Auditing can be regarded as a part of the accounting profession, and it involves the independent examination of the financial statements and records of a company (Sarido?an 2021). The aim is to confirm whether any material misstatement is there or not. In this process, the auditors are responsible for assessing various risks within the clients’ organisations, such as fraud risk, going concern risk, inherent risk, and others. The assessment of these risks requires the auditors to gain an appropriate understanding of the clients. Moreover, it is also important to obtain an understanding of different factors like entity level factors, industry-level factors and economy level factors in order to assess the susceptibility of the clients’ businesses to various external and internal factors. This report aims at assessing the above-mentioned aspects in terms of the company from the top 500 ASX-listed companies. Crown Resorts Ltd (Crown Resorts) is the selected company. First, this report discusses about the background of the chosen company. Second, the risks like inherent risk, going concern risk, fraud risk and control risk of the chosen company are assessed. Third, it assesses the entity, industry and economy level factors of the selected company.
Crown Resorts is one of the largest entertainment groups in Australia, and it has a key contribution to the development of the Australian economy. In Australia, two of Australia’s leading integrated resources that are Crown Melbourne and Crown Perth, are owned and operated by the group, along with Crown Sydney, which is the latest premium hotel resort and dining zone (crownresorts.com.au 2022). Overseas, Crown London Aspinall is owned and operated by the group, and it is a high-end private members club that offers an exclusive gaming experience in the West End entertainment district. In addition, 50% interest in the Aspers Group is held by it (crownresorts.com.au 2022). The group also holds a 20% interest in Nobu, which is one of the most recognised lifestyle hotels and restaurant brands in the world. In addition, the group has interests in different types of digital businesses, which include DGN Games (100%), Chill Gaming (50%) and Betfair Australasia (100%). The purpose of the group is the creation of exceptional experiences with respect and care for the communities (crownresorts.com.au 2022).
|
Particulars |
2021($m) |
2020 ($m) |
|
Revenue |
1536.8 |
2237.2 |
|
Net Profit/(Loss) |
(261.3) |
81.9 |
|
Net Profit Margin |
(17.00%) |
3.66% |
It can be seen from the above table that the net profit margin of Crown Resorts deteriorated significantly in 2021 compared to 2020, and the ratio is negative. It indicates that the group’s senior management is under immense pressure to maintain the expected profitability. As a result, they may adopt the strategies of fraudulent financial reporting to show a good financial performance and position of the group in the books.
The revenue of the group in 2021 and 2020 are $1536.8 million and $2237.2 million (crownresorts.com.au 2022). A decrease in revenue makes this account vulnerable to fraud by different methods, such as recording fictitious revenues and recognising the revenues from different hotels and restaurants prematurely.
The key expense accounts of the group are also susceptible to fraud risk because of the possibility that the management may have understated these expenses to boost profit. Declines in the key expense accounts of the group support this notion. For example, employment costs decreased to $695.4 million from $738.9 million, taxes and levies decreased to $373.1 million from $425.3 million, cost of sales decreased to $112.7 million from 124.1 million (crownresorts.com.au 2022). The possibility cannot be ignored that these accounts may have been fraudulently understated.
Cash and cash equivalent is an account that is largely susceptible to fraud because of its large amount. The group’s cash and cash equivalent increased to $476 million from $289.9 million, leading to the risk that this account may have been overstated after stealing cash (Mock, Srivastava and Wright 2017).
Non-current Interest-bearing loans and borrowings decreased to $974.1 million from $1121.8 million, and it leads to the fraud risk that this account may have been understated fraudulently to show fewer debts in the book. In addition, current interest-bearing loans and borrowings significantly increased to $314.3 million from only $8.2 million (crownresorts.com.au 2022). It creates the risk that this account may have been fraudulently misclassified to show fewer debts in the books.
There are certain key factors in the group that raises doubt about its ability to continue as a going concern. First, the group has a negative net profit margin in 2021 because of registering a huge net loss in the year. If this ratio continues to fall, it may affect the future viability of the group to continue as a going concern. It is a financial indicator of going concern issue.
