BAO3306 Auditing

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Question:

Acquire an appreciation of the reasons that audit and assurance services are needed in society. Also, understand the current environment auditors operate in, including all aspects of legal, ethical, and professional aspects.

– Recognize the main principles, concepts, and practices of auditors used to gather evidence and make decisions in order to form an opinion about the fair presentation of financial statements.

– Get an inside look at the audit of certain transactions and account balances

– The auditor is responsible for completing the audit.

– Gain a foundation understanding of other types d’assurance engagements

You should calculate 0.005% on the sales revenue account balance to determine materiality for this audit assignment.

0.005% = $13.5 Billion x 0.00005 = $677,065.

When assessing what could go wrong, it is necessary to evaluate the audit risks for five (5) of the significant accounts you selected by using the auditrisk model.

It is your decision to choose which accounts to include in the document.

But, it is important to be able justify your selection.

Answer:

Finance decisions are important and must be taken after extensive market research and thorough study.

Financial decision-making is based on information from the market.

Before investing in any company, an investor needs to gather as much information as possible.

The correct information from the market is critical to any investor’s decision to invest in a company.

Markets can access this information through the audit report.

Both the investor and company benefit greatly from auditing.

After the audit, the financial report is prepared. This provides a clear picture of market conditions.

An audit report is a summary of information about a company.

The importance of understanding the client is stressed in this assignment (Chow & Ho (2006).

The discussion continues with a discussion on accounts that might be causing financial statements misstatement.

Financial statements can be affected by such misstatements.

It can also create a negative image of the market.

Cost reduction is possible when the materiality is established.

This assignment will also discuss the risks associated with assessment.

Metcash was an Australian company that was established in 1927.

Metcash Limited, a small family-owned business, was the name he used to start this company.

This company sells grocery products, liquor hardware items, as well as other consumer goods at a more affordable price than most other companies on the marketplace.

Metcash strives to provide better services and products for both wholesalers than consumers.

Its headquarters is located in Sydney.

Metcash’s three divisions are called its business pillars or base. They work in the wholesale industry.

Metcash groceries and food

Hardware group independent

Metcash is the sole owner of these three segments.

Metcash deals with wholesale, distribution and through retail operations in merchandising.

Metcash supplies products in their brand in the market, which includes supermarkets as well as convenience divisions. This helps in supplying individual stores throughout Australia, which include 1434 IGA branded stores along with 250 friend grocers/ Egiway store.

Its two divisions, named Campbells wholesale and CDS C Store Division, help in providing food, soft drink, dairy products, and liquor in the market.

ALM Australian Liquor Market, it is Australia’s largest liquor wholesale.

The IBA independent brands Australia is another (Dunn (2006).

Metcash Limited is able to diversify the risks and rewards that they take on because they operate in different business lines within different industries.

They are able to supply more than 12500 restaurants, clubs, and hotels as well as other licensed places.

These two are available in Australia and New Zealand.

Metcash founded IBA as a subsidiary company in December 2003 (Gay 2007).

Its primary purpose was to build a natural brand.

ALM and IBM provide retailers with the most competitive prices.

Customers are also happy to receive their complete order from one source.

Mitre, Home Timber and Hardware Group were the first to form 3 independent hardware groups in November 2006.

It is Australia’s sole independent hardware wholesale.

It operates over 500 non-branded hardware stores.

Home Timber was established on September 4, 1953.

Metcash Trading Limited changed its name from Davis Limited to Metcash Trading Limited on September 4, 2000.

Metcash’s business is also expanding to other countries.

It’s currently operational in Hong Kong and China (Kend 2008).

Its staff and management have extensive market knowledge. Consumers demand their tastes, price structure, product quality, how to attract them, etc.

AUASB has issued ASA315, an auditing guideline. This standard helps to understand entities and their environment, in order to assess and identify risks of material misstatement.

This standard of auditorial auditing forms prerequisites and provides explanations and application material.

Auditors are required to perform an audit of the entity to determine its internal control and risk.

The ASA520 illustrates an analytical procedure to evaluate the risk accounts that are at high risk of material mistake.

In this section, ASA230 audit documentation shall be used to document all aspects of audit.

Auditors should assess the risk of material misstatement in the financial statements.

