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Associated Business Risks Of An Organization

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Question:

Discuss about the Associated Business Risks Of An Organization.
 
 

Answer:

Introduction:

An organization involved in a business has certain specific characteristics which makes it different from other organizations. Each and every organization has to work in different environment which makes the job of the management of an organization challenging as the conditions changes so are the challenges to an organization. Accordingly, the associated risks of doing business also change with even little change in environment and other conditions. In this document a detailed discussion shall be made on how to assess the associated business risks of an organization working under a particular environment and how to use analytical procedures for such an organization to conduct an effective audit in such circumstances.

Subject matter of our discussion:

There are numerous countries across the globe which have specific domestic auditing standard on understanding and assessing the risks of material misstatement through understanding the entity and its environment is auditing standard. In order to conduct an audit efficiently the very first thing that the auditors need to know is the environment in which a particular organization operates. The environment and the attributes of the environment of an organization will determine the nature of risks that such an organization will experience in conducting its operations (Arens et al. 2016).

Understanding the nature of the entity:

In this document a detailed discussion shall be made to understand the risks of business associated with the operations of Aristocrat Leisure Limited and accordingly, the analytical procedures that shall be used to deal with these risks and provide an appropriate opinion on the financial statements of the company.

Manufacturer of gambling machines Aristocrat Leisure Limited is an Australian company; with the administrative center of the company in Sydney the company conducts most of its research and development activities at its North Ryde site. Apart from Australia the company also has its marketing and brand development offices in countries like United States of America, South Africa and Russia. The management of the company takes product in its achievement of being the largest gambling machine manufacturer in the country and also at being one of the largest in manufacturing slot machines on the planet. In fact when it comes to manufacturing of slot machines the company is only second to International Game Technology (Byrnes et al. 2015).      

 

Business Operations:

The company is involved in manufacturing of gambling machines and slot machines and is one of the largest company in the globe in manufacturing these machines, certainly the largest in whole of Australia. The business operations of the company includes manufacturing of spinning reel slot machines and computerized gambling systems, development of computerized card games. The company has license to distribute computerized card game simulations, gambling machines and slot machines in more than 200 jurisdictions in and out of Australia (Cao et al. 2015).

Investment and investment activities:

The company is a constituent of Australian Stock Exchange ASX and was first listed in way back 1996. It first manufactured a machine in the year 1953 and since then have invested in number of new initiatives and projects to manufacture innovative gambling and slot machine. Investment activities of the company include huge amount of investment on research and development process to find new and better ways to manufacture and develop slot machines as well as other gambling machines. Investment in research and development processes has also helped the company to come up with innovative new products of its own. The company has made substantial amount of investment on developing computerized gambling systems and automatic spinning slot machines. Apart from these the investment activities of the company includes investment in computerized card games simulations and advances computerized gambling systems. Over the years the management has used its funds very sensibly as it clear from the fact that most of the investment initiatives take by the management in the past has helped the company to enhance its market growth substantially. Thus, at present the company stands as a market leaders in Australian manufacturing gambling machines the second market leader in manufacturing slot machines across the globe (Fayol 2016). 

Financing and financing activities:

Financing of the projects of the company has been done mainly by using the funds generated from the issuance of ordinary shares in the market and from loans taken from banks and other financial institutions. Thus, the financing of the company is a combination of own funds and borrowed funds. Apart from these two sources the company has also earned substantial amount of profit during the course of its existence and thus has substantial amount of retained earnings. The company has made efficient use of its retained earnings by financing profitable projects.

Financial reporting practices:

The company follows the international financial reporting standards to prepare and present the financial statements of the company. The company has followed the going concern concept in preparing the financial statements. In recording the transactions that the company enters into, double entry system of accounting and accrual basis of accounting prince have been used. The company prepares Balance sheet, income statement, cash flow statement, statement of changes in equity and notes to accounts. All these statements include corresponding figures of previous year to allow the users of these statement to compare the current year’s figures instantly with the corresponding figures of previous year. The company has also followed the guidelines of AASB 8, Segment Reporting, and has provided necessary information for different operating and geographical segments of the company in its financial statements (Jans et al. 2014).

 

Understanding the industry:    

Understanding of the industry of which the organization is part of us an important part of assessing the environment within which the organization performs to understand the associated risks and possible material misstatements in the financial statements.

Industry size:

The industry of production of gambling machinery and development of computerized gambling system and computerized card games simulations is a huge industry with numerous companies vying to capture bugger market share than they have at the present. Slot Machine Manufactures, International Game Technology etc. are well-known organizations that are in the business of manufacturing gambling and slot machines for number of years now. These are only few companies mentioned since these are the only two companies that are in the same league as that of the Aristocrat Leisure Limited. However, there are numerous other companies that are looking to capture the market with production and development of innovative gambling machineries and computerized card simulation games. Apart from that there are other companies which are trying to get in the industry in the future.

