Financial Balance Sheet and Income Statement of Earth Foods Ltd
Evaluating company’s financial statement and presenting an audit report is essential for reducing number of frauds and mistakes. This assignment has evaluated the financial balance sheet statement and income statement of Earth Foods Ltd. In relation to their financial statement the assignment has presented an audit analysis for the year 2011.
Question 1: Explanation of the accounting techniques used by senior management
It has been understood from the case study of Earth Foods Ltd that this company has reduced their revenue in the income statement in the business. In the month of August in 2010, the organisation has paid $20 million to their growers. However, in the same month of 2011, the payment has increased by $40 million. Hence, the organisation has faced high cash expenses in the business. In the opinion of Louwers et al. (2015, p.14), the senior executives can use the revaluation accounting technique to manipulate their financial data. Hence, it is clear that the senior manager has re-valued their financial data and decreased their earnings amount. Additionally, the management has increased their financial expenses in the business by increasing their unauthentic payments. Applying the revaluation accounting technique has increased number of fraud and decreased the annual earnings in the business. Therefore, the company has increased their liabilities. Therefore, the company cannot meet their market obligation in 2011.
On the other hand, the payment to their growers has been based on the rules of International Financial Accounting Board (IFRS) standards. As the almond price has increased per year the organisation payment amount has also increased. The growers have received a high amount of revenue, however, the payment highly increased in 2011. This transaction has not followed proper rules and regulations of IFRS standard and the number of frauds increased in the management.
Question 2: Explanation of the incorrect accounting in the income statement
The Audit committee of Earth Food Ltd has investigated that the organisation has faced audit risk regarding their payment. In the year 2011, the payment to grower has increased from 20 million dollars to $60 million. However, the payment immaterial has been 1.63% for the current financial year. This has increased their market liabilities in the business and the company faced financial crisis. Additionally, the company increased their shareholders' equity capital by 1.226 billion dollars. It has been understood from the transaction of 2010, the organisation can pay a high amount of $20 million to the growers. As they can sell all almonds they have been able to collect a high sales revenue rate in the business. Hence, the organisation has paid $20 million as the purchased priced increased per year. The junior auditor has evaluated the financial statement and has presented an accurate audit statement for the organisation. As opined by Zamboni and Litschig (2018, p.133), in case the organisation follows the relevant accounting standard in the business they can reduce audit risks in the business. Therefore, the organisation has increased their cash assets in 2010 and paid their relevant payments to the growers.
On the contrary, it has been understood that the company has increased their payment amount by $40 million in the next year. Therefore, the company has increased financial risks in the business. As the senior managers have applied revaluation technique in the business they are able to manipulate the company’s financial data. In case the organisation sold all their almonds in the current year their payments cannot increase by $40 million. This has clearly shown that this company faced an incorrect accounting. The senior managers did not follow the rules and regulation of accounting standard in the business. In the views of Eugene et al. (2018, p.739), the organisation has to understand the potential of their employees to reduce the number of fraud. Hence, the purchase amount has increased in the business. The almond price in 2011 has been $2.90 per kilogram. Therefore, the company cannot recognise a high payment amount in the current year.
The auditor-firm has to evaluate their transaction and understand the purchased unit of 2011. Based on their purchased units the auditors can be able to calculate the relevant payment amount in 2011. Additionally, the company can increase their financial assets in the balance sheet statement. Hence, the short-term and long-term liabilities can reduce in the business. Additionally, according to Yoon et al. (2015, p.431), the auditor can calculate the payment amount of 2011 by understanding their immaterial rate in the current financial year. In case the immaterial rate is 1.63% per year then the payment increment rate of Earth Food Ltd should be $326,000 for 2011. Hence, the purchase amount would be $20,000,000 + $326,000 = $20,326,000 in 2011. In case the immaterial rate increases payment rate of the company can also increase in the business. Therefore, the company can increase their payment amount to approximately $30 million in 2011. However, it is impossible for the company to increase their payment amount from $20 to $60 million.
