Analysis of Bega Cheese: Identification of Audit Risks
Instructions:-
Demonstrate the ability to critically evaluate information relating to Bega Cheese and apply analytical skills to identify potential audit risks. This will require extensive research on Bega Cheese’s operations, strategies, critical analysis of the annual report and any other information that you have obtained.
Length and format
The assignment shall be presented in the below format:
3. A title page containing the title of the assignment.
4. A table of contents
5. An executive summary
6. The build of the assignment (MS word, maximum 3,000 words, excluding references). Appropriate reference citations throughout the assignment are expected. Each page must be numbered.
7. References (excluding word count)
Required:
1. You are part of the audit team responsible for planning the Bega Cheese (parent and the consolidated economic entity) audit engagement for 2017. You and your colleagues have been assigned to gather relevant background information and prepare a report for a meeting with your senior audit managers and partner. In the report you must address the following issues:
a. What are the areas in which Bega Cheese conducts its operations?
b. Which particular laws/regulations (other than financial related categories which include legislations such as: Corporation Act 2001, Australian taxation laws, etc.) affect its operations? You need to list SIX laws/regulations.
2. Identify FIVE inherent risks for the audit of Bega Cheese. For each inherent risk, identify the account or accounts that may be affected.
3. With specific reference to Bega Cheese’s corporate governance arrangements, you need to assess the likelihood of the potential reliance that could be placed on the overall control environment.
Your conclusion should be supported by at least FIVE factors.
4. Recently Bega Cheese acquired the Vegemite and other Kraft brands in a $460 million deal that takes it far from its roots as a cheese producer. How will this acquisition affect your 2017 audit plan for Bega Cheese?
Your answer should be supported by at least FIVE factors.
5. In early 2016, Bega Cheese and Blackmores set up their joint venture- called Bemore- to supply infant formula and other nutritional foods to consumers in Australia and Asia (mainly China). However, due to regulatory change in China and intense competition the joint venture did not go as well as initially hoped. As a result, there was a dramatic fall in the share price of Bega Cheese. How will this fall affect your 2017 audit plan for Bega Cheese?
Your answer should be supported by at least FIVE factors.
Solution
Analysis of Bega Cheese: Identification of Audit Risks
Table of Contents
Selling Facilities for Acquisition. 5
Strategic techniques for operational efficiency. 6
The management – promoting strategic goals. 6
Laws Affecting the Operations of Bega Cheese. 7
The Australian Consumer Law.. 7
Corporate Law Economic Reform Program Act 2004. 8
The Competition and Consumer Act 2010. 8
Analysis of Bega Cheese’s Annual Report 9
Audit Risks and Risk Factors. 11
Integrity of Governance and Client Acceptance. 11
Financial Health of Bega Cheese. 11
Risk associated with Financial Reporting. 11
Bega Cheese’s Overall Control Environment 12
Executive Summary
The
Bega Cheese is one of the most trusted and credible dairy companies in
Australia. The Company offers a wide range of dairy products and services that
require the performance of different operations. The manufacturing, processing,
supplier service, milk supply, bio-nutrients, nutritionals, and human resources
management are some of the critical components that ensure organizational
efficiency. Effectiveness in these operations reduces risks and promotes profit
efficiency. A critical evaluation of the Company, its operations, strategies,
and FY2016 annual report facilitates risk management and analysis. This makes
the identification of the potential audit risks possible. This essay offers an
articulate critical discussion of BC’s operations, strategies, and annual
report through a critical analysis of literature and information concerning the
Company to outline possible risks.
Bega Cheese (BC) manufactures and distributes natural and processed cheese, powders, and processes butter and ensures the production, packaging, and distribution of cheese products. Over the years, the Company has continued to grow and expand its operations in the different areas for enhanced productivity, performance, and efficiency. The Company was founded in 1899 and commenced operations from North Bega in Australia. According to Fitzgerald (2017), the Company continues to grow its operations and expand. This has over the years resulted in the expansion of BC and the adoption and implementation of effective strategies for market development and entry. It continues to place emphasis on continued revenue growth, improved financial performance, sustainable operations that consider the future, and the development of shareholder value and wealth through dividend growth. Moreover, BC focuses on establishing effective partnerships with customers to build trust and support. These aspects among others make Bega one of Australia’s most credible dairy company. This essay offers a critical evaluation of the Company’s information to outline potential audit risks.
