Sample Auditing Theory and Practice Assignment

ACCT6006 Auditing Theory and Practice Assignment Sample

Question

Task Summary

Students are required to work in the group with maximum of three members. The assessment is designed to assess the subject learning outcomes above including students’ ability to research audit related issues and apply their knowledge to real cases. Students are expected to develop a professional report addressing tasks within following areas: i. Inherent risk identification. ii. Audit procedures in response to inherent risks identified. iii. Analytical review of the financial statements with the purpose of identifying areas of concern or comfort. iv. Substantive audit procedures addressing the identified risks. v. Audit report, its basis, and legal issues. The report should include an Executive summary, Introduction, Body (covering all tasks) and Conclusion.

Instructions:

Review the Financial Year 2021 audited annual reports including financial statements presented to the shareholders for the following organisations:

• Healius limited

• Telstra Ltd

Assume that your audit team is responsible for planning the audits for both companies for the most recent financial year. Discuss your strategies addressing each of the tasks below:

1. Identify at least three inherent risks that you would have to consider for each company in the audit planning phase and justify your answer. Cite the relevant ASAs/ISAs to support your answer. (10 Marks)

2. Which audit procedures and/or tasks would you have planned to carry out in response to the inherent risks identified above? Cite the relevant ASAs/ISAs to support your answer. (12 Marks)

3. Carry out an analytical review on the financial statements of these companies in the planning phase and identify areas of concern (high risk, problem areas) or comfort. Identify at least three areas for each company and justify your answer. (10 Marks)

4. Which audit procedures and/or tasks would you have planned to carry out in response to the high risks or problem areas identified above? Alternatively, in relation to which area would you have minimised your evidence gathering procedure? (10 Marks)

5. Discuss ethical and legal responsibilities/liabilities of the auditors in case they would have given an inappropriate audit opinion. Discuss safeguards available to the auditors. (6 Marks)

Effective communication, Presentation quality and peer review (6 Marks + 3 Marks + 3 Marks) The report should be expertly presented, persuasive, logical communication, coherent and consistency is expected throughout (e.g., formatting, language style, and linkages between the parts). Each group member is required to assess other members based on collaboration and contribution towards the assessment tasks. Please include the peer review commentary at the end of your assessment after the conclusion section. Peer review marks must be allocated in line with the learning rubric placed at the end of the assessment brief.

Solution

Executive summary

ASA 315 on Identifying and Assessing the risks of material misstatement defines those inherent risks as the susceptibility to a class of transactions, or misstatement that might be material whether at an individual level or when it is accumulated with other misstatements before any controls are put by the organization. This report cover the inherent risk related to Telstra and Healius Limited. It provides audit procedure and review of the financial statement of both company.

Introduction

This report provides the financial and audit related concern of the two business organization Telstra and Healius Limited. It also include the financial ratio analyses and ethical factor that can affect the company. Inherent risk analysis has also been included in this report.
Main Body

Identification of Inherent Risks in The Audit Planning Phase:

ASA 200 also states, that every company should assess the threat of inherent risks at the time of inception only i.e. at the assertion level when planning is done to determine the nature, timing, and extent of audit, as it will help to analyze the areas where additional analytical procedures are to be conducted to gather sufficient and appropriate audit evidence (Khelil, et al., 2016).

In this case, the inherent risks have been analyzed for two different businesses i.e. Telstra Ltd, and Healius Limited in the following manner:

Telstra Limited:

1. Telstra Limited is a public limited telecommunication company which provides network services to households and corporates of Australia. However, during the audit planning phase, the following inherent risks need attention. The company is controlling different types of entities. As per the nature of business, ASA 315 states that the risks of material misstatement in the company are increased because of the complex business structure of the company. Hence, the risk might be high in the form of inappropriate account balances, and the disclosure might be inadequate in financial statements.

2. Another inherent risk that the company might be facing is related party transactions. The company has several subsidiary companies as well, due to which it can be said that the company might not be disclosing correct related party transactions or the transparency is less (Cullinan, et al., 2017).

3. ASA 315 also states, that when inherent risks are assessed, it is important to assess the industry in which the company is working. And the industry in which Telstra is working is driven by technology, and the environment is competitive. In the past also, it is seen that the company is driven by competition, and there is a risk that due to increased competition, the company has been unable to meet the changing needs of customers. Hence, it can negatively impact the sales of the company and would increase the obsolete inventory as well.

Healius Limited:

1. One of the major inherent risks that are faced by the company is managing its supply chain. The company has suppliers from all over the world and is trying to reduce the risks but, as the operations of the company are complex, the risks regarding the supply chain are high.

2. The company has also risks regarding mergers and acquisitions. As the balance sheet of the company is strong, it gets involved in various acquisitions. Hence, the inherent risk is high regarding whether the company will be able to gain financial returns from the acquisitions or not. Hence, there are chances that acquisitions might not generate the revenue that the company has expected (Aigul, et al., 2021).