Industry growth:

The industry growth has been phenomenal to say the least. According to the data provided by a leading magazine the gambling activities have showed an increase of 200% only over the last 5 years and if the trend continues then the gambling society believes that the revenue from gambling will increase to 5 times within next 10 years. Obviously as the gambling activity going to increase so will the requirement and need of gambling machines and system. The increase in use of computerized card games simulations have increased to 3 times in recent years and so has the business of the developers of such game. The potential of growth of the industry is huge and in fact with this rate of growth it can be said that the industry is in high growth trajectory.

Industry supply chain:                            

The industry has an effective supply chain and it has contributed immensely to the growth of the industry and will continue to do even in the future.

Major players:

Slot Machine Manufacturers, International Game Technology, Developers Limited are the major players in the market and have dominated the market for number of years now.

Market share of industry players:

The major portion of the market share are of International Game Technology, Slot Machine Manufactures and Aristocrat Leisure Limited. These three combined provides more than 50% of the machines used for gambling. Also in card game simulations these three companies are the top market share holder in the industry. All the other companies combined have a market share of less than 50% when it comes to manufacturing and production of gambling machines are concerned.

Critical success factors:

The critical success factors are the following:

  1. Optimizing the use of available resources.
  2. Reduction in cost of production.
  3. Continuous endeavor to innovate and develop new and better machineries than earlier.
  1. Huge amount of investment on research and development activities to come up with new and improved products.
  2. Meeting the requirements of the stakeholders and users of the machines.

Major threats:

  1. Ever increasing rules and regulations of the law agencies.
  2. Continuous scrutiny of the government agencies.
  3. New companies entering the marketing.
  1. Ever changing requirements of the customers.
  2. Continuous up-gradation of technology obsoleting the machines very fast.
 

Understanding the legal environment:

The legal environment within which an organization works and operates is a huge factor that contributes to the overall development of an organization. Neither too much nor too less regulations is good for an organization and business hence, there should be proper balance between too much and too less regulations. Aristocrat Leisure Limited has to follow the relevant guidelines and provisions of competition act, Income Tax Assessment Act, 1997 and others to continue its business operation.

Understanding external environmental factors:

PEST analysis:

The political environment of the company is stable and has never been a roadblock to the progress of the company and there is nothing to believe that this going to change in the immediate future. The economic environment within which the organization operates is also progressive and helpful for the development of business. Socially the country is a developed and opened society which have helped the gambling business to grow and so the business of the company. Technologically the country is well developed and been a leader around the globe in that aspect hence, technological progress has also helped the company to grow further (Trevino and Nelson 2016).

SWOT analysis:

Strength of the company is its ability to innovate. Over the years the company has provided new and invocative products in the market. The company has an efficient management and workforce which have helped the company to be the largest gambling manufacturing company in Australia and second largest computerized card game simulation developer in the whole wide world.

Weakness of the company is the fact that often it has been unable to make optimum use of its idle funds and most of the times these funds have remained idle without any use. The ever increasing regulations and rules for the business of the company is another aspect to be looked at in the future as an area of possible concern.

The company has the opportunity to be a huge player in the manufacturing and development of gambling machines in the whole world. The card game simulations also provide the company an opportunity to take over the reins of the market from International Game Technology.

Threats are the ever increasing pressure of the existing players in the market to provide better quality products at relatively low prices in the market to keep the existing market share intact. Apart from that the threats of new entrants to the market is also a justifiable threat.

Understand objectives, strategies and assessing business risks:   

Human resource issues:

Constant innovation and up-gradation of technology makes it imperative on the part of the management to keep modifying its machines and card game simulations to keep up with the requirements of the customers. However, the work force of the company is not fully capable of handling the ever changing needs and requirements of the customers. Thus, the management needs to recruit better equipped personnel to deal with this problem (Sierra?García et al. 2015).       

Product development:

The customers’ needs and expectations are always on the rise and the competitors in the market are always on the look out to provide the customers there desirable products to capture the market. Continuous up-gradation of technology and subsequently the machines and computerized card game simulations is essential for the company to hold on its market share. 

Business expansion:

The main risks in business expansion strategy of the company is the lack of innovative ideas on the operational aspects of the business. For years now the company has not been able to give a break-through computerized gambling machine or card game simulations of highest quality. In order to expand the business the management needs a break-through product which shall be liked universally by the customers. Apart from that the funds to expand the operations is another issue that the organization has faced in the past.

New accounting requirements:

Implementation of the guidelines provided in Australian Accounting Standards issued by the Australian Accounting Standards Board is the primary objective of the management and executive of the organization (Sekaran and Bougie 2016).

Regulatory requirements:

The company is required to adhere to the Competition Act guidelines by not getting involved in any unlawful practices to hamper the competition in the market. Apart from that the company should disclose its earnings according to the provisions and guidelines provided in the Income Tax Assessment Act, 1936 and the relevant guidelines of Environment Laws of the country should also be followed to avoid penalty or other punishments.

