Identifying And Assessing The Risks Of Material Misstatement Through Understanding The Entity And Its Environment

Part 1

Coca cola is an American multinational beverage corporation that produces and markets non-alcoholic beverage concentrates and syrups. The firm carries out its operations in the beverage industry where different types of soft drinks are offered in the market (Metzger, 2014). Coca Cola offers wide range of products in the market but they all are associated with the beverage industry. On determining the nature of the business it is necessary to identify the industry in which company operates along with the type of products that are offered.   

The main operation that is being carried out by Coca Cola in the Australian market is production of soft drinks and they are stored in the bottles so as to offer them in the market. Further, for the manufacturing purpose advanced technology is employed that leads to efficient production and in turn allows company to enhance its overall performance in the market (Hoy, et. al, 2014). So, production is the main business operation and apart from this some other crucial operations are present such as finance, marketing, human resource etc.

The key investment activities of Coca Cola in the Australian market involve capital expenditure where organization purchase and sale fixed assets as per its business need and requirement. Generally advanced machines are required in the production of soft drink and this in turn acts as development tool for the firm (Hiscock and Warry, 2016). The Company sale fixed assets that are of no use and this somehow generates income for the organization in every possible manner.

The main financing activities of Coca Cola Company involves cash dividend paid where organization pays dividend to its investors. Change in capital stock is also one of the major activities along with the sale of common and preferred stock. The Company considers change in long term debt, issuance of long term debt and reduction.  

1. a) Industry size– It can be expressed that Coca cola operates in the beverage industry of Australia. The overall size of Australia food, grocery and beverage manufacturing industry is $125.9 billion (Australian food and grocery council, 2016) Furthermore, in the year 2014, 9025 million AUD was the size of soft drinks industry in the country (Market size of soft drinks in Australia from 2010 to 2014 (in million AUD), 2017).
2. b) Industry growth– The annual growth rate of beverage or soft drink industry of Australia is 0.7% which is quite low.  At present, the industry is growing through decline stage as people in the nation have become more conscious towards their health and well being. It has resulted in decreasing the demand of soft drinks in the country.
3. c) Industry supply chain- It can be asserted that the industry supply chain consists of five majors elements which are syrup producer, bottler, distributors, merchants and end customers. Furthermore, almost every player in the market goes through the same supply chain process (Boyjoo, et. al, 2017). The key products line of industry includes fruit beverages, carbonated soft drinks and bottled water.  
4. d) Major players– The major players in industry includes Coca cola,Bundaberg, PepsiCo Nudie Foods Australia, Schweppes, Kirks. However, it can be critically argued that Coca Cola and PepsiCo are facing intense competition from each others. The price and marketing strategies of market players directly affect companies in the beverage industry to a great extent.
5. e) Market share of Industry players

Above shown is the market share of key players in the beverage industry on the basis of sales value where it has been witnessed that share of Coca Cola is quite high which is around 25.9% and share of pepsi co is 11.5%.

1. f) Critical success factors– In the beverage industry, factors such as size of the organization, brand loyalty, price and product innovation can be termed as the critical success factors. Big size of corporation assists in carrying out effective negotiation with key suppliers and thus, supports in growth of the company (Lanis, McClure and Zirnsak, 2017). In addition to this, factors such as competitive pricing strategy and high brand loyalty are also essential for success of business in beverage industry.
2. g) Major threats– Nowadays, people are getting more conscious about their health, well being and this has emerged as one of the major threat for all the business operating in the industry. The demand of soft drinks and carbonated drinks has declined due to the increasing awareness. Another major threat which lies within the industry is of intense competition among rivalries. The volume of sales and profitability of brands such as PepsiCo and Coca cola has been adversely affected due to the intense competition existing within the beverage and soft drink industry of Australia.

Government highly regulates the food and beverage industry. Coca cola is required to comply with occupational safety and health act. The changes in the accounting standard where company has to comply with the standards introduced by AASB for financial reporting purpose. Apart from this, taxation requirement where taxes have to be paid to the government. The laws introduced by FDA keeps on influencing the main activities of FDA and due to this reason organization has to modify its operations accordingly (Spencer, 2015). The overall changes taking place in the non-alcoholic business era directly affects the business activity which takes into consideration competitive product and pricing policy pressures.

