Challenges to Be Faced While Conducting Audit - Coca-Cola - Case Study Example

SEC 10 K REPORT - COCA COLA of the of the Table of Contents Audit scope 3 2.Challenges to be faced while conducting audit 3 3.Brief overview of Coca Cola – Risk assessment 4 4.Audit approach 5 5.Risk mitigation 6 References 7 1. Audit scope The fundamental objective of this audit is to provide assistance to Coca Cola in reviewing its accounting figures which in turn will allow the managers to have a holistic view of the company’s financial position over the recent past. The auditor will endeavor to make sure that there is a smooth transition of responsibilities from the predecessor and therefore it is important to have a close look at the company’s financial as well as risk profile. In order to be able to do so a rigorous study of the financial reports has to be carried out. By doing so, the auditor will be able to assess the integrity and accuracy with which auditing was conducted by the predecessor. Moreover, it is also important for the auditor to have an in-depth idea about the accounting rules followed by the company which will also be gained through the assessment of financial reports. The scope of the audit will involve 48 hours of professional service per week and the fundamental objective will be to conduct a review of the major control points of Coca Cola. The auditor will be conducting a risk assessment for the company in order to learn about the extent to which the company is exposed to various forms of risk. The audit plan would also highlight the challenges or difficulties to be faced by the auditor while going through this transitional phase. Nonetheless, once this transition is made, it will help the auditor to get acquainted to the system of accounting within the company which in turn will prove to be beneficial when it comes to conducting thorough audit reviews of the company’s accounts. 2. Challenges to be faced while conducting audit It is expected that the auditor will face number of challenges while auditing the company’s accounts. First of all, given the fact that Coca Cola is a large company which is engaged in multiple business operations, the auditor will have to conduct a thorough analysis of complex data associated with all the business operations (Downs & Adrian, 2012). Although the task might not be that complicated even after the involvement of complex data, it may prove to be a matter of inconvenience if the data analysis has to be completed within a short and stipulated time frame (Bell & Griffin, 2012). Such rigorous analysis endangers the quality of audit that is done which in turn leaves the company exposed to a relative degree of audit errors. Such errors can have severe consequences which may put the company under scrutiny and thus tarnish its reputation. Another major challenge to be faced by the auditor is to have a proper access to information. Given the fact that audit reports are not only based upon facts and figures but also on internal information, it may well be difficult for the auditor to have access to such internal information during the initial phase of transition (Abbott, Parker & Peters, 2012). Such information bears extreme relevance when it comes to conducting an in-depth assessment of some of the major control points of a company like Coca Cola (Tapestry Networks Inc, 2013). Employees or the management may be reluctant in sharing critical information with a relatively newer auditor which in turn will make it difficult for the auditor to review the company’s accounts. Another major problem to be faced by the internal auditor is while managing multiple compliance audits. Given the fact that time has brought about a profound change in the rules and principles that business, organizations and other agencies are expected to adhere to, the internal auditor may find it relatively challenging to the accounting system or framework followed within the company. Failure to getting acquainted with the accounting framework or system followed within Coca Cola may also result in severe auditing discrepancies (EY, 2013). 3. Brief overview of Coca Cola – Risk assessment The international credit crisis has experienced unparalleled commotion over the recent past. If the ongoing credit crisis were taken an even worse shape, then in that case it may be difficult for Coca Cola to access the credit market on constructive terms which in turn could increase the company’s cost of borrowing. Moreover, the ongoing credit crisis may also make it difficult for Coca Cola’s bottling partners to borrow funds from the market on terms compared to those borrowed previously. This in turn would have an adverse effect on the Coca Cola system’s profitability as well as the share of income of the company’s bottling partners where the former holds equity method investments. The unending situation in the international credit market as well as their real or perceived impact on the company as well as its major bottling partners’ financial conditions combined with the weakening economic environment as a result of the financial crisis, may amplify the probability that the major credit rating agencies around the world may downgrade the credit ratings of the company. This in turn may increase the borrowing costs for Coca Cola by a drastic margin (Coca Cola, 2013). The considerable decline in valuation of the company’s assets as well as the decline in the equity market precipitated by the unending credit crisis in the international market and the instability in the global financial system has had a negative impact on the company’s pension plan assets. The lesser pension plan asset base may affect the company’s return on plan assets negatively. As a consequence, Coca Cola’s pension expense may increase by an unprecedented level thereby decreasing the company’s margin of profit. Alongside that if the present unpleasant market situation persists for an elongated period of time that it may hamper the company’s potential pension benefit expense. Due to the decline in value of Coca Cola’s pension plan assets as well as the reduction in the discount rate at which pension plan obligations were historically calculated, the managers of the company has decided to make contributions to the country’s as well as their own organizational pension plans (Yahoo finance, 2014). In addition to that, the unsteadiness of some of the chief financial institutions due to the worsening credit crisis also