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Develop an appreciation of the reasons for the existence of a societal demand for audit and assurance services, and an understanding of the current environment in which auditors operate, including legal, ethical and professional aspects

- Demonstrate an understanding of the key auditing principles, concepts and practices used by auditors to gather evidence and make judgments in order to form an audit opinion on the fair presentation of financial reports

- Develop an insight into the audit of specific transactions and account balances

- Be aware of the auditor’s responsibility in completing an audit

- Obtain basis understanding of other types of assurance engagement

  1. To calculate materiality level for this audit assignment, you are advised to calculate 0.005% of the sales revenue account balance, i.e. 0.005% of sales revenue of $13.5 billion = $13.5 billion x 0.00005 = $677,065.  
  2. In assessing what can go wrong, you are required to assess the audit risk for the five (5) significant accounts you have selected using the audit risk model. It is up to you to decide on the significant accounts you want to include in your document. However, you must justify your selection.

Understanding the Demand for Audit and Assurance Services

The decisions of finance are very important and are taken after a very deep study and market research. The information provided in the market are the base of such financial decision marking. The investor gathers all the information about the company before he invests in it. The decision to invest in any company is dependent on the correct information gathered from the market. The audit report provides such information to the market. Auditing is very useful and important for both the investor and the company.

With the auditing the financial report are prepared and this gives a clear picture to the market. Information’s accessed by the audit report of a particular company. In this assignment, the importance of understanding the client by auditor is highlighted and the auditor is done (Chow & Ho, 2006). A further, discussion is done on those accounts which can be the reasons to cause risk the financial statements which could be misstatement of the material. Such misstatements can affect the financial statements. Which gives an incorrect image in the market? The materiality is set which helps in cost reduction. The risk related to assessment which are related to those five accounts pertain to risk of incorrect setting of materiality are also a part of discussion in this assignment. 

Metcash is an Australian company established in the year 1927. He started this company as a small family business naming (Metcash Limited). This company mainly deals in grocery items, liquor hardware items and other consumer goods at a reasonable price compared to other companies in the market. Metcash believes in providing better products and services to its wholesalers and consumers. Its headquarter is in Sydney. Metcash has three divisions which are also called its base or business pillars working in wholesale industry. 

  • Metcash food and grocery
  • Australian liquor market
  • Independent hardware group

(Mason, Zhu & Van, 2017)

These three segments are completely owned by Metcash. Metcash deals in wholesale, distribution, through retail operations, merchandising etc.

Metcash supply products in their brand name in the market which includes supermarkets and convenience divisions which helps in supplying to individual stores all over the Australia including 1434 IGA branded stores and 250 friend grocers/ Egiway stores. Its two divisions naming Campbells wholesale and CDS C Store Division helps in providing grocery , non-food, soft drink , dairy products, liquor in the market. ALM Australian Liquor Market it is Australia's largest liquor wholesale. And another is IBA independent brands Australia (Dunn, 2006). It can be analysed that, Metcash Limited has diversified of risk and rewards from their business operations as they are operating in different business lines under different industry.

These two has a large network of supply over 12500 hotels, clubs, restaurants, and other government licensed places. These two not only works in Australia but also in New Zealand. IBA is a subsidiary company established by Metcash in December 2003 (Gay, 2007). Its Main purpose was to develop natural brand. ALM and IBM provides retailers the best price. Customers also feel good to get full order from one place.

3 independent hardware groups were formed in November 2006 with Mitre, Home Timber and Hardware Group. It is Australia's single independent hardware wholesale. It has over 500 non branded hardware stores. Home Timber was established in 1953. Metcash Trading Limited became official on 4th September 2000 changing its name Davis Limited. Metcash business is also spreading in other countries. It is operational in Hong Kong, China, Singapore, Malaysia, Philippines and over southern and central Pacific (Kend, 2008). Its staff and management has the very large amount of experience regarding the market, consumers demand their taste, about the price structure, the quality of the product, how to attract the consumers etc.

Key Auditing Principles, Concepts, and Practices

ASA315 is an auditing standard was being issued by AUASB; which confers to understand the entity as well as its environment in order to identify and evaluate the risks related to material misstatement. This standard of auditing forms requisites and provides application and other explanatory material in context to the responsibilities of auditor. The auditor is required to carry out risk assessment through analytical procedures in order to gain understanding about the entity and its internal control which is relevant for audit purpose. ASA520 portrays the analytical procedure that can be used to assess the significant accounts which are at risk of material misstatement. In this section, ASA230 Audit Documentation shall also be used in order to document each and every aspect of audit and all these identified accounts shall be properly documented (Hauke, 2012).