The auditor should also discuss with the engagement team the vulnerability of an entity’s financial report in regard to material misstatement. These include errors and fraud.

Analytical Procedures include the analysis of financial statements, ratios, and other information.

Audit documentation will be used in this section to document every aspect of audit.

Documentation is essential for all accounts at risk due to material misstatement.

These are five important accounts that have been identified as most at-risk of being materially missedtated.

Inventories: Metcash Limited’s business operations have different characteristics, so it is necessary to consider managing a range of inventories.

Metcash Limited’s inventory account can be subject to material misstatement if it is not properly managed.

Although the stock amount was $ 712.50 Million in the companys 2015 financial statement, it was reduced to $ 673.60 million in the financial statement for 2016.

Metcash Limited’s business activities are in fast-moving consumable goods sectors, so fluctuations can be observed in levels inventory. A set pattern cannot therefore be established.

It can be difficult to check inventory using manual procedures.

The company management requires proper inventory management.

If this is not done correctly, the inventory can be materially missed (Maze 2016).

Interest bearing borrowings. Based on Metcash Limited’s analysis and the disclosure of its financial statements, it can be concluded that there is interest bearing borrowing for current liabilities and noncurrent liabilities.

It is evident that the interest bearing borrowing for current liabilities as well as non-current liabilities has decreased significantly from last year.

An analysis of last year’s financial statements shows that interest bearing borrowing has dropped in both current liabilities and non-current liability (Hecimovic Martinov.Bennie & Roebuck (2009).

The interest bearing borrowing for current liabilities in 2016 was $ 15.70 million. In 2015 it was $ 63.2 million.

However, interest bearing borrowing in non-current liabilities was $ 794.80million in 2015. It has dropped to $ 299.40million for 2016.

Analyzing the statement shows the huge gap in interest bearing borrowing figures between 2016 and 2015.

This account is at high risk of being materially missedtated.

Cash and cash alternatives: It’s easy to manipulate cash or cash equivalents.

Cash equivalents and cash are the most liquid current asset.

Metcash Limited has seen a significant change in the cash and cash equivalent balance (McCollum (2006).

In 2016, the cash and cash equivalent ratio has declined significantly compared with 2015.

This can be interpreted as a possibility of material misstatement.

Metcash Limited’s sales account: Metcash Limited is one of the accounts being identified.

They must manage the risks associated with generating revenue from different business operations.

Below is a statement that portrays the sales revenue generated from various segments

Sales revenue for 2016

2015 sales revenue

Groceries & Food

Dividends: Metcash limited’s analysis of the financial statement reveals that the company paid a 2015 dividend.

The financial statement analysis for the year 2016 shows that the company did not pay dividends.

This base indicates that this account is at high risk for material misstatement.

Metcash Limiteds financial statements may misstate the dividend balance.

This auditing tool is used to determine the importance of any transaction or amount.

Auditors set a limit for any company that is small or large in terms both of financial statement items and amount.

It can be described as materiality.

While audit reports should clearly show the financial status of the company, no assurance device or audit can guarantee that it will be as stated in an independent financial report.

These reports provide a path to marking decisions.

Audit reports are used to inform management decisions. They can evaluate the company’s financial position and the business operation.

Auditors can identify material fraud or error in financial statements. They will need to analyse important accounts or a significant amount of money (Moroney & Trotman 2016).

The auditor’s limit is materiality. Anything beyond that limit will impact the stake holders’ decision making.

Auditors have the responsibility of identifying material misstatements in financial statements during auditing.

It is also up to the auditor to determine whether the account is significant or material.

Two types of materiality are important for auditors to consider when planning or performing materiality.

These standards are established by ASA320 which is the organization that establishes the accounting standards.

The first type can be described as the standard process that the auditor has set for the audit team to use or the planning matterity that was established by the auditor at an initial level of planning audit.

The second type is not final, since the materiality of an issue can be altered or changed with chance (Udrea 2010).

The professional experience required to identify materiality is not necessary.

It takes a certain level of expertise in audit to identify materiality.

Metcash limited could have the materiality set on the basis of the revenue it generated from the sale.

Metcash uses the same method to calculate materiality as Metcash when the company’s base is uncertain.

