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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.

  • 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.

Comprehensive and welljudged application of auditor responsibilities with reference to relevant Standards on materiality and disclosures. Excellent presentation, correct spelling, punctuation and grammar.

Effective and well-judged application of auditor responsibilities with reference to relevant

Standards on materiality and disclosures.

Excellent presentation, mostly correct spelling, punctuation and grammar.

A reasonable well-judged application of auditor responsibilities with reference to relevant

Standards on materiality and disclosures. Very good presentation, mostly correct spelling, punctuation and grammar.

Comprehensive and welljudged analytical review of the information provided in relation to balance sheet and profit and loss information. Correct ratio analyses and descriptions with identification of key risk areas. Correctly identified relevant assertions and appropriate audit procedures. Excellent presentation, correct spelling, punctuation and grammar.

Effective analytical review of the information provided in relation to balance sheet and profit and loss information.

Correct ratio analyses and descriptions with identification of key risk areas. Identified most relevant assertions and appropriate audit procedures.

A reasonable review of the information provided in relation to balance sheet and profit and loss information. Some correct ratio analyses and descriptions with identification of key risk areas. Identified most relevant assertions and appropriate audit procedures.

Analyzing Key Ratios

The concept of materiality is covered in ISA 320 which is an auditing standard which covers the significance of materiality while conducting an audit of a business. The materiality aspect of an item which is shown in the financial statements of a company is based on the judgement on the auditor which is generally done on the basis of complexity of the item or relevance of the item in relation to the financial statement of the business. In an audit process, the materiality of an item plays an important role as the auditor generally concentrates and applies more audit procedures on items which are considered to be material in nature in respect to the business of the client (Cox, Dayanandan & Donker, 2014). The assessment will be considering the financial statements of Cornwell Group which is engaged in the business of real estate management for clients (Cromwellpropertygroup.com, 2018). The purpose of the assessment is to analyze the financial statements of the company to comment whether the same is showing true and fair view or not. The assessment will also be computing planning materiality for the business.

The materiality concept in audit has a much wider scope and covers both qualitative material items and quantitative material items. Qualitative material items refer to those significant items of a financial statement which are generally relevant and most likely to have material misstatements. On the other hand, quantitative material items refer to which are of significant value and are shown in the financial statements of the company. The presence of material items in the financial statements determines the audit procedures which the auditor is going to apply and also the timing and extent of the audit is also determined similarly (Christensen et al., 2016). The auditor generally plans as to which item is to be considered as material and which is not during the preparation of the audit program and plan.

In order to effectively deal with the materiality aspect, the auditor first computes planning materiality which is base used by the auditor for considering tolerable errors and omission and also determining performance materiality for different items. The planning materiality estimate is computed by assuming a base which is then multiplies with a predetermined percentage to get the estimate for planning materiality of the business (Todea, Joldos & Cioca, 2013). The base which is considered for computing the planning materiality of the business are generally of significant value such as net profit before tax, total assets, total sales revenue generated by the business. In the case of Cornwell Group ltd, the base which is considered for the computation of planning materiality of the business is total assets figure which is shown to be $ 3410.9 million and the percentage which is estimated for computing planning materiality of the business is considered to be 2%. The computation of planning materiality is shown below in equity form:

Reviewing Notes to Accounts

 $ 68.218 million

The planning materiality of the business refers to the materiality level which is used for the purpose of deciding whether an item which is shown in the financial statements are material enough for the purpose of estimating if there are any misstatements in the annual reports of the company (Johnstone, Gramling & Rittenberg, 2013).

The notes to accounts are considered to be an important aspect of the financial statements and contain information regarding the treatments and methods which are used by the management in the preparation of the financial statements of the business (Hahn & Lülfs, 2014). The significant items which are covered in the disclosures and notes to account section are discussed below:

  • Deferred Tax Assets and Liabilities: The annual reports of the business show that the same consist of deferred tax assets and liabilities which are shown in the notes to account section of the annual report. The deferred tax assets and liabilities of the business arises due to temporary difference and carried forward losses of the business (Laux, 2013). The deferred tax assets and liabilities of the business contains complex treatments and therefore the auditor needs to review the same.
  • Interest and Cross Currency Derivative Contracts:As per the notes to accounts section of the annual reports, interest and cross currency contracts information are present which can affect the decision of the auditor. The business in engaged in derivate contracts and therefore the auditor needs to put emphasis on the valuation for the same in order to understand that the same is showing true and fair view or not.
  • Reserves:The reserves which are shown by the business in the annual reports of the company. The reserves amount which is shown in the annual reports of the company is considered to be important figure as the same can affect the financial statements of the business. The auditor needs to analyze the same and ensure that the financial statements are showing a clear view of the reserves and also the sources which are used for creating the reserves.

 Analytical Procedure refers to calculations of key financial ratios which are used by the auditor to assess the risks which are involved in a business. As per the analysis of the financial statements of Cornwell Group and also the key financial ratios which are computed in above chart, significant ratios of a business are effectively computed.

The liquidity ratio of the business comprises of current assets and quick assets of the business. The current ratio and quick ratio of the business are shown to be favorable for the year 2017 as the estimates are shown to be 1.11. The liquidity ratio of the business is considered to be important for the purpose of estimating the cash position of the business (Jans, Alles & Vasarhelyi, 2014). The auditor needs to take into consideration the liquidity risks of the business.

