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BUACC5935 Auditing And Assurance Services

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  • Course Code: BUACC5935
  • University: Federation University
  • Country: Australia

Questions:

According to ASA 240 The auditor’s responsibilities relating to fraud in an audit of a financial report:

‘When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.’

(https://www.auasb.gov.au/admin/file/content102/c3/ASA_240_Compiled_2019-FRL.pdf)

Required:

Write a letter to your Audit Manager Mr Bobby Brown in which you address the following:

1. Relying on the information in ASA 240 (refer to link above). Explain the difference between the responsibility of management and those charged with governance and the auditor in relation to the prevention and detection of fraud.

2. Discuss the misconception that exists in society surrounding the role of the auditor in relation to the prevention and detection of fraud in an audit of financial statements.

3. Provide three reasons why an auditor presumes that there are potential risks of fraud relating to revenue recognition in entities. Make sure that you explain your reasons clearly.

4. Provide two case examples of revenue misstatements that have been reported in the media.
 

Answers:

1.

The four main major risks of Woodside Petroleum for the process of business are the climate change risk management, risk of overrunning the costs of the business, risk of non-compliance with the legal requirements and the risk of not delivering sufficient returns to the shareholders. As the business is mainly involved in the process of petroleum exploration and oil and gas sector, the pressure from the environmental groups is ever increasing. Due to the emissions caused by the company’s business procedures, there is also increased risk on the company to maintain sufficiently lower level of the same. This should also be necessary in managing the climate change. After which, the next risk identified in the annual reports of the company is that of climate change. As identified in the annual reports of the entity, the business has a significant risk of overrunning the costs incurred by it. Some of the reasons for the same include the significant oversupply of petrol in North American gas markets and the increasing costs for the carbon which were non-existent before. The impact on the business is also significantly high because of low level of prices being charged by the company and a major turnaround in the plant of the company at Pluto. This was caused by a direct cyclone which adversely impacted the business of the entity. The legal requirements in the oil and natural gas exploration industry are also significantly high. Hence, it becomes necessary that the business follows the changing regulations on a constant basis. Otherwise, there is a significant risk of paying the penalties by the business. The final risk faced by the business which may be significant in nature is the lack of sufficient returns generated to the shareholders of the company. As the shareholders expect significant returns on the amount invested by them, it becomes necessary for the business to generate sufficient returns for the same. Otherwise, there is a chance of the increase in the risks faced by the company.

2.

Particulars

Formula

Amount

Gross margin

Gross Profit/Total Revenue

44.04%

Net Profit Margin

Total net profit/Total Revenue

7.84%

Current Ratio

Total Current Assets/Total Current Liabilities

4.10875

Quick Ratio

(Total Current Assets-Inventories)/Total Current Liabilities

3.95314

Debt Equity Ratio

Total Debt/Total Equity

68.61%

 
The changes in the gross margin would result in triggering further audit of the business of the entity. This is because the annual reports of the entity suggests that the gross margin of the business has been falling due to a significant decline in the prices. Any sudden increase in the gross margin may be a result of accounting manipulations. Hence, it will be checked thoroughly. The other margin which would be checked thoroughly would be the net profit margin of the entity along with the changes in its current ratio. Similarly, any changes in the current ratio or the debt equity ratio would result in a significant change in the nature of the business. These changes indicate at a significant change in the risk profile of the business. Hence, these need to be verified thoroughly to indicate the risks faced by the business.

 

3.

Inherent risk of business are completely different from business risk as they are mainly arises because of error or inefficiency in internal control of an organization. It is an evident fact that in case of financial audit usually inherent risk occurs whenever there are presence of complex transaction or any situation that requires high degree of judgment with regard to any financial estimations. In this case, even we have analyzed various inherent risks that are presented within the organization and needs to evaluate so that there could be overall reduction of risk factors in organization. The company tends to have an unsuccessful exploration and renewal of upstream resources and due to this risk factor delivery relating to value adding growth of commercialization associated with exploration discoveries concerning business strategies could get affected. It is analyzed that there is presence of risk factors related to the growth and divestment of company that could affects the ability to deliver anticipated value and meeting organization objectives and strategy. The company is unable to manage and prioritize the portfolio of opportunities that might ultimately have adverse impact on the company ability to choose appropriate concept that could efficiently support the required commercial agreements that are essential for securing the FID. It is analyzed that management of the organization are not able to negotiate, optimize, and finalize commercial agreements with primary stakeholders of company that might affects the current and future opportunity portfolio of the company. By analyzing the annual report we have identified that company policies related to global climate change tends to remain uncertain and even has potential to constraint the company ability to deliver stakeholder value arising from commercialization of hydrocarbon. Thus, by analyzing all the above risks factors we can say that various external and environmental factors are increasing the inherent risk and even there is no adequate and relevant internal control practices that are being used by business to mitigate those risk factors.

4.

The company is investing in strong and high-quality opportunity related to development and project management systems to mitigate the risk factors related to efficient and cost competitive commercialization of hydrocarbon that is one of significant contributor to future growth of company. Thus, investing in new project will affect the financial statements of the company as there will be outflow of capital and the overall assets of the company will increase. Even by using various commercial transaction the company tends to decrease the risks materializing of business. The company is continuously engaged in resource planning and management that would act as support system related to demand of a growing and diversified development of portfolio. The company keeps regular analysis of mix of capabilities associated to each opportunity and capacity to deploy. The future growth of companies mainly depends on ability to measure, acquire, explore, and develop various reserves thus, company is engage in divestment activities that will remain consistent with company strategy in order to provide profitable results to company and to increase value for all stakeholders of business. Even targeted acquisition and divestment activities will help to deliver maximum value from portfolio and will make sure that sustainability of the business increases irrespective of disruptive environment. Various carbon pricing and uncertainty surrounding related to future regulatory structure affects various cost effective strategies of company.   

5.

Calculation of Materiality in the audit

 

 

Base

Percentage of materiality applied to base

Amount (in millions)

Net Profit

25

96

Total Revenue

30

1462

Total Assets

15

4403

Total Equity

30

5223

Total

 

11183

 

The above items have been chosen on the basis of their relevance in affecting the results of the company. Any major changes in these items would adversely impact the performance of the company. Hence, they have been given similar weightage in calculating the materiality amount of the business.

 

Bibliography

Pacifici, M., Foden, W.B., Visconti, P., Watson, J.E., Butchart, S.H., Kovacs, K.M., Scheffers, B.R., Hole, D.G., Martin, T.G., Akçakaya, H.R. and Corlett, R.T., 2015. Assessing species vulnerability to climate change. Nature climate change, 5(3), pp.215-224.

McNeeley, S.M. and Lazrus, H., 2014. The cultural theory of risk for climate change adaptation. Weather, climate, and society, 6(4), pp.506-519.

Maas, S. and Reniers, G., 2014. Development of a CSR model for practice: connecting five inherent areas of sustainable business. Journal of Cleaner Production, 64, pp.104-114.

Sadgrove, K., 2016. The complete guide to business risk management. Routledge.

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