3. The company also operates in the international market, hence, there is a risk of foreign currency exchange, because the market is highly volatile, and the currency rates might fluctuate due to which the currency exchange risk is high, due to which inherent risk of the company is also high.
Audit procedures to be carried out:

Audit procedures are the steps that are to be carried out by the auditor to gather all the information regarding the financial statements of the company i.e. regarding the quality of financial statements to ensure that the stated financial statements are true and correct. It helps the auditors to form an opinion on the truth and fairness of the financial statements. The audit procedures are conducted to gather evidence when any kind of risk is identified. In this case, three different types of risk have been identified for the clients. It is also to be analyzed that there are seven different types of audit procedures that can be applied by the auditor, and in this case, the audit procedures to be carried out are:

Telstra Limited:

1. For account balance inherent risk, the audit assertion to be used is existence, completeness, and valuation. It is very important to ensure that the year-end balances of last year have been carried forward appropriately and there is no misstatement. It is also important to ensure that all the transactions exist, for instance, if an asset is shown on a balance sheet, the company should have the documents regarding that asset. Hence, the audit procedure to be used here is inspection and external confirmation.

2. The audit procedure for related party transactions should include testing how related party transactions are coded and traded in the enterprise resource planning system of the company. It also includes taking an interview with the personnel who is responsible for maintaining accounts of the company in the financial statements(Pankova, 2020).

3. It is important to understand the functioning of products and services sold by competitors. The auditor can use audit procedure, and inspection to analyze the degree of competition and technological advancement that the industry is facing.

Healius Limited:

1. ASA 500 states, that to collect audit evidence, regarding the supply chain the audit procedure of cross-checking the data should be used. The auditor should ensure that company is checking the performance of vendors to ensure that supply chain management is not at risk.

2. For this, the audit procedure of taking external confirmations, inspection, and interviewing can be used by the auditor, to ensure that external help or expert advice was taken by the company before finalizing the acquisition. Because it will ensure that the company is not entering into acquisitions to reduce or adjust their losses, or are not acquiring loss-making companies to reduce their profits.

3. The auditor should ensure that foreign exchange is as per the foreign exchange risk policy formulated by the company. They should also ensure the accounting of foreign exchange risk, and whether the company is creating any provision for the same or not. Here, audit assertion to be used are existence, valuation, occurrence should be checked, to ensure that all foreign exchange gains and losses during the period are reported accurately in the financial statements, and the balance sheet and profit and loss of the company include the impact of foreign exchange gain or loss.

Analytical Review of The Financial Statements:

The analytical review is a technique which is used by the auditor or accountant of the company to analyze the reasonableness of the components of financial statements, and the disclosures, omission of which might make the financial statements materially misstated. Hence, the analytical review is conducted when the auditor is aware of the environment in which the company is working. Hence, in this case, to conduct the analytical review of the financial statements of both companies, a technique known as ratio analysis has been used (O?NDER Tu?rkan. 2020).

Telstra Limited:

Ratio analysis is the technique which helps to evaluate the trend in account balances i.e. whether in the current year liquidity of the company has improved or not.

1. Current asset Ratio:

Here, the current asset ratio of the company has improved in comparison to the previous year because the current assets of the company have increased. However, likewise, the current liability of the company has also increased. This makes the current asset and liabilities of the company prone to risks because the current assets of the company are not sufficient to cover its current liability. The area of concern is current liabilities.

2. Gross Profit Ratio:

In the above case, the gross profit of the company has increased slightly, and the account balances that are at risk here are the sales and cost of goods sold by the company. If the sales of the company have increased, but, the related cost of goods sold has been increased by a higher amount, then the gross profit tends to decline. In this case, the sales have declined, but, the cost of goods sold has also declined by a relatively low percentage, due to which only a small percentage increase has been seen in gross profit. The area of concern is the cost of goods sold (Amanzholova, et al., 2019).

3. Non-financial factors:

The analytical review is also important for non-financial factors as well. Here those factors are the climatic change, that the company has to face, and its impact on the financial performance of the company. The company is also taking measures to reduce the climatic impact on the performance of the company because it hinders the operations of the company.

Healius Limited:

1. Current asset ratio:
 

From the above analysis, it can be seen, that the current assets and current liability account balance of the company are at risk. It is because the current asset ratio of the company has declined significantly in 2021 in comparison to 2020, and the current assets of the company are not sufficient to cover its current liabilities. The current assets of the company have declined by more than 300% which exposes the current asset to risk. The area of concern is current assets (Appelbaum, et al., 2018).

2. Gross Profit Ratio:

From the above, the account balance that is to be reviewed is sales and cost of goods sold. In comparison to previous, the gross profit ratio of the companyhas changed slightly, despite the fact that sales have increased. This has happened because the increase in sales is lower than the relative increase in the cost of goods sold, due to which there has been only a slight change in the gross profit ratio. The area of concern is the cost of goods sold.

3. Non-financial factors:

Here, the nature of the business of the company is highly exposed to data management risk along with the risk of cyber security. The information stored by the company is regarding the history of patients' clinical treatments as well as the financial data. Hence, if the company has been exposed to cyber risk it will have a negative impact on its reputation of the company (Sheehan, 2017).

