Audit and Assurance Sample Assignment

Audit and Assurance

Audit

INTRODUCTION

The people in today’s era are provided with immense opportunities to invest their money. However, the return that is available depends upon the way the organisation in which money is invested is working. To invest the money available, the investors look for the organisations that present best financial statements. But to get an idea about whether the financial statements are true and trustworthy an external assistance is required. The assistance is in the form of opinion on the financials. The professional providing the opinion is known as auditor. However, to frame such opinion various audit procedures are required to be performed.

These audit procedures include computation of the audit risk model, calculation of ratios to perform analytical procedures, computation of materiality, setting the account balances that are considered material, sampling plan and etc. The current report lays down a complete focus upon the different audit procedures that an auditor inculcates in his audit programme to gain sufficient and appropriate evidence. The entity chosen for the purpose of this report is Resonance Health Ltd. the different audit procedures are being applied on this organisation to provide an idea of how these work practically.

ABOUT THE ORGANISATION AND THE RESPECTIVE INDUSTRY

The Resonance Health Company is operating under the health care equipment industry. The location in which the company is situated is Australia. Basically, services and software that relate to non-invasive imaging in medical field are being developed and delivered by the company. This is the main specialisation area of the said organisation. The products developed by the organisation are mainly sourced by the pharmaceutical companies as well as by the clinicians. The use is the management and diagnosis of the diseases prevailing in humans. The company is famous globally and has received commendations from the famous physicians all over the world. Although the company is situated in Australia but it has gained clearance from all regulatory restrictions for US and Europe as well (Resource Base Limited, 2018).

AUDIT RISK MODEL

It is analyse that audit risk model is used or designed to identify the inherent, detention, and control risk associated with the audit procedure of organization. However, there are several risk which could not be managed and mitigated by auditors of company irrespective of the assertion test implemented in the audit procedure.

In order to compute the audit risk of the company, we need to multiply detention risk, control risk and inherent risk associated with the financial statement of company. There are following risks are given which might be faced by the Resonance Health Company in its audited financial statements (Resource Base Limited, 2018).

The inherent risk of the Resonance Health Company would be determined high as there is chances that company have high misstatement in its financial statement due to its increased complexities of the financial statements.

The control risk of company would be moderate as company may face issues in identifying the reporting and accounting frameworks issues. In case of The Resonance Health Company, control risk would be high as company has been filling its financial statement domestic and internationally (Resource Base Limited, 2018).

In addition to this, detention risk of The Resonance Health Company would also be moderate as there is less chances of the fraud, errors and omission to occur in the financial statements of company. All the accountants are highly experience and faces less issues in preparing the financial statements of company.

The audit risk model is used to identify the audit risk of the audit procedure implemented to evaluate the transparency and true and fair view of the assets and liabilities of the company.

Audit risk model is implemented to assess the audit risk associated with the financial statement of the Resonance Health Company.

Practical implication of the Resonance Health Company

After assessing all the details, it could be inferred that the Resonance Health Company is having high reporting risk and accounting compliance risk. There is chances that company may face issues related to the legal compliance and fraud and errors in its financial statements. The audit risk of the Resonance Health Company would be high as it has higher control and detention risk. The audit risk of company is computed by multiplying control risk, detention risk and inherent risk of the company.

In case of the Resonance Health Company, audit risk would be 10% as it has 36% detention risk, 27.8% inherent risk and 10% control risk.

Computation of the audit risk has been computed as below by using the following formula.

Audit Risk = Inherent Risk x Control Risk x Detection Risk

0.10 = 0.60 x 0.60 x Detection Risk

0.10 = Detection Risk = 0.278 = 27.8%
0.36

(Resource Base Limited, 2018).

ANALYTICAL PROCEDURES

Analytical procedures provide a better financial as well non-financial understanding about the organisation. These ratios make a calculation among different financial figures and even nonfinancial figures of the organisation. This calculation helps in understanding the trend and direction in which the organisation is moving. If only the financial aspect is seen in the analytical procedures, the main trend calculator way is the computation of ratios. The ratios could be categorised mainly into, liquidity ratios, activity ratios, profitability ratios and solvency ratios.