The risks of material misstatement at the financial statement are important to be carried out by the auditor. Beside this, the vulnerability of the financial report of entity in regards to material misstatement, counting those caused by error or fraud, shall be discussed with the engagement team. Analytical Procedures includes analysis of financial statement and ratios. ASA230 i.e. Audit Documentation is also going to be used in this section, to document every single aspect of audit. All the accounts which are at risk in relation to material misstatement are important to be documented.

Inventories: The business operations of Metcash limited are of different nature, which requires consideration for management of varied inventories. Otherwise the inventory account of Metcash limited can be at risk of materially misstated. In the year 2015, the inventory amount stated in the company`s financial statement was $ 712.50 million, however the financial statement of year 2016, stated the reduced inventory amount i.e. $ 673.60 million. As Metcash Limited is carrying out its business operations in fast moving consumable goods sector, therefore fluctuations can be observed in levels of inventory and a set pattern cannot be established. It is not easy to verify the inventory through manual procedure. Hence management of the company requires managing the inventory in proper manner. Otherwise this can be accounted at risk of being materially misstated (Mazé, 2016).

Interest bearing borrowings: The analysis of Metcash Limited`s financial position as well as the analysis of financial statement`s disclosure; it can be evaluated that there is interest bearing borrowing in non-current liabilities and current liabilities. It can be observed that interest bearing borrowing in both current liabilities and non-current liabilities has significantly reduced from the last year’s figure. The analysis of present and last year’s financial statement reveals that there is significant drop in interest bearing borrowing in both current and non-current liabilities (Hecimovic, Martinov?Bennie & Roebuck, 2009). As interest bearing borrowing in the year 2016 stated in current liabilities was $ 15.70 million, whereas in the year 2015, it was $ 63.20 million. On the other hand, the interest bearing borrowing (non-current liabilities) in the year 2015 was $ 794.80 million; which has been fallen to $ 299.40 million in the year 2016. The analysis of statement shows the enormous gap of interest bearing borrowing figures in context to year 2016 and year 2015. Hence this account is identified as at the risk of materially misstated.

Insight into the Audit of Specific Transactions and Account Balances

Cash and cash equivalents: Manipulation of cash and cash equivalents can be done in easy manner. Cash and cash equivalents are the most liquid form of current asset. The cash and cash equivalent balance of Metcash Limited, has extremely changed (McCollum, 2006). As the cash & cash equivalent has fallen down in the year 2016 to a great extent when compared to the year 2015. For that reason, it can be considered that, there is possibility of material misstatement at high extent.

Sales account: One of the other accounts which are being identified as, at the risk of being materially misstated is the sales account of Metcash Limited. Metcash Limited different business, such as- food & grocery, liquor etc. Hence, they are required to manage the risks which are involved in generating the revenue from sales through different business operations.

Segment

Sales revenue in 2016

Sales revenue in 2015

Food & Grocery

$ 9,265.4

$ 9,217.8

Liquor

$ 3,219.3

$ 3,103.6

Hardware

$ 1,056.6

$ 1,048.4

Segment results

$ 13,541.3

$ 13,369.8

Dividends: The financial statement`s analysis of Metcash limited reveals that in the year 2015 dividend was being paid by the company. On the other hand, the analysis of the year 2016`s financial statement depicts that dividends were not paid by the company. On this base, this account has been identified at a risk of material misstatement. As the dividend balance can be misstated in Metcash Limited`s financial statement.

Auditing tool which is related to the importance or significance of any transaction, amount or discrepancy this is known materiality. The auditor sets s limit or level in any company small or big in terms of amount figure or the items included in the financial statement. The can be defined as materiality. The audit reports should give a clear status of the financial condition of the company but still no audit or assurance device provides a 100% guarantee that the position in the financial statements of the company is as it is given in the independent financial report prepared by an auditor. These reports are helpful in providing path for marking decisions.

Audit report work as base for the management’s decision making by which they can analyze the different business operation and financial position of the business organization. Financial statements can be at material error or fraud that auditor has to identify from the audit and he / she needs to analyse significant accounts or material amount (Moroney & Trotman, 2016). The limit finalized by the auditor is materiality and beyond this limit will affect the decision making of the stake holders. It is the duty of the auditor to identify while auditing, where the financial statement has material misstatement. He/she also has to analyze that weather it is significant account or material account. 

There are two types of materiality that auditor has to manage or consider while he /she is performing or planning materiality. These standards are stated by the ASA320 the organization which sets the accounting standards. The first type of materiality can be defined as the standards process set by the auditor to be used by the audit team or the planning materiality that is set by the auditor at the initial level of planning audit. The second type of materiality can be said as not any final thing, as the materiality can be decided or changes with the chance In situation or in the identification of the particular issue (Udrea, 2010). The identification of materiality is purely a professional experience. A level of analysis skill of audit is required to select the materiality. 

