Auditing Theory And Practice For Coca Cola Amatil

Identification of the Key Inherent Risk Factors

Discuss about the Auditing Theory and Practice for Coca Cola Amatil.

This study encompasses real case example of Coca Cola Amatil, which is one of the largest company in Australia and has been operating since 1904. With global presence, the company is the world’s largest bottlers as well as distributors of the Coca Cola beverage range, which is operated, especially in the Asia Pacific region. The company has been constantly improving and adapting to the changes in the international market conditions (Coca Cola Amatil, n.d.a). The company aims to deliver shareholders returns, sustainably along with the availability of various facilities in production, warehouse and wide product range (Coca Cola Amatil, n.d.b).

The objective of this particular study is to illustrate the significance of audit planning for a large company such as Coca Cola. The detailed understanding of the real issues that may be faced by the company, while auditing is also covered in this assignment. Furthermore, the key risk factors inherent in nature were identified, so that the impacts of the audit on the company could be analyzed. Thus, with the help of this, appropriate audit objectives to avoid such risks were also indentified considering the auditing theories and practices of the company. In the later part of the study, the impacts of identified risks on the nature of audit evidence mix were examined in relation to the company. Moreover, the evidence mix consists of five key elements namely tests of control, tests of balances, tests of transactions, analytical procedures and understanding internal control.

 Considering ‘Coca Cola Amatil’ (CCA), particularly auditing perspective was taken into consideration, wherein its key risks were identified, which could have an impact on the future audit proceedings such and all the activities related to it. As per the requirements, the potential misstatements that are evident while conducting the auditing procedures are done under the principles set up by the Australian Accounting Standards Boards (AASB) and ASX standards in compliance with Corporation Act 2001. It has been complying with the accounting, financing and auditing standards, thereby facilitating continuous disclosures under the ASX listing rules and regulations as well as Corporation Act 2001 (Coca Cola Amatil, 2016). As per the requirements, the company reviews its practices on a regular basis in order to enhance the overall performance. This involves the key governance policies such as corporate governance, charters, various codes and policies and constitution (Coca Cola Amatil, n.d.c, CCA, 2016c).

Risk and Its Possible Impacts

The four critically inherent risks that are highlighted in the case of Coca Cola Amatil were interest risks, market risks, financial disclosure risks and operation and control risks. Apart from these risks, there were tax risks as well, such as increase in the rate of income tax or changes in tax laws would have adverse effects on its financial results. Although, it is believed that the estimates of the company were reasonable however, tax audits have been undertaken frequently to avoid any kind of misrepresentation in the reports as per the Audit Committee (SEC, 2015). Therefore, to mitigate these risks, it ensured to maintain tax transparency in the field of auditing, financing and accounting disclosures in its financial reports (CCA, 2016b).

The principle accounting policies and estimates that Coca Cola Amatil followed was ‘principles of consolidation’, ‘recoverability of current and noncurrent assets’, income tax, ‘pension plan valuation’ and revenue recognition. Wherein, the company made its disclosures with the support of its Audit committee. The assumptions/estimates were made based on the critical analysis of the current as well as future events and actions. The company also uses financial instruments, which are derivative in nature to reduce the effects of exchange rates of foreign currency, commodity prices, interest rates and other market risks (SEC, 2015). In order to mitigate the impacts and manage the risks that may be faced by the company, a risk management policy passed in the year 2011 that would significantly help in overcoming the same. Its key objective was to manage and forecast the risks. This policy was made in compliance with the Principle 7 under the ASX standards relating to the corporate governance and best practices. This in turn, shall increase trust among the public and attract more shareholders. The company further utilized ‘integrated risk analysis’ technique to evaluate the risks, thereby increasing its opportunities, which would enable it to competitive advantage. Correspondingly, ‘Audit and risk committee’ was formed, which ensured that there were no flaws in the financial reporting, thereby ensuring transparency, integrity and balance of disclosures and relevant information. This committee also assured internal control to maintain the effectiveness of the company and conducted internal and external auditing, so that it can satisfy internal auditors and facilitate the process of independent auditing. In addition, external auditors’ performance was also aimed to assess the risks by complying with the auditing standards (CCA, 2017).

In response to the inherent risks of tax and policy changes along with the other involved risks, the company had a committee charter to address the auditing and financial risks. This charter was responsible for reviewing the financial statements issued, which also focuses on making the required recommendations. It has been successfully covering all the risks with the assistance of various policies regarding business planning, business conduct, disclosures, environment, asset protection, fraud plan, occupational safety, purchasing, treasury, water and whistle blower protection (CCA, 2011). Thus, it can be opined that it has been systematically handling financial and disclosure risks.

