Understanding Financial Auditing And Audit Planning Process - Monash IVF Group Limited Case Study Essay.

Understanding of the underlying concepts of auditing and in particular of financial auditing. By adopting a logical, structured approach they should have the capacity to analyse the salient audit issues and apply relevant auditing theories and succinctly communicate their professional, ethical decision.

To ensure the audit is carried out efficiently and in a timely manner, the auditor develops an audit plan for the conduct and scope of the audit. ASA300 states that the auditor shall plan the audit so that the engagement will be performed in an effective manner.

1. For the purpose of the assignment, you assume the role of an auditor and your firm has recently been appointed as external auditor of an entity. As required by Auditing Standard ASA300, you are assisting your Audit Manager in preparing an audit plan for the audit of the entity’s financial statements.

2. The audit fee is $280,000 and had been communicated to the client in the Engagement Letter.

3. You are required to download the 2017 annual report published by the following entity:

4. Using information in the relevant chapters of the textbook, the company annual report and other relevant information, preparing a document for your Audit Manager to assist him in planning the audit. Note that quoting directly from textbook does not meet the objective of the assignment.

With reference to relevant chapters of the textbook prepare a document for your Audit Manager. Your document must include the followings:

1. Executive summary
2. Introduction
3. Key information:
4. a) Gain an understanding the client
5. b) Identify five (5) significant accounts most at risk of being materially misstated
6. c) Set planning materiality level
7. d) Identify what can go wrong (audit risk assessment) for each of the five (5) accounts selected in (b)
8. Conclusion

Introduction to Financial Auditing

The prevailing study aims to support the auditors in making effective decisions in auditing and offering them the appropriate and justifiable information regarding the financial performance and needs of clients. It concentrates on those improvement areas that are required to be handled in depth. The concerned auditing planning process will make a contribution by establishing significant accounts that are most expected to possess materialistic misstatement risks, along with the audit risks assessments. The entire study and audit plan will be based in accordance with the ASA 300 Planning an Audit of a Financial Report, plus full consideration will be given towards ethical standards and auditor professionalism and client satisfaction.

Monash IVF Group Limited is based in Australia and Malaysia engaged in offering assistive reproductive and professional women services. It offers quality services such as tertiary level prenatal diagnostic, fertility research, diagnostic ultrasound and low intervention IVF respectively. The company was established in 2014 and now is a key leader in the in the Assisted Reproductive Services provisions in the based countries (Monash IVF Group, 2018).

Richard has been engaged in working for InvoCare for twenty years till 2018. For most of the time, the position of CEO belonged to him and management of the business growth was in his hand via a number of ownership changes and more than 200 acquisitions, inclusive of offshore within Singapore (Monash IVF Group, 2018). On the other hand, the joining of Mr James Thiedeman in the Group was in the year 2009, 25 years have been spent by James in working with the company healthcare department in public as well as private sector. Finding a new CEO as well as a managing director for the Group can be a challenging task, and it is anticipated that the company shall make an announcement regarding the same in upcoming months.

With the experience of 40 years, the Group has developed into professional fertility as well as women’s imaging group and gained a global identification for scientific and innovative purposes. The Group is a driver in the development force of assisted reproductive technologies; they are involved in offering a variety of treatments and services with the goal to provide the utmost care to the patient (AnnualReports.com, 2018). Their services are served in a specialized and caring manner, with the help of the specialized team, scientists, nurses, doctors and the leading pursuits in this field.

The Monash IVF Group has positioned considerable significance on the collaboration based in operations, science and clinics. Further, this collaboration generally takes place in a formal manner in their medical advisory committee, and research meetings, wherein the scientists and professionals consider the success rates and make discussion on the insights based on new treatments and emerging opportunities related with the research and any other mutual projects (Bloomberg, 2018). 

Audit Planning Process

Competitors of company

The major competitor of Monash IVF Group is the provider of the reproductive treatment and services which is Virtus Health, and it is an ASX listed leading company

In order to assess significant accounts analytical procedure in accordance with ASA 570 will be applied in order to ascertain risk of going concern. Further, the nature of activities of organization will be assessed in accordance with ASA 315. The same will assist auditor in understanding the key areas which are required to be analyzed in detail.

Ratio analysis of Monash IVF Group

Particular	Year 2016	Year 2017
Current Ratio	60.3%	49%
Debt to Equity Ratio	56.3%	55.9%
Net Profit Ratio	19.07%	18.39%
Return on Equity	18.6%	19.3%

Intangible Asset

Intangible asset comprises goodwill, software, trademark and others. In the year 2017, an addition of $134000 has been done in software through acquisition and $3823000 through business combinations. The company recognizes impairment loss relating to intangible asset in case carrying the amount of an asset or CGU is more than its recoverable value. Further, the loss is reversed only to the extent to which the carrying amount of asset does not exceed net carrying amount in case no impairment loss has been accounted in books of accounts.

