Risk Assessment:
Each student is required to submit a risk assessment. The detailed assignment instructions are saved on Bb. In summary, the assignment consists of the following:
· Each student will complete a risk analysis of a selected public company
o It can not be the same company as any group selected company
· Written paper - for Risk Analysis should be at a minimum 5 pages adequately explaining the analysis results with appropriate citations.
· Written analysis will be prepared in Word, in APA form, and will be turned in via printed format and emailed to professor.
· The student needs to be prepared to discuss their risk assessment in class
Company I chose is TESLA
The attached file is an example of this project. professor gave us this example but said it could of been "stronger"
XYZ Audit Firm, LLP To: Allison Smith, Partner From: Jon Rousay, Audit Manager Date: March 30, 2017 Subject: Client Recommendation – General Mills EXECUTIVE SUMMARY I have performed a risk assessment on General Mills and believe the company to be an acceptable audit client and recommend we accept the audit engagement. To form my opinion, I have used AS2110 - Identifying and Assessing Risk of Material Misstatement as the basis for my assessment. Understanding the Company General Mills has been around for 100 years. Along the Mississippi River there was fueling waterpower and “in 1866 a man named Cadwallader Washburn began what would become General Mills” (General Mills website). He built a mill and called it “Washburns B.” It was the largest mill west of the Mississippi, but west of Buffalo New York. It would flood the markets with so much flour, which created a harder time to sell all of it. In 1877, John Crosby entered into a partnership with Washburn and they formed Washburn-Crosby Company, producing Winter Wheat Flour. In 1878, the "A" mill was destroyed in a flour dust explosion; the building caught on fire and there were workers who died. However, in no time at all, the construction of a new mill began immediately and was made a lot safer. This tragedy brought great attention to safety and even to this day, it is one of the priorities of the company. General Mills is a global consumer food company that develops distinctive value-added food products and markets them under unique brand names. They focus on six key products in food service channels, which consist of 1) cereals, 2) snacks, 3) yogurts, 4) mixes, 5) biscuits, and 6) frozen breakfast. These products produce 70% of the segment operating profit. General Mills has joined two joint ventures; Cereal Partners Worldwide and Haagen Dazs Japan; each at https://en.wikipedia.org/wiki/John_Crosby_(General_Mills) https://en.wikipedia.org/wiki/Winter_Wheat https://en.wikipedia.org/wiki/Dust_explosion XYZ Audit Firm, LLP 50%. General Mills just recently provided information to the stockholders stating the goal is to stand among the world’s most responsible food companies. The company provides updates across five key focus areas: Health and Wellness, Sourcing, Environment, Workplace and Community. General Mills serves the world by making food people love. The focus is on the consumer first. General Mills does this by understanding the consumer’s food preferences, how the consumer shops and how the consumer cooks today and then responds quickly to those desires. Consumers want natural foods with simple ingredients and limiting gluten, simple carbohydrates, and artificial ingredients. The consumer is looking for more protein, fiber, whole grains, and organic products. Consumers are snacking more. Therefore, these areas are what General Mills is focusing on for 2016 (General Mills Global Responsibility). This could provide the risk of lawsuits against General Mills if the ingredients used are not artificial ingredients, but advertised as being artificial. Having natural food ingredients may contribute to higher costs, which could lead to the company to overstate sales in order to show a profit. General Mills is “one of the largest food companies in the world, marketing in more than 100 countries on six continents” (General Mills Overview). They produce and market more than 100 brands. Some of the brands are Betty Crocker, Bisquick, Gold Medal, General Mills Cereals, Cheerios, Haagen-Dazs, Yoplait, Old El Paso, and Annie’s. General Mills has segments, which utilize the sales through United States retail, International, Convenience Stores and Food Services, and Joint Ventures. “In 2015 the performance was mixed. Two of the smaller operating segments delivered growth. The operating profit for the Convenience Stores and Food Services segment increased 15 percent to an all-time high of $353 million” (2015 Annual Report). The operating results for the international segment had a negative impact from the foreign currency exchange and “slowing economic growth in key emerging markets” (2015). However, there are good margin expansion and profit growth in constant currency. Changes in the foreign currency exchange rates could cause fluctuations in the earnings and cash flows. General Mills has entered into various hedging transactions to establish limits for each counterparty. This could be a possible risk for General Mills to want to change invoices to create a higher profit. The focus for 2016 is on five global growth categories: cereal, ice cream, yogurt, convenient meals, and sweet and savory snacks. General Mills works continuously to improve core products and to create new products that meet consumers’ evolving needs and preferences. In addition, they build the equity of their brands over time with strong consumer-directed marketing, innovative