DESCRIPTION AND FORMULA

2016-06

2017-06

2018-06

Current ratio

This ratio shows an insight into the Resonance Health Company’s liquidity. For computing this ratio the formula used is :

Current assets

Current liabilities

The name suggests the use of this ratio. The current scenario’s liquidity is computed by this ratio, i.e. how able the company is at current date to set off the liabilities at current date (Barman, & Sengupta, 2017).

3.41

2.63

3.91

Receivables Turnover

This is an important activity or efficiency ratio. The ratio is calculated by:

Credit sale

Average accounts receivable

This ratio signifies the number of times or the frequency with which the firm makes collection from its debtors during a year (Heikal, Khaddafi, & Ummah, 2014).

4.51

4.85

5.20

Return on assets (%)

This is an important profitability ratio. The calculation is done as follows:

Net income

Average total assets

The ratio represents the return as a percentage of the assets that have been employed in the business to generate that return (Aprisilya, & Mawardi, 2016).

-7.60

-6.37

4.83

Debt to equity ratio

This ratio helps in computing the level of debt a company uses against the equity which is employed in business (Resource Base Limited, 2018). The formula is

Total debt

Total equity

(Noreen, Brewer, & Garrison, 2014).

0.22

0.24

0.13

MATERIALITY AND SELECTION OF MATERIAL ACCOUNT BALANCES in the Resonance Health Company

When the financial statements of the Resonance Health Company are audited by an auditor, the focus cannot be maintained on every account balance. The audit has to be performed in a limited time span as well as with limited resources. If every account balance gets checked then it becomes too costly and time taking. That is why the auditor at his place has to decide the account balances which shall be checked in detail. However, the selection of the accounts cannot be done hypothetically or without any reasonable basis. The audit tool that helps in selection of such account balances is materiality level (Lakis, & Masiulevičius, 2017).

Materiality, as the name suggests signifies the part that is material, i.e. substantial. This part is so substantial that the decision of the person who knows about this part would be completely different from the one who does not. To compute materiality, the professional judgement of auditor is of utmost importance. However, this judgement has to be applied in calculation of the quantitative level of materiality (Eilifsen, Hamilton, & Messier Jr, 2017).

A series of steps are required to be followed to compute materiality. This involves selection of a stable base that is least volatile. This has to be one among, revenues, net profit, expenses, net assets, etc. For the company Resonance health Ltd the base selected is revenue. When a base account is finalised on the basis of stability, the next part is to compute a percentage of that. The percentage figure for revenue is 2%. After the 2% of revenue is computed, the resultant amount is adjusted by looking on the trends that are shown by the entity’s business. And the final figure that comes is known as materiality of business. In the given net income is ignored for computing materiality because net income had been negative in two preceding financial years and has shown high volatility (Ruhnke, Pronobis, & Michel, 2018).

The materiality amount is:

Revenues: AUD 2,896,395

2% of revenue: 57,928

As the financials are showing instability, the risk in business tends to be higher. Hence the materiality is set at AUD 50,000. Based on this materiality level, all the account balances present in the income statement are checked. The account balances whose amounts reach this level are considered material. These selected account balances are shown below (Resource Base Limited, 2018).

Assets

Liabilities

Cash & cash equivalents

Account payables

Receivables

Deferred revenues

Prepaid expenses

Other current liabilities

Property, plant and equipment

Intangible assets

SELECTED ACCOUNT BALANCES WITH AUDIT ASSERTION, PROCEDURES AND AUDIT WORK STEPS

ACCOUNT BALANCE

VALUE

AUDIT ASSERTION

AUDIT PROCEDURE (AUDIT WORK STEP)

AUDIT EVIDENCE

1. Cash & cash equivalent

AUD 1549088

Completeness, and existence

1. The cash that is presented in the company’s bank and lockers must be checked with the figure presented in the balance sheet.

2. The cash account must be checked with the cash sales invoices to look for accuracy of credits in cash account.

3. The debit entries in cash account must be checked with supportive receipts and payment slips (Resource Base Limited, 2018).

4. The cash accountant must be questioned about the manner in which the cash book is updated. The frequency of cash transactions must be compared with previous years.

· Cash book Xerox.

· Pass book Xerox.

· Payment receipts and slips.

· Sale invoices.

· Cash and bank ledger.

· Existence

The cash figure shown in balance sheet is present either in form of hard cash or bank balance or a combination of both.