Auditor's Responsibility in Completing an Audit

In case of Metcash limited, the materiality level could be set on the bases of the revenue generated from the sale of the company in the previous year till now respectively. When the base of any company is not definite it is thought to calculate the materiality same is with Metcash. As it is engaged in many businesses so there is no base for calculation in this case the sales revenue would be considered as the base of the entire further audit (Park, 2012). After the financial statement analysis by the auditor it is highlighted that a huge amount is involved in the Metcash audits. This has result in a very less percentage of materiality of sales revenue. 

Materiality level or amount

= 13,541.30 x 0.005 % = $ 0.677065 million or 677,065

The materiality level of the Metcash  as per the audit report is $ 677,065. It is clear that any amount or accounts or figures would be considered as material and a detail procedure of audit will come into implementation. Audit risk is mainly consists of three types of risks in auditing and assurance. Among these risks there are controllable risks and uncontrollable risks. Audit risk is the combination of three risks in auditing i.e. audit risk is overall risk in audit which is decided by considering all three risks (Luo, 2011). Audit risk can be define as the risk of auditor’s inability i.e. financial statements of the business organisation is materially misstated, but auditor is not able to identify the same. Following is the formula of audit risk:

Audit risk = Inherent risk x Control risk x Detection risk

Inherent risk: Inherent risk can be defined as the risk which arises from where judgement or estimations are required. In other words, where decisions are to be made on the basis of personal experience and estimates then inherent risk will be at higher side. Inherent risk is uncontrollable risk (or it can only be controlled if decisions are taken on non-estimated or judgements) and occurs other than failure of control (Mindak & Heltzer, 2011).  

Control risk: On the other hand, control risk is the risk which occurs only when there is lack of strong internal control system implemented and because of these financial statements is materially misstated. Trigger point of control risk is absence of adequate level of control system in business operations.  

Detection risk: Detection risk is the risk that auditor will not be able to detect material misstatement in the financial statements of the business entity. Detection risk is based on auditor’s ability or auditing skills.

Account

Inherent risk

Control Risk

Detection risk

Inventories account

In inventory valuation, many judgement and estimates are required, therefore inherent risk will at higher side. Metcash Limited has huge inventory base from its three business segment (Newman, Patterson & Smith, 2001).

Internal control system in inventory management is quite difficult because of huge inventory base of different segments; control risk will also be at higher side.

Detection here will also be at higher side. It is not possible for auditor to physically verify each and every inventory of Metcash Limited.

Interest bearing borrowings account

Interest calculation or outside borrowing is based on judgments and estimates by outsider (bank / financial institutions), therefore inherent risk is at higher side.

Control risk in this case will be at moderate side, since internal control system in outside borrowing is limited to finance section of Metcash Limited (Piercey, 2011).

Detection risk in this case is at lower level because there are many audit procedures that can test material misstatement in this case.

Cash and cash equivalents account

Inherent risk in case of cash and cash equivalents account is at moderate level. Since there is no estimations or judgement required in this account.

Control risk in case of cash and cash equivalents account will be at higher side.  Cash and cash equivalents account are highly liquid asset therefore there is high possibility of material misstatement in Cash and cash equivalents account.

Detection risk in cash and cash equivalents account is at moderate side, because there are many test of controls or through analytical procedure auditor can test appropriateness of cash and cash equivalents account.

Sales revenue account

In terms of sales revenue account, inherent risk is at moderate level. Since there are many business segments from where Metcash Limited generate revenues.

Control risk in terms of sales revenue account is at higher side (Ruthven, 2010). Revenue is generated form 3 different segments and managing them requires special set of skills.

Detection risk will be at moderate side because by applying analytical procedures, it can be tested.

Dividend account

Higher level of inherent risk. While proposing and paying dividend there are many estimates and judgements that management made.

Moderate level of control risk will be there because internal control weakness.

Detection risk will be at lower side.

Conclusion

The process of auditing is use to carried out to make certain whether the financial transactions are recorded appropriately or not in the financial statement of the company. This process make sure that the books of accounts shall be maintained in proper manner and there shall be no place of errors and fraud in company`s books of accounts. Auditing facilitates the business organizations by establishing a pattern to assess the risk of manipulations in the books of accounts. Besides this, auditing also helps in identifying the aspects related to exploitation of business property. While carrying out an audit process, auditors consider the errors related to both qualitative and quantitative aspects. As these errors can influence the audit process which in turn may affect the audit report. It can be determined through the assignment that is important for the auditors to understand the business of the client (entity). As through gaining understanding, it becomes easy for the auditor evaluate the financial information, transactions events and practices related to financial aspects. Auditor can gain understanding of the entity through a number of sources such as: discussion with client and employees, company`s financial statement of current and previous year, books of accounts etc.

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[Accessed 23 February 2024].

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