It is not possible for Coca Cola to compete with other companies in the market by taking wrong measures. Apart from this, the company is required to comply with the key principles and guidelines introduced in the IFRS for effective reporting. In case if any new financial reporting law is introduced by AASB then in such case it is mandatory for the business to change its internal practice so that overall performance can be maintained with the help of this. In short non compliance with the government regulations that can lead to business failure in every possible manner.

1. a) Pest analysis  

Business operations

It can be stated that factors such as political, economical, social and technology has direct impact on the overall operations Coca Cola Australia. The nation has developed strict laws and regulations which need to be followed by all the companies operating in the beverage industry of Australia. Changes in healthy policy and labour laws can adversely affected the business operations of Coca Cola. On the other side of this, the economic condition of Australia is stable and this has helped the company to carry out smooth flow of all its operations (Naramore, Virojanapa, Bell and Jhaveri, 2015). However, economic issues such as energy crises of Australia have adversely affected process such as manufacturing, sales and distribution of Coca Cola’s products in the country. Apart from this, the changing need and demand of people living in Australia have also changed drastically and the company has been affected by the same. For example, now people in country have started to focus more on consuming healthy food and drinks. The company is now respond quickly to these changing customer demands and should emphasize more on developing drinks which are healthy and full of nutrients. Factors such as technology have affected Coca Cola in positive terms and have contributed a lot in development of the brand. For example, high rate of technological innovations in the country have supported manufacturing units of Coca Cola to develop better and quality products. Technological innovations have also contributed a lot in carrying out aggressive marketing of Coca Cola’s products and services.

1. b) Swot analysis

Strength · High brand equity · Global presence · Customer loyalty	Weakness · Failure to offer healthy beverages · Low product diversification · Ineffective water management practices
Opportunities · Product diversification · Enhancement in supply chain management practices	Threats · Intense competition from brands such as PepsiCo · Sourcing of raw material

From the above mentioned table, it has been analyzed that high brand equity, global presence and customer loyalty are the three major strengths of Coca Cola. These strengths have provided the selected company with an opportunity to increase its sales, profits and gain competitive advantage over other market players. On the other hand, the company does not offer beverages which are healthy and can improve the well being of people and this can be termed as the major weakness of Coca Cola.

The company’s product line is limited and it does not operate with a diversified range of products and services. Product diversification in food and beverage industry can be termed as the key opportunity for Coca Cola. It will help the organization to find new customers and enhance its existing market share (Hill, Jones and Schilling, 2014). Apart from this, Coca Cola also has the opportunity to improve its supply chain management practices and this will support in lowering down the overall operational cost. It can be evaluated that intense competition from brands such as PepsiCo is the key threat which affects the sales and profitability of Coca Cola.   

1. c) Porter five forces Analysis

• Bargaining power of supplier – It can be expressed that factors such as large availability of supplier and low cost of switching has resulted in making the bargaining power of suppliers very low. As compared to switching of suppliers from Coca Cola to other brand, it is easier for Coca Cola to switch from one supplier to another.  
• Bargaining power of customers – Coca Cola in Australia carry out its business practices and operations with low bargaining power of customers (Stead  and Stead, 2013). It can be stated that the customers of Coca Cola are very loyal towards the brand and the customers are less sensitive about the prices.  
• Threat of new entry – For a company like Coca Cola, the threat of new entry in the industry is also low. The rationale behind this is that huge amount of human, financial and technological resources are required to entry the food and beverage industry. Even for companies which wish to operate at small scale, huge investment in terms of marketing and staff members are required. This restricts businesses to enter the market and compete with giants such as Coca Cola and PepsiCo.  
• Competition among existing business- The rivalry among existing companies in beverage industry of Australia is highly intense (Morden, 2016). Furthermore, Coca Cola is facing direct and intense competition from brands such as PepsiCo. High degree of competition has adversely affected the figure of sales, profits and market share of Coca Cola.    
• Threat of substitute –The number of alternatives or substitutes of Coca Cola is very high and this has restricted the company to acquire large market share. Customers in the beverage industry of Australia are focusing more on Coca Cola’s substitute which are fruit juices and other healthy beverages.

1. d) Other external factors

It can be expressed that external factors such as general economic conditions and interest rates can also affect the overall operations of the selected business enterprise. For example, situations such as economic downturn will restrict people in the market to spend more money on the consumption of food and beverages (Grant, 2016). At the same time, increasing rate of interest will create obstacles for the business in terms of carrying out aggressive marketing and expansion in the Australia market.  

