Useful websites: http://clients1.ibisworld.com.au/reports/au/industry/default.aspx?entid=17 You are a part of the team responsible for planning the Australian Agricultural Company Limited audit engagement for 2013. You have been assigned to gather relevant background information and prepare a report for a meeting with your audit partner and audit managers. Your report must address the following issues.

1. In relation to Australian Agricultural Company, provide a description of the following: * What are the principal sources of AAC’s revenue? * What does AAC produce and how does it conduct its operations? * Who are its primary competitors and what is AAC’s market share? * Which particular regulations affect its operations?

Revenue
Principal sources of revenue from Finished & Store cattle sales which made up 50% of its revenue in 2012, this is equivalent to $236,812,000. page 94.

Meat sales is the second largest source as it reaped $140,376 in revenue in 2012. Out of beef sales, Wagyu beef makes up 62% of total sales revenue from beef. North Asia is the biggest importer of this company’s product, purchasing 43% of produce and this is closely followed by Australia Pacific which takes 25%.

Operations and Produce
They produce different types of cattles which yield revenue from various uses. Their cattle produce consists of Grassed Finished, Grain Finished (non Wagyu), Wagyu, Breeder & Feeder and Live Export.

Operations:
- Herd Developments
- Breeding Herds and Genetics
- Live Exports
- Meat processing facility
- Beef Groups sales to restaurants, hotels, airlines and supermarkets.
- Cropping (like wool)

Farming Operations
Farming yields continued to perform and farmgate prices were within budget expectation. The table below sets out the areas harvested, yields and farmgate prices.
Summer Crops
Cotton suffered flooding at Goonoo, which impacted yield by 10 - 20%. Wylarah offsite chemical drift impacted yield, with some minor flooding. Sorghum suffered flooding at Goonoo, impacting yield, causing late harvest and some areas of total crop loss. This impacted profit considerably.
Winter Crops
Wheat at Goonoo had a great start and was of high quality. However the dry finish slightly impacted the yield. Wheat in Southern Queensland, and chickpeas had a dry finish. The chickpeas were planted to cotton country when the cropping program changed during 2012.
Other cost increases dampened farm gross margins and land access costs for Woodbine (2013 cotton) have been incurred and treated as a period cost in the result as they are not capable of being deferred.
Beef Group Operations
The Beef Group sold 16.9 million kgs (2011 – 17.0 million kgs) of boxed beef during the year.
The Beef Group continues to face pressure from the high AUD. Wagyu has faced competition from domestic Korean Hanwoo and US imports into Korea. Non-wagyu may not be competitive until AACo can control an abattoir. Wagyu gross margins are similar to 2011 while non-wagyu margins are negligible. There has been some increased cost of operations during 2012 that arose as a result of the decision to consolidate our cold store activity.
Other Cost Areas
Overheads have increased over 2011 by around 5% due in part to the expansion of the senior management team as the operations are being established and expanded to manage the Darwin abattoir and the expanded sales in the Beef Group that will arise from the anticipated abattoir production.

Australian Agricultural Company Limited is an Australia-based company, engaged in the operation of grazing and farming properties, beef cattle breeding, growing, feed lotting and trading and beef value-add businesses relating to wholesale meat marketing. The Company’s business segments include finished and store cattle group produces beef cattle that are either exported or sold for meat; farming operations include growing and harvesting of cotton, wheat, sorghum and other crops; wholesale beef group markets and distributes branded beef both internationally and domestically, and meat processing operations are based in Darwin. The Company operates an integrated cattle production system across 18 cattle stations, five agisted properties, two owned feedlots, five external feedlots, and two owned and two external farms located throughout Queensland and the Northern Territory, covering approximately 6.9 million hectares. FROM: http://finance.ninemsn.com.au/news-and-markets/company/?code=AAC

Competition and market share
The Free Trade Agreement which was signed between Korea and the US has led to competitive disadvantage in the Wagyu beef industry against domestic Korean Hanwoo and US imports into Korea. This is further sustained by the high AUD making Australian exports relatively more expensive. As Korea is AACo’s biggest export market, which accounts for more than 20% of beef exports, there is a real threat from this competition against the US.

Market share -
Australian Agricultural Company Limited
Market Share: 4.7%
Brand Names: 1824 Premium Beef, Darling Downs Wagyu, Kobe Cuisine, Master Kobe, Greg Norman Australian Prime
From: http://clients1.ibisworld.com.au/reports/au/industry/majorcompanies.aspx?entid=17

Regulations

Environmental Regulation: From Page 37 of Annual Report 2012
The operations of Goonoo and Aronui Feedlots are regulated by licences issued under the Environmental Protection Act 1994 and administered by the Queensland Department Agriculture, Fisheries and Forestry (DAFF). Each feedlot is required to report to the National Pollution Inventory each year with respect to water, air and soil quality. DAFF conducts audits of compliance with licence requirements at regular intervals. The Company recorded no breaches of licence requirements in 2012.