Appropriate Audit Objectives

Additionally, the company also had the intension to eradicate the operational and control risks that might exist. There were risks related to treasury that was faced by the company, which included borrowing and currency aspects. Another prominent risk was related to sustainability and economic conditions along with various situations that aroused in the global market. In addition, it also involved risks related to material business. The primary business risks included macro-economic factors, geopolitical risks, occupational safety/health issues and regulatory changes. Hence, to have an equal share in the risks and reducing its impact has been collaborating with partners. Especially in the context of Australia, the company was facing the issue of decline in the overall earnings with respect to ‘Sparkling Soft Drink’ category as well as in Indonesia and New Zealand. This ultimately resulted from the wellness and health concerns of the customers, wherein the public were becoming more health conscious and avoided the consumption of artificial ingredients and sugar. This resulted in shifting their tastes and preferences to low calorie products especially in the developed countries (CCA, 2016a).

Therefore, with respect this case, there has been the risk of market changes in which the existing and potential customers changed their preferences, thus posing threat to the company. To tackle all these situations and emerging competition in the global market, the company aimed to be more cost-competitive. To mitigate the business risks, the company had effectively implemented the OH&S framework keeping into consideration the nature of activities that took place in the company, in order to overcome accidents that might occur. Thus, with the help of regular reviewing, the management processes and policies are focused on addressing these issues. Furthermore, external auditing was also done for covering other risks such as utility disruptions and natural disasters (CCA, 2016a).

 Thus, there may be certain appropriate audit objectives for future considerations, as there is a possibility of increase in its leverage due to the result of pressures that was faced by the company from its wholesale customers. The company must maintain its policies according to the requirements of the shareholders, so that they can be easily attracted in the larger numbers, as compared to its current numbers. There is also a possibility that the company can have structural changes. The position of CCA has also been less secured in case of carbonate beverages as per the Australian market, which was mostly due to the changes in the preferences of the consumers of beverages as well as the increase of the bargaining power of the wholesalers. These were acting as a risk for the company which resulted in lower earnings and growth. Thus, it was noted that the financial results for the year 2017 was weak as per the rating that was provided. Therefore, the company must focus on putting more effort on its rating methodologies while auditing along with increasing the verifiability of its accounting and financial disclosures in the annual reports and other relevant documents (Staff, 2017).

The Audit evidence mix is a technique that is used to get the audit evidence extracted from the integration of substantial procedures and tests of control, which are intended to be obtained by the auditors to select the audit options. The test of control includes tests that are performed in order to obtain the audit evidences. Consecutively, the substantial procedures included test that were performed to detect the misstatements in the material information of the company. This was designed for suitable and effective operations of the internal control and accounting systems. These included tests of details of balances and transactions along with the analytical procedures of the financial statements. Therefore, companies must have pre-determined procedures to obtain the required Audit evidences. The basic procedure to be followed was conducting inspections, then after the results must be observed. Furthermore, inquiry must be done with confirmation, which is then followed by analytical procedures that must be carried along with computation (Accounting Financial & Tax, 2009).

The inspection must be done basically regarding the tangible assets of the firm along with its previous records and documents. The observation must be done by the auditor and inquiry must be carried forth to gather information regarding all the aspects of the audit evidence. After all these processes, confirmation must be presented as a written response form a third party after verification. In addition, computation involves authenticity and accuracy of the information collected through recalculation and re-performance. Subsequently, the analytical procedures include comparing financial information with the generated information, other anticipated results such as budgets in an industrial basis. Furthermore, the relationship between the non-financial and financial information is examined. All these information generated are critically analyzed to obtain sufficient and appropriate audit evidence mix. Considering these necessities, it must be complying with the international standards for auditing. This ensured proper compliance of material aspects with the requirements of essential procedures and basic principles under the International Standard on Auditing 500 ‘’Audit Evidence’’ (Accounting Financial & Tax, 2009, HKICPA, 2017).