Founded in 1899, BC has grown to become Australia’s largest and one of the most credible dairy companies in the country. Its continued market development and expansion has resulted to global influence. BC products are sold the world over, making BC’s global influence felt, which earns the company global reputation. The BC opened Original butter plant in 1900 and acquired the Original Co-op Store, which enabled its expansion in 1920. Further, the Company constructed another plant in 1924 and changed its name to the Bega Co-operative Society Ltd. in 1944. The latter years of the 1940s characterized the establishment of a department store and milk deliveries in the early 1950s (Bega, 2017). The BC started manufacturing powder products in 1956 before it commenced its operations from a branch in Canberra in 1960. Over the years, BC has expanded, acquired, and employed other market entry techniques to grow its operations and services. Recently, the development of Tatura facility in 2014, plans to sell Victorian sites for the acquisition of Vegemite and other brands for $460 million continue to shape the Company, its operations and strategies. A critical evaluation of the operations and strategies will create an effective platform for the identification of the potential audit risks.
A critical strategy for the Company growth throughout its history has been acquisition. The Company acquires other existing companies to expand its operations, enter new markets, and achieve a greater competitive advantage. According to Fitzgerald (2017), BC has acquired multiple companies and brands since its inception. However, the recent acquisitions define the company’s application of acquisition as a strategy. The Company’s strategic move towards purchasing Vegemite shows its dedication towards the achievement of its goals. The Company bought Kraft Mac & Cheese and Vegemite for a total of $460 million. The deal resulted in the expansion of the Company into the New Zealand market. The purchase and entry into consumer goods market promotes the Company’s attractiveness and competitiveness. According to Fitzgerald (2017), the move caused a rise in shares by over 15 percent. The strategy aligns with the Company’s objective of expansion and entry into new markets. The Vegemite and Kraft companies are a part of the Mondelēz division, which comprises of other brands from different sectors. This diversifies BC’s operations.
Selling Facilities for Acquisition
Bega Cheese strategic move of selling Victorian sites to fund the acquisition of Vegemite influences its operations significantly. The Company required funds up to $460 million to acquire Vegemite and to expand and diversify its operations. The company sold two facilities in Victoria to raise $200 million contributing to the $460 million required for the acquisition (Fitzgerald, 2017). While initially the Company preferred the application of another strategy to raise the money needed for making the purchase. The initial strategy was to pay the $460 million through bank debt before agreeing to sell the facilities. Facilities placed for sell included the spray dryers and a plant for processing instant formula at the Tatura facility. The acquisition placed the company at an elevated ground for diversification through the sale of Kraft branded and Vegemite products (LaFrenz, 2017). However, its impact is equally great to BC, as auditing becomes more complicated and poses significant audit risks.
Strategic techniques for operational efficiency
Moreover, Bega Cheese Company employs other different strategic techniques to carry out its operations while ensuring effectiveness and operational efficiency to boost profitability and create wealth for the shareholders. The strategies focus on integrating innovation, creativity, efficient manufacturing, enhanced supply and customer relationships and development among others. According to Bega Cheese (2017), the General Managers implements measures to ensure the achievement of success in manging the business effectively through the integration of the different tools and aspects of management and leadership. The current General Managers have broad knowledge, expertise, and experience to handle the different functions of the company successfully and ensure the achievement of the set organizational goals. The strategic move of employing the most suited and talented individuals for specific positions guarantees the company efficient leadership and management. The General Manager – Ingredients, McDonald, has the necessary experience to promote the organization’s goals in leading the company by facilitating end-to-end supply chain, operational efficiency, and procurement (Bega Cheese, 2017).
The management – promoting strategic goals
Moreover, the other General Managers contribute significantly towards the promotion of the Company’s strategic goals. The manufacturing, supplier Services and milk supply, and human resource managers, for instance, employ strategies measured for the achievement of the Company’s strategic goals. To start with, the General Manager for human resources maintains the responsibility of ensuring the development of a motivated, efficient, and high-performance workforce. The Company’s employees work towards the achievement of shared goals. The Manager creates leaders and improves their ability and focuses on the improvement of the performance of employees. Additionally, the management recruits and retains talented and motivated employees while maximizing their contribution in the processes. The manufacturing, supplier Services and milk supply managers serve equally important roles in the promotion of strategic goals of the Company (Bega Cheese, 2017). The coordination of the different units promotes coherence, effectiveness in manufacturing and processing, and supply of the products.
