Auditing for Bio Sustainable Feeds Ltd

Discuss about the Auditing for Bio Sustainable Feeds Ltd.

Introduction

The audit of the financial statement has been crucial to enhance the confidence of the users of such financial statements since its introduction. It is essential for every business entity to get the financial statement audited every financial year by an independent accountant. The independent auditor’s opinion provides assurance to the stakeholders that the management has prepared the financial statements as per the requirements of the applicable framework (Loughran, 2010). The stakeholders rely for their investment decisions on the auditor’s report, thus, it is crucial that the auditor performs duties with integrity and professional care. The guidance in regard to audit of the financial statements of the companies registered and operating in Australia are contained in the Australian auditing standards issued by the Auditing and Assurance Standard Board of Australia (Australian Government, 2016).

The provisions contained in the auditing standards require the auditor to follow a comprehensive process that includes pre-audit considerations as well as post audit considerations. In this context, a report has been represented here that deals with the issues arising in the audit of the financial statements of Bio-sustainable Feeds (BSF) Ltd, which is a company registered and operating in Australian. The primary activities of the company involve undertaking the research to find out sustainable aqua-culture feeds. This report provides an in-depth coverage of the steps that an auditor is required to take before accepting an audit engagement. Further, the report covers assessment of the audit risk and the audit considerations in forming an opinion on the financial statements and other statements such as prospectus and environmental sustainability statement.                             

Steps Required Before Accepting an Audit

The auditor is required to agree the terms of the audit with the client before accepting an audit engagement, which is done through engagement letter. The engagement letter need to be set out in such a manner that the covers the responsibilities of the auditor and the management comprehensively (Garczynski, 2008). The terms of the engagement letter should be drafted so neatly and cleanly that no doubt for controversy as regards the work to be done is left over. Thus, firstly the auditor of Bio-sustainable Feeds (BSF) Ltd should get the terms of the audit agreed with the company. After getting the legal formalities done regarding audit terms, the auditor should pay particular attention to the preconditions of an audit (Garczynski, 2008).

The preconditions of an audit relate to the determination by the auditor that the entity follows applicable reporting framework in preparation of the financial statements and acknowledgement from the management that they understand their duties in regard to audit (ACCA, 2016). Thus, the auditor of Bio-sustainable Feeds (BSF) Ltd should ensure that the company has applied the framework as prescribed by the Australian Accounting Standard Board in preparation of the financial statements. Further, the auditor should take in writing from the management that they understand their duties as regards preparation of the financial statements, access to full information to the auditor, and access to the books of accounts to the auditor at all relevant times.

After getting the above discussed things done, the auditor should prepare audit plan and program before starting the actual work of verification (Gray & Manson, 2007). The audit plan is broad document that specifies the areas of audit concern, timing of the verification, and the work force to be deployed on the assignment. After outlining the audit plan, the auditor prepares audit program that is more detailed and specifies the audit procedures to be undertaken to collect the audit evidence. Thus, in respect of audit of Bio-sustainable Feeds (BSF) Ltd, the audit should draw an audit plan and then prepare a comprehensive audit program (Gray & Manson, 2007).

In preparation of the audit program, the auditor should special attention to the crucial areas of the financial statements (Gray & Manson, 2007). For example, in case of Bio-sustainable Feeds (BSF) Ltd, the research and development expenditure and the patent development could be special audit areas requiring the auditor to work in detail. Further, there are ethical considerations, which should be taken into account by the auditor of Bio-sustainable Feeds (BSF) Ltd before accepting the audit (Kan, 2013). Those ethical considerations involve ensuring the independence by the auditor and maintaining client relationship. For this purpose, the auditor should ensure that there is no conflict of personal interest in conducting the audit of Bio-sustainable Feeds (BSF) Ltd. Further, the auditor should also communicate to the previous auditor of the company to know the reasons for not accepting the engagement if any (Kan, 2013).

Assessment of Audit Risk

The assessment of audit risk is very important in conducting an audit of the financial statements of an entity. The auditor is required to assess the risk at the initial level when planning the audit as well during the proceedings of the audit. The audit risk comprises of three components such as inherent risk, control risk, and detection risk. The inherent risk and control risk depend upon the organization while the detection risk relates to the auditor’s procedures. If the inherent and control risk are assessed as high, the auditor should be endeavored to reduce the detection risk so as to bring the overall audit risk to the appetite level (Delaney & Whittington, 2012). Computation of audit risk in respect of Bio-sustainable Feeds (BSF) Ltd has been shown below:

Audit Risk =  Inherent Risk*Control Risk*Detection Risk

Audit Risk =  90%*5%*80%

= 3.60%

The audit risk computed in respect of Bio-sustainable Feeds (BSF) Ltd arrives at 3.6%. This implies that there is 3.6% probability that the auditor gives an inappropriate opinion in respect of the financial statements of Bio-sustainable Feeds (BSF) Ltd. However, the percentage of acceptable audit risk depends upon the auditor’s judgment, therefore, if 3.6% audit risk is acceptable in the given circumstances, the auditor can accept the engagement (Delaney & Whittington, 2012).      

