In the above case study. the first part deals with the company Murray river Organics group limited and its preparation of general purpose financial statements to help the users in making economic decisions. It also discusses the company MGR as one of the main competitors in the farming industry. It assesses whether this company MGR has prepared this report in a true and fair manner or not. It assesses whether the revenue has been measured in a manner that is consistent with the accounting policies or not. The company can recognise revenue only when it can make things reliable. The business risks have been analysed with respect to certain geographical anamolies and certain market risks that have been associated with the company MGR. In the second part the assignment deals with the use of analytical procedure in identifying material misstatements that are associated with the company MGR. The figures of material misstatement are compared to last year and then analysed as to how these material misstatements impact the financial statements of the company.
Key information
Our understanding of the client
SAC 1 of AASB stated that an entity is a reporting entity if there are some external users that dependent on general purpose financial reports to make their decisions. An entity is considered to be a reporting entity if there are separation between managers and owners of the company with an economic interest or political influence of that company stated by Deegan (2014).
Our client is a listed company on the ASX and there is a greater separation of management and owners and other users with an economic interest. Therefore, Murray River Organics Group Limited is expected to produce GPFRs for the users in making decisions in regard of allocating their scarce resources to the company. The MGR is one of the main competitors in farming industry. It controls 4,447 acres of certified organic farmland in the region of Sunraysia of Australia and holds furthermore 2,069 acres of planted vineyards. This makes it the biggest dried vine producer and marketer in Australia and possible biggest vine producer in the world (Morgans n.d.). Based on these factors client has a significant impact on external stakeholders and MGR generated revenue of 48.5 million in 2017 according to Murray River Organics Investors 2017. The client has tremendous amount of shares so it is expected that the financial statements of this client have impact on others. Murray River Organics is considered to be a reporting entity and therefore is expected to produce GPFRs to its users of their financial statement. The entity is required to comply with the Corporations Act 2001, ASX Listing Rules, AASB and other accounting requirements.
Accounting policies is when an organisation chooses a particular accounting standard to measuring their performance. The most critical accounting policy for MRG is considered to be revenue account. This because is part of their daily operation activities of the business. Revenue is a gross profit of economic benefits that come from an ordinary activities of a business as form of inflow (AASB 2009, p. 10). Murray River Organics Group Limited prepares that annual report based on historical costs, they use is measurement because it represent a true and fair view of their financial reports (MROG 2017).
As we studied MRG Consolidated Financial statement we realised that they measured revenue using fair value once goods are delivered or title passed on. Revenue is recognised by MRG base on an estimated return of customer, rebates, discounts similar allowances (MROG annual report). The company recognises revenue only if they can measure it reliable.
MROG main objective is to be a leading company in providing high quality of dried vineyard to customers and be globally recognised company in the world. The company has introduced a new organic nutrition such as better-for-you food. The company’s strategy is to sell natural, healthy and organic products to its customer and this is one of their main strategies. Continuing with its expansion of current assets and vineyards and by acquiring assets and businesses to expand its products and brand. The Group focuses on having products that will have multiple purposes in the near future. Able to provide innovation ways of packaging in the future and convenient ways of doing it (Morgans n.d.).
‘Business risk is a risk that an entity’s business objectives will not be attained as a result of internal external factors, pressure and forces brought to bear on the entity’ (Gay and Simnett 2018, pp.214). The risks that will affect Murray River Organics Group’s financial report will be as follow:
Almost with every viticultural crop there is a various number of risks may affect yields. This will have a massive impact on Murray River Organics group’s performance. The profit will differ from year to year. Climate has a direct impact on Group’s performance due to not meeting their target. Poor weather condition has negative effect on agricultural productivity and leads to decrease in availability of certain goods.
Water is a crucial part of MROG’s ability to grow crops and risk of water that runs from Murray and Darling River will always be salty and not good for growing crops.
The group currently dependent on a high level of maintaining its current and futures customers though a customer relationship. The group may not be able to keep its entire customer and there are no obligations to keep buying goods.
The Group is required to comply with a various laws and regulations such as OH&S, tariff tax and employment safety.
Because the group trades globally there may be a risk of financial loss when converting foreign currencies to Australian dollars because Australian dollars is it main currency. The group is exposed to interest rate risk, this because it will borrow cash from a foreign country and rates will verify (MROG 2017).
