Introduction and Project Requirements
1. This assignment is to be submitted in accordance with the assessment policy, as stated in the Subject Outline and in the Student Handbook.
2. It is the responsibility of the student, who is submitting the work, to ensure that the work is in fact her/his own work. Incorporating another person’s work or ideas into one’s own work without appropriate acknowledgement is an academic offence.
3. Students can submit all assignments for plagiarism checking (self-check) on Blackboard before final submission in the subject. For further details, please refer to the Subject Outline and Student Handbook.
4. Maximum marks available: 20 marks. (Weighting = 20%)
5. Due date of submission: Week 10
6. Assignment word length = 3,000 words
7. Please use the “Spelling & Grammar” and “Word Count” functions and include the actual no. of words on the front page of the report.
8. Important Note: Please submit the Assignment through SafeAssign 2 |
1. You should at least have the following details:
a. An Assignment Cover Page clearly stating all of your members names and student numbers
b. Brief Introduction or Overview of what the report is about.
c. Main Body of the report with sections to answer the above sections and with appropriate section headings. Provide your responses in a table format.
d. Conclusion
e. List of References.
2. Ensure all diagrams and tables are clearly labelled and explained. .
3. Ensure all materials used are correctly referenced.
4. Use page numbers at the bottom of each page of the assignment.
5. Use the correct in-text referencing, appropriate expression, correct grammar, spelling and punctuation, 10-12pt font, appropriate word length and normal margins. Plagiarism will be severely penalised.
Learning Outcomes 9.1 - Identify and distinguish between tests of controls, substantive tests of transactions and substantive tests of balances.
9.2 -Identify and understand when the auditor will undertake substantive audit procedures in response to specific assessed risks of material misstatement.
9.3 - Understand how assertions relate to account balances
9.4 - Understand how to select the most efficient and effective combination of audit procedures that allows them to achieve the audit objective
9.5 – active participation in an “audit team context” with professional group discussions
9.6 - Co-operation with fellow students to produce a joint deliverable on time and to a high standard. 3 |
Assignment Theme: Developing an Audit Program for a selected listed Company The objective of this group assignment is to provide you with an opportunity to design an audit program for a real world company and focus on the “Substantive tests of balances”, which involves substantiating the ending balance of an account(s), which is comprised of multiple transactions, as at a certain year-end date.
Introduction and Project Requirements
1. Students are required to form groups of three students and inform their session lecturer of their group members by completing the “HA3032 T1 2018 Group Form Details”.
2. If you have difficulties forming such groups, please contact your lecturer asap.
Detail Project Tasks: Developing an Audit Program for a selected listed Company
3. Each group of students will select, or have selected for them, a unique ASX listed company to use for progressive analysis in this group assignment.
4. Final approval of the company/client - a company listed on the ASX and which has not already been selected by another group - is required by your lecturer.
5. Prepare a detailed audit program Report [Minimum of 3000 words] for the client/company in a group of 3 members.
6. Use publicly available online resources for research purposes. 4 |
Detail Project Tasks: Developing an Audit Program for a selected listed Company
1. Select a listed company from the current ASX List provided. This must be approved by the Lecturer.
2. Understand the nature of the entity and its industry, including the following items: a. Business operations b. Investments and investment activities c. Financing and financing activities d. Financial reporting practices
3. Perform analytical procedures of the Statement of Financial Position and of Financial Performance over the last three years using appropriate ratios and metrics. Select four key ratios and provide a brief explanation in the report. This can be presented in a table format.
4. Discuss with your group members which account balances are considered “material”. Explain how you calculated materiality for planning purposes and provide appropriate justification for your decision-making. (Note - Use a table format to structure your answers to questions 5, 6 and 7.)
5. Select up to ten different material account balances, at least five assets and five liabilities.
6. For each material account balance selected, list the relevant financial report assertions and explain why the selected assertions are applicable to each account.
7. Design a comprehensive set of audit worksteps for each material account balance, which addresses the selected assertions and which will result in sufficient and appropriate audit evidence being collected for your selected client company. (Assume that a predominantly substantive approach is being adopted).
8. Refer to the following websites for further information and research processes:
HA3032 – AUDITING - T1 2018 Group Assignment Form Details Please complete this form as soon as possible and provide one copy only to your lecturer. You will select or be assigned a unique ASX listed company to review for this group assignment. It cannot be a company which has already been selected by another group. Group No._____ (Note - this will be assigned to you by the Lecturer) Lecturer Name___________________________ (T1 2018) Session
No.________ Campus Location_________________________ Date______________ Student Name Student No. 1. __________________________ ______________________________ Student Name Student No. 2. __________________________ ______________________________ Student Name Student No. 3. __________________________ ______________________________ Company Selected_________________________________________________________ Approved by Unit Co-
ordinator_______________________ Date______________ Note – All students in the group, as listed above, are required to be active participants and all members agree to co-operate in the interests of each other’s learning and educational development.
