Analytical Review And Materiality Considerations For South32 Ltd (ASX:S32) Essay.

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.

The partner has requested you to prepare a preliminary analytical review on the information provided by your company. The partner suggests that as a minimum you address key balance sheet and profit and loss ratios over the period 2014 to 2017.

Based on these results and the nature of your company’s business and its markets, outline the apparent trends and changes in these ratios, the key risk areas for the audit and the matters that will have to be addressed in the audit plan. Give examples of relevant assertions and at least one audit procedure for each assertion.

Section 3.

• Review the statement of cash flows. Which category of cash flows provided the majority of cash inflows? Which category had the greatest outflows?

Identify the primary cash receipts and cash payments during the year.

What were the main non-cash financial and investing activities?

Using the results of questions 2 and 4, evaluate the going concern risk of this company.

What audit procedures would you recommend to address this risk.

Overview and Background Information

Materiality concern of the entity

Materiality is a subject of professional judgement, which is provided in ASA 320 “Materiality in Planning and Performance an Audit”. For the effective and efficient planning and performance of audit, materiality is very critical factor. The material misstatement, significant error and omission which either individually or in aggregate are considered material if it expected to influence the economic and financial decision of the user of financial statement. Materiality also includes omission expected to affect the financial decision, size and nature of material misstatement and surrounding circumstances and common financial and economic information (Belton, 2017). Materiality is a concept, which may change from the prospect of entity-to-entity, individual to individual. Materiality can be subjective and depends upon the size of company. Like in case of small company, an amount of $ 40,000 may be material but in case of large listed company, the amount of $ 40,000 may not be material for decision-making purpose. It is applicable for both quantitative as well as qualitative values (Alexander, 2016). As per ASA 320 and IASB, some percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statement as a whole. Like  0.5% to 1% of sales revenue, 2-5% of the shareholders equity, 5-10% of net profit of the entity, 1-2% of the total assets of the company or the gross profit being made by the entity.

The company which has been selected here is South 32 Ltd (ASX: S32) which is listed on Australian Stock Exchange and London Stock Exchange and deals in mining and metal industry. It has spun out of BHP Billiton in the year 2015 and is a producer of alumina, silver, zinc, manganese, nickel, coking coal, lead, aluminium and thermal coal. It has a number of reserves. The quantitative materiality has been defined and estimated using the above-mentioned criteria. Here, the materiality can be taken to be in between the range of $ 6.16 Mn to $ 17.95 Mn. This is an ideal range and has been taken out using the net profit and gross profit’s lower limit and the upper limit respectively (Erik & Jan, 2017). This will help the auditor in checking all the material line items and planning of the audit.

The draft notes and disclosures with respect to the company have been studied and it is seen that the company has given the basis of all the management estimates and the judgement and has also given all the material disclosures in the notes to financial statements. The auditors will have to employ the substantive as well as the analytical audit procedures in order to give and opinion on the financial statements (Grenier, 2017).

Ratio Analysis for South32 Ltd

For the evaluation of financial statement and financial and non-financial data, auditors can applied different procedure, which are substantive test, and the analytical review procedures. Substantive test involve the vouching the incomes and expenses items and verification involve valuation of assets and liabilities, major change in financial values, completeness of financial statement and inclusion of all major financial statement which effect the decision of financial users (Choy, 2018). If on the basis of information obtained through substantive measures, he performs preliminary analytical procedures, which includes determine the suitability of particular substantive analytical procedure, Evaluation of relevance of data, develop an expectation of recorded amount of ratios, find the difference of recorded value and expected value and investigation the result of analytical procedure, understanding the business environment, trend analysis and ration analysis and many others. Here in the given assignment, the preliminary analytical review is done with the help of basic ratios which we have derive from balance sheet and profit and loss account and examine the same trend over the period 2014 to 2017 (Das, 2017).

The ratio analysis has been done from 4 perspective. From the above table, we can see that in terms of efficiency ratios, the company has improved a great deal and the return of capital and the return on equity with which the shareholders are concerned has moved from negative to positive over 3 years (Farmer, 2018). In addition, the payout ratio was -32% in 2015 where in 2017, it increased to 51% in 2017, which goes on to show that the company is meeting the expectations of the shareholders. In terms of profitability ratios, the net profit ratio has improved considerably and the company, which was in loss in the year 2015, is now earning at the rate of 17.64%. Similarly, the operating margin ratio has improved from 12% to 33%, which goes on to say that the company has reduced costs and has improved on the business front. The company also enjoys a healthy current ratio and the liquid ratio and is well above the industry trend. This shows that the company would be able to pay off its short-term liabilities as it has enough of current assets (Werner, 2017). Finally, the company also has enjoy a good debt equity ratio, which is well within the control. It has fairly remained constant over the past 3 years at 27% and it shows that the company is mostly using equity capital and gas a cushion to use debt capital in the coming future, which comes at lower cost of capital.

Audit Assertions and Key Audit Matters

Audit assertion are representations and claims, which are being made by the management that the preparation and presentation of the financial statements has been done correctly and appropriately in the annual report. It shows that the management has handled all the risks in the company well. Audit risk is the risk of non-identification of the material misstatement, errors and omission even when the audit is carried out, it can be detective risk, control risk or inherent risk. Some of them are highlighted below along with the audit measures, which are required to be undertaken (Trieu, 2017).

Given below is the screenshot of the cash flow statement of the company.

From the given Cash flow statement, we can see that the majority of cash inflow are generated from operations in which the company deals amounting to $ 1,963 million, proceeds from financial assets amounting to $ 344 million and from dividend received from equity accounted investment amounting to $313 million (Saeidi, 2012). Because of that, it is concluded that the major cash inflow for the company is coming from the company’s own business operation that is operating activity. In case of cash outflow, the investing and financing activity of company reported for the same. In case of investing activity the major area where the amount of cash outflow is quantities is purchase of property, plant and equipment amounting to $ 316 million and from investment in financial assets amounting to $ 331 million whereas in terms of financing activity, major cash outflow was there in buy back of shares amounting to $ 244million, dividend paid to shareholders amounting to $ 211 million (Linden & Freeman, 2017).

From the study of the cash flow statement of the entity in the above para, we have discussed the principle items and activity of cash inflow and cash outflow like dividend received, dividend payment purchase of plant, property etc. (Goldmann, 2016). In cash of non-cash financial and investing activity except for amortization of the intangible and tangible assets. Here in case of this company as the company had declared dividend of $ 143 Mn so, it would account for non-cash financial activity.

From the above analysis, it can be concluded that the company has fulfilled the going concern assumption in the preparation of financial statement. As per the auditor’s report by KPMG, it can be seen that the company has prepared and presented the financial information as per the Australian Accounting Standards and the Corporation Act, 2001 and has thereby the met all the relevant criterias (Kim, Schmidgall, & Damitio, 2017). The auditors’ has given a clear opinion on the financial statements mentioning it to be showing true and fair view. However, the auditors have shown few key audit matters for which they had to take in additional measures for addressing the same and forming an opinion thereon. These issues include asset valuation including PPE and the intangible assets, closure and rehabilitation provision which was carried in the books for $ 1565 Mn and the tax matters which included assumptions made by the management in classifying and quantifying the provisions and contingent liabilities (Sithole, Chandler, Abeysekera, & Paas, 2017).

References

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