Question 3: Explanation of Earth’s business risks regarding high number of frauds
As the number of frauds and data manipulation increase in Earth Food Ltd, the management has consulted with Top Tier (TT) auditor firm. As studied by Askary et al. (2018, p.18), an auditor has to evaluate the client’s business environment to understand the employee’s potential. Therefore, the auditor can be able to evaluate their transaction and identify their data manipulator in the business. This can help the business organisation to reduce number of frauds and mistakes in the business. Moreover, the company can maintain high financial growth from year to year in the business.
Due to the audit risk in 2011, the auditors firm has to consider the following business risk while presenting the audit report.
i) The organisation can reduce their cash assets in the business. Therefore, management operation can reduce in the current year. Slow management operations can influence to reduce their annual productivity in 2011. Hence, sales revenue can reduce from year to year.
ii) In case the organisation reduces their income amount in the business the company can increase their market liabilities. Therefore, Earth cannot pay back their loan amount and debts in the future. Hence, possibility of bankruptcy can increase for the business.
The three aspects of fraud triangle are pressure on individuals, opportunity to commit fraud and ability to rationalise this crime. The organisation can face high number of audit risks in case of any of these three aspects is recognised in the business by auditor. Furthermore, in relation to their financial statement, it has been clear that the company has increased their number of fraud as the managers received an opportunity to commit fraud. As the internal control system of the organisation is slow managers are able to apply relevant accounting technique to manipulate data. Hence, the organisation has reduced their financial health in the business and assets can reduce. As argued by Sardasht and Rashedi (2018, p.69), the auditor has to evaluate the three aspects of fraud triangle in the business to understand the possible fraud factors in the business. Hence, the auditor can identify manipulator and take legal action against them.
Question 4: Description of the importance of professional scepticism in auditing and analyse whether TT exercised sufficient professional scepticism in their audit of Earth Foods
During an audit evaluation Top Tier (TT) audit firm has to depend on the management. The management has to provide the auditor with relevant business information and financial data. However, in the opinion of Lang and Soled (2017, p.423), an auditor cannot fully dependent on the management during audit evaluation. Auditor has to understand the potential of management employees. Therefore, the organisation can reduce their frauds and mistakes in the business. It is important for TT to maintain scepticism during in the evaluation. This can help to present an authentic data evaluation report in the business. Moreover, the auditor can identify the managers that increased audit risk for Earth Food Ltd in 2011.
During an audit evaluation, auditors follow three specific procedures in the business to understand the number of fraud such as inquiry, observation and inspection. However, in case the auditor identifies fraud in the management they can perform additional audit procedure to reduce audit risks. According to Yang (2016, p.6), in case an auditor identifies fraud in the financial statement they can perform a recalculation procedure to identify the audit risk. In this case, the recalculation procedure can be helpful for the organisation to understand the accurate payment amount in 2011. Hence, Earth can avoid unusual cash expenses in the business and gain financial assets. This can help the business organisation to maintain their financial performance from year to year.
In addition to that, after recalculating the financial data auditor can confirm the audit risk in the business. This can help the organisation take legal action against the data manipulator in the business. Moreover, the company can reduce their market obligation as the earnings can increase in the business. High financial assets can help the business organisation to meet their short-term and long-term market obligations in the business.
It is essential for the auditors to maintain scepticism in the management during the evaluation of their financial data. This can help TT to maintain a proper evaluation of the management. Additionally, the company can be able to take legal action against the data manipulator if auditor can maintain scepticism. Hence, the organisation can reduce their unjustified expenses from year to year in the business. Therefore, the company can increase their business in the future years. In accordance with Giner et al. (2016, p.285), scepticism can help the auditor to improve their audit quality in the business and reduce audit risks in a fast manner.