Each student has a responsibility to contribute equally to the completion of the group assignment and submit one assignment only by the due date. If your group encounters major problems and issues, which may prevent or delay completion of this assignment by the due date, student(s) need to inform their lecturer immediately. All students in the group are required to sign-off and date this form as acknowledgement of the above statement. Signed____________________________ Date__________ Signed____________________________ Date__________ Signed____________________________ Date__________
Introduction and Project Requirements
Auditing is an independent examination of financial information of an entity whether profit making or not and irrespective of its size that is small, medium or big or its legal form whether it is a company(whether listed or unlisted), partnership or any other body corporate and when such examination is conducted with a view to an express an opinion thereon on the financial statements of the company. This report will describe how the audit program in practicality is made considering all the important criteria for audit report and taking on the bifurcated responsibility of management in construction of accounts and auditor’s responsibility to express a qualified or an unqualified opinion. It will also help in framing an audit programme which will describe the steps in audit of material account balanced and selected assertions and providing sufficient and appropriate audit evidence which shall further in turn lead to expressing an opinion thereon.
TEST OF CONTROLS,SUBSTANTIVE TESTS OF TRANSACTIONS AND SUBSTANTIVE TEST OF BALANCES
Test of controls
Test of controls are that compliance procedures to verify the designing, operation, effectiveness and continuity of internal control system in the company. Auditor performs the audit procedure with respect to following assertions:
- Existence : Whether there are actually internal controls existing in the company or not.
- Operating effectiveness: It is done to check if the internal controls exist in the company whether they are operating effectively or not.
- Consistency: It is also to be checked whether or not the existing internal controls are operated through out the period.
Substantive procedure
Substantive procedure are performed to check completeness, accuracy and validity of transaction and balances.
Differentiating Substantive test of transactions and substantive test of balance
Substantive test of transactions |
Substantive test of balances |
These tests are done for the measurement purpose that is whether the transactions are recorded in proper period and at proper amount. |
Whether the item is disclosed and classified as per relevant accounting policies and relevant statutory laws and requirement. Test of balances are done to check that there is no assets and liabilities left to be recorded. It also verifies that event actually took place during the relevant period. |
Identifying and assessing the auditors need to perform substantive audit procedure
The auditor shall identify and assess the risk of material misstatement at financial level and assertion level for class of transactions.
The auditor shall identify, evaluate and assess identified risk and perform substantive audit procedure in following cases:
- If there is a risk of fraud.
- Considering whether the transaction is of complex nature.
- Whether there is transaction which gives rise to related party transaction.
- The materiality of transactions or the subject matter.
- When there is risk of significant unusual transaction.
Cases in which the substantive procedures only are not sufficient
The risks which are inaccurate and lead to high risk to significant account balances and where there is high automation involved and no or minimal manual intervention. In such cases substantive procedure alone are not sufficient.
Understanding relation of assertions with account balances
Relationship of assertion with respect to account balances:
- Valuation: In this it shows whether the asset or liability is recorded at an appropriate value.
- Existence: Whether the asset or liability exists at a given date.
- Rights and duties of auditor: Whether the assets is a right of entity and liability is a duty of the entity.
