Auditing And Risk Assessment Of Pacific Star Network Limited Financial Statements, Essay.

Importance of Statement Assessment in Determining Material Misstatement

Question:

Write report is to determine and evaluate the accounts of the financial statements in order to evaluate the actual value of the company.
 

The most important aim of the statement is to assess the significant accounts of the company in order to determine the material misstatement. The auditor should understand the client by determining and analyzing the internal environment and external environment of the company. The financial report of the organization shows the expense, income, liabilities, assets, shareholders’ equity and cash flow statement of the company. The auditor plays a significant role in the preparation and presentation of the financial statements of the company for the accounting year. The facts, figures and other factors will help to gain the understanding of the client and focusing on the material misstatement during the preparation and presentation of the financial statements. The internal and external auditors has to focus on the important accounts that are most at the highest risks of being material misstatement with the appropriate planning of the materiality. The assessment of the risk in the audit process will help to determine and evaluate the misrepresentation in the financial statements. The risk assessment program will help to evaluate the audit risk and analyzing the accounts of the financial statements.  

The Pacific Star Network Limited is Media Company in Australia. The business operation of the company includes broadcasting, digital assets and publishing which includes www.morrisonmedia.com.au, www.frankiepress.com.au and www.sen.com.au. The organization commonly operated two segments publishing and broadcasting. The company has amplitude modulated commercial broadcasting license in Melbourne and broadcasts on 1116 SN and 1377 MyMp (www.bwired.com.au, 2016). It operates two digital radio stations KOOOL and AUSSIE. The organization has subsidiaries which include Morrison Media Services Pty Ltd that publishes White Horses, Smith Journal, SEN inside Football, Frankie and Spaces. The auditors play an important in the preparation of the financial statement and analyzing the errors and omission in the financial statements. The report focus on the risk assessment with the help of audit process and gaining an understanding of the business of the client that would also help to evaluate the financial statement of the organisation. Therefore, the auditors has the responsibility to perform and plan the audit in order to assess whether the financial statements are appropriate and are free of misstatement that caused by fraud or error (Elliott and Elliott, 2008). 

Gain an understanding the client

The auditors should gain the accepting of the customer of Pacific Star Network Limited. The main purpose of the procedure is to evaluate the risk that financial statement includes the material misstatements due to:

• Nature of the business of the client
• The client operates its business in the industry
• Competition within the industry
• Suppliers and customers of the client
• The policies and regulations in which the business is operated by the client

The auditors can gain the understanding of the client by evaluating its stages entity level, industry level and economic level.  At entity level, the details of the organization can be gained through interview with the client and asking question about what the client do, how the functions are managed, ownership structure and its finance source (Epstein and Lee, 2011). This is a detailed process and time consuming. The customers are identified whether the customer have good reputation and paying the client timely. The suppliers are identified whether they are supplying quality products and services. Whether the client is an exporter or importer of the products identified. It is also to assess the capacity of the client to adapt to the changes in the technology and other trends (Fifield and Power, 2011). If the client does not adapt to these changes then there would be a risk of losing the market share and falling behind the competitors.       

Understanding Pacific Star Network Limited

At the industry level, the auditors can understand the client by evaluating level of the competition, level of the demand of the product and services, client reputation, support level of the government and level of rules and regulation of the government (Gough, 2002). The auditor should be interested in the position of the client within the industry, competition level and size of the client in relative to the competitors.  The more competition within the industry means more pressure are placed   on the profits of the client and the key issues is the position of the client and ability to withstand the downturns in economy (Holton, 2012). Apart from this, the issues faced by the client due to competition in the international market and evaluating the support of the government.    

At economic level, the economic conditions that affect the business operations of the client. The economic conditions include changes in interest rates, financial crisis and expectation of the shareholders to increase the profits (Kieso, Weygandt and Warfield, 2011). The economic downturns and upturns, currency fluctuations and changes in the rate of interest affect all the organizations. Therefore, the auditor is concerned with the susceptibility of the client to the following changes and ability to tackle the economic pressures. During the economic upturn, organizations are under pressure as they have to perform well than its competitors and improvements in the profits of the shareholders (Kimmel, Weygandt and Kieso, 2007). During the economic downturn, organizations may understate its profits and to maximize its write offs as it falls in the profits.                   

The financial report of the company should be anal analyzed in order to evaluate the actual value of the company. The income statement shows the expense, income, profit or loss of organization (Sharma, 2010). The financial position statement shows the assets and liabilities of the company. The statement of cash flow provides the inflow and outflow of cash within the accounting year. 