· Completeness

The total of hard cash and bank balance is taken completely to reach balance sheet figure of cash and cash equivalents.

2. Receivables

AUD 555,250

Rights & obligations, existence

1. Debtors shown in the balance sheet must be enquired directly to confirm the amount they owe to the organisation and the time from which the same is due.

2. The sale invoices related to credit sales must be matched with the debtor account to compute the balance of major debtors.

· Confirmation letter directly received from the debtors that have been contacted to confirm their balance and due tenure.

· Sale invoices

· Debtor ledger

· Management assertion letter

· Existence

The debtor balance shown in balance sheet represent the amount the organisation is entitled to receive on account of credit sales.

· Rights and obligations

The debtors that are shown in the balance sheet owe money to the company in legal terms. The organisation has a complete right to sue them in case of non-recovery.

3. Prepaid expenses

AUD 33,632

Existence, valuation

1. The prepaid expense account entries must be checked against the expense account for which payment has been made in advance.

2. The respective recipient must be contacted to obtain confirmation of receipt of the amount in advance basis.

3. The cash account or bank account of the Resonance Health Company must be checked in order to ascertain whether the payment has been actually made or whether the money got absconded in name of prepayment.

Prepaid expense account Xerox

Confirmation obtained in written form from recipient.

Cash book Xerox

Pass book Xerox

Cash and bank ledger

Existence

The prepaid expenses are actual payments made on prior basis. The same is not cash absconding in forged name.

Valuation

Only the amount that has been actually paid in advance is shown as prepaid expense.

4. Intangible assets

AUD 2,422,680

Valuation, existence

1. External valuation expert must be called to revalue to intangible assets of the self-made intangible assets of the Resonance Health Company.

2. For the intangible assets that have been purchased from outside the organisation, the acquisition contracts must be checked.

3. The depreciation chart must be checked to see whether accurate depreciation rates are applied.

Valuation expert’s valuation report

Acquisition contract of purchased intangible assets.

Depreciation charts of the entity.

The calculations done for computation of depreciation and carrying value of intangible assets.

Existence

The intangible assets of the Resonance Health Company that are shown in the balance sheet represent the intangible assets that are available with the organisation.

Valuation

The valuation of all the intangible assets has been done on carrying value reduced by the depreciation or amortisation amount.

5. Plant & equipment

AUD 60,986

Existence, rights & obligations, valuation

1. Entity’s premises are to be visited to check whether the assets are physically present there. Further, the condition in which these assets are working must also be checked.

2. The valuation criterion adopted by the Resonance Health Company must be analysed. If any problem seems visible, then the help of a valuation expert must be taken.

3. The asset purchase contracts must be checked to see if entity owns the asset, or has taken it on lease or any other alternative is adopted.

Asset purchase contract.

Lease agreement.

Asset checklist that management has provided which is crosschecked on physical check.

Report provided and verified by the property valuation expert, if any.

Existence

There is a marked physical existence of assets in the premises of organisation against which value has been reflected in balance sheet.

Rights & obligations

The entity has full right to utilise the assets in the business for which they have been acquired or taken on lease.

Valuation

The valuation reflects true value of the property, plant and equipment on current date.

1. Accounts payables

$ 52,263

Rights & obligations, existence

1. Creditors shown in the balance sheet must be enquired directly to confirm the amount entity owes to them. The time from which the same is due must also be confirmed.

2. The purchase invoices related to credit purchases must be matched with the creditor account to compute the balance of major creditors.

Confirmation letter directly received from the creditors that have been contacted to confirm their balance and due tenure.

purchase bills

creditor ledger

Management assertion letter.

Existence

The balance of creditors and other payables is represents the actual figure that existed.

Completeness

All the creditors and payables have been included in the books of accounts. No creditors have been missed.

2. Deferred revenue

AUD 91,440

Valuation, completeness

1. The contract with the client must be checked to analyse the amount of revenue that is yet not earned.

2. The valuation must be done again to check the mathematical accuracy.

Contract with client

Valuation done by entity rechecked by re-computation

Valuation

The amount shown as revenue not yet earned is reflecting a true amount based on the circumstances of case.

Completeness

Deferred revenue amount represents amount that has been related to all the clients.