has the propensity the increase the degree of counterparty risk that is associated with Coca Cola’s accessible derivative financial instruments. This may increase the cost of or impair the company’s ability to secure creditworthy counterparties for the purpose of conducting derivative transactions in the future. The reduction in the availability of credit in the market may also have an indirect impact on the purchasing power of Coca Cola’s consumer. As a consequence the demand for the beverages produced by the company could drop by a significant level thereby affecting the company’s net revenues and thereafter depleting Coca Cola’s profit margin (Coca Cola, 2009). Volatility in the foreign exchange rates could also have a direct impact on Coca Cola’s financial results. This is precisely because of the fact that the company is hugely exposed to currencies other than the United States dollar such as the Japanese Yen, Mexican peso, Brazilian real and euro. The exposure to these currencies has been largely due to revenues earned in those currencies, usage of these currencies for acquiring assets, paying off expense as well as incurring liabilities. In the year 2008, Coca Cola transacted in 69 active currencies other than the US dollar and generated almost 75% of the company’s net operating revenues from its operations conducted outside the US. Given the fact that Coca Cola’s consolidated financials are denominated in the US dollar, each and every accounting factor such as income, revenue, expense, liabilities and asses needs to be translated in the home currency value on the basis of the exchange rate in effect during the conclusion of every phase. Therefore any fluctuations in the US dollar against any of the 69 functional currencies will have an effect on the company’s operating revenue and income as well as the value of balance sheet items which are denominated in a different currency (Coca Cola, 2008). 4. Audit approach Phase description Deliverables Mobilization phase: Request company for relevant documents and other materials that will come to assistance during the audit. Develop and subsequently provide an interview list containing the names of key officials whose opinions would be instrumental for the audit. Formulate an audit program in order to guide activities over the course of the audit. Advanced data requests. Interview key professionals from the company. Comprehensive audit program documents for the audit of consolidated financial statements of the company. Execution phase: After the approval of the audit program and identification of the appropriate resources, audit process will commence as per the audit plan. Outputs following the execution of the audit process. Working papers supporting the outputs of the process. Reporting phase: The audit results will be summarized in a draft report and will be subsequently presented to the management of the company within three weeks of completion of the execution phase. The underlying purpose of this draft is to discussion as well as to include any comments prior to the issuance of the final report. Draft report for discussion and review. Final audit report. 5. Risk mitigation The most important step to be taken towards risk mitigation is to make a proper assessment of the financial position of the company. The fundamental responsibility of the auditor is to conduct a thorough analysis of various financial ratios in order to have an in-depth idea about the risk exposure of the company. The assessment has to be translated into detailed report that will include descriptions of the major controlling factors that the company relies upon heavily. In order to mitigate the risk, the auditor will also highlight the areas of inefficiencies that exist within the organization. The auditor has to make sure that there is no discrepancy as far as accounting is concerned. In that way the auditor will be able to shield the company from any form of external scrutiny which may tarnish its reputation. The auditor will also make sure that the accounting procedures are in complete compliance with the accounting principles generally followed in the company’s country of origin. Moreover, upon conclusion of the audit program the auditor will recommend appropriate asset liability management strategies to the managers of the company. The auditor will also suggest appropriate strategies in order to reduce the company’s exposure to foreign exchange risk. One way of doing that would be to use derivate financial instruments strategically thereby reducing the net exposure (Treasury management international, 2013). References Abbott, L. J., Parker, S. & Peters, G. F. (2012). Internal audit assistance and external audit timeliness. Auditing: A Journal of Practice & Theory, 31(4), 3-20. Bell, T. B. & Griffin, J. B. (2012). Commentary on auditing high-uncertainty fair value estimates. Auditing: A Journal of Practice & Theory, 31(1), 147-155. Coca Cola. (2008). Employees. Retrieved from http://assets.coca-colacompany.com/35/91/2c86fdfd435a93eca69c08d735ed/2008_Coca-Cola_10-K_Item_01a&b.pdf Coca Cola. (2009). Item 1a. Risk factors. Retrieved from http://assets.coca-colacompany.com/58/85/b97a47394b408a6b59e60b6980f6/2009_04_Coca-Cola_Item1A-1B.pdf Coca Cola. (2013). Form 10K. Retrieved from http://assets.coca-colacompany.com/d0/c1/7afc6e6949c8adf1168a3328b2ad/2013-annual-report-on-form-10-k.pdf Downs, C. W. & Adrian, A. D. (2012). Assessing organizational communication: Strategic communication audits. New York: Guilford Press. EY. (2013). Greater business challenges call for stronger audit committees. Retrieved from http://www.ey.com/Publication/vwLUAssets/EY-InSights-for-European-Audit-Committees-Greater-business-challenges-call-for-stronger-audit-committees/$FILE/EY-InSights-for-European-Audit-Committees-Greater-business-challenges-call-for-stronger-audit-committees.pdf Tapestry Networks Inc. (2013). Challenges of the global internal audit function. Retrieved from http://www.ey.com/Publication/vwLUAssets/ViewPoints:_Challenges_of_global_internal_audit/$FILE/ACLS_ViewPoints-Challenges_of_global_internal_audit_May%202013_AU1630.pdf Treasury management international. (2013). Managing Financial Risk in the Face of Uncertainty. Retrieved from http://www.treasury-management.com/article/1/241/2015/managing-financial-risk-in-the-face-of-uncertainty.html Yahoo finance. (2014). Quarterly Report. Retrieved from http://biz.yahoo.com/e/140424/ko10-q.html Read More