The financial operations of the Company require a team of experts that works towards the achievement if strategic and corporate development. Bega Cheese has an efficient finance team led by the Chief Financial Officer, Colin Griffin, an extensively experienced accountant and auditor, with over twenty years of experience as a finance manager and accountant within the diary sector. The financial operations of the Company rely majorly on the management of the finance team. The effective management of the team facilitates efficiency in handling finance, administration, treasury, and legal affairs concerning the financial operation of the company (Bega Cheese, 2017). The broadness of the function makes it prone to audit risks.
Laws Affecting the Operations of Bega Cheese
This law protects consumers and ensures that manufacturers offer products that meet the set quality standards. Like every business in Australian jurisdiction, the Bega Cheese must adhere with this law. Further, the law outlines guidelines for business conduct, shuns unfair business practices, and regulates safety of the products. Failure to meet the standards poses a fundamental risk for the company, which may affect the
These laws encompass state and federal laws that place emphasis on the protection of consumers and businesses from unfair practices. They work concurrently with the Codes of Practice to ensure fairness and competitiveness, and inform the consumer (Business.gov.au, 2016). The Bega Cheese must comply with these laws to avoid costly lawsuits.
Corporate Law Economic Reform Program Act 2004
As a simplification of the Corporations Act 2001, the Corporate Law Economic Reform Program Act 2004 outlines clearly the components of the former law to ensure effective application in managing business entities. Also known as the Audit Reform and Corporate Disclosure, the law integrates audit oversight, defines auditor qualifications, appointments, and independence among others. Further, it lays a framework for financial reporting that guide business entities and require them to abide in accordance with the Corporations Act 2001 (Australian Government, 2017).
This law consider the rights and concerns of the employer and employees and facilitates effective enterprise bargaining (Bukarica & Dallas, 2012). The integration of the Act in enterprise bargaining gives the employers and the employees a chance to express their concerns.
The Competition and Consumer Act 2010
This Act serves as one of the fair trading laws. It ensures fairness in trading to allow every business to compete fairly and effectively. It covers areas of critical concern for manufacturing companies like Bega Cheese such as interaction with suppliers, competitors, consumers, retailers and wholesalers. It highlights key issues such as market practices, the codes of practice within an industry, mergers & acquisitions, and collective bargaining, and safety among others. The Bega Cheese must consider this law and apply it effectively to avoid liability (Business.gov.au, 2016).
Analysis of Bega Cheese’s Annual Report
The analysis of the operations of BC show a Company that has shown an increase in revenues over the last financial year. BC generated more than $1,196.00 million in revenues in the FY2016, which was a notable increase of 7.5% (Bega Cheese Limited, 2017). While the Company focuses on the development of a higher gross-margin across, emphasis is placed on value addition within the product mix. In the FY2016, Bega Cheese focused on continuity of focus directed towards the conversion of costs in accordance with the rising manufacturing volumes and changes within the product mix. Further, the company recorded an increase in the utilization of certain products such as the nutritionals canning among other which required improved performance and functionality of the blending facility (Bega Cheese, 2017).
The
Company launched effective Bio-nutrients platform, announced the amendment of
the agreement of supplying infant formula, and the creation of a shared
operation between the Group and Blackmores. The launching of the Group’s Bio-nutrients
platform involved the appointment of the General Manager Bio-nutrients and the
identification and discussion of the business opportunities. Moreover, the
amendment of the agreement involved Bellamy’s Australia Limited and resulted in
the increment if the Company’s cumulative total to be sold to the esteemed business
partner. Further, in the FY2016, the BC announced and integrated operations
with the Blackmores thus receiving equal share in marketing, branding, selling,
and distribution. For instance, in January 2016, the Company launched a
co-branded product named Blackmores/Tatura infant formula that immediately
started distribution and sale (Bega, 2013).
The risk factors that may influence the audit include:
Engagement risk involves the risk that the team may face in dealing with Bega Cheese. For instance, following the failure the company experienced in 2015, there is a likelihood of material misstatement in the financial statement that the team may fail to find. The acquisition of Vegemite and Kraft brands increases the risk following the need to audit the parent company.
Integrity of Governance and Client Acceptance
The quality of the Company’s governance and the financial status of the company may pose another audit risk. Bega Cheese initially was relying on a bank debt but opted to sell facilities for the acquisition. This shows the company had difficulties recovering from low profitability of 2015. Also, the integrity of the governance and its ability to allow independent auditing may present a challenge. There is a need for BC to engage in the process without influencing it, to ensure quality results.
