Noyers Ltd Company Background
Noyers Ltd, a company with its headquarters in Launceston, Tasmania, has been listed on the Australian Securities Exchange (ASX) since 2001. Noyers is an agribusiness company engaged in the following activities:
• Large scale cotton growing, processing and marketing;
• Large scale walnut growing, processing and marketing; and
• Livestock (cattle and sheep) grazing.
Noyers Ltd, through its antecedent businesses, has been in existence for over 120 years. It has predominantly been involved in the agribusiness industry over this time, mainly operating in Tasmania, but with farming interests in Victoria, New South Wales and Queensland. During its history, the company built up considerable interests in livestock agency and auctioneering,real estate agency, agricultural supplies, heavy vehicle parts and repairs, agribusiness consultancy services, and some cropping and pastoral operations.
In the past 20 years, the company began to acquire interests in large scale cotton growing, processing and marketing operations in Queensland and New South Wales as well as significant pastoral operations (livestock grazing) in Victoria and Queensland.
During this period Noyers also acquired the operations of Oignon Pty Ltd. This small company had been established by Mr Gill Peters as an onion grower, processor and exporter. However, it had diversified into walnut growing, processing and marketing, and at the time of acquisition by Noyers Ltd of its business, Oignon Pty Ltd had significant interests in walnut orchards in Victoria and New South Wales.
In 2014, Noyers Ltd made the business decision to exit from its Tasmanian-based real estate agency, agricultural supplies and consultancy, heavy vehicle parts and repairs and related businesses in order to concentrate upon: large scale cotton growing, processing and marketing (and acquisition of associated water rights); large scale walnut growing, processing and marketing; and livestock grazing, in New South Wales, Victoria and Queensland. It therefore sold its Tasmanian-based businesses to other companies, whilst retaining a small walnut growing orchard in Gawler, North West Tasmania (now its only Tasmanian based operation).
Although it still has its headquarters in Launceston, Northern Tasmania, its main business activities are in New South Wales, Victoria and Queensland and its senior executives are located in Sydney, with senior managers located in the various agribusiness operations throughout country New South Wales, Victoria and Queensland.
The principal activities of Noyers Ltd are the production, processing and marketing of cotton, walnuts and livestock. The company has considerable land holdings with associated water rights to grow cotton in New South Wales and Queensland and is engaging in an expansion program to develop further land for cotton growing. It has processing facilities and warehouse facilities for cotton at several locations. It also has significant orchards either mature, maturing or under development in Victoria and New South Wales. Again, most of these orchards have associated water rights.
The company also has nut processing facilities and warehouses at several locations in Victoria and New South Wales. Investment is being made in expanding both orchards and associated facilities. Livestock rearing and grazing is conducted at several large pastoral holdings across the country. The company is investing in infrastructure on these properties such as dam building and livestock holding areas.
The company reports biological assets on its statement of financial position as:
At the end of each reporting period the company measures the unharvested produce of walnuts and other crops (e.g. cotton) at fair value less costs to sell. The company also measures livestock at fair value less costs to sell. The net increments or decrements in the market value of biological assets are recognised as either revenue or expense in the income statement in accordance with AASB 141 Agriculture.
• The fair value of sheep and cattle is determined by an independent valuation at each reporting date.
• Costs (i.e. planting, spraying etc) associated with the preparation for future crops are the best indication of fair value less cost to sell of walnuts and other crops.
The goodwill amounts recognised on the statement of financial position arose from the purchase of agricultural assets such as walnut farms. The company tests the recoverable amount of goodwill at least annually. The recoverable amount has been determined based on fair value less costs of disposal.
Other Intangible Assets
The other intangible assets arose from the purchase of another entity involved in irrigated cropping. These other intangible assets have an indefinite useful life and are not subject to amortisation and are tested annually for impairment. The recoverable amount of these intangibles is determined based on ‘value in use’ calculations. These calculations use cash flow forecasts by management covering a five year period and are based on crop yield rates taking into account past performance and predictions of future performance.
Permanent Water Rights
The value of permanent water rights is an integral part of the land and irrigation infrastructure required to grow walnuts and annual crops (cotton). The recoverable amount of permanent water rights is determined based on the fair value less costs of disposal. Permanent water rights are a tradeable commodity and therefore, the fair value of these permanent water rights is supported by tradeable market values. At 30 June 2019 the market prices for permanent water rights were higher than their carrying value.
