Based on the ratio analysis, we acan see that the current ratio is 2.15 to 2.29 which indicates the fact that the company has ample current assets to meet the current obligations and liabilities of the company. It indicates that the company will not faulter in the long run and will be able to pay back its creditors and short term lenders on time. The deby equity ratio has increased from 1.91 to 1.93 over the last year. This is way above the industry average of 2:1 and indicates that the company is using huge debt capital in its capital structure and is making use f trading on equity. The company will have huge debts and will have to bear the interest costs. The Gross profit margin has decreased from 53% to 51% and this is way below the industry levels of 60%, this shows that the cost of good sold in the company is high and the company is thus not able to maintain its gross margin well. The inventory turnover ratio ratio here for the company has been from 2.69 to 2.89 which is way below the industry average of 4 times. This shows that the company has not been able to liquidate its inventory in time and the cycle of movement of inventory to sales has been on the lower side. (Fay & Negangard, 2017)
The major risks of material misstatements on the basis of this alongwith the reasons is as follows:
- The increased debt equity ratio shows that the company may be facing issues for payment of fixed interest obligations in the future when it may be short of the cash flows.
- The huge share of the debt in the entire capital structure that is almost 65% in debt indicates dilution of power in the hands of the debt holders fromm the equity shareholders.(Jones, 2017)
- The lower Gross profit margin is conclusive of the fact that either trthe sales may be shown less or may be done at lower prices or direct costs may be shown as inflated or it may be that management responsible for purchases has not taken care of doing so at the minimum possible price. This shows the lack of internal control.(Sonu, et al., 2017)
- The other risk is the risk of inventory not being liquidating on time and thus becoming obsolete after a period of time, this may also lead to losses in future.
- The 5thrisk of material misstatement is the impairment charge expenses relating to brands and goodwill. It may be that the specific valuation if done, would have resulted in a completely different amunt, howevr, here the same has been done using the difference in company share price and carrying value of the fixed assets. (DeZoort & Harrison, 2016)
Preparation of the financial statements is one of the responsibilities of the management and the directors of the company based on the Australian Accounting Standards and the Corporations Act, 2001, that is showing on unbiased basis and free from material misstatements basis the fraud or error. They are responsible for disclosure of the all the information leading to the going closure assumption of the group, to disclose all the significant issues relating to going concern and using the rules of accounting based on going concern. In the given case the auditor the given the expression of opinion on the financial statements as showing the true and fair view of the state of affairs and that it is free from material mistatements based on the assumptions and estimates used by the auditors. They have mentioned nothing in this regard and thus have given a clear auditor report which shows that though the company is not operating profitably in some of the areas but it has mentioned all the important and significant disclosures in the notes to accounts and there is no such intention of the directors of the company to liquidate its operation in the near future or to sell of its operation to any other entity. Moreover, considering the ratio analysis and the other financial factors like net profit, discontinuing operations, social impacts, the business interruption risks, the tax and the social risks, the seasonal nature of the business, etc make it a riskier business but they have evolved the ways to mitigate all these risks and thus it is not impacting the going concern assumption of the entity. (Raiborn, et al., 2016)
On studying the Social Responsibility Report of the company, Billabong Biz, the listed entity should disclose all the material risks be it economic, environmental or the social impact factor, if any and how they are able to manage it and mitigate the risks associated with it. This is being properly disclosed in the financial information via director’s report. The company is facing the health and safety standards issue in the factories on account of the goods manufactured in China, however the company is mitigating the risk by utilizing the services of the external auidit body on the social compliance issues including the required Code of Conduct, SA8000 and Worldwide Responsible Accredited Production (WRAP). (Grenier, 2017) Moreover, the activities of the company is not subject to any environmental degradation reporting or emission reporting which may cause environmental damage.The directors have also reported that the group is committed to deliver the best corporate practices and bringing the maximum value to the shareholders. For this, the company is maintain high levels of corporate governance, ethical standards and integrity. Besides this, the auditors haven’t expressed their view on the corporate governance report and due to this, I would recommend to have an external assurance on the Sustainability report which would underline the areas of improvement, the mitigation measures that can be undertaken and what all practices and procedures can be improved to have better social accounting rank such that the society is also benefitted from the business and it activities. (Knechel & Salterio, 2016)
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud within organization. Journal of Business Ethics, pp. 1-18.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), pp. 241-256.
Jones, P., 2017. Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Sonu, C., Ahn, H. & Choi, A., 2017. Audit fee pressure and audit risk: evidence from the financial crisis of 2008. Asia-Pacific Journal of Accounting & Economics , 24(1-2), pp. 127-144.