With particular reference of the risks that were apparent in the company, Coca Cola Amatil, the impact of individual risks on the evident mix was examined. Various risks were already mitigated with the help of the risk framework used by the company. Additionally, the management department and moreover financial audit was done internally as well as externally, which was one of the important phases of its accounting and financial reporting. The material risks such as exchange rates, price changes and similar issues can be mitigated with the support of appropriate evidence mix, which will enable the engagement of financial audit, thereby generating evidences for audit collection. Thus, this will eliminate any chances of misstatements and helps in managing the material business risks (CCA 2016). With proper audit evidence mix usage, the current risk it was facing can be mitigated, as the company will ensure proper representation of the facts and figures. This in turn shall reduce the possibility of any risks because the company shall built trust among the investors and shareholders with no red flags or misstatements in the accounting and financing reports regarding disclosures as per AASB and ASX standards. Furthermore, conducting proper tests and using assertions while obtaining the audit evidence during the audit procedures must be systematically and critically facilitated to reduce the possibility of any risks (AUASB, 2013). Therefore, for the purpose of monitoring such risks, the companies require to establish a risk assessment report as per Corporations Act 2001, which assists in effectively manage the possible financial risks through insurance, contracts or currency swaps (Austlii, n.d.a, Austlii, n.d.b).

Conclusion

In an overall basis, conclusions can be drawn that considering all the risks, the key inherent risks factors affected the performance of Coca Cola Amatil and accordingly shall have an impact on its future audit and its planning. However, understanding the concept of Audit evidence mix, the effect of the risks that the company was facing especially was the change of tastes and preferences of the customers, which require to be mitigated. This was the greatest concern for the company therefore, with initially improving the product lines according to the demands. This will thereafter, accordingly plan out the changes in the audit evidence mix. Furthermore, by forecasting the requirements during the procurement of raw material procurement and manufacturing helps in maintaining the quality of information and disclosure.

References

Accounting Financial & Tax, 2009, Audit evidence, Home, viewed 22 September 2017, <https://accounting-financial-tax.com/2009/10/audit-evidence/>.

AUASB 2013, ‘Auditing standard ASA 500 audit evidence’, Auditing and Assurance Standards Board, pp. 1-20.

Austlii, n.d.a, Corporations Act 2001 – SECT 763C when a person manages financial risk, Commonwealth Consolidated Acts, viewed 22 September 2017, <https://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s763c.html>.

Austlii, n.d.b, Corporations Act 2001 – Sect 892K Risk assessment report, Commonwealth Consolidated Acts, viewed 22 September 2017, < https://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s892k.html>.

CCA, 2011, ‘CCA risk management policy’, Group Risk, Fraud and Security, pp. 1-4.

CCA, 2015, ‘Corporate Governance Statement 2015’, Coca Cola Amatil, pp. 1-9.

CCA, 2016a, ‘Annual Report 2016’, Coca Cola Amatil, pp. 1-133.

CCA, 2016b, ‘2016 tax transparency report’, Coca Cola Amatil, pp. 1-10.

CCA, 2016c, ‘Corporate Governance Statement 2016’, Corporate Governance at Amatil, pp. 1-12.

CCA, 2017, ‘Audit and finance committee charter’, Coca Cola Amatil, pp. 1-5.

Coca Cola Amatil 2016, ‘2016 Half Year Report (Including Appendix 4d)’, Coca-Cola Amatil Limited, pp. 1-31.

Coca Cola Amatil, n.d.a, Our history, Our Company, viewed 22 September 2017, <https://www.ccamatil.com/our-company/our-history >.

Coca Cola Amatil, n.d.b, Our company, Coca Cola Amatil, viewed 22 September 2017, <https://www.ccamatil.com/en/our-company>.

Coca Cola Amatil, n.d.c, Corporate Governance, Our Company, viewed 22 September 2017, <https://www.ccamatil.com/en/our-company/corporate-governance>.

HKICPA, 2017, ‘Statement of auditing standards 500 audit evidence’, Hong Kong Institute of Certified Public Accountants, pp. 1-13.

SEC, 2015, Annual report pursuant to section 13 or 15(d) of the securities exchange act of 1934, United States Securities and Exchange Commission, viewed 23 September 2017<https://www.sec.gov/Archives/edgar/data/21344/000002134416000050/a2015123110-k.htm#s9D6DEE6912FD82A81B62CEF8CD2DB5CD>.

Staff, R, 2017, Fitch: Coca-Cola Amatil’s leverage to rise; weaker Australia earnings, Reuters, viewed 22 September 2017, < https://in.reuters.com/article/india-sensex-nifty-stocks/sensex-nifty-end-lower-banks-fall-idINKCN1BX0NQ>.