Acct20075-Auditing And Ethic Related To Assessment Answers

Section 1

Determine the level of materiality to be used for the audit of the group accounts for the year ending in 2017. Your answer should include a discussion of the nature of materiality, and a
description of what materiality represents in terms of the audit of a set of financial statements, and should discuss the different bases and considerations employed in arriving at materiality.
Explain the rationale behind your choice of a certain level of materiality. Provide a quantitative estimate of materiality for your company.

Section 2

Section 3

Answer:

Introduction

Air New Zealand (AIZ) is an airline company based on Auckland, New Zealand. It operates flights in New Zealand and other international countries. The purpose of this paper was to develop analytical analysis on materiality auditing, analytical review, audit procedures and form an opinion based on auditing by reviewing the annual auditor report for AIZ Limited for the year 2017. 

Section 1

Materiality in auditing relates to the misstatements or omissions that are considered material only if they impact the economic decisions of users based on financial statements either independently or in total. Here, the auditor explains a judgment on whether the financial statements are prepared in all material facets to gain assurance of the users. The nature of materiality includes both quantitative and qualitative. The quantitative aspects include setting a judgment of the materiality during the planning stage and the set a percentage of the net income. Then consider the performance materiality on the amounts receivables or inventory (“AccountingScholar.com”). Also, estimate the misstatements and the total aggregate in a cycle and determine the overall materiality to determine whether they were misstated. Qualitative aspects include factors like the company not disclosing acceptable dependent liabilities and its transactions, incorrect description of accounting policy which are material. Similarly, minor mistakes in financial statements lead to materiality violations. Different bases of materiality are planning, performance and overall materiality. Planning materiality is the opening one where the maximum amount believed by the auditors to be misstated by an error or fraud and still not affect the decisions of the users. Performance materiality is the amount less than the overall materiality set by the auditor to reduce the low level and the probability of the misstatements will exceed the overall materiality. Also, it is set to reduce the risks that the total undetected misstatements could be material to the financial statements of a company. Overall materiality refers to that base of materiality that is the highest amount of information not disclosed, omitted or misstated that affects the economic decisions of the financial users or the accountability of the management as a whole. The level of materiality is that of planning and overall materiality. The audit materiality says that they primarily consider of the misstatements of consolidated financial statements of the Group that economic decisions of an individual will be changed. This means that this is a planning materiality which is done at the commencement of the business. Similarly, the planning materiality is based on the quantitative considerations nature of materiality concept. In addition, they consider whether other matters brought during materiality auditing affects their decisions or judgment which is a qualitative aspect. The overall materiality is done through the evaluation of the whole work for consolidated financial statements which was $30 million affected by some factors of the airline industry. In this overall materiality, there was a profit tax of 6%, total equity of 2% and an operating revenue of 1%. 

Section 2

Income statement of AIZ Company preliminarily analytical review 2014-2017 in million terms.

Net income of a firm is that final profit or loss realized by a business after all expenses have been deducted.  AIZ Corporation has only earned net income profits over the years but a decrease in 2017. In the year 2014-2015, the net profit moved from 262-327. While in the year 2015-2016 it increased from 327-463. However, there was a reduction in the net profit from 463- 382 in years 2016-2017.

Balance sheet analytical review in millions.

Cash of a firm is the liquid asset owned by a business either cash at hand, cash at the bank or either in investments which can be converted to ready money. In AIZ, their total cash has increased tremendously over 2014-2016 and decreased badly in 2017. The amount of total cash in 2014-2015 was 1234-1321. Consequently, a significant increase from 1321-1616 in the years 2015-2016. Nevertheless, there was a decline in the total cash from 1616-1369 in 2016-2017.

Trend and risk areas for audit

The trend in revenue from 2014-2016 is increment and a decrease in 2017. The decrease in revenue this means that either there were changes in demand and supply or tastes and preferences of the consumers or economy fluctuations which reduced the number of customers traveling. Operating expenses should not be so high and operating income should not decrease at any year to avoid failure of the business. Net profit should not decline as well as it was cash in 2017 for the smooth running of the firm. Current asset reduced in 2017 meaning that the amount to convert to cash in short-term lowered in 2017. The company should check on its non- current liabilities to reduce its obligations for the better profitability of the business. Management assertions are those claims made by members of a company regarding certain aspects. Therefore, the auditors have to validate the financial statements to rely on them on matters of the business. Some of the relevant management assertions revenue recognition and segmental information, expenses, cash and cash equivalents, investment in other entities, property, plant and equipment, trade and other receivables, earnings per share, inventories, taxation (Carter, & Dawson, 2017). Audit procedure for revenues includes reviewing a contract with customers to ensure that all revenues and expenses are recorded in accuracy using analytical procedures. Also, for cash and cash equivalents you use bank reconciliation and bank confirmations, type of bank accounts for entries. Audit procedures for trade and other receivables you confirm the receivables in the general ledger, calculate the total, investigate reconciling items. For inventories include test the inventory count, observe physical inventory count and reconcile inventory count in the general ledger. For the audit investments then develop audit objectives and procedures for investment then design to appropriate investment assertions. 

Section 3

Cash flows review

Conclusion

References

ACCAthink head.com. (2018). Going concern.  n.d. Retrieved from https://www.accaglobal.com/my/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/going-concern.html

Carter, T., & Dawson, J., (2017). Air New Zealand Annual Financial Results 2017. Retrieved from https://p-airnz.com/cms/assets/PDFs/air-nz-2017-financial-results.pdf

Ismail, S., (2015). How to audit cash and cash equivalents: basic auditing procedures. Retrieved from https://www.linkedin.com/pulse/how-audit-cash-equivalents-basic-procedures-sabbir-ismail/

Sharp, L., (2018).  Materiality in the audit of financial statement. ICAEW. Retrieved from https://www.icaew.com/international-accounting-and-auditing/audit-planning/materiality-in-the-audit-of-financial-statements  

Sherman, F., (2018). Types of opinions rendered in accounting. Retrieved from https://smallbusiness.chron.com/types-audit-opinions-rendered-accounting-61485.html