Borrowings

The company follows the policy of recognizing loan and borrowing at fair value of the consideration which is amount received reduced by transaction cost. Further the same are amortized by application of effective interest method. Loans and borrowing are considered as non-current liability only in case same can be deferred for a period of twelve months or more. Current Borrowings of Monash IVF Group comprises derivates and capitalised finance facility fees. In order to provide that whether classification of current and non-current liabilities have been appropriately or not both of these accounts required to be assessed in detail.

Contingent considerations

The financial report of the company has been conducted on the basis of accrual and is totally related on the historical costs (unless and until it is mentioned specifically) exclusive of the derivative financial instruments and the assumption of the contingent consideration in the business combination, that is done on fair value measurement. The fair value gaining or loss held on the contingent consideration is categorized as a financial liability (Chen and et al., 2015). The contingent consideration was accounted at 150 in the year 2017, which is lower than the previous year which was 500 in 2016, indicating that contingent payment is a further consideration (Griffiths, 2016).

Revenue

Monash IVF Group has performed effectively in revenues in FY17, regardless of this fact there is a reduction in the revenues in the patient treatment and their related revenues. In addition, the net profit after tax rises by 2.9% or $0.8m to $29.6million in opposition to the past year. Furthermore, the revenues of Group were declined by 0.9% at $155.2m for the year-end (Chan and Vasarhelyi, 2018). The revenues down by $1.4m by 0.9% to $155.2 million in comparison to FY16 Revenue which is gauged at fair value measurement of the concern received or receivable.

Key Objectives of the Study

Income tax

The income tax was reported at $20.1m in the financial year 2017; the income tax expense includes existing as well as deferred tax. The income tax is held in profit or loss, exclusive of an extent that it is related with the business combination or to the aspects realized in equity in a direct manner. Although, the Group is subjected to income tax within Australia as well as its jurisdiction where it is conducting is foreign operations. Judgement is needed while identifying the global provision meant for income taxes and while considering if or if not deferred tax balances is realized on the financial position statements. Also, the changes held in the events will make modification in expectations, which might affect the extent of provision for the recognizable income taxes and deferred tax balances (Louwers and et al., 2015).

The core concept of materiality

Materiality is known as, in regards to the information, that the information that is misstated, non-disclosed or omitted to have the chances to adversely impact the decisions regarding the scares resources allocation by the financial report users or the discharging of the responsibility by the Group’s managerial authority and the enterprise’s governing and regulatory bodies.

Specification available in auditing standard of Australia as well as International Standards of Auditing relating to materiality

The materiality is the prime aspect when it comes to financial reporting, instead of auditing theory. Although it is not mentioned under ISA 320 Materiality in planning and performing an audit but some core characteristics have been highlighted by the ISA regarding the same which are; misstatements are stated to be material if they can impact the financial statement users (Lakis and Masiulevi?ius, 2017). The judgement regarding the materiality is based on the environmental events, inclusive of the nature and extent of the misstatements. It has also been stated that the judgement is conducted on the basis of the common requirements of the users as a group. By considering this aspect, compulsory requirements have been established by the Auditing Standard ASA 320 Materiality and Audit Adjustments to offer descriptive guidance on the materiality and related relationship on the audit risk. By considering and planning for the materiality level of the Monash IVF Group, the auditor might assess the materiality and related relationship on the audit risk in full.

Materiality as mentioned under Accounting Standard AASB 1031 Materiality, possess a significant role in making decisions which the preparation and representation of financial reports are done by the business entities. This auditing standard states the materiality role in terms of audit planning and in the evaluation of the audit evidence (Baldauf, Steller and Steckel, 2015).  The materiality decision of the auditor is considered as a multi-factor engaging quantitative as well as qualitative terms.

Overview of Monash IVF Group Limited

By considering the financial reports of the Group and its performance, it can be cited that the most appropriate method to assess the risk of material misstatement for the auditor is to evaluate the historical financial statements and the perspective and judgements of the auditor. Thus, the assessment of the historic statements might permit the auditor to make a perfect judgment by which the financial statements can do material misstatements while assisting the auditor in setting a threshold for examining the potential misstatements (Graham, Bedard and Dutta, 2018). Hence, the threshold can be implemented by the auditors of the Group in determining the risk acceptance level or less materiality threshold held for auditors.

