Thursday, December 12, 2019

Accounting Systems of Cochlear Limited †

Question: Discuss about the Accounting Systems of Cochlear Limited. Answer: Introduction Cochlear Limited is a company that manufactures medical devices and supplies the Nucleus cochlear implants. The Hybrid electro-acoustic implant and the Baha bone conduction implants are also manufactured by the company. The company is based in Sidney and it was started in the year 1981 with finance from the government of Australia. The government intended to commercialize implants and it was started by Dr Graeme Clark. The company holds about two thirds of the worlds hearing aid/implants business. Cochlear was named by Forbes as the worlds most innovative company in the year 2002 and 2003 (Funnell Cooper, 2012). The company was also need by the same magazine as the most innovative firm in the year 2011. This paper analyzes the accounting systems of the company and how the company performs financially by accessing and evaluating its financial reports over the years. Knowledge of Cochlear and its entities The companys manufacturing facilities are based in Sweden and Australia. The main facility is located at the Macquarie University in Sydney. Cochlear distributes its products in more than 110 countries globally. Approximately 43% of the companys revenue is derived from the Americas. 40 % of the revenue is from Europe while Middle East and Africa represents 17% of the companys annual revenue. The remaining 17% which is approximately $161.3 million is from the Asia-Pacific. In the year 2015 Cochlear spent about 15% of its revenue on research and development and this amounts to $128 million (Caanz, 2017). Cochlear revenue for the year 2015 was AU$ 925.6 million. The net income for the company during the same period was AU$ 145.8 million. The company is headed by the president. The chief executive officer and then the Executive Director are in charge in that order. The current share price for Cochlear Limited is 158.71. The dividend yield declared in the previous year was 1.40/1.70. The total issued shares of the company are 57.43million shares. The regulations in this industry are very strict since its involves health care. The company needs to maintain high quality standards for its gadgets (Arens, 2012). The company is also required to adhere to the International accounting standards and to conform to all the rules put in place by the ASX. Identification of business risk The identification of business risk process helps to identify inherent risk in the internal control systems or in the accounting policies and procedures of the company. The business risk for Cochlear is identified by reviewing regulations and legislation in this industry. The firms financial statements are also analyzed to help identify the risks. The biggest business risk is that of the business seizing to be a going concern. Cochlear is exposed to financial market risks. This includes the currency risk and the interest rate risk. The company trades in Australian dollars and the fluctuating currency market may affect the companys returns. Since the company operates in more than 100 countries across the world, most of the payments are made in form of US $ and therefore change in interest rates represents a significant business risk for the business. The interest rate on loans may rise in future given the current economic environment in Australia. The demand for loans in the country has been on the rise in the country in the last three years. This therefore means that there is a high probability that the interest rates will hike in future. This therefore exposes Cochlear to additional expenses in interest rate. The 2015 financial reports indicate that the companys loans and other interest bearing liabilities amounted to AU$168,159,000. An increase in interest rates would therefore have a significant negative effect on the companys revenue. The other risk that can be identified from the analysis of the financial statements is the liquidity risk. Liquidity is the ability of a company to meet its financial obligations when they fall due. The total current assets in 2015 financial year amounted to AU$ 420,879,000. When you less inventory ($127,613,000) the current assets are at $293,176,000.The current assets for this period are A290, 253,000. This therefore means that the liquidity is at a significant risk level since in case the current assets reduce by a little margin, the firm may find itself in liquidity problems. Cochlear is also exposed to credit risk. This is the risk resulting from a situation where a customer who owes the company fails to meet their financial obligations as agreed. It mostly results from trade receivables and notes receivables. The current credit terms for Cochlear are 30 days (Fund, 2012). The risk that the company is exposed to in relation to credit is not above normal. The total maximum exposure to credit risk by the company for the year 2015 totaled $236,728,000. Based on historical data of the company, this is a fair value. Specific account balance Accounts receivable Loan account Inventory account (a) Explain why the account balance is at significant risk of material misstatement. a)The accounts receivables balance are likely to be affected by material misstatement. This account is likely to be affected by material misstatement because the creditors may pay by cheque through the bank and the bank may fail to credit the companies account with the right amount hence leading to misstatement. Another reason is that the person preparing the financial statements may enter an incorrect amount of the debt settled hence leading to material misstatement in the final books of accounts. The account receivable account is at a significant risk of being materially misstated because the account has a huge impact on the companies` short term assets. Overstating accounts receivable therefore increases the companys total current assets and hence giving a wrong impression that the company is owned money that it expects to receive soon and therefore misleading the investors and shareholders The loans account balance also has a high risk of being misstated. This is because, high amounts of loans makes the financial position of a company undesirable and hence the management of the company may try to misstate loans so as to hide from investors the real amount the company owes creditors. The loans may be reduced so as to keep attracting investors due to low debt to equity