The significant accounts that are most at the risk of being misstated are operating expenses, debt issue, current liabilities, intangible assets and current assets. Therefore, it is the liability of the assessor to estimate the material misstatement in the accounts in order to avoid fraud (Spiceland, Sepe and Nelson, 2011). The consequences of misstatement are increase or decrease in the expenses, increase or decrease in the debt level, increase or decrease in the assets and liabilities and increase or decrease in the total value of the company. The risk can be analyzed by evaluating the ratios such as profitability ratios and liquidity ratios. The changes in the ratio will helps to evaluate the accurate values of the accounts and if it varies a lot then there can be risk of the material misstatement (Stittle and Wearing, 2008). The false presentation of the overall value of the company can affect the decisions of the investors and other stakeholders. The significant accounts of Pacific Star Network can be at risk and that may result in liquidity risk or solvency risk. The intangible assets can be misrepresented that can affect the current assets worth of the organization (Turtledove, 2007). The misrepresentation of the debt issue can affect the capital structure of the organization. The debt equity ratio provides the level of equity and debt of the organization. The increase in the material misstatement can lead to fraud. Therefore, it is the duty of the auditor to examine and assess the actual value of the accounts as well as determining the misstatement in the accounts. The in service expenses increase or decrease will influence the net income of the organisation that will also affect the value of return on assets, return on capital employed and return on equity as well as the net profit and gross profit margin of the organization (Warren, Reeve and Fess, 2005). The profit margin can be affected by the misstated figure and facts and thus affecting the financial position of the company. The auditors should analyze the value of the accounts and mitigating such risks.  

Auditor's Responsibility in Preparation and Presentation of Financial Statements

The financial report comprises of income statement, cash flow statement and balance sheet of the company. The profitability ratios show the ability of the company to generate earnings and cash requirement to pay off the debts, future expansion and meet other obligations. The profit margin and gross profit shows the sales proportion turned into the profit (Wolf, 2008). The gross profit margin shows whether the seller of products has appropriate mark of on the products sold to pay for the other expenses. The diminishing ratio determines that the client may be paying additional for the inventory or less charging to their clients. The profit margin shows the profitability of the organization and the auditor would be able to find the variability in profit earning capacity of the client (Zopounidis, 2008). The profit margin varies too much then it shows uncertainty and volatility that makes difficult to assess the fairness and truth of the financial report. The return on assets provides the capability of the organization generate returns from the assets and return on the shareholders’ equity shows the ability of the organization to generate return from the invested funds of the shareholders. If the ROE and ROA are decreasing then it would be difficult of the company to pay interests and dividends and repay loans. The auditor would make comparison between the previous year and current year to identify the trends or differences in the profitability of the company. The comparison can also be made with the competitors and budget. Any changes when compared to competitors or budget, previous years can be investigated by the auditor to indicate that there can be risk of the material misstatement. The liquidity ratios show the capability of the entity to compensate off the obligations. The relation above one means that the entity will be capable to reimburse off the short term obligations. An auditor will compare the trends the rates in order assess the liquidity situation of the company. 

The setting materiality helps the auditor to use the professional judgment equipment for the creation of the useful situation to the primary users for the financial report. For the case of the listed companies, the primary users also help the owners for lending the major funds and thus it also helps the primary users to lend the funds of the lenders (Berk and DeMarzo, 2007). Audit firms vary their methods with the purpose to set the materiality in order to carry out the risk assessment in the organization. Therefore the guidelines are created by the AASB 1031 for the creation of the materiality and thus it also helps in calculating the percentage of the appropriate base. Thus for the selection of an appropriate base, the auditor chooses an point from the financial position statement or the appropriate base (Elliott and Elliott, 2008). In selecting the appropriate base, the auditor also helps in the creation of the suitable base that are requisite for the enlargement of the judgment that is based on the knowledge of the client and thus the needs of the financial report users helps them in the process of decision making. For instance, if the client is listed in the security exchange, the profit lies before the tax is likely to be important as it drives the dividends and return on the investment for the process of decision making. The base was selected for the creation of the profit before the tax (Fifield and Power, 2011). Thus for profit organization, the assets or the revenue are generally used as a base. Thus this also helps the client to take the professional judgment for the development of the auditor’s knowledge and thus it also helps in the development of the preferred, the choices are also helps in the auditor’s knowledge for their client and thus it also helps in the professional judgment. The AASB 1031 also helps in the provision of the guideline for the appropriate calculation and thus it also helps in calculating the materiality. Thus the material percentage also helps in the creation of the item and thus the five percent tax also being increased to the 10 percent of the profit. When the setting is lower than the planning materiality, the auditor then increases the quality and the quantity of the evidences also needs to be gathered (Gough, 2002). When the gathering of the evidences successfully satisfies the criteria, then lowering the materiality level set also helps in the gaining the potential misstatements and thus it also helps in appropriate analysis and thus it also helps in the concluding the potential misstatement and thus it also helps in the creation of the auditors access for planning the materiality (Holton, 2012). With the support of the arrangement of the materiality, the administration also helps to create a center of attention for the investors for the investment and thus it helps the auditor for knowing the financial statements. The materiality also helps in the materiality echelon of the Pacific Star Network is considered at the 1% of the entirety proceeds of the organization. The material echelon is calculated as the

Risk Assessment in Audit Process to Determine Misrepresentation

Materiality Level= 1% * 20.86 million dollar

= $20.86 million*0.01

=$208,860 million

Therefore, the amount determined by the auditors also creates the financial levels of the risk managements that are required for the proper enhancement of the materiality of the financial statements (Kimmel, Weygandt and Kieso, 2007). When the materiality amount considered being necessary for the reduction of the appropriate low levels then the aggregated and the undetected financial statements are also helpful for the establishment of the lower limit of the planning and thus it also helps in the misstatement and thus it also helps in accessing the planning of the materiality (Sharma, 2010). At this level of the acceptable error for the creation of the setting and thus it also helps in the enabling the auditors to determine the significant terms and hence, the material matters are also taken into considerations.