Noyers Ltd has several local and overseas bank accounts. The overseas bank accounts, used to deposit receipts from overseas customers are in US dollars. The company accountant uses the exchange rate at the close of the last business day in the financial year to convert the bank accounts in foreign currency to the equivalent A$ value at the year end.
Noyers Ltd makes sales overseas on different conditions for different customers. When cotton bales are sold FOB (shipping point), revenue is recognised when the goods are shipped to the customer. When cotton bales are sold FOB (destination), revenue is recognised when the goods are received by the customer.
During the 2019 financial year, the major activities of the company were severely impacted by the drought conditions being experienced in Queensland, New South Wales and Victoria.
• In 2019, 4,200 hectares of cotton was planted, compared to the previous year (2018) of 17,162 hectares. Planting was curtailed because of lack of rain and available water for irrigation.
• Significant use of water entitlements allowed the yield of walnuts to increase from 9,508 tonnes in 2018 to 9,808 tonnes in 2019.
• There was significant expenditure on purchasing feed for sheep and cattle despite decisions being made to drastically reduce sheep and cattle numbers to amounts commensurate with available feed.
China and India are the two largest markets for Australian cotton. Prices of per tonne of walnuts declined by 25% during the year because of oversupply from other countries including Chile and the United States. Prices per kilogram fell from 2018 where it reached a peak of $2.87 Australian dollars per kilogram to $2.46 per kilogram in June 2019. Whilst domestic sales of walnuts make up some proportion of the total sales, most of the Australian walnut production is exported to the United Kingdom, other European countries and some Middle Eastern countries.
Cattle live weight prices were 275.3 cents per kilogram of live weight at 30 June 2018 and 261.7 cents per kilogram live weight at 30 June 2019.
Other External Factors
• Toward the end of the 2019 financial year, a Sovereign Wealth Fund of a European country purchased a significant shareholding in Noyers Ltd of 12% of the issued shares. Whilst the directors of the company have indicated that it is too early to predict the
intention of this Fund, market analysts have theorised that this may be the forerunner of a complete takeover of Noyers Ltd, given the company’s significant investment in water entitlements.
• Most of Noyers Ltd’s export sales are conducted in United States dollars, so the company is exposed to fluctuations in exchange rates. The Australian dollar fluctuated significantly against the US$ in the 2019 year.
• There are other countries that compete with Australia in the overseas cotton and walnut markets.
The Entity’s Objectives and Strategies
The company has the objective of continuing to invest for long term sustainable growth. It plans to continue to develop its cotton properties in order to increase the total amount of irrigated land available for cotton planting. It also plans to increase the size of both its mature walnut producing walnuts and its immature orchards and associated infrastructure. In addition, it is continuing to invest in grazing property infrastructure with the view to grow the livestock business.
The income statements and balance sheets for 2019, 2018 and 2017 are shown below:
Using the information provided about Noyers Ltd and appropriate research regarding the industry and other economic factors:
a. Assess the key business risks of Noyers Ltd from the information available to you (at least six (6) need to be identified);
b. Explain the implications of each risk identified on the financial statements;
c. Identify the related financial statement accounts at risk.
d. Identify the related management assertion (refer to ASA 315) most at risk for each financial statement account identified as being at risk.
e. Justify your identification of the management assertion at risk.
Materiality assessment requires an auditor to make judgements about the size of misstatements that would be considered ‘material’ to the users of the financial statements.
The auditor will design procedures in order to identify and correct errors or irregularities that would have a material effect on the financial report and affect the decision making of the users of the financial report. Materiality is used in determining audit procedures, sample selections, and evaluating differences from client records to audit results. It is the maximum amount of misstatement, individually or in aggregate, that can be accepted in the financial report.
In selecting the base figure to be used to calculate materiality, an auditor should consider the key drivers of the business. They should ask, ‘What are the end users (i.e. shareholders, banks etc.) of the accounts going to be looking at?’ For example, will shareholders be interested in profit figures that can be used to pay dividends and increase share price?
S & A Partners’ audit methodology dictates that one planning materiality (PM) amount is to be used for the financial report as a whole (that is, rather than separate PMs for the income statement and the balance sheet). The basis selected is the one determined to be the key driver of the business.
