Discuss about the Auditing for Bio Sustainable Feeds.
BSF (Bio-Sustainable Feeds) is a company that is listed on the Australian Stock Exchange (ASX). An Australian-based bioresearch firm has consistently indulged in sustainable aquaculture from the last 2 decades. However, the company had to encounter a major problem when one of its key researches on plant-based feeds crumbled. Due to such failure in the research, the company had to expend a massive amount of AU$360million in the year. The company had provided about its strategy to the people where it stated that with the use of plant-based fish feeds, it can manage to transfigure ten kilos of low value fish into one kilo of high value fish but in contrast to this, it was observed that the actual transformation of fish species was thirty kilos of low value fish into one kilo of high value fish. As a result, the conversion rate was three times lesser than the targeted transformation. Furthermore, the death rate of fish species was much lesser when plant-based fish feeds were utilized and therefore, their growing rate increased doubly. In addition to this, the fish-species transformed were bigger than that of the already matured fishes (CBC, 2016). Studies state that the matured fishes were approximately sixty percent smaller than the transformed fish-species.
The environmentalists who stated that developing luxurious species at an expense of food crops associated to human are immoral soon challenged the above-mentioned strategies. They considered that developing such species into high-value would only be profitable for the rich people and the poorer, as always cannot be benefit. They also regarded such transformation to be exposed towards starvation and malnutrition risks. Hence, BSF Ltd took major steps to comply with environmental rules and regulations and as a result, it started to research on bacteria so that recaptured methane gas, residue from sugarcane etc. is made through fish-feeds (CBC, 2016). As a result, it expended more than AU$160 million for conducting the research and further AU$200 million for development purposes. This research was beneficial to the company in few extents. It had received an offer grant of AU$500 million from CSIRO (Commonwealth Scientific and Industrial Research Organisation) on one major condition that a minimum of AU$100 million grant expended on alternative aquaculture feeds every year.
Steps to be considered prior to audit
An auditor must evaluate the pros and cons of an audit assignment before conducting an audit that also includes risks associated with the assignment, nature of audit, responsibilities, etc.
When an auditor receives information of an audit assignment, he must verify minimum past three years information related to the compliances and books of accounts of the company. He must also crosscheck with the prior audit of the company regarding the compliances of statutory rules and regulations and other ethical responsibilities towards the stakeholders (Piedrahita, 2003). The auditors of BSF Ltd are also bound to undertake the same steps prior to an audit. Information on the business nature is also very vital and an auditor must conduct considerable research on the business nature of a company and other rules and regulations applicable to it. An auditor must also make ways to obtain the books of accounts and compliances of the company for the past three years and after getting such documents, he must carefully assess them to arrive at a decision whether the company has been diligent in carrying out its obligations towards the benefit of shareholders, investors, etc (Cappelleto, 2010). An auditor must assess the environmental impacts of the company’s activities and he must verify whether the company has engaged in any kind of activities that are harmful for the environment as a whole. Even the auditors of BSF Ltd are bound to evaluate whether the company has not indulged in any harmful activity that can negatively affect the environment. It is well known that environmental issues are the prior concern that a company must be focused on and an auditor can be a perfect medium to assist in this regard. Furthermore, whenever any company (BSF) receives an offer grant for research motives, an auditor must see whether such funds are not utilized somewhere else. Hence, it is the moral duty of an auditor to analyze the company’s activities so that both the company and auditor can gain confidence among people and obtain prosperity as a whole (Hoffelder, 2012).
Inherent, Detection and Control Risks
Due to high competition and large transactions, a business is always prone to various kinds of risks. However, if the management effectively does evaluation of risks, then most of the risks avoided. Prevention of risks is very crucial for the company because it facilitate in long-term development. However, even after risk strategic planning, there are some risks that are inherent in nature. Inherent risks does not depend on any type of business, instead it is completely associated with the business activities of a company (Douglas et. al, 2015). Therefore, as it a general happening, companies must effectively encounter it. Control risks are those types of risks that cannot be moderated even through proper due diligence methods. Because of the presence of inherent risks in a company, complete removal of risks cannot be done. The main reason behind the occurring of control risks is the failure on the part of management to prevent such risks. Detection risks are those types of risks that cannot be discovered even after undertaking proper care (Geoffrey et. al, 2016).
In the given scenario, the business of BSF Ltd consists of 90% inherent risks that clearly indicate high speculative activities performed by the company. In relation to this, the auditors must take the audit assignment but must be very cautious about it (Dan, 2005). Furthermore, the control risks of BSF are 5% that indicates chances of lesser gaps in the internal control policies of the company. The detection risks stand at 80% that indicates high level of undetected risk even after taking proper care. The main cause behind this failure is the presence of inherent risks in the company that clearly indicates speculation in the company’s activities.