1. a) Industry development

Investment activities

The risk associated with industry development is very high for brand like Coca Cola. The company will be required to make become competent in terms responding back to the changing demand and trends within the industry (Zhou and Wan, 2017). For example if the demand of fresh juice and beverages increases within the industry, then Coca Cola will need to make changes in its products offering according to the same. Lack of expertise will results in adversely affecting the brand image and operations of Coca Cola.      

1. b) New products and services

Increasing product liability and failure of new product in the market are another major risk which needs to be taken care by Coca Cola. The brand will need to ensure that it does not get indulge in manufacturing products which are faulty or which adversely affect the health and well being of customers.  

1. c) Expansion of business

At the time of carrying out business expansion, Coca Cola will be required to ensure that effective market research has been carried out and the demand of people has been estimated in the best possible manner. The rationale behind this is that the risks associated with failure of estimating customer demand accurately can negatively affect the overall cost of operations. It can also results in financial failure of Coca Cola which is a big threat in long run.  

1. d) New accounting equipment

The accounting requirement introduced by AASB keeps on changing rapidly and it is mandatory for every business to comply with the requirement. In near future it is possible that Coca Cola may face risk due to introduction of new accounting requirement as it can enhance business cost due to implementation (Frynas and Mellahi, 2015). Generally, when any new requirement takes place then its implementation enhances cost of the business in terms of providing training to the accounting manager etc.

1. e) Regulatory requirements

It takes into consideration the legal requirement introduced by the government of Australia. For instance if government has introduced any new law linked  with recycling of bottles and Coca Cola is not able to comply with such law. Then in such case it will act as major risk for the business and in turn it has to be managed in proper manner.

1. f) Current and prospective financial requirement

The finance related requirement can also act as hurdle for the business in every possible manner. Further, in case if interest rates are increased then in such case to satisfy the investment activities business will not be able to obtain loan from the bank. This will act as major risk and satisfying the overall financing activity for the organization will not be possible.

1. g) Use of IT

Another business risk which Coca Cola might face is linked with the use of IT systems which are ineffective and incompatible (Coombs, 2014). Here, the risk is that the selected company may lose large part of its market share to its competitors by using IT systems which are incompatible. The brand will also face challenges in terms of carrying out smooth flow of its business operations by making use of such IT systems.

1. h) The effect of implementing a strategy

Improper implementation of strategy is a risk because it will results in wastage of resources such as technology, time, efforts and finances. The brand will need to ensure the fact that developed strategies are implemented in the best possible and desired manner.

Financing activities

Coca Cola

Ratio	2014	2015	2016
Current ratio	1.02	1.24	1.28
Quick ratio	0.81	0.89	0.98
Asset turnover	0.51	0.49	0.47
Return on invested capital	22.36%	26.31%	26.85%

Pepsi Co

Ratio	2014	2015	2016
Current ratio	1.14	1.31	1.28
Quick ratio	0.85	1.05	1.08
Asset turnover	0.90	0.90	0.87
Return on invested capital	14.07%	14.22%	13.39%

Above shown are the financial ratios for analyzing the performance of Coca Cola and it has been compared with one of the main competitor of company named Pepsico operating in the market. Further, considering the current ratio of company that supports in knowing the cash position of the business and highlights whether business is able to meet its major expenses or not. So, the current ratio of Coca Cola is growing every year and it is highlighting the financial efficiency of the enterprise. On the other hand, Pepsico current ratio is also growing and it is same as compared with Coca Cola. Therefore, it is recommended to Coca Cola to focus on its performance enhancement so that it can perform better as compared with Pepsico.

Considering the asset turnover ratio of Coca Cola which has declined in the year 2016 as compared with the past. This is representing the inefficiency of the business in utilizing its assets and corrective actions are required to be taken so that company can utilize its assets in effective manner. In case of Pepsico its asset turnover ratio is better as compared with Coca Cola. Therefore, it is recommended to Coca Cola to focus on this area for enhancing its overall performance in the market. Return on invested capital of Coca cola is quite high and is representing the efficiency of the organization.

