In early 2016, Bega Cheese and Blackmores set up their joint venture- called Bem
ID: 3225000 • Letter: I
Question
In early 2016, Bega Cheese and Blackmores set up their joint venture- called Bemore- to supply infant formula and other nutritional foods to consumers in Australia and Asia (mainly China). However, due to regulatory change in China and intense competition the joint venture did not go as well as initially hoped. As a result, there was a dramatic fall in the share price of Bega Cheese. How will this fall affect your 2017 audit plan for Bega Cheese? Your answer should be supported by at least FIVE factors.
Explanation / Answer
Factors affecting change in audit plan 1. Materiality Due to the fall of the share price and the fact that the joint venture did not go as planned, the materiality aspect of the audit plan will be affected. The impact of the fall of share price on the true and fair view of the financial statements will have to be considered. Materiality is the magnitude of risk of misstatement on the true and fair view of financial statements. in light of the circumstances, it's probable that the judgment of a reasonable person relying on the information would have been changed owing to such omission. Materiality is important as stakeholders decisions may be affected, and thereby cause financial loss to them. Since the share price has reduced the focus of the audit and the materiality will be affected 2. Audit Risk Audit risk is the risk that after performing an audit, misstatements will still exist. The change in regulatory framework, intense competition and fall in share price would increase the need to detect and minimize audit risk which comprises of control risk i.e. controls implemented will not be sufficient, detection risk i.e. the misstatements and omissions will not be detected and inherent risk i.e. the fact that after conducting an audit, the misstatements and omissions would still exist in financial statements. 3. Nature of the client's business The complexity and geographical operations of sales in another country coupled with regulatory changes as well as the have an impact on the audit plan for the year. This is doubly required as the dependency on audit of Bega cheese would be increased owing to the poor financial performance and failure of the joint venture 4.Going concern assumption Going concern refers to the assumption that the entity would continue to exist in the foreseeable future. Since the joint venture did not take off, this assumption would have to be evaluated in accordance with the future projections and financial viability of the enterprise to exist in the near future. 5. Competence of Management Competence of Management and their basis for evaluating strategic and financial decisions related to the enterprise would have an impact on the audit plan. If it is clear that the management cannot be trusted and that their basis for estimation of the financial future of the enterprise, it's operational stability and security is unreliable then the audit plan will have to be modified accordingly.