AUDIT RISK AND PLANNING

BILLABONG INTERNATIONAL LIMITED

Contents
1. Overview of Billabong International business ...................................................................................... 2
1.1. Industry ......................................................................................................................................... 2
1.2. Recent developments ................................................................................................................... 2
2. Business and audit risks for Billabong International ............................................................................. 3
2.1. Business Risks................................................................................................................................ 3
2.2. Audit Risks ..................................................................................................................................... 4
3. Horizontal analysis of Billabong International ...................................................................................... 5
4. Areas of Risk of material misstatements based on horizontal analysis ................................................ 7
5. Going concern issue .............................................................................................................................. 8
6. Billabong International social responsibility measures ........................................................................ 9
Conclusion ................................................................................................................................................... 10
References .................................................................................................................................................. 11

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 1. Overview of Billabong International business
Billabong international (BBG) limited deals in marketing, wholesaling, distribution and retail
outlets of different products. The major product BillaBong offers include eyewear, apparel,
wetsuits and board-sport accessories. The company deals in several brands like Kustom, Honolua
Surf Company, Xcel brands and Von zipper. It was founded in 1973 and now it has branches in
10,000 cities of world including 100 countries (BillaBong, 2017). The company specializes in
products of professional athletes for junior and senior athletes. The major existence of the
company is in Australia, North America, New Zealand, Brazil and South Africa.

1.1. Industry
Billabong international is operating in Australian Wholesale and retail industry. Retail industry
of Australia is a highly competitive industry. During 2016 the industry has developed by 3%
which is slower than 2015 due to cautious spending habits of Australians (Deloitte, 2017). Due
to online existence of small retailers, the business of large and old retail companies have got
impacted drastically.

Out of 250 retailing companies operating in Australia, four companies have gained the highest
global market shares of retail market. The influx of international retailers is increasing including
like John Lewis or Debenham (Euromonitor International, 2016). It is expected to further
increase up to 5% in 2017. The increasing inclination of Australian people towards international
brands has become a threat for local brands like Billabong despite of its international existence.

1.2. Recent developments

Due to increasing competition Australian sports retail market, BillaBong international has made
major developments in order to attract prospective customers and retain current customers. The
local retailers of Australia like BillaBong are investing in store design and international brand
standards for high satisfaction level of customers. The retail company has adopted customer
experience model for leveraging the customer services up to international standards (IBIS World,
2016). Billabong has also made huge investment in flagship store for improvement in customer
and employee turnover. In order to retain high market share, Billabong has increased its
investment in international retail market.

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Despite of sudden demise on Australian Stock exchange earlier 2013, the company has gained
net worth of $1.6 billion US (Bunce, 2017). Due to crash down on stock market during 2013, the
company had to take rapid developments for retention of its market leadership including
establishment of flagship stores, change in store design and major focus on international brands
(Silva, 2013).

2. Business and audit risks for Billabong International

The highly competitive industry of BBG has resulted in increased risks either business or audit.
The company has to survive with huge struggles in order to deal with crucial outcomes due to its
sudden demise on stock exchange during 2013. In order to deal with different kinds of risks, the
company has established a risk management committee to deal with this issues timely. The
business and audit risks of BBG have elaborated as follows

2.1. Business Risks

Billibong has been market leader for more than 2 decades despite of this, it had to face several
downfalls and turmoil due to influx of international rivals and active operations of local
competitors. Currently the company is facing three main business risks.

2.1.1. Strategic risk

In order to comply with customer experience model for high satisfaction level of customers, the
company. The company has been facing high strategic risk due to possibility of non-
implementation of business model as planned. Due to wrong implementation process, the model
can’t be as effective as targeted (Disborough, 2010).

2.1.2. Operational Risk

Operational risk is associated with day to day operations of a company. Billibong is has suffered
great turmoil back in 2013 due to alleged investment bargain. Due to recent brand acquisitions
and strategic changes, the day to day operations of the company have got impacted. Due to big
squeeze in market share, the company has to lower down its prices below than intrinsic value for
customer retention.

The company announced discount on equity issue for recapitalization of business by selling
48.5% shares in Nixon for $285 million US (Arnold, 2012). Due to huge discount the market

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share price of company decline leading to operational issues and a major threat to going concern
of the business.