Financial Health of Bega Cheese
This audit risk poses a major challenge to the auditor considering a possibility of a lawsuit upon the client’s declaration of bankruptcy. There is a need to determine the financial health of the company to avoid wrongful accusation for misstated financial statements by attorneys, investors, or creditors. The BC shows a likelihood of such a scenario considering it previous financial year loss. There is a need to assess the possibility of misstatement of the financial statements by the management.
Risk associated with Financial Reporting
Bega Cheese financial health at the moment present a significant risk in financial reporting. The team of auditors will focus on determining the quality of the internal controls of the company and the complexity of the transactions and reports. The acquisition of the Vegemite and shared deal with Blackmores, the complexity of the transactions increases increasing the financial reporting risk.
High-risk operation
The major risk factor regarding the BC is the fact that the company has inadequate or limited capital. The team must investigate the influence of this factor in influencing the economic prospects of the company to determine areas of concern, the possibility of future cash flow instability, and the effectiveness of the strategic/operational plans.
| Machine failure | Property, plant and equipment account |
| Energy supplies | Production cost |
| Technological equipment such as computers | Footnote disclosure for manufacturing equipment |
| Energy supply | Inventory, cost of products, |
| Industrial actions |
(Bega, 2013)
Bega Cheese’s Overall Control Environment
The BC’s corporate governance focuses on the management of risks and the maintenance of internal control. The management has established effective standards, structures, and processes of ensuring internal control. The management of Bega Cheese Group has established platforms for risk management and internal control systems, which work effectively to assess the effectiveness of the organizations design. Such an overall control environment is dependable. Moreover, the assessment and overseeing of the controls, organizational policies and procedures to ensure their efficiency is critical to the development of an efficient internal control system (Bega Cheese, 2015). The assessment and evaluation of the control system allows its improvement through the integration of more effective approaches and tools.
Further, monitoring and reviewing the risk register annually enhances risk management while annual insurance ascertains adequate coverage. In the process of risk management and internal controls, the management ensures efficient communication, competence, and integrity. The integration of these elements in the control environment in Bega and Cheese Group improves the effectiveness of the processes significantly. Most importantly, the compliance of the internal control systems with the laws, the reflection of all materials in the financial statements, and the consultation in different matters concerning the overall control environment boosts its reliability and potential reliance, making it applicable I the near future (Bega, 2013).
The critical analysis of the Bega
Cheese Company presents the company as a credible dairy company in the
Australia with effective leadership and management. The application of
analytical skills in the evaluation of its operations and strategies allows the
determination of the audit risks affecting the company. Bega Cheese has in the
recent past acquired companies and merged with others to continually improve
its market share, competitiveness, and enter new markets. The market entry and
development strategies continue to influence its growth and expansion. In
acquiring Vegemite and Kraft brands, the company was relying mainly on
receiving a loan from a bank before shifting strategy to sell facilities in
Victoria. The acquisition, worth $460 million, served an important role in
promoting the development of the company. However, the analysis shows that the
company had minimal finances for the acquisition and, therefore, the sale of
the facilities. Moreover, the company applies mergers as a strategic move for market
entry and development. The company merged with Blackmores to rebrand its
products making them more attractive in Asia as well as in Australia. Most
importantly, the different operations and functions of the organization under
the broad and effective management of the company continues to influence the
different organizational aspects. The management ensures adherence to the laws
and regulations of Australia. Ensuring this adherence and the implementation of
an effective internal control system improves the company’s ability to address inherent
risks, audit risks, and manage the risks facing the company.
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Bega. (2013). Bega. Retrieved from Bega Cheese: http://www.asx.com.au/asxpdf/20130912/pdf/42j9x38vcn2rl8.pdf
Bega. (2017). Brief History. Retrieved from Bega Cheese: http://www.begacheese.com.au/student-resources/brief-history/
Bega Cheese. (2015, June 22). BEGA CHEESE LIMITED (ACN 008 358 503) AUDIT & RISK COMMITTEE CHARTER. Retrieved from Bega Cheese: http://www.begacheese.com.au/wp-content/uploads/2015/07/Audit-and-Risk-Committee-Charter-v1.4.pdf
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Fitzgerald, B. (2017). Dairy company Bega Cheese to sell Victorian sites to fund Vegemite acquisition. Retrieved from ABC: http://www.abc.net.au/news/rural/2017-02-28/bega-tatura-and-derrimut-facility-sale/8309278
LaFrenz, C. (2017). Bega Cheese buys Vegemite in $460m deal. Retrieved from Financial Review : http://www.afr.com/business/retail/fmcg/bega-cheese-buys-vegemite-in-australia-20170118-gtu82r
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