Calculation of Materiality limit

The calculation of the Group’s materiality amounts will be derived by making use of the quantitative approaches that might be increased or reduced on the basis of the professional judgement of the auditor regarding the potential impacts of the qualitative factors, for example, risk of gaining manipulations, potential impacts of the misstatements of the patterns, limited debt covenants, expanding impact of misstatement for the manipulation of share prices, possible effects of the misstatements held in the segments based information,  fraud detection or signs in historic period, misstatements regarding achievement of project earnings, validity and reliability of accounting systems(Eilifsen and Messier Jr, 2014). In the present case of Monash IVF Group Ltd. revenue method has been applied in order to compute the level of materiality. Thus the materiality level is .5% of total revenue.

Total revenue for the year 2017 is $155182000

Material level =$155182000*.2%

= $310364

Thus, the transaction which is individually or accumulated above the specified materiality limit is required to be analyzed in detail in order to provide an opinion relating to the existence of a risk of material misstatement in books of Monash IVF Group Ltd.

Intangible Asset

Reason due to which specified account require detail assessment

The intangible asset of Monash IVF Group Ltd comprises a significant part of the total asset, i.e. $254688000 approximately 90% of the total asset. Thus, it is covered under to material level applied in order to assess the risk of materiality. An intangible asset is believed as a crucial part of a financial asset as the same required to be assessed with more concern and effectiveness in comparison to other accounts. Moreover, as in the present case, it covers a major portion of the total asset. Thus a detailed analysis is mandatorily required to assert opinion of the risk of material misstatement.

Competitors of Monash IVF Group Limited

Significant Assertion

The key assertion required in the present case is relating to valuation and amortization policies followed by the company. As amortization of same is a tax-deductible expenditure thus, it is necessary to assess that whether a specific provision of AASB 138 Intangible asset has been followed or not.

Steps to be followed for Auditing

• Initially, a schedule of al intangible asset should be developed and compared with previous year balance in order to ascertain the changes.
• Accounting entries relating to amortization should be analysed in detail in order to assess whether amortization has been done in accordance with provision specified in AASB 138 ‘Intangibles Asset’ or not.
• The analytical procedure should be carried down in order to ascertain whether an intangible asset is valued at fair market value or not.

Borrowing

Reason due to which specified account require detail assessment

A significant change in current borrowing of Monash IVF group Ltd have been assessed as same were having a positive balance of $453000 at the end of year 2016 and same have been turned to $-116000 at the end of year 2017. The reason behind same is that derivates which were available previous year are now no available. The derivative financial instruments which have been held by the group are hedged with floating interest exposure rate. Company follows the procedure to recognize them at fair value along with considering transaction cost which is recognized in profit and loss while it has been incurred. Thus, all these transaction require detail analysis to provide specific appropriate opinion. Hence same has been considered significant account.

Significant Assertion

Appropriate recognition and valuation are the two key assertions required to be ascertained.

Procedure of Auditing

• The audit procedure should be initiated by assessing the method of valuation of derivatives
• Moreover, emphasis should be made on reasonableness on management evaluation of the fair value of other assets, liabilities along with borrowings.
• The efficient substantive procedure should be applied to assess the availability of material risk.
• Finally, compliance provision of ASA 520 ‘Analytical procedures’ should be applied in order to assess the viability of accounting treatment applied for recognition of borrowings.

Contingent considerations

Reason due to which specified account require detail assessment

A significant decrease in account balance of contingent consideration has been assessed, i.e. from $500000 to $150000 (Annual report of Monash IVF Group, 2017). Thus, the reason behind is required to be assessed in detail. It might be possible that a part of revenue might be recognized as contingent consideration and same will eventually lead to a present unfair position of books of accounts.

Significant Assertion

The key assertion to be assessed that whether same has been valuing on fair value method or not. Further, the validity of transaction affected by this account required to be asserted.

Procedure of Auditing

• Checking compliance with para 24 and 25 of FASB statement no. 141 which specifies that contingency consideration should be accounted when contingency issue becomes issuable.
• Further compliance with the provision of AASB 137 ‘Provision for contingent liabilities’ is required to be assessed to verify the appropriateness of its recognition.
• The policy followed by the company to evaluate contingent consideration is required to be assessed in order to ascertain whether transaction have been valued in accordance with fair valuation method or not.

Revenue

Reason due to which specified account require detail assessment

A decrease of 0.9% in revenue of Monash Group IVF Ltd., i.e. from $156.6 million to $155.2 can be assessed in comparison to the revenue of the previous year 2016. However, the change in net profit after tax is 2.9% as it has enhanced from $28.8 million to $29.6 million (Annual report of Monash IVF Group, 2017). The contradiction requires to be assessed in detail because in general circumstances profit and revenue have a positive relation. Thus, the unusual scenario is the reason that account might consist of risk of materiality. Moreover, income is having a significant impact on other vital accounts such as income tax, Net profit etc. Thus it requires to be assessed in detail.