Audit Program for the BSF Ltd

Audit program is prepared to list out the audit procedures and the time at which these procedures will be applied for collecting the audit evidence (Johnstone, Gramling & Rittenberg, 2015). While preparing the audit program in respect of audit of Bio-sustainable Feeds (BSF) Ltd, the auditor should remember that the all the special consideration areas are adequately identified. Further, the audit program should be sufficiently detailed that it serves as a complete guide to the staff involved in the audit process (Ordelheide, 2016). In order to make to the audit program more flexible, the auditor can subdivide the audit consideration areas into two parts such as general and special. The general audit consideration area should cover the audit procedures applied to the normal risk items, while, the high risk items of the financial statements should be covered under the special audit consideration area (Ordelheide, 2016).

Audit Program of Bio-sustainable Feeds (BSF) Ltd: General/ Normal Risk Items
Items	Audit Procedures	Timing	Team Member
Cash	·         Identify the sources of cash receipts and payment ·         Check the internal control process with respect to cash receipts and payments ·         Check the authorizations for payments above $1000. ·         Conduct physical count of cash and cross check with the book balance ·         Test check the cash receipt and payment vouchers on basis	September 12, 2016	Mr. X (Senior audit assistant)
Revenues	·         Identify the primary and secondary sources of revenues ·         Check sale invoices and entries in the sales day book ·         Cross check total monthly sales from Excise and sales tax records	September 13, 2016	Mr. Y (Senior audit assistant)
Purchase of Materials	·         Identify the nature of material (trade or non  trade)  ·         Check purchase bills with the purchase day book ·         Check order book with the purchase day book	September 14, 2016	Mr. Z (Junior audit assistant)

Table 1: Audit Program: General Risk Items (Cpaaustralia.com, 2016)

Apart from the above listed items, the verification of the customers and suppliers ledgers and the day to day expenses are also covered in the normal risk areas unless the circumstances warrant otherwise. Further, the audit program also includes the verification of the internal control environment, processes, and the organization structures.

Audit Program of Bio-sustainable Feeds (BSF) Ltd: High Risk Items
Items	Audit Procedures	Timing	Team Member
Research and development expenditure	·         Identify the nature of activities undertaken in the research ·          Ensure compliance with the AASB1011, “ Accounting for research and development (AASB 1011, 2016) ·         Identify the expense on patent to be charged to revenue and that which is to be capitalized	September 15, 2016 to September 20, 2016.	Mr. A (Engagement partner )
Government Grant	·         Ensure that accounting treatment is given as per AASB 120.	September 21, 2016	Mr. A (Engagement partner )
Going Concern	·         Enquire the management about non compliance with environmental laws ·         Take legal advice as to the repercussion of non compliance with environmental laws	September 22, 2016	Mr. A (Engagement partner )

  Table 2: Audit Program: Special Consideration Items

The above audit areas/items have been identified as high risk and hence require special attention of the auditor. Further, considering the high risk, these items have been assigned to the engagement partner for verification and the time period for verification has also been enhanced.

Verification of R&D Transactions of BSF Ltd

While verifying the financial transactions, the auditor should ensure that the accounting treatment given by the company is in accordance with the accounting standards and complies with the provisions of the Corporations Act 2001. In respect of the research and development expenses, the Australian Accounting Standard 1011 provides for the measurement and the treatment to be given in the books of accounts (AASB 1011, 2016). The accounting standard provides ruling as to what expense to be treated as of revenue nature and what to be capitalized in the books. The revenues nature expense on the research and development is charged to the income statement in the year in which it is incurred, while, the capital nature expense is deferred. There is a specified criteria in the accounting standard that should meet before taking decision for the deferment of the research and development cost. Thus, the auditor should carefully check whether the criteria as specified in the standard is met for deferment of the research and development cost (Gramling, Johnstone, & Rittenberg, 2012).

In the present case, the major part of operations of Bio-sustainable Feeds (BSF) Ltd comprises of research and development activities. Therefore, the auditor should be attentive while verifying the expenses incurred on the research and development cost. Further, the company also receives grant from the government agency namely Commonwealth Scientific and Industrial Research Organization (CSIRO). The treatment of grant received for the research and development expenses is also prescribed in the accounting standard 1011 (AASB 1011, 2016). Thus, the auditor will have to pay due regard to the accounting treatment given to the money received from CSIRO as grant to meet out the research and development cost by the company.

