Recognizing the nature of the company, what’s the company’s market overview? Who (if anyone) regulates the client? What’s the company’s business strategy? Computation of income statement and balance sheet ratio, and Development of common-size financial statements and focus on relevant audit risk and potential steps to reduce risk
Auditing is the procedure of investigating the financial reports of the business organisations for determining the material misstatements. When the financial statements of an entity are audited, the auditors need to consider the primary risks related to material misstatements and steps need to be taken for minimising them. In this context, ASX has formulated eight corporate governance principles for the Australian entities to ensure sound mechanism of corporate governance (Asx.com.au 2018).
This report intends to assess the adherence to the ASX CGC principles and process of assessment of an ASX listed entity. In order to fit the purpose of this report, Orica Limited is selected as the organisation, which is one of the biggest global providers of blasting systems and commercial explosives. The primary business activities of the organisation include providing the above products to quarrying, oil and gas, mining and construction, supplying sodium cyanide for extracting gold along with providing ground support services in tunnelling and mining (Orica.com 2018).
ASX Corporate Governance Principles and adherence of Orica Limited to these principles:
“ASX CGC Principles and Recommendations” have been introduced in 2003 so that the companies ensure sound practices of corporate governance. Orica Limited is no exception to this aspect, since it has to adhere to these standards. The below-stated discussion would evaluate the effectiveness of Orica Limited in complying with the “ASX CGC Principles and Recommendations”:
According to this principle, an organisation needs to establish and disclose responsibilities and roles of the management and directors along with measuring and monitoring its performance.
It is necessary for the organisations to have boards with suitable skills, size, composition and commitment for performing their duties effectively (Baylis et al. 2017). In accordance with the annual report and corporate governance statement of Orica Limited, it has seven board members and their skills sets are disclosed appropriately.
Along with this, Orica Limited has disclosed previous experience and skills of their directors for ensuring sound corporate governance within the organisation.
The business entities are needed to serve responsibly and ethically to comply with this principle. In Orica Limited, it has formulated suitable framework of policies associated with values and code of conduct. In order to comply with the code of ethics, the directors, staffs and other executives require acting ethically.
It is necessary for the organisations to have formal procedures in order to safeguard and verify the integrity of corporate reporting (Chambers and Odar 2015). It could be observed that CSR Limited has conformed to the principles such as AASB, IFRS, IASB and Corporations Act 2001 for ensuring corporate reporting integrity. All such aspects assure fair and true depicting of the accounting statements of Orica Limited. Besides, the managers of the business unit meet with the representatives of the team of corporate finance for obtaining an overview of the financial aspects of the organisation in order to maintain financial reporting integrity (Duncan and Whittington 2014).
This principle requires all the crucial information of the business organisations to be in balanced and timely manner (Griffiths 2016). In case of Orica Limited, the organisation has enforced a long-term framework for providing timely and pertinent information to all the stakeholders.
The organisations are needed to maintain the shareholders’ rights by delivering them with all the necessary information (Jones et al. 2017). In this regard, it is noteworthy to mention that the market disclosure policy of Orica Limited assures timely supply of crucial information to the shareholders. This has helped the shareholders in undertaking timely investment decisions.
This principles states that every ASX listed organisation is needed to mitigate their risks through the formation of a sound framework for risk management. In order to adhere to this principle, Orica Limited has formulated suitable policies and procedures so that it could monitor its business risks. The four primary factors in the risk management framework of Orica Limited include Risk Committee, Annual Risk Review, Internal Audit and Sustainability Risk.
As per this principle, fair remuneration needs to be paid to the directors for attracting and retaining them to assure the organisational benefits (Marques 2018). In addition, the organisations need to align their interests with those of the shareholders. Orica Limited has developed its remuneration framework effectively to retain its directors. The remuneration framework of the organisation comprises of short-term and long-term incentives along with fixed remuneration.
