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Audit Assignment

It is an audit assignment for the company A2 milk Limited, this paper will explain the company under the following limelight. The paper will explain various risk and inherent risk along with any material misstatement. This a report format assignment which detail the organisation under the following work action leading to the fact that it will further help in building an appropriate audit plan to check that the elements are correct and accurate for the period ending 30 June 2018.


As an audit senior, you have been assigned the task of gaining an understanding of the client, as well as identifying inherent risks and risk of material misstatements based on your research. The information you gather will be used to help plan the audit. You are required to write a report to your audit manager outlining the information.


This segment is divided into elements first being the company analysis and its background information and status. Other being the recent event on which the company is considered to be in news.

a. Provide an overview of the client's business, operations and industry.


The organisation is in true sense and extension of the A2 Corporation Limited which deals in a segment of products rather than the whole unit as a whole. This organisation came into existence by a scientist or a professional Named as Dr Corran McLachlan in the year 2000. It is a New Zealand based company and listed in the NZX ATM and also in the AZX 200. The company has its business operations in Sydney and supplies is business operations across countries like home country, and also US, UK, Singapore, Malaysia, China etc. The company is managed by just of handful people which being 111 employees and fetching the profits or around A $ 52.2 Million with a revenue of A $ 337.30 Million. They are known for making and trading the infant formula and dairy manufacturing.

Recent News -
The company is reaping profits and have in the first four quarter of 2018-2019 reaped a profit up by 58.5 percent, primarily for an excellent demand in the country of china and united states.

Another news which is doing the round is the share price of the Australian market and the hits of financials cliffs on account with the New Zealand.

The other latest move is that the company has definitely led to a movement and a major combat on the company and the share market, as on date August 2018 Jayne Hrdlicka will play both roles one of the CEO and the Managing director of the company.

On the more the company has new range of products which being the Premium A2 milk with honey and the a2 Platinum premium pregnancy formula. The organisation is made as top 10 most innovative food companies which will result for the fiscal year 2018 which is around NZ $ 20 Million.

On the more the company is having also restructured its responsibilities and the senior leadership analysis. The other news related to it being one of the biggest brand player and game changer for the sector, there recent chocolate two percent fat reducer and the natural products innovation has led to an increased sales of 1100 stores across th country with massive trading.

b. Identify four areas of business risks for the company and give a brief explanation of the identified risk.

Understanding the organisation brief business nature, work culture and the business operations which they are dealing with the company in the respective of an auditor can be viewed and reviewed with following business risk while undergoing business operations. Listed below are th four major risks: -

1) Product Quality -
The major risk is the product quality standards as the company deals with a factor which is the actual true sense the USP of the company if it gets failed then the company will become a complete failure in itself. On the more, the organisation is one which produces the baby product and baby milk and also a great promoter for the pregnant females, hence the burden of quality and stake of such element is very important and therefore to maintain of such quality is very high and becomes a large burden of concern and issues for the company as well as the auditors.

2) Supply Chain-
Another important area which needs to regularly monitored is the logistic department. Majorly, because the product which we are dealing in is highly perishable in nature and therefore, quick transfer with a safe closet along with a regular follow of action is much required. On the more, the internal management needs to understand that a control error on such process can lead to damage on account with the goodwill and the patent mark of the organisation. On the more being the core essence the company if not traded it correctly can end up in a situation of complete crash down as well as major costing amounts which can be irrecoverable after a given point of time.

3) Regulations: -
Organisation being from the food processed industry, it is strongly controlled and managed by the governmental actions and compliances. These include the concepts of price controls barriers, tariffs rates, penalties concerns, competition and various laws in built for consumers. On the more, the company has to keep a strong hold on the fact that company are making products which are way under control for the company and company alliances. The Auditors ensure and check whether the company will be able to meet such regulation on a regular basis if such companies are not meet on time interval then the company may lead to major compensations, laws suit.

4) Agricultural practices: -
This segment explains a concept on account with the environmental and a social economical cause. This is a situation where the company Corporate social responsibility comes into action it is a situation where a major analysis of the animal welfare is the prime concern from a sector of people which will lead to a brand negative reputation if any news leaks or damages are made as per the company treating the environment and the surrounding in a correct and a useful manner. It may lead to cancellation of the company's licenses. Hence, the auditors and the top management must be always on toe to ensure that organisation is free and away from such risks.

c. Identify four areas of risk of material misstatement in the financial statements for each of the business risk identified.

