Application Of Australian Auditing Standards To Coca-Cola Amatil’s Financial Report

Introduction to Australian Auditing Standards

Introduction to Australian Auditing Standards

ASA 315, ASA 570 and ASA 701 are some of the auditing standards introduced by the AUASB to enable the auditors to recognize and evaluate the probable risks of material mismanagement occurring in the organization. ASA 315 deals with the ‘Identification and Assessing the Risks of Material Mismanagement through Understanding the Entity and Its Environment.’ It bestows the responsibility of risk assessing and identification of substantial mismanagement to the auditors by comprehending the entity, its environment and its internal control measures.

ASA 570 deals with the accountability of the auditors regarding the evaluated risks as per section 315.The auditors have to report the risks regarding the operation of the entity as a successful concern in the future and their analysis in the Independent Auditor’s Report.

ASA 701 states that the auditor should communicate the key audit matters relevant to the identification of risk as per section 315 and 570 in the auditor’s report. It guides the auditors regarding the content covered and its format in the auditor’s report (Auditing and Assurance Standards Board, 2016).

In this report, the auditing standards would be applied to the financial report of Coca-Cola Amatil and the conclusions would be stated by Ernst & Young.

Coca-Cola Amatil is a public limited company with its headquarters at New South Wales, Australia. It is one of the largest providers of the non-alcoholic beverages in the Asia-Pacific region. It is amongst the five main Coca-Cola bottlers. It supplies its products in six countries- Australia, New Zealand, Papua New Guinea, Indonesia, Samua and Fiji. Its revenue was AS $ 5.12 Billion and profit was AS$ 79.9 Million in 2014(Coca- Cola Amatil, 2018). 

The audit of Coca-Cola Amatil for the years 2015 and 2016 was conducted by E& Y. It is a multinational profession services firm, the headquarters of which are situated in London, England. It is amongst the largest professional consultancy firms in the world and one of the ‘Big Four’ accounting firms. It has 2, 31,000 employees in 150countries worldwide. It is the provider of consultancy services including tax, assurance, legal and financial audit to the companies (E & Y, 2018).

According to ASA 315, it is the accountability of the auditors to identify and assess the risks of substantial mismanagement in the financial reports of the organization, through analyzing its internal environment and control (Auditing and Assurance Standards Board, 2013). The relevant matters in this regard are:

1. Business and Sustainability Risks: There are certain market, financial, operational and socio political threats to the organization which could affect its future prospects. Some of them are:

• Macro –Economic Factors affecting competition and demand: The consumer spending habits relating to food and beverages in Australia and New Zealand is challenge for the company. Due to lack of liquidity in the local Papua New Guinea currency market, the company is facing threat in its survival.
• Decline in the Sparkling soft drinks business: The customers are aware of their health and wellness concerns, so there has been a downfall in the soft drinks business in Australia, New Zealand and Indonesia.
• Additional compliance and imposition of the taxes:  Certain additional compliance such as proposed container deposit scheme and the sugar and plastic taxes have emerged in the recent times. The policies on the consumption of beverage products and the focus on litter and obesity issues have led to the risks concerned with the regulatory compliances.
• Threats of natural disasters and cybercrime: The organization is exposed to the threats of natural disasters like flood, fire and earthquakes. So, the organization is prone to business risks in this regard.
• Occupational, Health and Safety risks: The workers in the organization are prone to serious injury through industrial and traffic accidents because of the nature of the business (Awadallah & El-Said, 2018) .