FRAMING AN AUDIT PROGRAMME
Objective of audit |
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PRIMARY OBJECTIVE: Audit is conducted to express an opinion on financial statement that is the primary objective is reporting. Reporting on whether the financial statement provides true and fair view. |
SECONDARY OBJECTIVE: The secondary objective is to detect the misstatement in financial statement and not to frame such an opinion if the auditor is unable to confirm or refute the risk of fraud. |
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NATURE OF BUSINESS ENTITY: § Business operations: Alderan resources ltd is company that is involved in natural resources. The company is popularly known in natural resources industry for providing metal exploration and production services. § Investments and Investments activities: Alderan resources ltd is investing and expanding aggressively and decided to begin drilling at Accrington and Perseverance which is company’s current high drilling program. § Financing and financing activities: Recently the company has raised $3 million through placement of 5 million shares in which maximum are solid and reliable shareholders for the investment purpose mentioned in above point. § Financial reporting practices: The Company follow the practice of generating quarterly cash flow statement which shows cash generated from operating activity, investing activity and financing activity. So for the quarter ending 31st march 2018 net cash and cash equivalent was $A6, 43,000 PERFORMING ANALYTICAL REVIEW PROCEDURE As per ASA 520 analytical review procedure means evaluation of financial information through analysis of relationship of both financial and non-financial data. It includes comparing: a) Information with prior period b) Future results such as budgets and forecast c) Analyzing industry information for the sake of comparing results. d) Analyzing financial information using appropriate ratios and key areas which may be affected due to risk of material misstatement. This may contain either simple comparison policies or complex analysis that advanced automated or statistical techniques. Performing substantive procedure shall involve: 1) Considering suitability of substantive analytical procedure that is determining suitability of such procedures for a particular item. 2) These procedures are usually used for those events or transactions which are tend to be predictable that is which may regularly occur at regular intervals. It can be used to estimate or compare ratios such as gross profit ratio and other profit related ratios. 3) Reliability of data also plays an important role in performing analytical procedure for example information obtained from external source shall be more reliable than information obtained from internal source as it may be modified or filtered by the management or internal personnel’s. 4) Such procedures are also influenced by measuring comparability of information available that is whether the information available is comparable or not. 5) The information available for performing such procedures shall be relevant. For example profit ratios for nonprofit organizations. 6) It involves developing expectation for recorded values and such expectations should be accurate and precise so that many misstatements can be easily accessed and identified Key ratios which can help in analyzing financial performance and financial position of last 3 years: 1. Return on assets=Net income or loss/Total assets*100 2. Return on equity= Net income or loss/shareholders equity 3. Current ration=current assets/current liabilities 4. Cash ratio=cash +liquid securities/current liabilities Where invested capital=total equity + long term debt involved to finance the company
Explanation of selected four ratios A. Return on assets is ratio that shows the percentage of income earned on total assets employed. It is a very effective ratio which let us know whether the assets employed are facilitating the company in generating revenue or not. In case of Alderan Resources pvt ltd the ROA is (17.19%) which is due to highly incurred losses which are due to increase in expenses such as administration expenses, depreciation expenses and impairment of exploration and evaluation expenditure which may be due to investment in heavy drilling project but ROA has improved as compared to previous year which was (24.75%) that is 2016. B. Return on equity can be said to as net income earned or attributable to shareholders directly. It helps the shareholders whether the money invested in the company are providing them regular return or not but in this case the ROE is (.17) which means that there are no profits and in turn means that zero dividend payout ratio. C. Current ratio is liquid ratio which shows that current asset will be sufficient to pay off the current liabilities. Most appropriate current ratio is 2:1 but Alderan resources ltd has 32.85 which is more than satisfying for a loss incurring company and which is mostly due to humongous cash and cash equivalent. D. Cash Ratio is the ratio that identifies whether the current cash and cash equivalent is able to repay short term liabilities. As discussed above the cash available is more than sufficient to repay short term debt and long term debt to some extent. If compared with previous year(2016) the cash and cash equivalent has increased and short term liabilities have decreased concluding high cash ratio as compared to previous year. Following are the procedures to be performed: INSPECTION: This step incorporates examining of records, documents and also the tangible assets. Analytical procedure consist of obtaining documentary evidence originating from third party and also which are remained with third party which is usually called the External evidence which is far more reliable than internal evidence. It also contains documentary evidence from the entity and also contained with entity which is usually known as internal evidence. Inspection also includes documentary evidence which originates from third party and which can be founded with entity and vice versa. Observation: Next step in performing analytical procedures to analyze the financial performance and financial statement is observing the process and workings performed by others. Example being overseeing the counting of stock done by management or the stock department head. Inquiry/Confirmation : It consist of enquiring or obtaining accurate and appropriate information from a knowledgeable advisor who may provide appropriate advice and on the basis of such response further actions may be taken. For example applying ASA 505 external confirmation and asking for confirmation from debtors for balance statement or obtaining copies of balance in the books of debtor/suppliers. Calculation/workings: This step consists of verifying mathematical