes. Thus, we see that on all aspects the management can take undue advantage of this account. So, the auditor needs to check that proper provisions have been followed by the management in preparation of the said account and whether it is ethical as per the law and check the accuracy of the statement in that regards (Abdullah & Said, 2017). Since provsions are based on a lot of assumptions the auditor might face inherent risk in the same which is not due to lack of control.
Inventories – Inventories are an important part of the financials of the company and it is necessary that companies should follow the principle of valuing them in cost or net realizable value whichever is lower and in this case also the inventories should be correctly valued else it end up giving a wrong assumption to the shareholders that the books are free from all kind of errors. Thus, inventory valuation should be considered as a key matter by the auditor even in case of Murray as they have inventory which is highly replevisable. There may be audit risk of detection where the auditor might fail to judge whether or not all the inventories are valued accordingly because of the volume of the same.
Business combination
Whenever the companies indulge in such type of corporate acquisition where the acquire any business then they to see that they are making disclosure of them and are accounting them in a correct manner (Charles H, et al., 2015). There are high chances that the management might not be able to correctly calculate the value of the assets and liabilities that have been acquired and hence the need arises that it should be highlighted as a key event and all the transactions related to this should be analysed thoroughly (Epstein, 2018). The auditor might face control risk in this regard here the internal controls of the management may not be sufficient enough to support such business integration.
Challenges with Valuation of Intangible Assets
Conclusion
Based on the overall analysis it can be said that financials of the Murray Company have been prepared with great precisions but there are certain areas where the company can fail and in those situations the auditor needs to put their analysis to work and find that all the accounts are properly presented and there are no misstatements. The materiality level can be considered but post that in case any of the accounts are found to be materially misstated then that should be stated in the audit report of the company.
The audit report is an important document on which the investors depend to state whether the books of the company have been presented in the best manner and if there are any misstatement in that and if the management has function effectively and has done all their duties as was required from them as per the auditing and accounting standards. The financial statements should be a clear picture of what the company stands for and there should not be any mistake in that all kinds of assumptions should be accurately disclosed in the annual report of the company.
References
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Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the more things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-35.
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Gullet, N., Kilgore, R. & Geddie, M., 2018. USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF EARNINGS. Academy of Accounting and Financial Studies Journal, 22(2).
Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), pp. 23-40.
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Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.
Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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