Analyzing Key Accounts and Ratios of Monash IVF Group Limited

Significant Assertion

The two assertions which required to be assessed are occurrence and accuracy.

Procedure of Auditing

• General ledgers are assessed in detail in order to assess the manner of accounting.
• Sample method can be applied to review specific details relating to revenue such as date of delivery, date of payment and other information relating to the transaction.
• The trend of sales of present year can be compared with previous year trend to ascertain any significant variance exists (Chan and Vasarhelyi, 2018).
• It is necessary to be assured that information of general ledger should be in accordance with the figure of actual sales.
• The provision relating to sale return as well as the discount is required to be analysed.
• The possibility exists that company might use accrual or deferral in order to adjust the information for timing difference. Accrual revenue refers to sales which have not been recognized in cash. Deferred revenue occurs after cash has been received for sales. Thus, a close review of these transactions is required to be kept in order to confirm that only actual transactions have been presented and no falsified information have been presented.

Income tax

Reason due to which specified account require detail assessment

Income tax of Monash IVF Group Ltd comprises current as well as deferred tax. Deferred tax calculation required to be assessed in detail as it consists of deferred tax asset as well as deferred tax liabilities. An increase of $800000 can be assessed in deferred tax asset in the year 2017 in comparison to the closing balance of the previous year (Annual report of Monash IVF Group, 2017). The reason behind the same required to be evaluated in detail in order to assess the validity of the transaction.

Significant Assertion

The key procedures are required to be applied to assess element, i.e. completeness of transactions relating to current tax and deferred tax.

Procedure of Auditing

• The primary step of auditing income tax account is to assess the carrying amount from the balance sheet of prior years.
• Further, the calculation relating to deferred tax asset as well as liability required to be recalculated in order to assess whether any calculation error exists or not.
• Whether the provision relating to income tax specified in AASN 112 ‘Income Taxes’ have been complied or not is required to be assessed on a mandatory basis.
• The auditor requires to assess that deferred tax asset and deferred tax liability should be recognized in accordance with Para 5 of AASB 112.
• Para 15 of AASB specifies that deferred tax asset and deferred tax liability should be recognized only in case of temporary taxable differences. This the same should be verified by the auditor.
• The accounting procedure applied by the organization for recognizing net income tax liability should be verified in detail in order to analyse whether same has been done in accordance with the provision of specified accounting standard or not.

Conclusion

It can be concluded from above discussion that Monash IVF Group Board are highly committed to driving their activities and earnings, on domestic as well as abroad basis and has continued to deliver a strong performance and financial health. The Group has delivered an outstanding performance with improvisation to earnings; however, there is some sort of reduction in the treatments and services of patients and their related revenues. The Group has been capable to the leader in assistive reproductive and professional women imaging services through their quality and caring services. However, there is a decline in their net revenues as compared to the previous year, yet their accounts state solid identity in the financial statements, but the decline in revenue is the aspect where the auditor is required to give attention.

References

Annual report of Monash IVF Group, 2017. (Online). Available through < file:///C:/Users/HP/Downloads/2632593_1102947298_monashivf%20(1).pdf>. [Accessed on 20 September 2018].

AnnualReports.com, 2018. Monash IVF Group Ltd (Online). Available through < https://www.annualreports.com/Company/Monash-IVF-Group-Ltd>. [Accessed on 20 September 2018].

Baldauf, J., Steller, M. and Steckel, R., 2015. The Influence of Audit Risk and Materiality Guidelines on Auditors’ Planning Materiality Assessment. Accounting and Finance Research, 4(4), p.97.

Bloomberg, 2018. Company Overview of Monash IVF Group Limited (Online). Available through < https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=265494257>. [Accessed on 20 September 2018].

Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.

Chen, Y., Gul, F.A., Veeraraghavan, M. and Zolotoy, L., 2015. Executive equity risk-taking incentives and audit pricing. The Accounting Review, 90(6), pp.2205-2234.

Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public accounting firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.

Graham, L., Bedard, J.C. and Dutta, S., 2018. Managing group audit risk in a multicomponent audit setting. International Journal of Auditing, 22(1), pp.40-54.

Griffiths, P., 2016. Risk-based auditing. Routledge.

Lakis, V. and Masiulevi?ius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR USERS OF FINANCIAL STATEMENTS. Journal of Management, 2(31).

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

Monash IVF Group, 2018. (Online). Available through < https://www.monashivfgroup.com.au/>. [Accessed on 20 September 2018].

Monash IVF Group, 2018. (Online). Available through < https://monashivf.com/>. [Accessed on 20 September 2018].