2.1.3. Compliance risk

The compliance risks is a business risk associated with companies operating in industries which
are governed by laws like Wine Industry. BBG has already devised suitable policies and
strategies in compliance with laws and regulations of Australian retail industry (BillaBong ,
2017). Due to complete compliance of the company, this risk is controlled in case of BBG. The
company has set standards and policies for customer and employee protection as per consumer
act and retail industry laws of Australia.

2.2. Audit Risks

Audit risk is risk of misstatement of financial statements of a business. It refers that the financial
performance and position of a business has not presented properly in accordance with true and
fair view. The audit risk has three major components i.e. control risk, detection risk and inherent
risk. The product of these components is audit risk shown as follows

Audit risk = Control risk x Detection risk x Inherent risk

Due to material misstatements in financial statements of a company, it is possible that the audit
performed is not effective. There are two major components of audit risk associated with
BillaBong international:

2.2.1. Risk of material misstatement

Risk of material misstatement states that due to high business risk and lack of proper internal
controls, it is possible that the financial statements of a company does not give true and fair view
(Mohseni, 2014). The overall business risk in case of BillaBong is high due to high strategic and
operational risk. It gives rise to certainty that the financial statements may be manipulated by the
management in order to show favorable business position and performance.

2.2.2. Detection risk

There is a possibility that the auditor of a company may not detect a misstatement in financial
statements based on assertions of the management of a company. The detection risk may lead to
inappropriate audit report which may mislead stakeholders by presenting a wrong position of a
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company. BillaBong international has hired us as audit firm as its external auditors. We have
expert auditors with detailed audit procedures. Due to expertise of out audit firm, and effective
internal audit committee of BBG the detection risk is low.

3. Horizontal analysis of Billabong International

The ratio summary of BBG for the year 2015 and 2016 has shown in below table. The summary
has also given the comparison of company’s performance with the industry performance

Ratio 2015 2016 Industry

Current Ratio 2 2 2

Debt to Equity Ratio 1.03 0.92 1

Gross Profit Margin 51% 53% 60%

Inventory Turnover 3 times 3 times 4 times

Trade Receivables turnover 7 times 7 times 6 times

Source: (Morningstar, 2017)

3.1. Horizontal analysis

The horizontal analysis of a company is based on its financial ratio analysis. The evaluation of
above table of ratio is as follows

3.1.1. Current ratio

The current ratio of BBG is constant in both years i.e. 2015 and 2016. The industry current ratio
is also 2 which shows that the company has maintained a balance between its current assets and
current liabilities i.e. liabilities are half of assets of the company. The company is doing well in
this area.

3.1.2. Debt to Equity Ratio

The debt to equity ratio of the company has declined in 2016 as compare to 2015. Initially it was
1.03 which was 0.03 times more than industry average debt to equity ratio (Annual Report,

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2017). Increased debt to equity ratio than industry ratio shows that the company was aggressive
in its financing through loans and debts instead of equity sale or issuance of shares. Back in 2013
the share price of the company declined drastically due to discounted issue of equity for
recapitalization program. It was the reason the company had to rely on debt source of finance for
its funding purpose.

In 2016, the debt to equity ratio of the company has improved by 0.11 times due to increase in
share price of the company (BillaBong , 2017). The company has become able to improve its
debt to equity ratio more than industry average i.e. 1. It shows that company is also working
effectively in this area.

3.1.3. Gross Profit Margin

The gross profit margin of BBG has improved by 2% from 2015 to 2016. Still it is lower than the
industry average gross margin i.e. 60%. The gross margin of the company has increased at an
increasing rate as compare to 2014-2015. The surf market of Australia is too occupied with
international companies and inclination of Australians towards international brands. Due to this
factor, the competition in market is tough and suppliers have edge for bargaining power leading
to increase in cost of sales (Bunce, 2017). Due to this factor the increase in gross profit this year
have not been progressed at a rapid rate. The company has to trade at low profit margins in order
to retain customers in long run. This area is risky and may give rise to temptation for material
misstatement of financial statements of the company.