Company is able to gain high return on the invested capital and due to this reason its profitability level is quite high. Considering the case of Pepsico its return on capital employed ratio is less as compared with Coca Cola which is representing inefficiency of the business. Therefore, on the basis of overall analysis it has been found that Coca Cola is operating efficiently as compared with its key competitor Pepsico in the market.

a) Communication and enforcement of integrity and ethical values

The selected business enterprise has adopted for open communication channels which assist in encouraging the views and opinions of workers (Rothaermel, 2015). Furthermore, Coca Cola also promotes integrity and ethical values through its communication channels. The results of this is that areas such as monitoring, administration and design of the entire organization. The company promotes ethical practices and encourages all the staff members to follow the same.

Effective training and development programs are offered to all staff members with an objective to enhance their overall competency level. At the same time, Coca Cola conducts business seminars and conferences to increase the existing knowledge base and skill set of all its workers. A fair and transparent process of recruitment and selection is used by the brand and here, staff members are selected on the basis of factors such as experience, core competencies, knowledge level and skills set (Deresky, 2017). No form of discrimination is promoted within the business practices.  

It can be expressed that government, regulatory authorities and investors plays very important role in the overall decision making and corporate governance of Coca Cola. These parties work separately from the management and ensure that the company is carrying out legal and ethical practices. The level of involvement of these parties is quite high and at the same time, their experience level is also good. These parties interact with external and internal auditors at regular intervals with an objective to ensure smooth functioning of all business activities of Coca Cola. Suggestions and opinions are offered by these parties to enhance the overall corporate governance practices of the selected business enterprise.

Part 2

The company is open towards taking business risk at regular intervals and effective management of risk is carried out by Coca Cola. However, it can be critically argued that instead of taking normal risk, the corporation focuses more on taking calculative risk. The risks taken are generally linked with implementation of new marketing strategy or expansion of business in new markets (Kaynak, Mockler and Dologite, 2014). A set procedure of financial reporting is followed by Coca Cola where the business focuses on carrying out compliance of the reports with the accountings standards. In addition to this, the organization also believes in honest disclosure of financial performance and maintaining transparency in the entire procedure of financial reporting. Both manual and automated systems are used by Coca Cola to process the information and carry out different functions of accounting.   

Coca Cola is operating with hierarchical organization structure and it has developed various levels of management. Employees working in the organization subordinate with other people and this result in carrying out flow of operations and activities in the desired manner. Apart from this, Coca Cola uses hierarchal structures because it supports the brand in making every employee well clear about his/her roles and responsibilities. The decision making within organization is mainly decentralized and decisions regarding planning, execution, control and review are taken on the basis of the same.   

The process of assigning authority and responsibility is highly effective within Coca Cola. The rationale behind this is that the company’s HR policies focus more on making employee clear about their roles (Iivonen, 2017). Furthermore, the responsibilities are being assigned to workers on the basis of factors such as their area of expertise, experience, skill set and knowledge base. Each employee except the CEO has a reporting authority and there is proper chain of command which needs to be followed while communicating any formal information. Different departments have been established and the managers of those departments are authorized to assign roles and responsibilities of workers along with the consultation of top management of Coca Cola.

The human resources practices and policies adopted by Coca Cola can be termed as one of the most effective practices in the world. For example, fair and transparent policies of recruitment and selection of personnel’s has been adopted by Coca Cola. The company also strictly follows the labor and human resources laws developed by government and other regulatory bodies within Australia (Stead and Stead, 2013). Training has always been a crucial part of the company’s HR practices and training sessions are conducted at regular intervals to enhance core competencies of employees working in Coca Cola. Promotion, rewards and compensation are also offered to staff members. Furthermore, it can be expressed that a fair policy of compensation and reward has been adopted by the brand. No discrimination is carried out by the company and promotion, incentives, compensation and rewards are based on factors such as performance delivered, skill set and knowledge base etc.

References

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Hiscock, R. and Warry, B., 2016. Bottled tension: Will Australia ever see a national container deposit scheme?. Australian Environmental Law Digest, 3(3), p.27.

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Lanis, R., McClure, R. and Zirnsak, M., 2017. Tax aggressiveness of alcohol and bottling companies in Australia.

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Naramore, S., Virojanapa, A., Bell, M. and Jhaveri, P.N., 2015. Bezoar in a pediatric oncology patient treated with coca-cola. Case reports in gastroenterology, 9(2), pp.227-232.

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