List and Describe the Possible Inherent Risks in the Retail Industry

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SKU: ACC301991 Category:

Method of reporting comprehensive income

Borrowing costs and estimated interest for company

 

Research Project

This assignment is a research component within the Auditing Practice assessment. There is no model answer to this assignment. You need to conduct desk research and based on this and any anecdotal evidence and/ or personal experience consider the questions given.

 

Topic

Inherent risk, in a financial audit, measures the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in cycles before considering the effectiveness of internal controls.

 

Industry Sector of Interest

Consider the risks inherent to the retail industry such as grocery supermarkets and conduct research about the following questions.

1. List and describe the possible inherent risks in the retail industry.

2. Determine which inherent risks may currently be considered critical.

3. Determine which practices might address the inherent risk identified in’2’ above.

 

Question 1

Springfield Ltd is a company involved in a diverse range of activities involving power generation, machinery retailing and agriculture.

The accounting policy note attached to the 2015 financial statements included the following under the heading ‘Leases’:

During the year the company entered into a refinancing arrangement which involved the sale of the Lily Mountain power station under a sale and leaseback arrangement. The difference between the carrying amount of the power station and its original cost has been included in profit and disclosed as a gain on sale of a non-current asset. Sales proceeds in excess of the original cost have been treated as deferred income in the statement of financial position. The amount of deferred income will be systematically amortised over the term of the lease.

The power station is a unique asset in that the licence to generate power from that station is held by Springfield Ltd and cannot be transferred. The leaseback period is for the remaining 20 years economic life of the power station and Springfield Ltd has guaranteed its expected residual value at that time of $55 000.

 

Requirement:

(1) Does the Springfield Ltd sale and leaseback arrangement involve a finance lease or an operating lease? Justify your choice.

(2) Critically evaluate the accounting treatment adopted by Springfield Ltd with respect to the sale and leaseback agreement. Refer, where necessary, to relevant sections of AASB 117.

(3) Compare the resulting deferred income account with the Conceptual Framework/Framework’s definitions of and recognition criteria for the elements of financial statements.

 

Question 2

Chapter 27 introduces accounting for equity interests in other entities, providing basic knowledge on the consolidation process, the history of the governing Australian accounting standards and an understanding of control.

The Qantas Group’s main business is the transportation of customers using two complementary airline brands, Qantas and Jetstar. They also operate subsidiary businesses including other airlines and businesses in specialist markets such as Q Catering.

The airline brands operate regional, domestic and international services. The Group’s broad portfolio of subsidiary businesses ranges from Qantas Freight Enterprises to Qantas Frequent Flyer.

 

Extract from Qantas 2012 Statement of financial position as at 30 June 2012

$m

Equity attributable to the members of Qantas 5,885

Non-controlling interests 4

Total equity 5,889

 

DISCUSSION POINTS

(1) The extract from the Qantas 2012 Annual Report shows that overall Qantas holds the majority shareholding of its subsidiaries with non-controlling interests (NCI) in the Qantas Group of $4 million. Explain what control, if any, the shareholders represented in the NCI could use to influence the decision making of Qantas.

 

(2) AASB 10 defines ‘control’ and ‘subsidiary’. Given that the NCI represents only $4 million of the $5,889 million why is it necessary for Qantas to show the NCI separately?

 

Question 3

Identify 1 Australian listed company (select either BHP Billiton Limited or Qantas Airways Limited), with balance dates ending on 30th June 2014.

Identify Australian listed companiesBHP Billiton Limited OR Qantas Airways Limited
1. GICS Industry**
Board composition (No 2 – 5):
2. Number of directors (&Gender of directors)
3. Number of board meetings
4. Qualification of directors
5. Experience of directors (Whether they are on other boards)
6. Number of Australian and foreign subsidiaries
7. Number of Australian and foreign associates
8. Borrowing costs and estimated interest for company
9. Number of employees
10. Method of reporting comprehensive income

 
 

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