Auditing Of Funtastic Limited - Need For Independent External Audit, Conforming To The Guidelines Of Common Good And Stewardship, Key Performance Indicators, And Ratio Analysis

Assume that you work for an audit firm which is considering to audit Funtastic Limited, an ASX-listed company. The 2017 Annual Report of Funtastic Limited can be accede using the following link. The audit firm you work for has never audited a legal firm in the past.

https://www.asx.com.au/asxpdf/20171110/pdf/43p3wd623h59s4.pdf

Answer the following questions with reference to Funtastic Limited.

i) Why would the shareholders of Funtastic Limited require that an independent external auditor, in this instance Grant Thornton, perform an annual audit?

ii) Discuss whether or not or how does the audit process that Funtastic Limited went through promotes common good and stewardship.

iii) Assume Funtastic Limited has tight key performance indicators (KPI) for sales. Executive management and sales staff are remunerated and their performance is evaluated based on revenue generated and net income made. Identify and discuss ethical issues that are likely to stem from KPIs in place and how they might affect the auditor’s plan.

iv) Perform ratio analysis and relevant comparisons as part of your planning analytical procedures to identify significant issues or results of the business that require detailed investigation and explanation. The analytical procedures should cover profitability, liquidity and solvency. It is totally up to you to determine the relevant ratios and calculations. Discuss the effect of your preliminary analytical review on your audit plan.

http://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf

Auditing of the financial statements refers to the close examination of a business entity’s financial records. It can be carried out by an efficient and recognised external independent auditor, which is able to accurately judge the fairness of these financial statements. It is important for ensuring the accountability towards the different stakeholders of the business entities. The tax institutions, different financial institutions, government agencies and the management of the company require proper auditing of the financial statements in order to ensure reliability of the company’s operations and financial statements. This report expects to investigate the need for independent auditing, conforming to the guidelines of common good and stewardship, Key performing indicators and ratio analysis of Funtastic Limited of Australia.

Credibility: Financial statements become much more credible, when it is audited by any external auditor. In this age of increasing biasness by internal auditors, it is necessary for auditing by external auditors (Alleyne, Hudaib and Pike 2013.).

Re-verification: It is better to re-verify the financial statements by the external auditors, in order to ensure the accuracy and impartiality of the reports. It also helps to ensuring that the reports remain error free (Gerber et al., 2014).

Fraud detection: External auditors examines each and every aspect of the bookkeeping records till the final preparation of the financial statements along with the way of auditing of the internal audits. This helps in fraud detection. In such cases, it becomes important for external auditors like Grant Thornton to periodically audit the financial statements of Funtastic.

Stewardship is a traditional approach of accounting which emphasises that stewards of the company such as director’s acts ethically and responsibly by providing relevant and reliable financial information in relation to the resources at their disposal or ownership (Gerber et al., 2014). In the case of Funtastic, the directors have provided authentic and relevant information about the different aspects of the functioning of the company. The directors have provided complete, authentic and relevant information with regards to the company. Some of these important information have been provided below:

• The directors have provided various kinds of information about the remuneration policies of the management personnel of Funtastic. Here complete information about the salary fees, cash bonuses, monetary as well as non-monetary benefits, and super-annuation. Complete information has been provided with the regard for the stakeholders (Funtastic.com.au 2018). 
• Complete information about the different share based payments and its arrangements have been provided by the directors, in their report. Here the different share options with regards to the remuneration options have been provided.
• Important information about the sale of international, bank debt restructuring  and capital raising such as successful capital raising of $8.2 million have been provided by the auditors (Funtastic.com.au 2018). In addition to this, the directors of toy company Funtastic have provided information about the environmental regulations. The company is not required to hold any kind of environmental protection authority licenses.
• Along with all the above mentioned information, some additional information about the review of operations of some of the key strategic, operating achievements and financial results from continuing operations have been provided. Some of the key strategic achievements include continued development of company’s own brands, continued development of global distribution network, expansion towards lifestyle products. Some of the key operating achievements include part sale of international business, management restructure and strategic reviews were completed.
• Information about the dividends had also been provided by the directors of Funtastic. It was stated that for the financial year ended 31^st July, no dividends were declared or paid in any kind (Funtastic.com.au 2018). This was stopped for some time until and unless the company returned to a profitable position and reduces the primary debt levels.

All these information were extensively provided by the directors of Funtastic in thei report, which is presented in their annual report, each year. These data and information were published in good faith and were relevant with the needs of the stakeholders. Thus, it can be said that the principle of stewardship and common good were thoroughly followed.