ratio. The loan account may be understated by the companies` management so as to show that the companies liabilities are less than they really are and hence indicating that the company is performing well financially. Inventory account balance is also at a high risk of being materially misstated. This is because, when determining liquidity of a company, the inventory of the company is deducted from the total current assets. Inventory can be reduced intentionally so as increase the total current assets and hence make the liquidity position of the company appears more desirable and balanced. The inventory account balance of Cochlear is at the risk of being overstated so to increase the total current liability and hence improve the liquidity of the business. (b) Explain the key assertion at risk of not being valid. The assertions made by the management of Cochlear may not be valid due to the following reasons. The first is that there may be particular accounts balances that are omitted from the companies` financial statements. For example the liabilities account balance many be omitted and therefore it means that the value of liabilities presented by the auditor is not true (Busby Au, 2017). This therefore needs to be investigated carefully to prevent omission that is material to the financial records. The assertions may be invalid due to wrong valuation and allocation. The assets, liabilities, and equity may be recorded wrongly in the financial statements hence leading to the assertions being invalid ("Cochlear implantation after burn injury of the head", 2011). (c) Detail one (1) relevant substantive audit procedure to address the assertion at risk as identified in b) above. The substantive procedure to be used to address the assertion for accounts receivables begins with examination of the companys original information/books of account (Godfrey Chalmers, 2007). An auditor should get a sample of clients from the companys accounts receivable ledger and review the information in this ledger. This helps to ensure that the clients listed as owing money to the company can be confirmed to be really true. The next step is to review the original sales documents to make sure that the sale actually occurred and hence resulting to the accounts receivable balance (Montgomery, 2013). The auditor should then interview employees in the accounting department. This will help the auditor to understand how the company records its initial transactions and possibilities of error. The accounting information should have sufficient backup to help ensure that the transactions really happened. Absence of proper training of employees may result to errors that may affect account b alances. The next step is verification of balances with the clients. The auditor should contact the main clients who are listed in the receivable to verify that they really owe Cochlear the amount recorded. The final step in the procedure is to track the payoff process. This involves determining when the company was paid for goods and how long its takes to apply the received amounts to the accounts receivable. (d) Detail one (1) relevant practical internal control that would mitigate the risk in relation to the assertion at risk as identified in b) above. Internal control measures put in place by Cochlear can help to prevent the fraud in the company as a result of omission or incomplete account balances. The error of incomplete account balances can be mitigated by separating duties in the accounting department. This helps to ensure that the person committing the errors is not the same person who is in a position to conceal the fraud or the error (Rahman, 2016). When there is adequate division of duties between the people performing accounting procedures and those in charge of controls. This will ensure that a mistake made at the initial recording of information is does not recur in the later stages of the accounting process (Ricchiute, 2006). Conclusion This report contains an in depth analysis of Cochlear financial reports which helps in identification of risks in the business. The financial reports of the company in the year 2015 and 2016 are evaluated to help identify business risk. The risks identified include the currency risk, credit risk and interest rate risks. The account balances that are identified as being most susceptible to material misstatement include the accounts receivable, loan account and interest rate expense (Gay Simnett, 2012). The assertion at risk for not being valid include error of incomplete statements, misstatement and omissions. The substantive audit procedures to prevent the risk of account receivables being misstated are also explained. This report helps to identify and explain the areas that an auditor needs to be focused on when carrying out an audit on Cochlear limited. References Arens, A. A. (2012). Auditing, assurance services and ethics in Australia: An integrated approach. Frenchs Forest, N.S.W: Pearson Australia. Busby, P., Au, A. (2017). Categorical loudness scaling in cochlear implant recipients. International Journal Of Audiology, 1-8. Cochlear implantation after burn injury of the head. (2011). Cochlear Implants International. Caanz, ., Kemp, S., Chartered Accountants Australia + New Zealand., Global Accounting Alliance (Firm). (2016). Auditing, assurance and ethics handbook 2016 Australia: |b incorporating all the standards as at 1 December 2015. Milton, Qld: Wiley Caanz,S, . (2017). Auditing, Assurance And Ethics Handbook 2017 Australia. S.l.: Wiley Australia. Funnell, W., Cooper, K. (2012). Public Sector Accounting and Accountability in Australia. Sydney: UNSW Press. Fund, I. M. (2012). Australia. Washington: International Monetary Fund. Gay, G. E., Simnett, R. (2012). Auditing and assurance services in Australia. North Ryde, N.S.W: McGraw-Hill Education. Godfrey, J., Chalmers, K. (2007). Globalisation of accounting standards. Cheltenham, UK: Edward Elgar. Montgomery, R. (2013). Auditing. [Place of publication not identified]: Theclassics Us. Rahman, A. (2016). Australian accounting standards review board. [Place of publicRicchiute, D. (2006). Auditing. Mason, Ohio: South-Western/Thomson Learning.ation not identified]: Routledge. Shishegar, M., Hashemi, S. (2014). Cochlear Implantation in Pediatric Patients: Comparison of Limited-Incision and Standard Cochlear Implantation. Indian Journal Of Otolaryngology And Head Neck Surgery, 67(3), 238-241.

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