As per the provisions of the accounting standard, the research and development cost is deferred only when there is strong probability that the cost will be recovered in the future. This implies that if the circumstances indicate that beyond all reasonable doubts the cost incurred on research and development activities will benefit the company in the future (AASB 1011, 2016). The cost deferred in the book of accounts is amortized over the period of time in the proportion in which the future economic benefits from it are expected to flow to the company. Further, the research and development cost deferred is also required to be reviewed on each balance sheet to see for impairment in the recoverable amount if any. If on the balance sheet date the recoverable amount is found lower than the carrying amount shown in the books, the difference is charged to the income statement as impairment loss (AASB 136, 2010).

In the present case of BSF Ltd, the auditor should be concerned about the expenditure of $360 million AUD incurred by the company in researching plant based fish feed. This research has got failed to thrive, which implies that the company is not going to take benefits from this research any more. Therefore, the auditor of the company should ensure that the unamortized amount remained out of $360 million AUD has been fully written off in the books. Further, the company has undertaken another research, which is to explore bacteria based fish feed. On this research, the company has incurred $160 million AUD till date, however, yet now the development phase has not begun. Thus, the auditor should ensure that the company has recognized $160 million AUD in the income statement in the current financial year.

Further, the company has also received grant in respect of research and development activities amounting to $500 million AUD. The accounting standard prescribes to credit the grant to the income statement, if the research and development cost is charged to the income statement. Further, if the research and development cost is deferred, the amount of grant is required to be deducted from the carrying amount. In the current case of BSF Ltd, the company has charged $500 million AUD ($360 million+$160 million AUD) to the income statement. Therefore, the auditor should ensure that the full amount of grant is credited to the income statement till the end of the current financial year.

Drawing Audit Opinion on Research from Social and Environmental Perspective

The triple bottom line is an accounting framework that encompasses people, planet, and profit as the measure of the sustainability of the business. As per the triple bottom line framework, the sustainability of the business operations is evaluated based on three parameters such as people, planet, and profit (Henriques & Richardson, 2013). This framework takes into consideration the ecological, social, and economic issues in evaluating the sustainability of the business operations. Further, as per this framework, the business operations are deemed sustainable when the business is found to be maintaining a proper balance between the people, planet, and profit. This implies that the business should contribute the required amount for the well being of the people, safety of environment, and growth of the economy (Henriques & Richardson, 2013).

In auditing a research organization, the auditor not only certifies the financial statements, but various other certificates and forms are also attested. The most crucial among those is the certification of the sustainability of the business operations of the research organization. In this regard, it is important for the auditor to analyze the impact of the business operations on the society and the environment before issuing any certificate in regard to sustainability (Savitz, 2012). The impact of the business operations on air, water, energy, and other natural resources forms the basis in analyzing the environmental impact of the business operations of the company. Thus, in evaluating the environmental impact of the business operations, the auditor should pay due regard to the impact on the air, water, energy, and other natural resources (Savitz, 2012).

Further, the social impact of the business operations is evaluated taking into account the measures such as employment rate, poverty level, household income, and quality of life. Thus, while evaluating the social impact of the business operations of an organization, the auditor should analyze the impact on unemployment rate, increase or decrease in the poverty level, household income of the people, and the quality of life (Slaper & Hall, 2011). In the current case of BSF Ltd, the auditor is requested to attest that the research operations of the company have been socially and environmentally responsible. For this business purpose, the auditor should first analyze the impact of the research operations of the company on the society and environment considering the measures as discussed earlier (Slaper & Hall, 2011).

The facts of the case of BSF Ltd reveal that the research being undertaken by the company is affecting the environment adversely. In the opinion of the environmentalists, the plant based fish feed innovated by the company causing diversion of good quality human food crop to growing luxury fishes. The environmentalists are of the view that the good quality human food crop could be used for human consumption rather than feeding the fishes. Thus, environmentalists opine that it’s a miss-utilization of the good quality human food crop and affecting the environment adversely. Further, the plant based fish feed research is also causing imbalance in the economy by making rich the richer and poor the poorer. Along with this, the company has incurred huge amount of resources in this research, which would be a complete waste if the research outcome is not accepted by the government.                  

Based on the above discussion, it could be articulated that the research operations of the company are having negative impact on the triple bottom line. The three elements of the triple bottom line such as people, planet, and profit all are being affected adversely by the research operations of the company. Therefore, in the given circumstances, the auditor can not issue clean report on the sustainability of the research operations of BSF Ltd. The auditor should not sign off the statement as being true and fair that describe the research being undertaken by BSF Ltd as socially responsible and environmental friendly.

Drawing Audit Opinion in Regard to Patent Obtained by BSF Ltd

As a certifying authority, the auditor should be in possession of the corroborative evidences in respect of each and every fact that is being mentioned in the statement to be signed by the auditor. In relation to the certification of the prospectus, it is the duty of the auditor to verify the genuineness and fairness of the statements made in the prospectus before affixing signatures (Gaeremynck & Vermoesen, 2009). In the current case of BSF Ltd, the auditor is requested to attest the prospectus of the company wherein it is mentioned that the company holds exclusive control over the bacteria based feed technology. In this regard, the auditor is duty bound to collect evidences that affirm the fact that BSF Ltd holds exclusive control over so called technology before signing off the prospectus.