Question 5: Explain the process that auditors can use the company financial statement as an analytical tool
The auditors can perform their analysis based on the income statement and balance sheet statement. As the organisation increased their payment amount in their income statement the organisation has increased financial liabilities. Therefore, the auditor can reduce their audit risks in the business by recalculating the financial transactions in the business. This can help to calculate the actual payment amount in the business and the organisation can increase their financial assets. The opinions of Christensen et al. (2016, p.31) reflect that the organisation cannot identify accurate income amount until auditor evaluates their financial income statement. This can help the business organisation to increase their financial performance in the business.
It has been understood after evaluating the balance sheet statement of Earth Food Ltd the payable for growers has been added with Accounts payable & accrued liabilities in 2011. However, from 2006 to 2010 the organisation has recorded their payable for growers separately from accounts payable. As the managers receive access to the financial statement organisation balance sheet statement has corrupted (Ward and Forker, 2017, p.351). Therefore, the managers have manipulated their data in the business and increase financial expenses. This has influenced to increase their financial expenses in the business and the organisation has faced high data manipulation in the business.
On the other hand, after evaluating the financial income statement of Earth Food Ltd it has been understood that the organisation has increased their cost of sales in the business. However, the sales amount has increased in the business. Based on the high sales amount the management has calculated the gross profit amount. It is clear that the calculation of annual gross profit is accurate. However, as studied by Karadag (2015, p.26), the company requires to evaluate their financial data to understand if the cost of sales amount is authentic or not. On that basis, the organisation can increase their sales in the future. The calculation of net profit is accurate in the business. As the organisation has reduced unusual losses in the income statement, the organisation has increased their net profit amount in the business.
|Purchase amount ||$57,117||$56,942||$29,149||$35,755||$15,186|
Table 1: Purchase from 2007 to 2011
In relation to table 1, it has been understood that the organisation has reduced their purchase amount in business per year. Therefore, the company expenses have reduced in the business. Based on the annual purchase the organisation has paid the relevant amount to the growers. Hence, it has been understood that the company has maintained a ratio of 1:1 between the purchase and payable to growers’ amount. The ratio between purchase and payable to growers is clearly showing that the organisation cannot increase their payment amount from $20 million to $60 million in 2011. Burtonshaw-Gunn (2017, p.5) has stated that the organisation has to evaluate their financial data and understand their relationship with audit risks. Hence, the company can identify the data manipulator in a fast manner.
Question 6: Identification of two material weaknesses in Earth’s internal control system in 2011
After evaluating the financial statement of Earth Food Ltd it has been clear that organisation has been unable to take full control over the management. According to Ge et al. (2017, p.358), lack of control can increase opportunities to commit fraud in the business. Therefore, the organisation has increase frauds and data manipulation in the business. Due to lack of control, the organisation has been unable to reduce their financial expenses from year to year. This has increased financial crisis for the company and possibility of bankruptcy has increased. In the year 2011, the company has failed to maintain control over their management. Therefore, the managers have gained access to their financial statement in the business and increased their expenses. Hence, the company can increase financial difficulties in the future year. As argued by Newton et al. (2015, p.603), a business organisation has to improve their internal control system to monitor their employees and reduce number frauds.
In addition to that, the organisation is facing difficulties regarding their information system. Ineffective information system has increased number of frauds in the business. Therefore, the organisation has been unable to evaluate their transactions in the business. Furthermore, the company has reduced their cash assets in the business. In the views of Cheng et al. (2018, p.1111), the company has to improve their business communication system to reduce audit risks from their financial statement. Therefore, the company can maintain high financial performance from year to year.
As the organisation has failed to maintain an effective control system in the business, the managers increased data manipulation in their financial statement. Therefore, the company has increased financial difficulties. The auditor has to identify the manipulator and provide suggestion to the management to improve their internal control system. The auditor has to provide suggestion about the management faults of Earth Food Ltd.
It can be concluded that the Earth Ltd has increased their number of fraud in the business. Therefore, the auditor has to evaluate their financial data to identify the data manipulator. The organisation has faced difficulties regarding their internal control system. This has increased opportunity to commit fraud for the managers in 2011.