Once the basis is chosen for PM, the percentage is chosen from the range based on qualitative client factors, including:
• The nature of the client’s business and industry (for example, rapidly changing, either through growth or downsizing, or an unstable environment)
• If the client is a listed entity (or subsidiary of) subject to regulations
• The knowledge of or high risk of fraud.
Using information from the financial statements for Noyers Ltd, you are to use professional judgement to complete the following tasks:
• Determine planning materiality (PM) based on your understanding of the key business risks by selecting a base and selecting a percentage from the relevant range of percentages. Provide a rationale for your selection of the base and percentage. Calculate the PM.
• Determine tolerable error (TE) by selecting a percentage (see footnotes at the bottom of the spreadsheet). Provide a rationale for your selection of the percentage. Calculate TE.
• Determine ‘Clearly Trivial Threshold’ (CTT) by selecting an appropriate percentage. Provide a rationale for your selection of the percentage. Calculate CTT
For each significant financial statement account assertion, the inherent risk and control risk are assessed. The work performed around understanding the business provides the inherent risk assessment, while the results of any control testing provides the control risk assessment. The combination of these two risks can be known as overall risk assessment (ORA). The ORA determines the nature, timing and extent of the substantive procedures to be performed – that is, the detection risk to be mitigated by auditors.
The ORA is determined using the following table:
There is an inverse relationship between the ORA and detection risk (DR).
(Spreadsheet tab Task 3 identifies six financial statement accounts and related assertions assessed as being at risk for Noyers Ltd. Note that the control risk for these accounts/assertions has already been assessed by other members of the audit engagement team as indicated in spreadsheet tab Task 3.)
a. From the information that you have available to you about Noyers Ltd, assess the inherent risk for each of these five account/assertions (high, medium or low).
b. Justify your assessment of the inherent risk level for each of the five account/assertions.
c. Applying the qualitative audit risk model described above, determine overall risk assessment for each account/assertion and then determine the acceptable level of detection risk.
This task requires you to respond to the overall risk assessment of identified significant accounts by developing audit tests. In practice, this phase requires an auditor to prepare anbaudit program, which outlines the audit tests (tests of controls and substantive tests) to be undertaken to reduce the risk of material misstatement to an acceptable level.
If control risk is assessed as less than high, then tests of controls are undertaken to gather evidence of their existence and operational efficiency. Assessment of controls and testing their operational efficiency is outside the scope of this case study and thus, we require you to focus on substantive tests in this task.
You will note that the information for Noyers Ltd includes some information regarding the accounting policies and treatment applied by Noyers Ltd for some accounts identified as likely at risk of material misstatement.
Spreadsheet tab Task 4 identifies eight financial statement accounts and related assertions assessed as being at risk for Noyers Ltd. For each of these eight financial statement accounts and related assertions:
a. Develop one appropriate audit objective1 ; and
b. Develop one appropriate audit procedure for that audit objective. (Note: Each audit objective and procedure must be specific to Noyers Ltd) Use the spreadsheet tab Task 4 in order to complete this task.
This task requires you to carry errors found during the audit to the summary of audit differences. The errors in recorded amounts an judgemental differences encountered during the audit for which the client has not made a correction will need to be summarised to evaluate the materiality of their aggregate effect on the financial statements and their effect they may have on the overall conclusion (audit opinion).
To enable you to complete the audit process, you are provided with a summary of key issues identified during the course of the audit, related discussions with management and resulting conclusions (refer to Appendix A below).
a. Consider each of the findings provided in the additional information (See Appendix A below) and prepare a summary of audit differences (SADs) and identify/assess the overall impact of the unadjusted audit differences, assuming that the client has adjusted for the differences agreed with the auditor and NOT adjusted for the differences not agreed with the auditor (your assessment should show the impact of each difference on the current assets, non-current assets, current liabilities, noncurrent liabilities and the profit/loss for the year).
b. Compare the net result with the materiality figures and assess the impact of the unadjusted differences on the audit report.
c. Determine the type of audit report that should be prepared under Australian Auditing Standards(Note, you do not prepare the audit report, just determine the type of audit report that should be prepared). Reference this section with the relevant Audit Standard.