The manipulation of current assets, current liabilities, debt issue, along with the in service expenses can change the worth of the corporation; the value can be changed in either improving or declining. Thus, the auditor detects misstatement or manipulation in the financial records of Pacific Star Network by the accountant that be able to improve or reduce the worth of the organisation (Spiceland, Sepe and Nelson, 2011). The presentation of incorrect cost can influence the judgment of the investors as well as even it is the illegal act by the accountants of the company, who manipulate the accounting information of the company in order to provide incorrect information to the users of the financial statements of the company to influence them to invest in the company. The misstatement of the information of current liabilities can influence the debt level of firm and the total worth of firm (Stittle and Wearing, 2008).   The misstatement of the information of current assets can affect the asset of firm and the overall cost of the firm. The misstatements of the information of intangible assets as well affect the level of asset of the firm as well as overall cost of the firm. The misinformation in debt issue will involve the echelon of debt of the firm also financial responsibilities of firm. The misinformation in operating expense can affect the cost of expenditure of the firm the overall revenue of firm. The misinformation in these can influence the economic ratios of firm like current ratio, profitability ratio, efficiency ratio, as well as solvency ratio (Turtledove, 2007). The alteration in profitability ratio can influence the degree of profitability of the firm like net margin ratio as well as gross profit ratio. The alteration in the debt issue can influence debt equity ratio as well as the financial leverage of the firm. The alterations in the financial ratio can affect the debt level, asset level, profitability level, along with overall presentation of the firm. The alteration in the worth of the expenditure of the operating can affect the ratio of the firm. The alteration in these specific accounts can alter the capital, structure of the company, profitability as well as overall of firm (Warren, Reeve and Fess, 2005).  The misstatement of the financial statement of the firm can manipulate the decisions of the users of the financial statements such the shareholders of the company investors and other stakeholders of the company. The accountant of company prepares the financial statement of the company and in case of the accountant manipulate with the financial data of the company then the information on the financial health and financial performance of the corporation will be changed that can misled the investors and shareholders of company and influence the decision of the investors (Wolf, 2008). The auditors play important role in detecting the misstatements in financial statements and in case of an auditor has been bribed and support the misstatement of the financial report of the company then it will be cheating with the investors and shareholders. 

Conclusion

The main focus of the report is to determine and evaluate the accounts of the financial statements in order to evaluate the actual value of the company. The auditor determines and evaluates the significant accounts, for example, current assets, intangible assets, current liabilities, debt issue and operating expenses that are risk of being material misstatement. The variation in the value will influence the value of the organization as it will affect the assets, profitability and liabilities of the organization. The auditor plays an significant role in the accurate and fair demonstration of the financial report of the company. It is the responsibility of the management and accounting department to represent the value of the organization and reducing the risk of fraud.  

References

Berk, J. and DeMarzo, P. (2007). Corporate finance. Boston: Pearson Addison Wesley.

Elliott, B. and Elliott, J. (2008). Financial accounting and reporting. Harlow: Financial Times Prentice Hall.

Epstein, M. and Lee, J. (2011). Advances in management accounting. Bingley, UK: Emerald.

Fifield, S. and Power, D. (2011). Managerial finance. [Bradford, UK]: Emerald.

Gough, L. (2002). Global finance. Oxford, U.K.: Capstone Pub.

Holton, R. (2012). Global finance. Abingdon, Oxon: Routledge.

Kieso, D., Weygandt, J. and Warfield, T. (2011). Intermediate accounting. Hoboken, NJ: John Wiley & Sons.

Kimmel, P., Weygandt, J. and Kieso, D. (2007). Financial accounting. Hoboken, NJ: John Wiley.

Sharma, N. (2010). Business finance. Jaipur, India: ABD Publishers.

Spiceland, J., Sepe, J. and Nelson, M. (2011). Intermediate accounting. New York: McGraw-Hill Irwin.

Stittle, J. and Wearing, B. (2008). Financial accounting. Los Angeles: SAGE Publications.

Turtledove, H. (2007). Settling accounts. New York: Del Rey/Ballantine Books.

Warren, C., Reeve, J. and Fess, P. (2005). Financial & managerial accounting. Mason, Ohio: Thomson/South-Western.

Wolf, M. (2008). Fixing global finance. Baltimore, Md.: Johns Hopkins University Press.

www.bwired.com.au, b. (2016). Pacific Star Network - Home. [online] Pacificstarnetwork.com.au. 

Zopounidis, C. (2008). Managerial finance. [Bradford, England]: Emerald.