Minimization of Gathering of Evidence:

In the above, the audit procedures to be conducted for high risks areas are as follows:

Telstra Limited:

1. The high risks area in Telstra is the current liabilities. It is important to check the existence and occurrence of liabilities to ensure that they are due. Here, external confirmations can be taken from third parties like banks, and also calculations can be done to examine the liability of the company (Dai, et al., 2019).

2. To check the sales and cost of good sold by the company, it is important to check the valuation i.e. whether the sales around the year has been recorded at the correct price, whether the cost of goods sold is accurate or not, and have occurred during the year.

3. Here, for the non-financial factors, the steps that the company is taking to reduce the impact should be checked along with analyzing the investment that the company has done to reduce the uncertain risks.

Healius Limited:

1. Here, the account balance at risk is a current asset. It is important to analyze the existence of current assets, and the reason why current assets have been diluted. The auditors can take confirmation from the bank regarding the dissolution of assets.

2. Here, the company can analyze the sales that they have made and check the price fluctuations throughout the year to check that valuation is carried out at the correct prices.

3. Here, the auditor should check the measures that the company has taken to reduce the impact of cyber risks, and what security measures have been taken to reduce the risks.

Here, the auditor could have found less evidences regarding the current liabilities in Telstra as it was increased due to pandemic, and sales in the case of Healius, because very slight change has come in the sales and cost of goods sold of the company and these areas of the company are not high risks, which needs the auditor to conduct substantive analytical procedures.

Ethical and Legal Responsibilities:

The code of ethics of auditors states that auditors should be independent while forming an opinion on the accuracy of financial statements. It states that the opinion of the auditor on financial statements should not be influenced by the third party because if the opinion formed by the auditor is inappropriate it will make the financial statements incorrect for those who take decisions based on financial statements. The institute has said that when it is found that auditors have given inappropriate opinions, they can be held liable for their actions legally, and the company has the right to remove the auditors and they will be liable for penal provisions as well, in the form of loss suffered by the company and can be sentenced as well(Saha, et al., 2017).

Conclusion

From the above report assessment, it can be conclude that financial analyses can both the companies has been performance well, although management of the Telstra need to improve the liquidity situation by using the appropriate liquidity policy. Ethical compliance should also be consider by both the companies to improve is non financial performance for the longer period. The auditor can attract criminal and as well civil liability in case of offences and can be prosecuted for fraud and being a part of insider trading. Hence, there have been cases where shareholders of the company have initiated proceedings against the auditor because of the inappropriate audit opinion that they have given. It reflects that the auditors have not followed the duty of care and were not diligent while conducting their duties to give an opinion on financial statements which is true and unbiased.

Reference:

Aigul, A., Lyazzat, S., Aleksandr, P., &Aldanysh, N. (2021). Organisation problems and audit of the effectiveness of interbudgetary relations, 20(5). https://doi.org/10.13165/VPA-21-20-5-05

Amanzholova, B., &Karakchieva, V. (2019). Performance audit in construction organisations: relevant criteria and analytical procedures. Journal of Corporate Finance Research / ???????????????????? | Issn: 2073-0438, 13(2), 81–103. https://doi.org/10.17323/j.jcfr.2073-0438.13.2.2019.81-103

Appelbaum, D. A., Kogan, A., &Vasarhelyi, M. A. (2018). Analytical procedures in external auditing: a comprehensive literature survey and framework for external audit analytics. Journal of Accounting Literature, 40(1), 83–101. https://doi.org/10.1016/j.acclit.2018.01.001

Cullinan, C. P., & Zheng, X. (2017). Accounting outsourcing and audit lag. Managerial Auditing Journal, 32(3), 276–294. https://doi.org/10.1108/MAJ-03-2016-1349

Dai, J., Vasarhelyi, M. A., &Medinets, A. F. (2019). Audit analytics in the financial industry (Ser. Rutgers studies in accounting analytics ser). Emerald Publishing Limited. Retrieved April 22, 2022, https://lesa.on.worldcat.org/oclc/1124605784

Khelil, I., Hussainey, K., &Noubbigh, H. (2016). Audit committee – internal audit interaction and moral courage. Managerial Auditing Journal, 31(4-5), 403–433. https://doi.org/10.1108/MAJ-06-2015-1205

O?NDER Tu?rkan. (2020). Analytical procedures in an audit: review and application by cases. O?neriDergisi, 99-106, 99–106. https://doi.org/10.14783/maruoneri.710692

Pankova, S. V., & Popov, V. V. (2020). Applying analytical procedures for performance audit of customs authorities. Economic Analysis: Theory and Practice, 19(6), 1035–1055. https://doi.org/10.24891/ea.19.6.1035

Saha, S. S., & Roy, M. N. (2017). Quality control procedure for statutory financial audit : an empirical study (First). Emerald Publishing Limited. Retrieved April 22, 2022.https://lesa.on.worldcat.org/oclc/993432933

Sheehan, K. (2017). The ongoing audit transformation. Accountancy Ireland, 49(6), 54–55.https://lesa.on.worldcat.org/oclc/7335029058