1. Market risks: The market risks such as foreign currency exchange risks, interest rate risks and commodity price risks are faced by the organization. It is facing the risks regarding the financial assets and liabilities, particularly the cash and cash equivalents, term deposits, bonds, loans and bank overdrafts. The firm is prone to the primary risk exposures in relation to the fluctuations in the prices of raw materials. The firm is facing the risk of substantial mismanagement as the management can manipulate the statistics of the foreign currency transactions and the exposures in this regard, in the financial reports.
2. Liquidity risks: The risks relating to the failure of the organization to meet the financial obligations as and when they arise is termed as Liquidity risk. There is a risk of substantial mismanagement as the management can project the exaggerated value of the financial assets which are set aside for liquidation as   and when the need arises.
3. Credit risk: The risk that the creditors or borrowers may fail to fulfill their commitments, arising in the financial loss to the company is termed as Credit risk. There is a risk of material mismanagement as the management can mismanage the amount of exposure which it has set for each financial institution.
4. Translation risk: It arises when the organization prepares the financial statements of the branch in the home currency. So, in this case the foreign operation’s financial statements are converted into Australian Dollars utilizing the applicable foreign rates for the particular period. As a result, fluctuations in the foreign exchange rates can influence the organization’s net assets, profit and other income. It may result in mishandling of the statistics related to the exchange rates by the management (Ernst & Young, 2013).
5. Impairment of SPC assets:  The impairment of the assets of SPC amounted to $ 4.9 Million in 2015 while it amounted to $217.3 Million as at 31st December, 2016.Due to the amount of impairment and its calculations in assessing the recoverable amount of the SPC assets, the auditors considered it to be as a risk of material mismanagement (Financial Reporting Council, 2016).
6. Carrying value of intangible assets: As in 2015, the intangible assets amounted to $908.7 Million comprising 18.8 % of the total assets. In 2016, they amounted to $1077.4 Million comprising of 16.7 % of the total assets. The auditors assessed the accounting estimates, specially the assumptions about the future and considered it to be a matter of material risks.
7. Accounting for discounts and promotional allowances: The identification of discounts and allowances includes judgment and assumptions, especially the expected claim of each consumer .So, this matter was considered by the auditors as a matter of substantial mismanagement.
8. The profit made by the company in 2015 was $ 403.4 Million while in 2016 it was $ 257.3 Million .It decreased by $146.1 Million. The property, plant and machinery amounted to $ 2019.9 Million in 2015 while it was $ 1948.9 Million in 2016.So, it decreased by $ 71Million. The stock amounted to $ 733.9 Million in 2015 while it was $ 676.4 Million in 2016, so it decreased by $ 57.5 Million. The equity and net debt of the company amounted to $ 3556.1 Million in 2015 while it amounted to $ 3403.1 Million in 2016.With regards to this trend, there is a huge possibility of making losses and cash outflow to the company.   

ASA 315: Identification and Assessment of Risks of Material Mismanagement

The share price of Coca- Cola Amatil is AUS$ 8.19 as on 20^th January, 2018. The downfall in the profitability can be due to changing consumer preferences and opting of healthier beverage options. The share price is expected to decrease by 16.94 % in the future, so there can be a huge loss to the company in this regard (Coca- Cola Amatil, 2016).

1. The auditors assessed the business risks as per ASA 570 and found that the management has adopted certain measures to mitigate them. They include innovations in the products, adoption of cost –out measures and policies regarding stakeholder awareness .With regards to Occupational health and safety risks, the management continually reviews its framework and invests in initiatives to mitigate it. The cyber threat and risk of natural disasters is mitigated by investigation on a regular basis to check the adequacy of all the procedures(KPMG, 2013).
2. To mitigate the foreign and interest rate risks, the company hedges the dealings related to the future estimated cost of goods sold related transactions up to four years. The commodity price risk is mitigated by entering into futures, swaps and option contracts.
3. The liquidity risk is mitigated through adoption of the liquidity policy relating to  the least level of committed facilities in relation to net debt .The company also maintains sufficient funds and financial assets which are readily convertible into cash to reduce the effect of risk.
4. To mitigate the credit risk, the company restricts the limit of credit exposure to each financial institution.
5. With regards to translation risk, the company hedges the risk by entering into derivative contracts.
6. Impairment of SPC Assets: The auditors analyzed the estimates and calculations used to assess the impairment of assets .Also, they evaluated the rational of the net realizable value of stock by contrasting the statistics of stock to sales forecast(E & Y, 2014).
7. Carrying value of intangible assets: The auditors analyzed the calculations of the value of assets as per AASB 136 .Also; they judged the accuracy of the disclosures made in the financial reports.
8. Accounting for discounts and promotional allowances: The auditors tested the procedures and policies made by the company for the calculations of discounts and allowances (Kerr, 2013). 