 

Current and prospective financial requirements:

The company needs to fulfill its commitments to the banks and financial institutions in order to get financial assistance in expansion of business. Any failure on the part of the company in fulfilling its commitments to financial institutions and banks would hamper the chance of the company in getting financial assistance from these organizations (Sadgrove 2016).

Use of IT:

The use of information technology is crucial for the development of the company especially since the company is involved in the business of manufacturing computerized gambling machines, slot machines and simulation card games. Proper and effective use of information technology would help the company to achieve its desired objectives in the future.

Effects of implementation of a new strategy:

As soon as a new strategy is implemented there bound to be some changes in the organization. Accounting requirement might change with the implementation of a new strategy. The accounting professional must have the necessary knowledge to deal with changes and its impact on accounting environment. 

Performance of analytical procedures to understand entity’s performance:

An auditor is responsible to express a clear opinion on the financial statements of an organization as to whether the financial statements portray the true and correct picture of the organization. In order to discharge his responsibility efficiently and to express a valid opinion on the financial statements an auditor needs to corroborate evidence by using analytical and substantive procedure. The extent of use of substantive procedures would be dependent on the results of the analytical procedures used by the auditor. Thus, use of analytical procedures has to be done effectively and efficiently by the auditor (Louwers et al. 2015).

Use of analytical procedures such as assessing the gross profit margin , net profit margin of the company in the current year and comparing the same with the previous years’ figures along with the standard industry parameters would help the auditor to check for any unnecessary fluctuations in these metrics. Apart from the percentage of interest expense to overall expenses, the growth in sales, the increase in operating expenses all these will help the management to identify any unwarranted fluctuations and possible area of misstatements and frauds.

Understand management and governance:        

The mission and vision statement of the company has made it amply clear for all the stakeholders to understand how serious the management is to run the operations within the organization in accordance with the ethical values and norms of highest standards. The management has made sure that the importance of following ethical guidelines is conveyed to the employees, labor and other stakeholders in clear terms. The company has a separate unit that looks into this aspect of the organization and is responsible for design and administration of ethical values within the organization.

In order to ensure that the manufacturing process as well as other important aspects of business are effectively managed the management has a standard skill and knowledge development program which includes providing training to the employees and educating them with new and improved technologies to equip them to deal with the challenges at the work place.    

The governance of the company can be segregated into two main pillars, these are the shareholders of the company and the management of the company. The management of the company is separate from its shareholders. The decisions taken by the management of Aristocrat Leisure Limited are pure to achieve its desirable business objectives and for the benefit of the company. The company has a standard internal audit program which is completely independent of the management (Krahel and Titera 2015).    

The management of the company has a very clear style when it comes to running the operations of the company. Managing the business risks by taking important decisions keeping in mind the interests of the company is the backbone of decision making process within the organization. Huge importance is given to the financial reporting process and the management never interfere with the accountants in financial reporting process.

The organizational structure of the company is such that it allows the management to take important business decisions only after consulting with the other stakeholders of the company such as shareholders, banks and financial institutions who have provided the company with financial assistance.

The management segregates duties and responsibilities of different departments within the organization. The employees have their duties and responsibilities clearly curved out thus, there is generally no overlapping of roles and responsibilities within the organization.

The company has a standard recruitment policy which is regularly up-top-dated by the management to ensure that employees and staffs recruited by the company is capable of discharging their duties and responsibilities efficiently. Also in order to develop the skill and knowledge in the work force the company has a standard training program to ensure that the work force gets to know about the new development in their field of work to be able to give their best while working for the company (Knechel and Salterio 2016).        

 

References:

Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.

Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. and Vasarhelyi, M., 2015. Evolution of auditing: from the traditional approach to the future audit. Audit Analytics, 71.

Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement audits. Accounting Horizons, 29(2), pp.423-429.

Fayol, H., 2016. General and industrial management. Ravenio Books.

Jans, M., Alles, M.G. and Vasarhelyi, M.A., 2014. A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), pp.1751-1773.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.

Krahel, J.P. and Titera, W.R., 2015. Consequences of big data and formalization on accounting and auditing standards. Accounting Horizons, 29(2), pp.409-422.

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

Sadgrove, K., 2016. The complete guide to business risk management. Routledge.

Sekaran, U. and Bougie, R., 2016. Research methods for business: A skill building approach. John Wiley & Sons.

Sierra?García, L., Zorio?Grima, A. and García?Benau, M.A., 2015. Stakeholder engagement, corporate social responsibility and integrated reporting: an exploratory study. Corporate Social Responsibility and Environmental Management, 22(5), pp.286-304.

Trevino, L.K. and Nelson, K.A., 2016. Managing business ethics: Straight talk about how to do it right. John Wiley & Sons.

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