Auditing and Assurance Flame Ltd

Question: Discuss about the Auditing and Assurance for Flame Ltd. Answer: Introduction As being a senior Auditor in EA partners, the firm is going forward to take a new client, Flames Ltd which is supermarket in Australia for compiling a risk assessment report as portion of initial stage for the preparation and auditing plan. The Auditor will be analyzing inherent risk of the new company. For assessment of the assessment will be done by looking to the information which will be released by the media through newspaper, news, and industry magazine as well as academic information. Further, the appropriate standard needs to need to be applied for the reference. After the assessment of the risk, a suitable control has to be suggested which will be mitigating the impact of that risk on the firm. Overview of the Company The company selected for explaining the inherent risk of the company is Flames Ltd. Flames limited is renowned retail groceries Supermarket of Australia, with headquartered in New Jercy. Flames Ltd. is basically dealing in Selling packaged foods, vegetables, fruit, meat, etc. But moving forward for the expansion DVDs, Magazines, Stationery hotel services as well as petrol sectors. Currently, it is running its store to more than 200 stores all over the Australia. Some of the Supermarkets are trading as Safeway' Shop in Victoria, which is including- 3 stores in Suburbs 4 area in the rural area. Flame is providing a opportunity to many of the people in the New Jercy. Customers of the Flames are giving a very good response to the shop. Flame is also moving forward for supplying the merchandise products in the budget of the customer. Further Flames is planning to expand its business all over the Australia and meeting to the High of success. Flame is one of the fastest growing retail compa ny in the field of the retail supermarket. Risk Assessment For doing the risk assessment of the company specifically, inherent risk needs to be considered. Therefore there will be evaluation of risk through material misstatement on the financial statements, which will be given by the client. A very important factor which will be increasing the inherent risk is the external factor and environment. By the annual report with ending June 2015 and half yearly report ending January 2016, here are some inherent risk which is recognized: Sale Revenue The Australian economy is growing at an increasing rate which is surely affecting the sale of the retail stores. The competitors in the market are too affecting the position of Flames Ltd. Due to this reason, there is some inherent risk in which some of the special audit consideration is required. The company also got 700 m $ from the sale of assets and property which is another source of income for the company. The revenues have increased by 2.03% as compared to the previous. It is because of the time during the festive season when the demand for food, beverages, and liquors are high (Hsu,2013). Inventory Further looking to the factor of the inventory flames Ltd has huge inventories. From the report, it is seen that the inventories are increasing form previous to the current year (van Kruidhof, 2013). The comparison is made with the inventories of the last two years which are showing increase in the inventory turnover ratio with 13.56 in the 2016 and 12.33 in 2015. Accounts Receivables looking to the receivable it is seen that with the increase in the sales revenue there is decrease in the accounts receivables. This is depicting the efficiency in the process of collecting the debt also due to some other reason. In the report released by the Moody's Investor services at 26 August 2015 (CRC 2015) has rated Flames Ltd in the Standards Poor which has increased from BB+ to A. So there was special consideration made to the accounts receivables people (Li,2014). Borrowings Looking to the factor of the borrowing it is observed the all the borrowing have been capitalized. Moreover, the (Australian Accounting Standards) AAS 34 says that it is necessary to capitalize the cost of borrowing only when if the acquisition are attributable directly, production and construction of assets which are qualifying. The borrowing cost is identified as cost during the period in which it is occurring. There has been increase in the borrowing form 1645 $ million to 2000 $ million in 2016. The company has increased the amount of debt with 17% in the current year which shows that risk of the business has increased. There huge chance of risk of the Flame Ltd. which may capitalize the borrowing expense which will have recorded as expense. The company will be getting to exposure of the high-interest risk because it is going to borrow at variable and fixed interest rates (Covello Merkhoher,2013) Liquidity risk Looking towards the current ratio and quick ratio, it shows a huge variation and changes. The current ratio has decreased, and there is increase in the quick ratio. This shows that company can meet the cash require of the company in some of the point. The company has sufficient amount of cash to meets the operation of the company. The company id more looking forward to delivering cash requirement for the bank. Effects of change in the foreign currency Flames Ltd is delivering its operation not only domestically but also internationally. So there is involvement of the foreign currency. Effect of it has been shown in the income statement of the company. But due to the inflation company is suffering from the huge loss in doing the transaction globally (Shariff Zaini,2013). Other Financial Liability The other financial liability of the company has increased for the current year. As well as in respect of paying other liabilities financial liabilities it has increased by 93% from the earlier year. There has been increase in 5.45% current liability which is not showing a positive signal to the companys position (Simunic et al., 2016). Conclusion After doing the complete analysis of the company's position in respect of the inherent risk, it can be concluded that most of the risk of the company lies in the current ratio, other financial liability, and risk in the investment of the foreign exchange. The inherent risk of that factor cannot be changed, so to minimize the risk, there need to be taken care for some of the factors. With a view to minimizing the risk, there have to be some steps taken, and this can be done while doing the process of audit some factors needs to be kept in mind: There sale revenue should be recorded correctly, after doing a proper verification of the vouchers, specially the invoices of the peak and festive season. This will help in maintaining the proper store of the account. In the case of the inventory, a proper security should be maintained, so that there are no chances of the inventory getting stoles or any employee doing fraud. The receivable of the Fame should be checked time to time and collection period of the receivable should be increased so that, there is no such due present in the collection of the debtors. Similarly, in the case of the borrowing, a proper checking needs to be done whether the classification of the borrowing has been placed in the correct group while maintaining the balance sheet of the company, as this is the ultimate place where the position of the company is reflected. Finally, come the point of the liquidity risk and investment form then foreign currency. So company can take step of adopting the process of hedging to minimize the risk which will be occurring from the difference in the value of currency. Further, the liquidity risk should be taken into consideration with increasing in the assets. Reference List Covello, V. T., Merkhoher, M. W. (2013).Risk assessment methods: approaches for assessing health and environmental risks. Springer Science Business Media. Hsu, H. C. (2013). Using MSN Money To Perform Financial Ratio Analysis.Journal of College Teaching Learning (TLC),7(9). Li, W. (2014).Risk assessment of power systems: models, methods, and applications. John Wiley Sons. Shariff, A. M., Zaini, D. (2013). Inherent risk assessment methodology in preliminary design stage: a case study for toxic release.Journal of Loss Prevention in the Process Industries,26(4), 605-613. Simunic,D. A., Ye, M., Zhang, P. (2016). The joint effects of multiple legal system characteristics on auditing standards and auditor behavior.Contemporary Accounting Research. van den End, J. W., Kruidhof, M. (2013). Modelling the liquidity ratio as macroprudential instrument.Journal of Banking Regulation,14(2), 91-106.