A loss of a facility by the group could result in delay of productions of goods which can decrease profit and the group will have to find other alternatives to cover for this cost (Morgans n.d, p. 100).
For the purpose of this assignment we are going to use analytical procedure – simple comparison to identify accounts that are mostly at risk of being materially misstated by Murray River Organics Group Limited. Simple comparison is comparing two different amounts which can be done by comparing current year to last year amount (Gay & Simnett 2015, p. 227). After we have compared Murray River Organics Group Limited’s current and previous year we believed the following accounts are most at risk of being misstated by the Group.
The preliminary estimate of materiality at the financial statement level is called financial materiality. It is the maximum amount by which auditors can estimate how much of their material misstatements are being materially misstated. These misstatements does not affect the decision making of reasonable financial decision making users. These statements are supposed to guide the decision making users and design of auditing standards(Rydin 2013). This estimate is not a guide but a specific determination of what is material and what is not material in an audit.
In the above case the company Murray river Organics group Limited has identified a set of material misstatements that need to be assessed whether this level of planning materiality can affect the decision making users of financial misstatement. The material misstatements relate to the following items that include revenue, planning materiality and finished goods consumed, inventories , property,plant and equipment and trade and other payables. These material misstatements have been identified in respect of auditing the financial statements. In auditing the financial statements, it is clear that these material misstatements could have an impact on the decision making sers(Audsabumrungrat,Pornupatham and Tan 2015) . These decision making users need to properly analyse the financial statements before making any investment related decisions. These material misstatements significantly affect the decision making users of the financial statements . if material uncertainty exists. The users of the financial statements will make improper decisions related to investment if planning materiality exists(Edgley 2014.). Hence the material misstatements will significantly affect the users of the financial statements in a negative way. Hence, determining a level of planning materiality is important so that the users of the financial misstatements will not get affected by the material misstatements that exists in the financial misstatement(Simpson 2013).
Our assessment of what can go wrong
The material misstatements that can go wrong are mentioned in the previous section . These material misstatements are assessed in relation to the comparison of different figures at the end of the two years. A comparison of two years is done and on the basis of that the material misstatements are identified. The company makes an assessment of some of the things that can go wrong in the material misstatements that are identified as follows:
From the above analysis it is clear that the company Murray river organics investors have material misstatements that affect a lot of decision makers that are involved in the financial statements. The company has a tremendous amount of shares so it is expected that the financial statements of the client will have impact on other financial statement users. It makes an assessment of whether the provisions of AASB have been followed in respect of the particular case study or not . The material misstatements have been analysed in respect of the financial statements of the company. A further discussion has been made in respect of the impact of material misstatements and how they can be misinterpreted in respect of misleading investors.
References
Vasarhelyi, M. and Romero, S., 2014. Technology in audit engagements: a case study. Managerial Auditing Journal, 29(4), pp.350-365.
Audsabumrungrat, J., Pornupatham, S., & Tan, H. T. (2015). Joint Impact of Materiality Guidance and Justification Requirement on Auditors’ Planning Materiality. Behavioral Research in Accounting, 28(2), 17-27.
Deegan, C., 2014, Financial Accounting Theory, 4th edition, McGraw-Hill, Australia
Gay, G., Simnett, R., 2015, Auditing & Assurance Services in Australia, 6e, McGraw-Hill.
Edgley, C., 2014. A genealogy of accounting materiality. Critical Perspectives on Accounting, 25(3), pp.255-271.
Hematfar, M. and Hemmati, M., 2013. A comparison of risk-based and traditional auditing and their effect on the quality of audit reports. International Research Journal of Applied and Basic Sciences, 4(8), pp.2088-2091.
Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and earnings management. Review of Accounting Studies, 18(2), pp.414-442.
Pilcher, R., Gilchrist, D., Singh, H. and Singh, I., 2013. The interface between internal and external audit in the Australian public sector. Australian Accounting Review, 23(4), pp.330-340.
Rydin, Y., 2013. Using Actor–Network Theory to understand planning practice: Exploring relationships between actants in regulating low-carbon commercial development. Planning Theory, 12(1), pp.23-45.
Simpson, P., 2013. Ecologies of experience: materiality, sociality, and the embodied experience of (street) performing. Environment and Planning A, 45(1), pp.180-196.
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