The group has a net current asset position of $5.7 million in 2021 compared to a net current liability position of $213 million in 2020 (crownresorts.com.au 2022). Furthermore, it is highly geared as it used debt financing largely in 2021 to finance its operations, whereas it did not issue any equity share in the same year. These are the financial indicators that raise material uncertainty on the group’s ability to continue as a going concern (auasb.gov.au 2022).
The group recorded a negative operating cash flow of $14 million in 2021 compared to a positive operating cash flow of $326.9 million in 2020 (crownresorts.com.au 2022). It is another financial indicator of going concern uncertainty.
The group has registered a substantial operating loss of $239.5 million in 2021 compared to an operating profit of $163.4 million (crownresorts.com.au 2022). A key aspect is that the group did not declare or pay any dividend in 2021 (auasb.gov.au 2022). These are two key financial indicators of going concern risk.
In addition, the group faced regulatory investigations because of drawing $420 million in cash and $99.3 million of letters of credit as a result of an event to cancel or suspend any of the casino license of the group. It is a key indicator leading to the going concern risk.
There are certain key factors in the group that increase its overall inherent risk. Crown Resorts operates in a highly regulated industry where it has to comply with many legal laws and regulations. As a result, both the pressure of compliance and compliance costs of the group increase, leading to an increase in inherent risk. The management may understate this cost to avoid an adverse impact on profitability (auasb.gov.au 2022).
In addition, the adverse or unfavourable regulatory changes may adversely impact the operations and profitability of the group leading to the risk of fraudulent financial reporting practices to show a better performance. As a result, inherent risk is increased.
The overall inherent risk of the group is increased if it fails to maintain its reputation or if it involves in any negative publicity (crownresorts.com.au 2022). As a result, the key stakeholders like customers and suppliers may shift to the group’s key competitors, which eventually affects its operations and financial performance.
The volatility in the gaming revenue of the group increases the inherent risk because it may motivate the senior management to overstate revenue to maintain the expected profitability level. Another key factor that significantly increases the inherent risk of the group is the COVID-19 pandemic. Disruption because of this pandemic creates pressure on the management to maintain the anticipated profitability. This may work as a motivation for the management to increase profit fraudulently (auasb.gov.au 2022).
The overall control risk of the company is low because of the presence of an effective internal control function. The Audit and Corporate Governance Committee is responsible for internal control, which includes monitoring the group’s financial statements’ integrity, the internal control systems’ effectiveness, and monitoring the effectiveness, performance, objectivity and independence of the internal and external auditors (crownresorts.com.au 2022). The committee has the responsibility of reviewing the internal control over financial reporting’s adequacy and effectiveness. The committee also reviews the annual statement of the group on its risk management and internal control systems so that any necessary concerns can be raised to the Board of Directors. The whistleblowing arrangement is a major part of the group’s internal control, and the committee is responsible for assessing the adequacy of this arrangement so that the employees and contractors can raise concerns about potential financial reporting improprieties (crownresorts.com.au 2022).
It is important for the auditor to consider the entity level factors when gaining an understanding of the client. Crown Resorts prepare its financial report by complying with the Australian Accounting Standards as issued by the Australian Accounting Standard Board (AASB) and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) (crownresorts.com.au 2022). The main customers of the group include tour groups, business travellers, individual tourists and others. Since the group has foreign operations, it is also involved in international transactions in different currencies like the US dollar, British pound, and others (crownresorts.com.au 2022). Sources of financing include both debt financing and equity financing, but the group largely relied on debt financing in 2021 compared to equity financing. In the case of the ownership structure, the group is a locally-owned publicly listed company. The Audit and Corporate Governance Committee is responsible for the internal control systems of the group (crownresorts.com.au 2022).
