FROM:The Audit Managerin ACC-331 & Co.
SUBJECT:GrohlCo. – Audit Planning and ethical issues
Businessrisks faced by Grohl Co.
Followingthe meeting with the finance director of Grohl Co Kyle Diesel, someof the business risks that were pointed out include single supplier,quality control issues, changes in exchange rates, regulatory issues,liquidity issues and key customers reliance.
Singlesupplier – Grohl Co relies solely on one overseas supplier for thekey material that are copper wiring. This could be a high risk to thecompany especially when there is an emerging operational failure onthe side of the supplier. If a disruption emerges for example on thesupplier side, it would mean that the whole operations of Grohl Co.will stop abruptly since there will be no other alternatives tosource the essential materials.
QualityControl issues – The incidence of Grohl Co. supplying its customerswith corroded circuit boards could have resulted from a poor qualityof copper wiring procured from the overseas supplier. The companyopted at sourcing the materials from one supplier in the name ofcutting down the cost. It seems that the copper wiring imported wascontaminated that led to corrosion. The tragedy also revealed thatthe company has poor quality management measure, and if immediateactions are not taken, the firm may end up losing most of thecustomers.
Exchangerate fluctuations – Grohl Co imports the key materials from anoverseas company. This means that the business is at high risk ofbeing affected by the volatility in the currency exchange rates. Thecompany also relies on the foreign market where half of its productsare exported to the international market. This could also be affectedby the exchange rate volatility and hence affecting the expected cashflows. This would eventually lead to volatility in profits.
Liquidityrisk – The Company acquired a loan of $30 million which was toomuch as compared to its total assets. This increased the gearingratio of the company, and it is riskier as it increases the chancesof insolvency (Arnold, 2010). The enterprise will also be expected topay an interest of $1.2 million which is too high as compared withits cash in hand balance of only $130,000. The current and quickratios also indicated that the firm is not able to meet its currentobligations as they fall due.
Sincethe firm deals with much of foreign transactions that include importsand exports, this could lead to a numerous misstatement of revenueand expenditure. This risk will most probably arise if the exchangerates fluctuate heavily in the course of the year.
Anothermaterial misstatement risk could arise when writing off the obsoleteinventory. The copper wiring noticed to be corroded were to beremoved and appropriate accounting adjustments made. If this were notdone, for example, the closing inventory and the profit of the firmwould be overstated.
Productrecall and refund to the customers is another misstatement risk sincesome may demand a refund instead of circuit board replacement. Thiswould call for unrealizable revenue that results in an overstatementof the profit.
Also,finance cost could lead to material misstatement if the loanamortization cost was not applied. The financial reporting standardsrequire business to disclose loan measurement and recognize it as afinancial liability (Arnold, 2010).
Interviewingaudit manager, Joseph Coyne of Foo & Co as a financial controllerof Grohl Co. was against the codes of ethics for professionalaccountants of IFAC’s. The former member of the audit team is notrecommended to work with the client in a position that wouldinfluence the audit exercise. This would also create a threat broughtby high familiarity. Therefore, I would recommend that Grohl Co.Should review the company policies that allow the members of auditteam being employed by the client.
FASB.(2015). 2015US GAAP Financial Reporting Taxonomy.Retrieved October 05, 2015, from FASB:http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176164649716
ArnoldG. (2010).Corporate financial management 4thedition.Britain: Pearson Education.