AUDIT RISK ASSESSMENT OF BEGA CHEESE LIMITED

Areas of operations

BCL is one of the major market players in Australian dairy industry that specializes in the production of natural and processed and cheese, butter and rich cream products. It was formed in 1899 and its manufacturing facilities are located in Bega, New South Wales and Strathmerton in Victoria (Australian Business Review, 2017). BCL is listed on the Australian Stock Exchange (Asx.com.au, 2019) and follows the acquisition model for expansion of its operations across the globe, with major acquisitions of brands like Vegemite and Kraft in the past, and acquisition of companies like Tatura Milk in the past and Koroit production facility in the current year. By exporting its products to over 70 different countries across the globe, the Company claims to sell 1 million packets of cheese every day (Bega Cheese Ltd, 2016). These sales account for 40-50% of BCL’s revenue. Besides selling its products under various brand names, BCL also caters to the needs of other local manufacturers by supplying bulk quantities under contracts to be sold under other brand names (Bega Bionutrients, 2016).

BCL’s revenue from the two major products is depicted using the following pie chart (with data extracted from Segment reporting note in financial statements):

2. Laws and regulations affecting BCL’s operations

Besides being subject to reporting requirements under various local and international laws, BCL being engaged in operating various dairy farms and food processing facility has to comply with laws and regulation applicable on the dairy and farming industry. Some of these regulations are listed below:

• Australian Animal Welfare Standards and Guidelines having regulation relating to fair treatment of animals and land transportation of livestock, and cattle farmer
• The Foods Standards Code – FSANZ standards
• Export Control (Prescribed Goods - General) Order 2005
• Exports Control Act 1982
• FSANZ Product Recall Protocol under which company needs to have a working recall system complying the requirements
• Environment protection, occupational health and safety laws

3. Key Risk Areas

Adoption of the acquisition model of growth by BCL has resulted in purchase of several small and big brand names in the industry. The company also frequently undertake joint ventures within its industry. This has resulted accumulation of goodwill and intangible assets in its financial statements which might be overvalued. Further, the group operating in the food and agriculture industry has to account for its biological assets in accordance with IAS 41 and carry its inventory at fair value less cost to sell in accordance with that accounting standard. Since, these are subjective areas and often requires management of the entity to exercise judgment and are also subject to significant estimation uncertainty, the report identifies these two areas as highly risky and prone to misstatement due to the inherent degree of variability within their account balances.

Besides, the group has several transactions with related parties which are also inherently risky as transactions with related party could be undertaken on non-arm’s length basis resulting in the entity being unable to realize full value of its resources. Besides these transactions re to be eliminated for the purpose of consolidation procedures under IFRS 10 Consolidated Financial Statements. These procedures and he resulting adjustments are often complex and require the entity to apply considerable judgment and skill, and therefore could be prone to error. The following paragraphs of the report discuss these identified issues in detail.