Risk assessment of Orica Limited:
Nature and market overview:
Orica Limited is an ASX listed organisation involved in providing blasting systems and commercial explosives to the various industrial sectors of the nation. As it falls under the mining sector, this industry has generated $356 billion in the form of revenue with a growth rate of 0.4% in 2017 (Vasarhelyi, Alles and Kogan 2018). In addition, this sector has employed nearly 990,000 employees with approximately 3,000 businesses in the nation. However, it has been identified that the divergent demand has direct impact on the overall sector performance of the nation. Due to this, the profitability of this sector has improved.
Regulatory authority and the business strategy of Orica Limited:
Orica Limited needs to comply with few significant regulations at the time of carrying out business operations. These regulations include the following:
- Australian Competition and Consumer Commission
- Australian Security and Investment Commission ( ASIC)
- Australian Consumer Law
- Fair Trading Law
- Australian Accounting Standards Board (AASB)
- International Accounting Standards Board (IASB)
- International Financial Reporting Standards (IFRS)
Upon critical evaluation of the annual report of the organisation, it has been evaluated that Orica Limited has adhered to all the above standards. The organisation follows five significant business strategies. The first strategy is to make investments in the business along with strengthening the shareholders. The second strategy is to provide rapid, easier and smarter building solutions. The third strategy is to affect design along with adapting the varying ways of business. The fourth strategy is to ensure the improvement of the products by enhancing its quality and efficacy. The final strategy is to develop positive impact on the minds of the customers regarding the organisation.
The efficiency position of the organisation has improved significantly, as the products are released from inventory base at a faster rate, as evidenced from inventory turnover (in days). It has started to clear its short-term obligations by making early payments to its creditors. From the viewpoint of solvency, it could be observed that the organisation is highly dependent on debt for raising its funds. However, it possesses adequate capability to meet its finance cost with operating income. Hence, it could be inferred that Orica Limited is maintaining healthy financial position in the Australian market.
Relevant audit risks of Orica Limited and steps to minimise risk:
Audit risks of Orica Limited:
According to the annual report of 2017, global currency risk due to the fluctuations n USD is one of the significant risks for Orica Limited (Orica.com 2018). The impact of significant competitive forces such as global and domestic suppliers along with new technology could be observed on Orica. This leads to replacement risk for the organisation. In Orica Limited, risk could be observed in terms of digital services that the mining firms use, since absence of digital services could minimise the revenue of the organisation. Another risk is associated with climate change and energy and Orica needs to adhere to the government regulations for minimising the impact of business operations on the environment. If these regulations are not followed, material effects on the business are bound to occur.
Besides these risks, Orica is encountered with liquidity risk, credit risk and market risk Orica would face liquidity risk, if it does not have adequate funds to meet the short-term dues and obligations. Credit risk would occur when there is failure on the part of the customers to meet their contractual obligations (Schmidt, Wood and Grabski 2016). Market risk is inherent in Orica at the time there is exposure of the organisation to the aluminium prices arising from contract-based sales.
Steps to minimise the identified risks:
As identified, Orica Limited has developed audit committee and risk committee to deal with the various kinds of risks. For this, the audit and risk committee reviews internal control, reporting system and system of risk management to formulate effective strategies. It has developed credit approval policy for evaluating the new customers to investigate their credit worthiness so that the credit risk is mitigated. For dealing with the liquidity risk, adequate cash and bank balances along with reserves are maintained to monitor the actual and forecasted cash flows (Orica.com 2018). The market risk is minimised through hedging strategy and for minimising the overall audit risk, analytical procedures need to be developed. In this context, the implementation of the method of account balance comparison, which would help the auditors to contrast the amounts in trial balance with adjusted trial balance. Finally, the auditors could conduct regression analysis in order to minimise the audit risk.
Based on the above discussion, it could be stated that Orica Limited has adhered to all the “ASX CGC Principles and Recommendations” by implementing various strategies such as formation of board, effective remuneration structure, code of conduct, timely revelation, risk realisation and management and others. Some major risks are inherent in the business operations of Orica and they include credit risk, liquidity risk, market risk, risk related to digital innovation and others. For this reason, the organisation has undertaken certain steps like hedging, financial statement analysis and others for mitigating the above-stated risks. Finally, it has been found out that Orica Limited is maintaining stable financial position and performance in the Australian market.
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