3.1.4. Inventory Turnover

Inventory turnover shows the number of times a company is able to sell its inventory in market. It also
depicts the demand of its products in market. The companies having high demand have high inventory
turnover due to growth in sales time to time. The inventory turnover of BBG has remained stable during
2015 and 2016 i.e. 3 times. It has shown a low turnover than the average industry inventory turnover i.e. 4
times (Annual Report, 2017). It has shown that the demand of the company products has not increased
drastically during these 2 years. It indicates that the company is having struggles for its market share
retention due to intense competition in market. On average the inventory turnover in market is 4 times,
more than 1 times than company turnover.

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3.1.5. Trade Receivables turnover

The trade receivable turnover depicts the number of times a business receive payment from its customers.
The average industry receivable turnover is 6 whereas BBG has maintained it at 7 times for both years. It
shows that the company has increased number of payment receivable turnover due to which it has
maintained a balance of liquidity ratio (IBIS World, 2016). The company has maintained efficient
operations in this areas as well. Due to effective functioning of credit cycle of the company, it is able to
collect payment timely from its customers all over the world. It shows that the company is stable and has
no risk to its going concern in near future.

4. Areas of Risk of material misstatements based on horizontal analysis

The major areas of Risk of material misstatement as per analysis of ratio summary given above include:

4.1. Revenue

The revenue of the company is increasing slowly due to intense competition in market. It is possible that

the company has forged its revenue estimation in order to increase its profitability to cover up increasing

expenses. Due to increase in revenue as a result of manipulation, the financial statements may be

materially misstated leading to unfair view of the financial statements. This areas requires extra

consideration to get a fair and transparent view of financial statements.

4.2. Cost of sales

The cost of sales of the company are increasing due to bargaining power of suppliers in surf industry of

Australia. As there are many competitors of the company in market, it is possible that BBG management

may have manipulated total cost of sales to show increased profits. The suppliers of the company can help

the auditors as a result of external confirmation for getting the proof of authenticity of cost of sales.

4.3. Gross Margin

The gross margin of the company has been lower than average market gross margin since past many years
due to drastic decline of the company’s share price in market. In order to get the clear and fair view of the
company’s gross margin, the revenue and cost of sales should be estimated again by auditors. This area
may indicate manipulation of financial performance of a company in order to attract investors.

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4.4. Cash in hand

There is a possibility that cash in hand of the company have been manipulated as the company is
having operational issues. Operational issues is giving rise to risk associated with day to day
operations of a company. Billibong is has suffered great turmoil back in 2013 due to alleged
investment bargain. Due to recent brand acquisitions and strategic changes, the day to day
operations of the company have got impacted. Cash in hand is an areas which has less authentic
records unlike cash at bank where confirmations can be taken from an external party. That’s why
the risk of material misstatement is high here.

4.5. Inventory

The inventory turnover of BBG has remained stable during 2015 and 2016 i.e. 3 times. It has
shown a low turnover than the average industry inventory turnover i.e. 4 times. It has shown that
the demand of the company products has not increased drastically during these 2 years. It
indicates that the company is having struggles for its market share retention due to intense
competition in market. On average the inventory turnover in market is 4 times, more than 1 times
than company turnover.

5. Going concern issue

Going concern principle is an accounting principle which is based on an assumption that a business is
able to operate for foreseeable period of time in future (Accounting Tools, 2017). It is based on the
performance and financial position of the business by detecting any risks which may halt its operations in
near future. Owing to the horizontal analysis summary of BBG, the going concern issue seems irreverent.
As despite of declined gross profits, the company has maintained a sound liquidity position which is
helpful for it to operate in long term.

Complete financial information about the company is available which shows that the company has no
genuine financial issues which may hinder its operations in near future (BillaBong, 2017). The issues to
be taken into account while evaluation of going concern issue as an auditor, the major areas to be
considered include; negative trends in financial performance of the company, increase in loans of the
company, denial of trade credit by suppliers, any big litigation against company etc.