Park, 2012) Since it is involved in several businesses, there is no basis for calculation. Therefore, the sales revenue would serve as the foundation of the entire additional audit.

Metcash audits involve a lot of money, which is evident after the auditor’s financial analysis.

This has resulted in a much lower percentage of materiality sales revenue.

Materiality level/amount

= 13,541.30×0.005 % = $ 677,065 Million or 677.065

According to the audit, the Metcash has a materiality of $ 677.065.

It is evident that any amount, figures or accounts would be considered material. A detailed procedure of audit will be initiated.

Audit risk is made up of three types.

These risks include both controllable and non-controllable.

Audit risk is a combination of three auditing risks.

Audit risk is the sum of all three audit risks. It is calculated by taking into consideration all three (Luo 2011).

Audit risk can also be defined as the risk that an auditor is unable to perform their duties.

Audit risk is the possibility that financial statements are materially misrepresented by the business organization, but the auditor is unable to identify them.

The following is the formula for audit risk:

Inherent risk: The risk that results from the use of judgments or estimates is called inherent risk.

If decisions must be made based upon personal experience or estimates, then the inherent risk is greater.

Inherent risk can be described as an uncontrollable or inexorable risk. It is not possible to control if decisions have to be made on non-estimated judgements.

Control risk: The other side of the coin, control risk refers to the risk that is only present when an internal control system is not in place or financial statements are incorrectly interpreted.

The absence of an adequate control system in business operations is the trigger for control risk.

Detection risks: A risk that an auditor won’t detect material misstatements within the financial statements for a business entity.

Auditor’s skills or ability to detect material misstatements in financial statements of business entities is what determines whether there is detection risk.

Statement displaying Audit Risk Matrix

Account

Inherent risk

Reduce Risk

Risks of detection

Many judgments and estimates are needed in inventory valuation. Therefore, inherent risk will be higher.

Metcash Limited is blessed with a vast inventory from all three of its business segments (Newman, Patterson & Smith,2001).

Due to the huge inventory base across different segments, internal control systems for inventory management are difficult. The control risk is also higher.

The detection rate will be higher.

Auditors cannot physically inspect every Metcash Limited inventory.

You can borrow interest bearing loans

Interest calculation and borrowing outside are based upon judgments by an outsider (banks or financial institutions), so inherent risk is higher.

The case is considered moderately risky because Metcash Limited’s internal control system to prevent outside borrowing is only limited to the finance section (Piercey 2011).

Because there are so many audit procedures that can check for material misstatement, detection risk in this case will be lower.

Cash and cash equivalents account

The inherent risk of cash and cash equivalents accounts is moderate.

This account doesn’t require judgment or estimation.

The risk of control in cash and cash equivalents accounts is higher.

Cash and cash substitutes accounts are highly liquid assets, so it is possible for Cash and Cash equivalents to be misstated.

Because there are many controls available or an auditor can use analytical procedures to test the cash and cash alternatives account, detection risk is low.

In the case of sales revenue account, inherent risks are moderate.

Metcash Limited has revenues from many business segments.

In terms of controlling risk, the control risk for sales revenue account is higher (Ruthven 2010).

The revenue is generated from 3 distinct segments. Special skills are required to manage them.

It can be tested using analytic procedures so detection risk is not too high.

Dividend account

Higher inherent risk.

Management makes many assumptions and judgments when proposing or paying dividends.

Due to internal control weakness, there will be moderate levels of control risk.

The detection risk is lower.

Conclusion

Auditing is performed to ensure that financial transactions are properly recorded and included in the financial statement.

This audit ensures that company’s books of account are kept in a correct manner.

The process of auditing allows business organizations to establish a pattern that will help them assess the likelihood of manipulations in their books.

Auditing is also useful in identifying issues related to the exploitation and management of business property.

Auditors must be aware of both the qualitative and quantitative errors that may occur during an audit.

These errors can have an adverse effect on the audit process and may also affect the audit report.

This can be done through an assignment. It is crucial for auditors to get to know the client’s business.

It is easy for auditors to assess financial information, transactions events, and practices related financial aspects once they have gained an understanding.

The auditor can understand the entity from a variety of sources, including discussions with employees and clients, financial statements for current and past years, books of account, and discussion with clients.

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