or statistical accuracy of accounts and calculation solely done by employees or professional in a company. Reviewing analysis : This step of analytical procedure involves reviewing the significant trends, ratios and comparing such trends and ratios and performing further procedures for any unusual event or transaction occurred during the review process. Re-Performing the work done: Last step of this procedure is redo the work which is performed by the management and the company’s personnel’s so that the auditor shall get the idea of how the work is performed in the company and if there is any fraud or any misstatement is to be detected or need to be assessed or communicated to the top management. Concept of materiality of account balances as per ASA 320 Materiality: Material account balances are those which may affect the judgment of users of financial statements. For e.g. for equity shareholders net profit attributable to equity shareholders is of utmost importance as their dividend payment is dependent on such profits. Usually percentage is used as benchmark for some material balances. For e.g. any expense exceeding 2% of total revenue shall be disclosed separately rather than shown as some additional information. Determination of account balances which are material for planning purposes As per ASA 320 Misstatement can be found in components of financial report or statement such as assets , liabilities, equity , revenue or expenses. Also it states that whether there are any items whether there are any items or account balances which require attention of users of financial statement(such as sudden rise in profits and consistent negative losses. So if statement of financial statements is considered there are many expenses which can be considered material for planning purpose which are administration expenses, employee benefit expense and also share based payments. These components are considered material because there is quite a high increase in such expenses if compared with previous year that is the year ending 30th June 2016. Most important of them all is share based payment which is maximum of all and was not at all opted by employees during the previous year. Here it is assessed that due to such consistent losses the users of financial statement shall put their attention on such negative losses and expenses which are giving rise to such consistent losses. Capital structure also plays an important role in determining the materiality of account balances in planning, in other words whether the company is financed by long term debt or shareholders equity. If the company is financed by long term debt it may give rise to uncertainty of repayment which may lead to company going into bankruptcy. But the Alderan Resources ltd is solely financed with shareholders equity which includes mainly the shares issued through seed capital raising that is $10,50,000 in which the money is raised from friends and family which may give rise to related party transaction in future. |
ASSETS |
ASSERTIONS |
EXPLAINATIONS |
CASH AND CASH EQUIVALENT |
EXISTENCE ACCURACY CONTINUITY |
Ø As there is increase in cash and cash equivalent as compared to previous year so it is to be checked whether such amount of cash actually exist or not Ø It is also to be checked whether the cash balance are reconciled that is the recording of cash is accurate. Ø Also it is to be verified whether the continuous internal controls are made for cash as there is maximum misappropriation in cash. |
TRADE RECEIVABLES |
OCCURANCE RIGHTS VALUATION |
Ø It is to be checked in such case whether the transaction or event even took place or not. For e.g. it can be done by directly confirming from the debtors. Ø It is the right of the entity to claim the amount from debtor as asset can be referred to as right of the entity. Ø Valuation of trade receivables are also to be verified whether valued at proper amount. |
PLANT AND EQUIPMENT |
EXISTENCE VALUATION |
Ø Existence of plant and equipment should be checked by verifying title deeds, transfer deeds and agreement with lessor in case of lease. Ø It is to be ensured that the plant and equipment are properly valued that after proper depreciation and amortization. |
EXPLORATION AND EVALUATION EXPENDITURE |
OCCURANCE COMPLETENESS DISCLOSURE |
Ø It is to be checked in case of such expenditure whether such expenditure took place and for what purpose it took place. Ø Also the completeness of the expenditure is to be checked whether all the expenditure are complete or not. Ø It is also to be examined whether the such expenditure has been properly presented and disclosed as per proper standards and requirements. |
EQUITY |
ASSERTIONS |
EXPLAINATIONS |
TRADE PAYABLES |
MEASUREMENT OBLIGATION |
Ø In trade payables it is very important that the payables are recorded in proper period and at proper amount. Ø It is to be ensured that the payables are liability of an entity that is they are an obligation to be paid at an given date. |
LOAN PAYABLES |
EXISTENCE VALUATION OBLIGATION |
Ø It is to be examined whether such long term loans exist during the year or not. Ø Valuation of such loan payable should be at proper amount as it may influence the decision of users of financial statement. Ø It is to be made sure that company has acknowledged their obligation to be paid to other party from which the loans has been raised. |
AUDIT WORKSTEPS ADDRESSING SELECTED ASSERTIONS FOR MATERIAL ACCOUNT BALANCES
It is the responsibility of auditor to collect sufficient and appropriate evidence and express an opinion thereon and expressing such views to the directors or top management and provide true and fair view of financial reports.
ASSETS |
ASSERTIONS |
AUDIT PROCEDURES |
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CASH AND CASH EQUIVALENT |
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TRADE RECEIVABLES |
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PLANT AND EQUIPMENT |
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EXPLORATION AND EVALUATION EXPENDITURE |
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EQUITY |
ASSERTIONS |
AUDIT PROCEDURS |
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TRADE PAYABLES |
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LOAN PAYABLES |
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The above report is constructed in accordance with the ASA specified by Australian Auditing and Assurance Board s. Such Standards require complying with ethical and statutory requirements for plan and performing the audit to obtain sufficient and appropriate audit evidence about whether the account balances are free from material misstatement.
Such audit programme is made after taking into account various documentary evidences and previous year’s critical information.
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