The current ratio of BBG is constant in both years i.e. 2015 and 2016. The industry current ratio is also 2
which shows that the company has maintained a balance between its current assets and current liabilities

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i.e. liabilities are half of assets of the company. In 2016, the debt to equity ratio of the company has
improved by 0.11 times due to increase in share price of the company. The company is doing well in both
of these area. The inventory turnover of BBG has remained stable during 2015 and 2016 i.e. 3 times
(Annual Report, 2017). It has shown a low turnover than the average industry inventory turnover i.e. 4
times. It has shown that the demand of the company products has not increased drastically during these 2
years.

The evaluation of financial statements and annual report of the company along with other documents, it is
shown that the company has maintained a compact financial position in market. Due to effective
functioning of credit cycle of the company, it is able to collect payment timely. It shows that the company
is stable and has no risk to its going concern in near future. As per complete analysis of financial
information about the company is available it is evident that the company has no genuine financial issues
which may hinder its operations in near future.

6. Billabong International social responsibility measures

Corporate social responsibility (CSR) is the measures or frameworks adopted by a business to
protect environment and society from harmful effects of business operations. BillaBong
international is not involved in any kind of manufacturing or production processes, so risk of
environmental pollution or exploitation of social resources is low. CSR report of the company
has shown that BBG has taken effective measures for safe strategies and harmless operations.
The company has employed latest equipment for minimum utilization of energy (BillaBong,
2010). For energy needs, BBG has shifted its systems to renewable energy sources in order to
save the environment.

BBG management has maintained a strong connection with eco system and environment at large.
The corporate environmental performance, energy efficient operations, complete disclosure of
environmental risk and proper measures to avoid it are the basic policies adopted by the
company to ensure its safe practice of corporate social responsibility. The company has
undertaken vast pollution prevention program. Due to integration of environmental
sustainability, the company has involved all of its stakeholders to ensure safe environmental
practices.

CSR framework of BBG has included demonstration of sustainable development of the

environment in long term (BillaBong, 2017). The resource management program of the company

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has covered under CSR framework. The resource management committee of BBG has taken
necessary measures to cut down the use of materials, energy and other resources in order to save
the environment. The CSR rating of BBG as per its report are calculation by using eco intensity
ratio. The CSR rating include 2.6 for community 2.8 for employees, 3.7 for environment and 2.9
for good governance (CSR Hub, 2016).

External assurance is an assurance which is taken by involving external experts for an unbiased
opinion on a matter. In case of CSR and sustainability report of BBG, external assurance is not
necessary due to extensive and elaborative CSR report of the company. External assurance
increases the credibility of a report in the eyes of stakeholders (Kueller, 2014). It may help in
proving the authenticity of the CSR report issued by BBG management. As auditor of the
company, we will recommend for external assurance to be at a safe side for getting further
assurance of the company’s sustainability stance.

Conclusion
This report has discussed the operations of Billabong international company. It has also included
business and audit risks to be countered in case of the company including strategic, operational
and compliance risks. The horizontal analysis of the company for 2015 and 2016 and its
comparison with industry has shown that major areas of financial statements for risk of material
misstatement are revenue, cost of sales, gross margin, and cash in hand and inventory. The report
has also stated that the company has no serious going concern issues. The CSR framework of the
company has indicated strict measures taken by the management for safe environmental
practices.

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References
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[Accessed 13 Sep 2017].

Annual Report, 2017. Annual Report, Sydney: BillaBong Internatioanl Limited.

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Available at: https://seekingalpha.com/article/714571-billabong-strong-retail-brands-in-turmoil?page=2
[Accessed 12 Sep 2017].

BillaBong , 2017. Risk Management. [Online]

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[Accessed 12 Sep 2017].

BillaBong, 2010. HOW ARE BILLABONG'S ECO PRODUCTS, ENVIRONMENTALLY FRIENDLY?. [Online]
Available at: http://www.billabong.com/za/blog-post/2272/2010-11-29
[Accessed 13 Sep 2017].

BillaBong, 2017. CORPORATE OVERVIEW. [Online]

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Deloitte, 2017. 2017 set to be ‘fascinating’ year for Australian retail. [Online]
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Kueller, A., 2014. 4 EXTERNAL ASSURANCE TRENDS IN SUSTAINABILITY REPORTS. [Online]
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Morningstar, 2017. Billabong International Ltd BLLAF. [Online]

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