Material Misstatements

1) Product Quality -

The inherent risk labeled is the fact that the of the unsafe and the unfit production of the goods and the products. The major risk being that the company goes through a quality and safer measures of producing the A1 milk to first the A1/ A2 milk and then reprocessed the same to the A2 milk. It very important that company ensures that the company which so young does not at any point of time does not sale contaminated milk and milk products. The risk is high as the product quality is directly associated with the revenue which the organisation earns by each product type.

Product Quality.jpg

The quality of the product has reached the company to earn so much revenue and therefore a major risk is attached if this segment.

2) Supply Chain: -
The inherent risk involved is the timely accessibility of the product to the customers in the domestic land as well as the international land. The logistics must ensure that the company has dealt with a process of support and they major aspect is the ethical concerns must be correctly dealt with. The supply becomes a valid inherent risk as it attacks the accounts in two ways one being the export sales and the other the transportation costs. It highly supports the Group performance and outside trading.

3) Regulations: -
The company to ensure that it sustain in the market pressure and leads to a position of the building a product through multi-channel where the route is set on the basis of the various market entrants and foreign governmental compliances. It becomes an inherent risk if the company does not keep a self-check and disclosures about the various policies and contracts undertaken so that it does not land up into any illegal transactions. Recent moves on account with signing the partnership with China partners has led the company to follow CNCA as well as the CFDA act rules and therefore, the company has to ensure that the legal issues are not highlighted to the level which leads to court suits.


4) Agricultural:
Inherent risk associated with norms is very important as the company deals with a factor that farming is the crucial element or the base of the company business operations. On the more, the company cannot function or exists if they deal with the sustainability and the promotional issues. Thus, deals with major risk on account with the expenses of maintenance and compliances of the water usage and other process which do not harm the business practices. It is a major risk the business carries if the company does not take a routine check it can lose the ethical concerns and lead to a loss on the future business trades and damages as well.

d. Carry out an analytical review of the company and together with information gathered in part (a) identify another 3 areas of risk of material misstatement in the financial statements and explain why you think these areas are at a risk of misstatement.


Risk of Material Misstatements on the Analytical Basis

The other three risks that the company can face are stated as below after understanding the fact that the company deals with the basis of process milk and milk foods for the infants. These can also lead to a situation which may led to a position of material misstatements in the financial statements and led to risk assertions.

1) Effect of customer discounts and rebates on revenue -
The risk persists to the level that the company recognize the sale in the books of accounts only when the ownership and the attached risks as well as rewards are transferred. The level of risk is high as the company deals with variety contracts and transactions which cannot be accomplished until proper check is established. The major reason that it controls a level of risk as this concern is also specified by the auditors in the key audit matters as well showing that the auditors also have to keep a strong value analysis on such aspects. Further, as the company records in its financial statement's revenue net of all the discounts as well as the rebates other deduction correct estimation is very necessary.

Effect of customer discounts.jpg

2) Payment to Suppliers and Employers -
The other risk which is prominent in the cash payment have increased the double value from fiscal year 2017. The value payment made was 3,94,111 thousand dollars and it went to as high of 6,29,652 thousand dollars which is an alert in itself as the such rises in expense usually works when the company has seen a major rise in revenue or remuneration policies. The auditors must check the expense invoices, salary sheets and approvals, performance appraisals as well as suppliers bills and checks. The risk level is very high because there are chances that department is leading to fictious expenses or fraudulent transactions are build to reduce profits and again benefit on taxes.

3) Inventory estimations: -

The third level of business risk which can be a high level of risk material misstatement is the Inventory valuation. Therefore, inventory management is a major concern in connection with such business especially being the perishable food items. Inventory has to be timely and correctly managed as without which non-sales can be done and neither the company can earn profit in appropriate manner. On the more, if not checked and monitored correctly, it can lead to major loss in revenue as well as expenditure. It is definitely a major risk assertion as failure in inventory management can lead to non-availability or over availability of a certain category of the product. Moreover, inventory calculation is always on a crucial segments and deals with major concerns on account with the estimates and judgements analysis.

This paper has dealt with an aspect of describing the risk in various parameters which being the business risks, material misstatements, operational risk, inherent risk. It also explains the company practical approach and real concerns in context with the risks incurred by the company while processing the products as well as selling the products in the market. It explains the concept from an audit perspective and details the same in the audit planning prospects.


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