The pumping of water from the Comet River for irrigation and feedlot use at Goonoo Station is subject to licensing under the Integrated Planning Act 1997 and the Water Act 2000. Regulations specify minimum water flows and heights in the river to allow sufficient environmental flows. Wylarah has a licence to harvest water from the Balonne River for irrigation purposes.
The pumping of underground water for the prescribed purpose of ‘Livestock Intensive’ requires licensing and regular reporting and monitoring. The Company has several licences allowing this pumping subject to these regulations and conditions being met.

Stock watering facilities, which utilise bores, require licensing in Queensland, and registration in the Northern Territory.

Stock water facilities shared with Queensland Stock Routes are administered by local governments, guided by legislation and framework developed by the Queensland Government. Shared water facilities need to comply with registered Stock Route water agreement requirements.
A Permit to Occupy is also required if this facility is unfenced within a station grazing area.

Vegetation Clearing Permits are sought under the Vegetation Management Act 1999 (Queensland) for any clearing required for ongoing operations including but not limited to the development of areas for land use change and the installation of infrastructure such as fence lines and water development.

The Company continues to be involved in consultation processes for example in the areas of Water Resource Planning, Wild Rivers legislation, and the conversion of land titles in relevant areas.

The Company must abide by environmental and other obligations contained in Queensland’s State Rural Leasehold Land Strategy in respect of the Company’s pastoral leasehold interests in Queensland. The State Rural Leasehold Land Strategy is a framework of legislation, policies and guidelines supporting the environmentally sustainable, productive use of rural leasehold land for agribusiness.

Northern Australia Beef Limited (NABL), a wholly owned subsidiary of the Group has been issued with an Exceptional Development Permit
(EDP) to build an abattoir on land owned by NABL at Livingstone Farm, Noonamah, Stuart Highway, NT. That EDP contains stringent and detailed environmental monitoring requirements overseen and administered by Department of Lands, Planning and Environment (NT). NABL is not aware of any breaches of the EDP requirements to date, and strives to comply in all respects with the terms of the EDP.

The Board considers the Company has adequate systems in place for the management of its environmental requirements and is not aware of any material breach of environmental requirements of licence conditions as they apply to the Group.

The Company is aware of the reporting requirements under the National Greenhouse and Energy Reporting Act (the Act). The Company conducted an assessment, which complies with the framework provided by the Department of Climate Change. This assessment concluded the Company’s energy consumption and greenhouse gas emissions are below thresholds set for mandatory registration and reporting under the Act. Previously, the Company reported voluntarily under the ‘Greenhouse Challenge Plus’ (GHC) Program. This program ceased in June 2009, but the Company continues to collect greenhouse emissions and energy consumption data using the GHC reporting structure.

With respect to the Australian Federal Government’s carbon schemes certain emissions from agriculture have been exempted. However the
Company continues to monitor and assess carbon reduction schemes for risks and opportunities.

2. A commonly used tool to assist in conducting strategic analysis decomposes the client’s business environment into the following four spheres of influence - Political Economic Social Technical
Prepare a PEST analysis detailing the kinds of factors that may have a material impact on the business of AAC. Two factors are expected for each of the four areas. Be sure to identify how each of the factors impacts AAC

Political 1. Decision of Australian government in June 2011 to suspend live cattle exports to Indonesia (p.8 annual report) → Has flow on economic effects Indonesia’s self-sufficient policy after the suspension on live cattle (Indonesia’s cattle import permits decreased by half) → Economic effect to Aus’ cattle industry since it can’t export as much → increase supply in domestic market so prices for cattle fall Links back to decrease in exports from Political section → less exports → increase in domestic supply causing cattle prices to fall2. Free Trade Agreement between Korea and US --> Australia is strategically disadvantaged since cheaper for Korea to buy beef products from US. Big impact since Korea is AAC’s major export market constituting more than 20% of AAC’s annual beef sale | Economic 1. Ongoing strength in Australian dollars against US dollars → challenges for beef export business since Australian cattle would be more expensive. Australian dollar has been above parity against the US before, the trend has been for AUD to be around parity with US. (Check exchange rate against Korea, Indonesia and North Asia as well) AUD → Won : trend is generally rising from 09-12, but fallen significantly in 2013.AUD → Rupiah : appreciated from 09-13 with a significant spike upwards towards the end of 2013.