new products, and effective merchandising. They believe their brand- building strategy is the key to winning and sustaining leading share positions in markets around the globe. (2015 Annual Report) XYZ Audit Firm, LLP General Mills acquired Annie’s Inc. in October 2014 for organic food business, which now makes General Mills “the fourth largest natural and organic food manufacture in the United States” (2015 Annual Report). This could be risky since this is similar to what happened with their competitor, Kellogg Company in 2000. The sales of their competitor had tumbled the past five years since “Kellogg tried to exercise greater control over its subsidiary.” (Gasparro) This could cause the sales to decrease due to competition within the company. “Sales of Annie’s boxed dinners, including its signature macaroni-and-cheese, rose 8% in the year through Aug. 8, and cookies were up 18%, thanks in part to a flood of new items, according to Nielsen. But sales of Annie’s salted snacks fell 31% in the same period, reflecting growing competition from mainstream rivals like Campbell Soup Company, Pepperidge Farm and even General Mills’ Chex, both of which are removing artificial ingredients” (Gasparro). Having bought Annie’s, General Mills has increased its long term debt to 34.64 in 2015, causing it to be riskier in 2015 due to having more liabilities and less equity. However, General Mills is now just as risky as other competitors. (Morningstar) Internal Control As outlined in their annual report, “management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded and transactions are recorded accurately in all material respects, in accordance with management’s authorization”. The auditors need to review internal controls closely. In particular, segregation of duties and food safety which can be assessed by performing various site visits to observe activities and operations. About half of the 42,000 employees work outside the United States. This could be an internal control problem, if the employees do not have separate duties and responsibilities and the company is trying to save money by having one person responsible for more than one job. Also, the auditors should closely review General Mill’s food safety policy to ensure their adherence to all regulatory laws their internal food safety processes as General Mills believes it is the leader in setting high standards for prevention, quality and investment. The company’s food safety risk management strategy is based on three core elements: prevention, intervention and response. The internal controls and COSO framework appear to provide for appropriate separation of duties and responsibilities, and there are documented policies regarding use of our assets and proper financial reporting. These formally stated and regularly communicated policies demand highly ethical conduct from all employees as specified in their code of conduct. http://quotes.wsj.com/CPB XYZ Audit Firm, LLP Client Information After reviewing the annual report, 10k filing and press releases, the auditors need to interview management, internal audit personnel, employees, legal counsel and certain functions like human resources, finance, marketing, sales and production. Among other things, these conversations will help the auditors assess the risk of fraud as called out in AS 2401. One of the areas to be considered should be the effectiveness of Project Century, Project Catalyst and Project Compass. During fiscal 2015, General Mills took significant actions to streamline the organization and improve our operating efficiency. Project Century was focused on simplifying the North American supply chain and better balancing manufacturing/distribution and adding flexibility for growth. Project Catalyst was focused on increasing organizational effectiveness across the U.S. businesses. The auditors should consider how the new structure allows the company to be faster and more agile, to quickly adjust to a changing marketplace. This included making changes to our policies and practices to reduce overhead expense and improve organization speed. Lastly the company executed Project Compass, which the initiative to increase organizational effectiveness within the International business segment. Theses target areas are key company initiatives that should be evaluated further the audit team. Analytical Procedures In accordance with AS 1105, the collection of assess audit evidence to critical to forming an opinion on the engagement risk level. The company’s revenue decreased in 2015, the key executives still received about 9 million more in compensations in 2015. (Morningstar) These employees may have been over compensated, if it is determined by General Mills’ revenue. The auditor would need to investigate a little more to find out how the compensations are generated. Also it was reported on April 1, 2016 by Yahoo Finance that the sales of General Mills are struggling and that within the first nine months, the sales have declined 2%. (2016 Zacks). This could create a risk causing management to try to find ways to increase the sales by changing figures. The receivable turnover has been decreasing over the last five years. In 2010, it was 14.83 and currently in 2015, it was 10.58 (Morningstar). General Mills has more of its revenue awaiting receipts and may need to manage their receivables better. A lack of collecting sooner is a potential loss of reinvesting future earnings from reinvesting. The customers may look to competitors, especially since Kellogg’s, a competitor, has a receivable turnover of 12 in 2015 (Morningstar), which is higher than General Mills.