The profitability ratio of the business comprises of gross profit ratio, net profit ratio, return on assets and return of equity of the business. The gross profit ratio of the business is shown to have tremendously improved from previous year performance of profitability. This shows that the business has an efficient operational structure and is also performing better in terms of previous year. The net profit ratio of the business also shows improvement from estimates of previous year which suggest that company is maintain the costs of the business (Yoon, Hoogduin & Zhang, 2015). The auditor needs to ensure that the balance which are shown in the financial statements are showing true view and no item which should be present in the income statement is missing. The return on assets and return on equity of the business is shown to be favorable which is also a positive sign for the business. Both these estimates are considered to be financial indicators for the success of the business.

Analyzing Cash Flows

The asset management ratio comprises of asset turnover ratio which shows the ability of the business to generate revenue from the use of assets of the business. The asset turnover ratio is also shown to be favorable. However, the auditor needs to check whether the fixed assets of the business are valued in a proper way for which the auditor can use the help of an expert for valuation of the assets of the business. The auditor also needs to check the condition of the assets and also the depreciation which is charged on the assets which affect the valuation of the assets of the business.

The leverage ratio of the business is associated with capital structure which is used by the business during the year. The debt ratio of the business measures the debt of the business and the calculation which is shown in the financial statements and the same shows that the debt of the business has reduced significantly as per the policies of the business. The debt to equity ratio of the business shows the mixture of debt and equity which is used by the business for financing the activities of the business. The auditor needs to verify whether the balance which are shown for the borrowings and equity are appropriately shown in the annual reports of the business.

The dividend which is shown in the financial statements of the business shows the current performance of the business. The dividend yield ratio of the business shows the dividend of the business has increased significantly during the financial period. The auditor needs to check whether the financial statements effectively shows the value of dividend paid by the business during the year.

The cash flow statement of the business is shown in the financial statement of the company and shows different activities which are undertaken by the business which includes operating activities, investing activities and financing activities.

The cash from operating activities of the business generates maximum amount of cash flows for the business as the same is shown to be $ 154.3 million. The cash from investing activities as shown in the cash flow statement of the business shows the maximum amount of cash outflows for the business. The cash from investing activities is shown to be $ 187.7 million. The primary cash receipts as identified from the cash flow statement of the business for the year 2017 is shown to be receipt from customers for the operational activities of the business and the figure for the same is shown to be $ 342 million. The primary cash payment which is made by the business as identified in the cash flow statement is the payments which is made to the suppliers of the business during the year. The cash flow statement shows the two major cash receipts and cash payments are covered in cash from operating activities of the business.

Understanding Materiality

The main cash from investing activities can be identified as the payments which the business made for the acquisition of disposal group. The main cash from financing activities of the business is the receipts which the business gets from taking a loan for the business.

The going concern principle of the business is considered to be an important principle which all accounting professionals are required to follow while preparing the financial statements of the business. As per the analysis of the financial statements, the net profits of the business are shown to be favorable and also the liquidity position of the business is also shown to be appropriate (Krishnan & Wang, 2014). The business also has positive cash from operations as per the estimates which are shown in the cash flow statement of the business. Therefore, it can be assessed from the financial statements of the business that the going concern of the business is not affected in any way (Feldmann & Read, 2013). However, the audit in order to satisfy the skeptical attitude needs to apply audit procedures in order to confirm or deny whether the going concern principle of the business are appropriate or not.

As per the auditor’s report of the business, the financial statements of the company is shown to be showing true and fair view and all relevant accounting standards are followed in the preparation of the financial statements of the business and also all relevant regulations of accounting are also followed accordingly as per Corporation Act 2001. The auditor of the company is Pitcher partners and as per their judgement they have issued an unqualified audit report (Louwers et al., 2015).

The valuation of investment property which is done by the management is a bit complex in nature and therefore the auditor needs to apply relevant accounting standards for the purpose of valuation of investment properties. The auditor needs apply verification process for ensuring that the value of properties are effectively represented. The valuation of intangible assets of the business are also covered in the key audit matters of the company and the auditor needs to estimate whether the same are showing true and fair view.

Reference

Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit quality: Insights from audit partners and investors. Contemporary Accounting Research, 33(4), 1648-1684.

Cox, R. A., Dayanandan, A., & Donker, H. (2014). Materiality disclosure and litigation risks: A Canadian perspective. International Journal of Disclosure and Governance, 11(3), 284-298.

 Cromwellpropertygroup.com (2018). Retrieved 1 September 2018, from https://www.cromwellpropertygroup.com/__data/assets/pdf_file/0015/22920/CMW-2017-Annual-Report-final-web.pdf

Feldmann, D., & Read, W. J. (2013). Going-concern audit opinions for bankrupt companies–impact of credit rating. Managerial Auditing Journal, 28(4), 345-363.

Hahn, R., & Lülfs, R. (2014). Legitimizing negative aspects in GRI-oriented sustainability reporting: A qualitative analysis of corporate disclosure strategies. Journal of business ethics, 123(3), 401-420.

Jans, M., Alles, M. G., & Vasarhelyi, M. A. (2014). A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), 1751-1773.

Johnstone, K., Gramling, A., & Rittenberg, L. E. (2013). Auditing: a risk-based approach to conducting a quality audit. Cengage learning.

Krishnan, G. V., & Wang, C. (2014). The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), 139-160.

Laux, R. C. (2013). The association between deferred tax assets and liabilities and future tax payments. The Accounting Review, 88(4), 1357-1383.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.

Todea, N., Joldos, A. M., & Cioca, I. C. (2013). Considerations Regarding Materiality Calculation and Audit Risk in the Context of the Guidelines for Audit Quality. Anale. Seria Stiinte Economice. Timisoara, 19, 728.

Yoon, K., Hoogduin, L., & Zhang, L. (2015). Big Data as complementary audit evidence. Accounting Horizons, 29(2), 431-438.

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