Along with the entity level factors, it is also crucial for the auditor to consider the industry level factors. The group operates in an industry that is full of intense competition. The key competitors of the group are Las Vegas Sands, Playtech, bet365, Aristocrat Leisure and William Hill. The group is one of the largest entertainment groups in Australia and overseas, which implies that it has a good reputation amongst its clients. The group is entitled to receive many government grants and payments both in Australia and overseas. For example, it was entitled to receive employee retention scheme related payments in 2021 in Australia and the UK totalling $184.2 million (crownresorts.com.au 2022). It regulates in a highly regulated industry where it is needed to comply with many laws and regulations imposed by the governments. In 2021, there was a strong leisure market demand on weekends, but the corporate and group bookings were affected because of international and interstate border closures (crownresorts.com.au 2022).
The operations and financial performance of the group have been severely affected by the economic downturn caused by the COVID-19 pandemic. It affected the disposable income of its customers, leading to a decrease in sales and profitability (crownresorts.com.au 2022). The group is exposed to the interest rate risk as the change in interest rate affects the cash and cash equivalent and long-term debt obligations. In order to reduce the exposure from the unfavourable changes in interest rate, the group uses interest rate swaps. Since the COVID-19 pandemic has disrupted the operations and financial performance of the group, it failed to provide the shareholders with a dividend in 2021. In addition, there are many aspects that work as a pressure situation on the management for overstating profit, such as the adverse impact of the pandemic, intense competition, reduction in gaming revenue, increase in compliance costs, and others (Abdullahi and Mansor 2018).
Conclusion
The above analysis shows that Crown Resorts operate in the leisure and entertainment industry. There are certain key aspects that expose the group to the fraud risk, such as a decrease in sales, operating and net loss, and others. The group is also exposed to major going concern uncertainties because of many financial and other indicators, like adverse net profit ratio, high gearing, negative cash inflow from operating activities, high dependence on debt financing, and others. The business risks of the group are the main sources of inherent risk since aspects like the adverse effect of COVID-19, risk of negative publicity, and others increase the inherent risk. However, it has a low control risk in the presence of an effective internal control system which is monitored and reviewed by the Audit and Governance Committee. Other factors include entity, industry and economy level factors having an impact on the audit.
References
Abdullahi, R. and Mansor, N., 2018. Fraud prevention initiatives in the Nigerian public sector: understanding the relationship of fraud incidences and the elements of fraud triangle theory. Journal of Financial Crime.
About Us | Crown Resorts 2022. Available at: https://www.crownresorts.com.au/about-us (Accessed: 31 March 2022).
Auasb.gov.au. 2022. Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement. Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA315_03-20.pdf (Accessed: 31 March 2022).
Auasb.gov.au. 2022. Auditing Standard ASA 570 Going Concern. Available at: https://auasb.gov.au/media/jbwpiyr5/asa_570_12_21.pdf (Accessed: 31 March 2022).
Crownresorts.com.au. 2022. ANNUAL REPORT 2021. Available at: https://www.crownresorts.com.au/getsydmedia/fc03c891-1c33-4566-8ffb-24f1292d3ae4/90daba8e-1d19-477e-b3b3-1a79df35d1c7.pdf (Accessed: 31 March 2022).
Crownresorts.com.au. 2022. Crown Resorts Limited Audit & Corporate Governance Committee Charter. Available at: https://www.crownresorts.com.au/getmedia/6e53befe-c9a7-4b4b-9d00-7e60fd1b8fd9/Crown-Resorts-Limited-Audit-Corporate-Governance-Committee-Charter-August-2021.pdf?ext=.pdf (Accessed: 31 March 2022).
Mock, T.J., Srivastava, R.P. and Wright, A.M., 2017. Fraud risk assessment using the fraud risk model as a decision aid. Journal of emerging technologies in accounting, 14(1), pp.37-56.
Our businesses | Crown Resorts 2022. Available at: https://www.crownresorts.com.au/about-us/our-businesses (Accessed: 31 March 2022).
Our purpose & values | Crown Resorts 2022. Available at: https://www.crownresorts.com.au/about-us/our-purpose-and-values (Accessed: 31 March 2022).
SARIDO?AN, A.A., 2021. An Empirical Analysis for Determinants of Strength of Auditing and Accounting Standards in The World. JOEEP: Journal of Emerging Economies and Policy, 6(1), pp.188-193.
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