A key performance indicator (KPF) is a measurable value of quantity which shows how efficiently a business entity can achieve its key objectives and goals. They are mainly of two kinds, high performing KPI for total performance of the organisation and the low ones which focuses on a particular job, department or function. In the case of sales, as has been the case with Funtastic, it has been chosen as the key performance area (Frisch and Huppenbauer 2014). This can be executed by assigning monthly sales growth, average profit margin, sales target, monthly sales calls, emails, etc. are some of the ways. However, there are some ethical issues attached with it. It is similar with the case of Funtastic. Some of the ethical issues are as follows:

• Excessive pressure on the individual: One of the most important of the pressure sales KPI is the high pressure which is placed on the individuals. As sales is one of the most demanding and significant aspect of any business, placing it as a chief KP might create unwanted pressure on the different employees of the business (Johnston and Marshall 2013).
• Adoption of unethical practices: Due to the high amount of pressure being placed on the individuals, they resort to various kinds of unethical measures for completing their targets. This causes a number of losses for the company ranging from misuse of assets of the company, damaging of the merchandise, presenting a false image of the company for achieving sales target.

Need for independent external audit

The actions of the sales executives for the purpose of fulfilling the sales targets could have a big impact on the working of the auditors. Misrepresentation in the financial statements, excessive gifts provided by the salesmen for completing sales transactions, misusing data and information technology, damaging of merchandise (Frisch and Huppenbauer 2014). All these activities leads to a negative impact on the financial statements of Funtastic. The auditor must be cautious and look for these areas for neutralising their impact.

Financial ratios of any business entity is one of the most important parameters for measuring the performance of the business entities. Financial ratios like profitability ratio, solvency ratio, and leverage ratios are very important financial measures for understanding the efficacy of the different operations undertaken by the business entity (Delen, Kuzey and Uyar 2013). In the case of Funtastic, some of the business ratios have been analysed in detail. 

Some significant concerns have to be raised in this case. Funtastic has been suffering in the financial frontier. The current ratio of the company is 0.19, which is very poor, the current liabilities have exceed the current assets by approximately $ 57, 000, which raises serious concerns. The low current ratio suggests that the company has low liquid assets. In the terms of the profitability ratio, the company has also suffered even more. The operating margins of Funtastic has been in negative at $ (419), which is an important issue. Similarly, the return on assets is at $(100) (Asx.com.au. 2018). This raises concerns with regards to the operation of the company. In the case of the leverage ratio, the debt-equity ratio is at (1.38), which again raises some important doubts about the longevity of the organisation (Asx.com.au. 2018). The auditor has to report these issues to the management of the company. As the liquidity, operations and the longevity is in doubt. It becomes the auditors first and foremost duty to bring the attention of the management in this regard.

Conclusion:

Auditing is one of the most important aspect of ensuring the financial health of any business organisation. It is important for in the case of Funtastic too. Here in this report some important aspects of the financial performance of the company has been seen, where the immediate attention of the management of Funtastic is required. Moreover it is very important for the management to ensure audit by an external auditor as it is necessary and helpful. The appointment of sales as the KPI has some ethical issues, which must be addressed as well. The issues relating to the liquidity, profitability and leverage must be addressed. This would ensure the long term viability of the organisation in the Australian market.

References:

Alleyne, P., Hudaib, M. and Pike, R., 2013. Towards a conceptual model of whistle-blowing intentions among external auditors. The British Accounting Review, 45(1), pp.10-23.

Asx.com.au. 2018. [online] Available at: https://www.asx.com.au/asx/share-price-research/company/FUN [Accessed 1 Sep. 2018].

Chan, A.M.Y., Liu, G. and Sun, J., 2013. Independent audit committee members’ board tenure and audit fees. Accounting & Finance, 53(4), pp.1129-1147.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Frisch, C. and Huppenbauer, M., 2014. New insights into ethical leadership: A qualitative investigation of the experiences of executive ethical leaders. Journal of Business Ethics, 123(1), pp.23-43.

Funtastic.com.au 2018. Funtastic Limited.  Funtastic: Big Brands, Big Thinking | Funtastic.com.au. [online] Available at: https://www.funtastic.com.au/ [Accessed 1 Sep. 2018].

Gerber, J.S., Prasad, P.A., Fiks, A.G., Localio, A.R., Bell, L.M., Keren, R. and Zaoutis, T.E., 2014. Durability of benefits of an outpatient antimicrobial stewardship intervention after discontinuation of audit and feedback. Jama, 312(23), pp.2569-2570.

Johnston, M.W. and Marshall, G.W., 2013. Sales force management: Leadership, innovation, technology. Routledge.