The facts of the case reveal that BSF Ltd has recently undertaken a new research that is for exploration of the bacteria based fish feed. The research in this area is still under process and the company has undertaken only the initial research activities till the end of the current financial year. The substantial research activities to be undertaken in the development phase, which the company is yet to start. The company has spent $160 million AUD on this research and another approximately $200 million AUD are expected to be spent in the upcoming years on the development activities. It could be observed from these facts that bacteria based fish feed research of the company is in initial phase and substantial work is still remains to be done.

It is inferred from the plain reading of the provisions of AASB 1011 that the research would be deemed to be completed on completion of the substantial part of the development activities (AASB 1011, 2016). Thus, the company conducting research could hold or control the intangible asset like patent only when the research is substantially completed. Further, the provisions of the standard entail that for recognizing the expenditure on the research as intangible asset, there should be a reasonable probability that the company will get the benefits from the research in the future periods (AASB 1011, 2016). In the current case, BSF Ltd is still to undertake the development activities in relation to the bacteria based fish feed research.

Applying the provisions of the standard to the current case of BSF Ltd,, it could be articulated that there does not exists any patent or knowhow for recognition in the books of accounts in respect of the bacteria based fish feed research. The expenditure incurred on the bacteria based fish feed research does not meet the criteria for being capitalized in the books of accounts. Thus, if there is no intangible asset being recognized in the books of accounts in respect of bacteria based fish feed research, then how could the company declare values of patent in the prospectus. The assertion of the management that the company has exclusive control over the bacteria based fish feed technology seems to be grossly wrong. Thus, the auditor should not sign off the prospectus that includes the statement that the company has exclusive control over the bacteria based fish feed.       

The objective of the audit is to attest that the facts and information being audited is true and fair. All the stakeholders such as shareholders, lenders, creditors, and the government rely on the auditor’s report in taking their decisions as regards investing, lending, and regulating. Therefore, the auditor should perform his duties with integrity and objectivity while discharging the attest functions. The report presented here narrates the processes and steps that the auditor has to undertake before accepting the audit engagement as well as while forming opinion. This report is presented in relation to the business operations of Bio-sustainable Feeds (BSF) Ltd of Australia, which is engaged in researching sustainable fish feeds.          

References

AASB 1011. (2016). Accounting For Research and Development Costs. Retrieved September 12, 2016, from http://www.aasb.gov.au/admin/file/content102/c3/AASB1011_5-87.pdf

AASB 120. (2015). Accounting for Government Grants and Disclosure of Government Assistance. Retrieved September 12, 2016, from http://www.aasb.gov.au/admin/file/content105/c9/AASB120_08-15.pdf

AASB 136. (2010). Impairment of asset. Retrieved September 14, 2016, from http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf

ACCA. (2016). Acceptance decisions for audit and assurance engagements. Retrieved September 12, 2016, from http://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/acceptance-decisions.html

Australian Government. (2016). Auditing and assurance standard board. Retrieved September 12, 2016, from http://www.auasb.gov.au/

Cpaaustralia.com. (2016). Sample audit program. Retrieved September 14, 2016, from https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-resources/practice-management/sample-audit-programs-manual.pdf

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Gaeremynck, A. & Vermoesen. R. (2009). Guidelines to the auditor in prospectus and other related engagements. Maklu.

Garczynski, M.F. (2008). Knowledge-based audits of health care entities. CCH.

Gramling, A.A., Johnstone, K.M., & Rittenberg, L.E. (2012). Auditing. Cengage Learning.

Gray, I. & Manson, S. (2007). The audit process: principles practice and cases. Cengage Learning EMEA.

Henriques, A. & Richardson, J. (2013). The triple bottom line: does it all add up. Earthscan.

Johnstone, K., Gramling, A., & Rittenberg, L.E. (2015). Auditing: a risk based-approach to conducting a quality audit. Cengage Learning.

Kan, E. (2013). Audit and assurance - principles and practices in singapore (3rd edition). CCH Asia Pte Ltd.

Loughran, M. (2010). Auditing For dummies. John Wiley & Sons.

Ordelheide, D. (2016). Transnational Accounting. Springer.

Savitz, A. (2012). The triple bottom line: how today's best-run companies are achieving economic, social and environmental success -- and how you can too. John Wiley & Sons.

Slaper, T.F. & Hall, T.J. (2011). The Triple Bottom Line: What Is It and How Does It Work? Retrieved September 12, 2016, from http://www.ibrc.indiana.edu/ibr/2011/spring/article2.html.

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