3. Other current liabilities

AUD 407968

Valuation, rights and obligations

1. The other current liabilities chart must be checked to see the components as well as the accuracy the valuation.

2. The proof of entity being liable to pay the amount stated in the other current liabilities must be asked for and checked.

Management response on other current liability component.

Earlier payment trends copy.

Valuation

The amount shown in other current liability account balance is not understated or overstated.

Rights & obligations

The organisation is bound to make payment of amounts shown in the other current liability section.

SAMPLING PLAN

ASA 530, audit sampling, helps the auditor in arranging the selection of items that can form a sample base on which the audit procedures can be performed. This ASA is important to be considered in an audit in the Resonance Health Company because of the certain inherent limitations that revolve around audit function. Considering time and costs constraints, every item of the population comprising account balances cannot be audited by the auditor. To provide a reasonable assurance on the financial statements a sample base has to be selected by the auditor on which he lays his overall opinion. Sampling helps in determining that sample. In the above sections materiality has been calculated for the organisation’s financial statements. Using the materiality level and sampling together, a proper audit can be designed. Many forms are present in which a sample can be designed, but it is always good to go with a systematic or scientific sampling technique (AICPA, 2017).

Scientific sampling works by choosing a sample on the basis of a certain criterion and not according to any non-reasonable selection in financial statement of the Resonance Health Company. In the given situation the materiality level could work as a scientific base, and the items that lie in the materiality level could be used to gather the sample items. However, as far as the number of items is considered that can comprise of the sample size, there is no designated quantity. Everything gets dependent upon the risks that the auditor recognises as the audit commences. If during the audit tenure, the auditor feels that the risks are not too prevalent in the business; a smaller sample size could prove enough to provide sufficient and appropriate audit evidence. However, if the case is opposite, then a larger sample size is highly required (Ussery, et. al 2019).

CONCLUSION

To base an audit opinion which is reliable in the most appropriate manner, the necessity is to conduct an audit in highly professional manner. Auditor independence is the foremost requirement to conduct any audit procedure properly. The audit evidences that are gathered in the due course of audit must be documented carefully for the use of future purposes. However, audit even if done very properly could not make it certain that account balances are completely free from chances of material misstatements. It is just a matter of provision of reasonable assurance for the financial statement of the Resonance Health Company. The crux of this report is that the Resonance Health Company is having high audit risk due to the high inherent and detention risk. Nonetheless, financial performance of Company is good and effective in market since last five years.

REFERENCES

AICPA. (2017). Audit guide: Audit sampling. John Wiley & Sons.

Aprisilya, T., & Mawardi, W. (2016). Analisis Pengaruh Total Asset Turnover, Book To Market Ratio, Debt Equity Ratio Terhadap Expected Return Dengan Trading Volume Acitivity Sebagai Variabel Intervening (Studi Pada Perusahaan Perbankan yang Terdaftar pada BEI Periode 2010-2014). Diponegoro Journal of Management, 5(2), 417-430.

Barman, A. N., & Sengupta, P. P. (2017). DETERMINANTS OF PROFITABILITY IN INDIAN TELECOM INDUSTRY USING FINANCIAL RATIO ANALYSIS. International Journal of Research in Management & Social Science, 25.

Eilifsen, A., Hamilton, E. L., & Messier Jr, W. F. (2017). The Importance of Quantifying Uncertainty: Examining the Effect of Audit Materiality and Sensitivity Analysis Disclosures on Investors’ Judgments and Decisions.

Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.

Lakis, V., & Masiulevičius, A. (2017). ACCEPTABLE AUDIT MATERIALITY FOR USERS OF FINANCIAL STATEMENTS. Journal of Management, 2(31).

Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.

Ruhnke, K., Pronobis, P., & Michel, M. (2018). Effects of Audit Materiality Disclosures: Evidence from Credit Lending Decision Adjustments. Betriebswirtschaftliche Forschung und Praxis (BFuP), 70(4), 440-471.

Ussery, E. N., Omura, J. D., Paul, P., Orr, J., Spoon, C., Geremia, C., & Carlson, S. A. (2019). Sampling methodology and reliability of a representative walkability audit. Journal of Transport & Health, 12, 75-85.

Resource Base Limited, 2018 retrieved from http://www.resonancehealth.com/investors/annual-reports.html