Fonterra Co-Operative Group Ltd.

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Overview of Fonterra Co-Operative Group Limited.

Fonterra Co-operative Group Limited is a multinational New Zealand dairy cooperative

Ingredients - includes manufacturing and global marketing of dairy products. This includes
working on behalf of other manufacturers trading dairy products. Milk powders, proteins and
fats, cheese and probiotics are included in the products.

Consumer – The division includes the production, marketing and sale of retail dairy products of
added value. These services are handled by experienced managers that help the milk business
and customers to benefit from the range of technical and Risk Management Services offered by
Fonterra. These services also contribute to ensuring the domestic name of its products made of
world-class packaging.

The Quality Forum of the Audit brings together auditors, customers, businesses and
regulators. The purpose of this initiative is to allow stakeholders to work together to promote a
transparent and productive dialogue. This will help the governments and regulators to contribute
to their work and develop concrete ideas that further enhance the confidence in an independent
audit. Although Fonterra Group accepts that the audit standards do not specify the purpose of the
audit, they provide guidance on how to conduct it. Therefore becoming essential to take into
account what it says and what expectations it may have. Fonterra Group considers statutory audit
needs to be undertaken due to the benefit of shareholders. Auditors are appointed to report to the
shareholders independently on the truth and fairness of the financial statements. They also need
to report to the shareholders, by exception, on the other requirements of the company law.

Various risks involved in Fonterra Group include:

Inherent Risk

Although accounting standards provide detailed accounting methods, there are still grey areas in
which the Organization has to evaluate based on its judgments and assumptions in the recording
and reporting policies. This can vary between the organizations as it creates a risk gap. Often it
occurs when an entity is required to report a transaction daily or regularly occurring. This is
caused by misunderstanding or incorrect knowledge.

Inventory susceptibility to robbery

The total group assets account for 60.2% of the inventory. This is a significant percentage of the
operations in the company. Stock or inventory is Fonterra Group's main asset. The nature of the
stock increases the risk of volatility and thus, the risk. Inventory robberies will increase the
Group's costs and thus reduce Fonterra's profits. In the financial year 2019, 0.38% of sales in
2019 and 0.44% of sales in 2018, were less in inventory. This meant that expenditures of almost
$6.5 million in 2019 (2019 Annual Report) were lost. This is a type of inherent risk involved in
the company’s activities.

Control Risk

The accountant at Fonterra prepares the financial statements of the company for each year and
pays particular attention to avoiding potential risk and uncertainties.

The control procedures followed by the accountant include:

Addressing the right person's proper duties: The accountant believes that division of
responsibilities is necessary to guarantee the right person performs his duties efficiently. He
therefore checks the duties and ensures that all duties are shared among the whole workforce
based on the individual's skills, knowledge and experience.

Addressing the correct documents. Often in an incorrect filing system used in several company
departments, purchases or customer invoices are lost. The accountant checks the documentation
and makes sure it matches with the specific purchases or sales. The accountant then creates a
corresponding table, following a numbered documentation system, so that all documents can be
found on-site. Fonterra Group can eliminate the possible errors in its financial statements by
using these simple control mechanisms.

In the slide, represents a flow chart which entails the various revenue rates from various
competitors of Fonterra Group from 2002 to 2019. Colun records the highest with a 27.5% rate
of sales volumes despite having started low in 2002 with 16.7%. Nestle records the second with
19.9% sales volume with high-low fluctuations despite starting from 21.1% in 2002. This is a
drop of 4.4%. Fonterra records the third with a sales volume of 17.9%, which is a drop from
24.2%. This suggests that various factors indulge in increasing competitiveness as it recorded
first in 2002. Watts still lags with a drop of 0.8% within the ten years. The graph representation
is as shown in the slide.

Revenue - Audit Procedures

The auditor of Fonterra Group generally check revenues in each year. However, in the case of
inconsistencies, the audit company reviews the record from the previous years (Annual report,
2019).

This process is responsible for monitoring and ensuring compliance with taxation. It also helps
the management of Fonterra to identify signs and additional liabilities of tax evasion. Auditors
also collect interest, tax or penalties as appropriate. Factitious sales at or during the year to reach
a certain amount in the financial statements could give top management some rewards, such as
bonus or incentive. (Annual report, 2019).

Substantive Testing

Substantive revenue assessment methods are often used by auditors to detect fraud or financial
information mistakes. The aim is to determine the validity, accuracy and completeness of the
Organization's balance sheet and transactions. Detailed tests at the test stage and analytical
procedures are applied in several stages of the audit in this company in regard to the annual
reports of 2019. The company uses substantive testing in determining errors which may result
from various transactions involved in the balance sheet. Further audit tests are used by KPMG to
reveal any errors occurred (Annual report, 2019)

Unpredictable Audit Procedures

Potential issues of corporate fraud and misconduct, such as manipulation of financial statements,
unauthorized expenditure or tax evasion, may arise during the revenue audit. Fonterra Group
does not engage in such practices as per suggested by the management. Incase such misconducts
arise, and the management becomes familiar with audit procedures they can conceal a fraud. In
this case, they receive surprise visits from outside auditors. If an auditor suspects that the
company is engaged in fraudulent activities, it conducts unforeseeable audit procedures, such as
the assessment of accounts that are not normally audited or smaller. Such unforeseeable audit
procedures usually make it easier to detect fraud by creating uncertainty.

Conclusion.

KPMG should also revisit their audit methodologies and implement these methodologies to
ensure that PCAOB auditing standards are followed in the area of revenue auditing in Fonterra
Group. Besides, the audit firm should consider whether additional training of their auditing staff
or other steps are needed to ensure that the PCAOB standards are followed. Given the nature and
importance of the issues covered by this practice alert, engagement partners and senior
engagement team members of Fonterra Group needs to take action to ensure that the team
properly implement the auditing standards. The audit committees in the company should discuss
their approach to auditing revenues with KPMG, including the issues addressed in this context.

References.
Fonterra Co-operative Annual Report, 2019: http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-
2.amazonaws.com/attachments/FCG/341613/308498.pdf