Calculation of Audit Risk for BSF Ltd:
Audit Risk= Inherent Risk*Control Risk* Detection Risk
Hence, for BSF Ltd, audit risk= 0.9 * 0.05 *0.8 = 0.36
This risk is acceptable and hence, the auditors can progress for the audit of BSF Ltd.
Inclusion in audit program
BSF’s audit program must accommodate both specific and general items so that it is ensured whether aggregate audit coverage is done or not. The general items consist of data such as information on nature of business, kind of business and regulations that administers a company etc. The specific items consist of environmental rules and regulations, amount of offer grant utilized and purposes for such utilization etc. Moreover, prominence must be given to associates authorized for the conduct of audit, their knowledge level, and care required for guarding the business activities (Manoharan, 2011).
Year 2015 (end)
R&D A/C Dr. 500
To, Bank A/C 500
Capitalization of R&D
Patent A/C Dr. 500
To, R&D A/C 500
Entire 2015 considered for the case.
The process of amortization initiated from 2015 end as the research and expense done at that point of time.
Amortization cost of patent 5 years = 500 million/ 5 = $ 100 million each for 5 years.
Patent Ac Dr 100
To, patent Ac 100
The R&D expenses of the company capitalized until the time the company did not initiated the operations. The entries are passed in a fashion that the capitalization of the amount is done till the time the operations began. Hence, the entire research expense of 160 million is chargeable to the patent cost. Moreover, if the company covers the expenses of development before business commencement then it can charge 200 million dollar to the cost of patent. In addition, if the business commences before or between developments then it will be able to charge that portion of development cost that is incur before business commencement.
Activities that are environmental-friendly and socially responsible
Even though the company prioritizes on enhancing the quality of produce of fish species, yet environmental experts have disregarded its practice as the transformation was only for rich people and it was prone to malnutrition and starvation risks. This is the reason why BSF initiated bacteria research to produce residue of sugarcane and other items. The research conducted by the company was initially not as per environmental and social concerns but due to objections from environmentalists, it had adopted alternative methods that were also not an established research technique (Brown et. al, 2014). Therefore, signing off a report as giving due concerns to environment and social concerns on the company’s part is not acceptable. If an audit report is signed, an emphasis of matter paragraph will prevail. This emphasis will provide that even though the company carried out activities that were disregarded by environmentalists and not as per social and environmental concerns, it adopted other methods for aqua-culture that give importance to environmental and social issues (Brown et. al, 2014). Moreover, the company obtained offer grants that prove that its activities are not harmful but due to a major assertion, emphasis of matter paragraph is often opted. Hence, audit statement provided after providing adequate disclosures.
Exclusivity of Patents
It is a well-known fact that a patent can be acquired after the completion of development and research activities. Therefore, as BSF had provided in its prospectus that it had entire rights over the bacteria research is a clear misstatement on the company’s part that can misguide the stakeholders. Such misstatements should not form part of a prospectus because it is the first essential document of a company. In other words, these statements can lessen the look-out of the company (Bowlin, 2011). Stakeholders take their relevant decisions based on the company’s prospectus and as it is an introductory document, only valid materials incorporated in the prospectus. Furthermore, if the company desires to incorporate misstatements in the prospectus to obtain high gains or trust, it is the moral responsibility of an auditor either to either disallow the company from doing so or disassociate himself from the audit process because his integrity is at stake if he gets involved in such activity (Eilifsen et. al, 2001). An auditor must never make ways to associate himself with such a company that provides false prospectuses or any other falsified documents to the stakeholders (Bowlin, 2011). It is his ethical and moral duty to get rid of such matters because if being caught, his entire career will be finished, professional goodwill demolished, and additional legal actions will have to be faced by him. Therefore, he must make ways to provide an appropriate judgement on the financial statements that also includes the prospectus of the company so that do not misguide.
The above discussion of the report clearly recognizes the importance of audit and audit program. A company should never claim anything in the prospectus before it is patent. This leads to misleading facts and ultimately can be booked for duping the investors. Moreover, the role of audit program even comes the forefront. It is the duty of auditors to look into the matter and ensure that the company complies with all the relevant rules. The auditor should provide a qualified report if any discrepancies found. However, the audit program failed to perform in this respect. Overall, the claim made by BSF is not true and hence misguiding in nature.
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