Slow recovery from natural disaster in Japan. The majority of our revenue is received in Australian dollars, although the prices received are influenced by movements in exchange rates, particularly that of the US dollar, Japanese yen, and Euro relative to the Australian dollar-> from page 86
2. Global demand for beef is at record level due to drought and increased consumption in US and European countries (p.9 Annual report) Economic growth in Asian countries → overall rise in living standards → want to demand better quality beef | Social 2. Increase in awareness of greenhouse gases→ Saving energy with just eating raw vegetables (less demand for meat to reduce impact on environment) type in google - greenhouse gases ⅓ come from agricultural http://www.arrcc.org.au/eat-less-meat-why -> About the greehouse emissionsGreenhouse gas - http://www.worldwatch.org/agriculture-and-livestock-remain-major-sources-greenhouse-gas-emissions-0http://storage.globalcitizen.net/data/topic/knowledge/uploads/2011083092023705.pdf
Growth in Asian population → growth in global food production by 70% by 2050 → beef production to reach $15 billion p.7 http://www.who.int/nutrition/topics/3_foodconsumption/en/index4.htmlAging population | Technical (R&D, automation, technological change)1. Sustainable and land management best practice - Innovative measures to reduce energy consumption i.e. new technology to reduce diesel consumption. Purchased new trucks and tractors to improve fuel efficiency.- Significant groundwork done in 2012 to position AAC as major producer of solar energy - Diesel bores were replaced with solar bores during the year and the Company continued to run a pilot solar-diesel power generation system on Headingly Station → lead to long term energy and fuel efficiency (p.17 report)This is due to solar energy moving from domestic to an industrial practice.- database of library 2. New meat processing operations based in Darwin |

3. List and explain give key audit risks which would impact on the audit of AAC. Include the account and assertion most affected by the risks identified. Be sure to link audit risks to their applicable business risks (from your research in sections 1 and 2 and/or other applicable research). Do not include risks related to biological assets (or to their associated changes in value in the income statement) in this question.

Audit risks:
1. Downward evaluation of land due to decrease in price of cattles (Valuation and allocation)
This reduction in import permits also meant cattle which would have been destined for the Indonesian market have remained in the domestic market, with the increase in domestic supply causing a drop in cattle prices. (p.8)
The drop in cattle prices caused by the suspension of live trade has also required AACo to make prudent revaluations of our northern Australia property holdings based on the valuations provided by Herron Todd White for all the AACo pastoral properties. This has resulted in an approximate
$41 million write down on the statement of financial position of which $8 million flowed through to the profit and loss account as an impairment. (p.30)

2. The rising exchange rate of AUD against trading partners and competitors. Valuation and Allocation of inventory?

3. Summer crops suffered from flooding → significant impact on profit. More than doubled between 2012 and 2013 despite the flooding. page 34.

4. Occurence of sales.
The Beef Group sold 16.9 million kilograms of boxed beef during the year (2011: 17 million kilograms). Slow recovery from natural disasters in Japan presented significant challenges for the Company’s wholesale beef operations in 2012. In addition, while Indonesia remains a strong market for AACo, access quotas for exporters to the country have been an inhibitor to growth and led to higher prices for beef.(page 12)

5.

Impairment of PPE from $300 to $8000, lease PPE expense doubled. Tax benefit from making a loss.

Interest bearing loans from $56,000 to $3000. Cash flows from operating activities: Payment to suppliers, employees and other from $402,000 to $277,000. but total employee expense increased from $29,000 to $34,000 mostly due to compensation and employee benefits.

Inventory changed from ($2,500) in 2011 to ($500) in 2012. Trade receivables has actually increased, from ($5000) to $2,500.

(a) Allowance for doubtful debts
Trade receivables are non-interest bearing and are generally on 14 day terms. An allowance for doubtful debts is recognised when there is objective evidence that an individual trade receivable may not be collectible. Based on our assessment of the recoverability of trade receivables at the reporting date, we concluded that an allowance for doubtful debts was not required at 31 December 2012 and 31 December 2011. page 101.

Changed accounting policy, 2011 figures are restated page 85.

4. Biological Assets - Livestock is a major asset for AAC. Describe how you would alter your audit plan to ensure that AAC’s biological assets (and their associated value changes in the income statement) are fairly stated.

Audit testing, internal controls

Biological Assets- livestock-> decreased from 168,353 (2011) to 166,338 (2012) page 70

Page 76-> provides an explanation
Based on market value -> Look at outside factors eg. newspapers, AACo live export cattle (Victoria River Group & Darwin) are valued based on market quotes available at each reporting date.

Short fed cattle in feedlots are valued based on market quotes

Brand -> Independent valuation by Landmark

5. Your assignment should be presented in a format as if it were to be presented to a meeting of senior auditors at your accounting firm. It should be succinct, and use of tables is encouraged. The report should also be coherent and so consistency is expected throughout (e.g., formatting, language style, and linkages between the questions). Note that groups who split up the tasks and work independently are likely to have more difficulty accomplishing this objective compared to groups who work on each of the parts collaboratively.