According to ASA 701(Para 9), the auditors should focus on the matters relating to governance and evaluate the areas of higher risk of material misstatements in accordance with ASA 315(Auditing and Assurance Standards Board, 2015).  In the context of Coca-Cola Amatil, the impact of the important audit transactions is as follows:

1. With regards to the business risk, the company can have loss in terms of competition with the firms selling healthier beverages.
2. Where the local market of Papua New Guinea is suffering from liquidity crises, the entity can face the risk of credit.
3. The non- compliance with the newly introduced or proposed legislations can lead to legal actions against the company.
4. Most importantly, the risks due to the natural disasters and cyber threat can be a danger to the company’s existence or pose a major threat to its commercial activities.
5. The market risk can pose a threat to the company’s commercial activities as the company deals in foreign currency transactions.
6. The company can face liquidity crises due to its failure to liquidate the financial assets to meet its commitments (CPA Australia, 2013).
7. The entity can face financial losses due to the failure of counterparty to meet its obligations.
8. In the case of translation risk, the entity can face the threat of mismanagement of the calculations in the projection of the statistics in the financial reports.
9. With regards to impairment of assets, there is a risk of mismanagement in the recoverable amounts and their accounting of each class of SPC’s assets.
10. In the context of carrying value of the intangible assets, the company can face the risk of inaccurate estimates regarding the future, resulting in wrong analysis of the statistics and their projections in the balance sheet.
11. The risk relating to the accounting for discounts and promotional allowances relates to the inappropriate calculations, influencing the cash outflow of the company( Nexia-SAB &T, 2016)

As per ASA 570, the financial reports are prepared with the assumption that the concern will continue operating as a successful entity in the future, till the management dissolves it or halts its operations when it is left with no option (Auditing and Assurance Standards Board, 2015).

The decision of the management whether the entity would continue to survive as a successful concern depends upon a number of factors. These include happening of the contingent event whose results are uncertain. The extent, nature, complexity of the entity and   type, characteristics of the industry in which it operates also influence its capability to survive as a successful concern in the future. These factors also affect its decision making abilities. When there is an absence of continuity in its transactions, it can’t be observed as a going concern (Deloitte, 2016).

In the context of Coca –Cola Amatil, its business risks including the threat to the soft drinks business due to change in the consumer preferences, the retail  pricing pressure influencing the entity and the liquidity crises faced by the entity in the local Papua New Guinea market  does not affect its ability as a going concern.

Apart from this, the compliance of the proposed legislations   relating to the container deposit scheme and the levy of sugar and plastic taxes does not pose a threat to its existence as a successful entity. The Occupational Health and Safety risk and the threats posed by the natural disasters and cyber security risk can disturb the business activities if there is an absence of the adoption of appropriate policies and procedures .But if the company has reduced the influence of the major disturbances by adopting appropriate measures and policies, it would not affect its capability to operate as a going concern.

ASA 570: Accountability of Auditors Regarding Evaluated Risks

The market, credit, liquidity and translation risk cannot affect the organization’s capability as a going concern as appropriate measures have been adopted by the company to mitigate these risks (Coca- Cola Amatil, 2015). 

With regards to the charges of impairment of assets, carrying value of the intangible assets and provisions relating to the discounts and provisional allowances provided to the consumers cannot affect the organization’s ability to operate as a going concern. This is because the entity has adopted suitable measures to cope up with these risks.

Recommendations/ Conclusion

To conclude, it can be said that the focus of the audit is to analyze the financial reports and state the opinion regarding the performance and the risks of material misstatements of the company. It should be executed with the assurance that the financial report does not project any possibilities of probable frauds, thereby affecting the capability of the company to continue as a going concern in the future (Salem, 2012).

The responsibility of the auditors is to test the accounting principles and procedures applied by the management with relevance to the dealings of the company. The steps involved are accumulating the data and testing its authenticity and dependability. It is tested by suitable proofs at the operational level and through its records. The relevant results should be derived from the analysis done by the auditors. If there are frauds or mistakes in the procedures or policies adopted by the organization, then the auditors should suggest the measures to rectify them as well as strictly monitor to stop their occurrence in the future. Also, the concerned personnel should be penalized for committing frauds, so that the staff doesn’t repeat it in future (Szívós & Orosz, 2014).

Coca-Cola Amatil, which is one of the largest listed entities on ASX, has complied with the applicable Australian Auditing Standards. Also, the auditing team has assessed the important transactions of the company on the basis of Australian Auditing Standards. They have suggested suitable measures to upgrade the accounting processes and mechanisms relating to its areas of operations (Coca –Cola Amatil, 2018). 

References 

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Auditing and Assurance Standards Board (2015) Auditing Standard ASA 570 Going Concern [online]. Available from: https://www.auasb.gov.au/admin/file/content102/c3/ASA_570_2015.pdf [Accessed 20^th January, 2018].

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