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Identify  and  distinguish  between  tests  of  controls,  substantive  tests  of  transactions  and substantive tests of balances.

Identify and understand when the auditor will undertake substantive audit procedures in response to specific assessed risks of material misstatement.

Understand how assertions relate to account balances

Understand how to select the most efficient and effective combination of audit procedures that allows them to achieve the audit objective

Active participation in an “audit team context” with professional group discussions

Co-operation with fellow students to produce a joint deliverable on time and to a high standard.

Financial Analysis

The substantive tests are the balances that are used to decrease the threats of the audit risks. The internal control system helps to determine material consideration of account balances. It is considered that Arafira Resources Limited has been taken into consideration to evaluate whether company has been facing high loss in its business.

Arafira Resources Limited is the mineral extraction company which has been running its business in Australia. This business has been planned to implement the rarest of the rare minerals of earth. The main headquartered of company is in Perth, Western Australia. This company is listed in the Australian Stock exchange (ARAFURA Resources Limited, 2017).

It is evaluated that the auditors of the company are more worried about the over value statement and less value in the books of statement. There are several test such as substantive test, assertive test and audit program have been used to evaluate the business business transaction of the company. The test balance is used to evaluate the balance of accounts maintained in the business transactions.  

With the business transactions of company is accompanied with the extraction of the rarest of the rare minerals present on this earth. This company is the permanent supplier of Neodymium and Praseodymium from the Noland which is the biggest project of company.

The busienss project of Company is situated in the northwest territory of Australia.

The mineral tenure project is secured by the three major extraction licenses which are applied on four mineral leases (ARAFURA Resources Limited, 2017).

In 2015, company had invested in the mineral production around $110,010. The payments for extraction and evaluation amounted to $

The payment for the extraction of mineral has being AUD $ 6,189,149 (ARAFURA Resources Limited, 2017).

Company has invested $2,263,935 in its research and development department which increase the long term benefit program of organization.

 The net cash outflow from the investing activities of Arafura Resources Limited, $4,035,224 (ARAFURA Resources Limited, 2015).

In 2016, Arafura Resources Limited had invested capital of $523 in property, plant and machinery. The current extraction of Arafura Resources Limited is to $4,072,639.

 The expenses and investment of Arafura Resources Limited is $51,229 which eventually increases the cash outflow of $1,608,469 (ARAFURA Resources Limited, 2016).

Arafura Resources Limited invested $55396 in 2017 in plants and machineries and deployed more funds in its assets amounting to $3,364,107.

The current investment of Arafura Resources Limited in 2017 is $ 182500 as provision for lease incentive in 2015 and $ 421,693 as lease investment (ARAFURA Resources Limited, 2017).

Ratio Analysis

In 2017, Company has increased its investment in research and development department amounting to $6,764,740. On the other hand, the transaction cost is around $ $309,099 as transaction costs of the shares

The total equity share of Arafura Resources Limited is $130,385,162 in 2015. The company has increased its equity funding by $ 3.6 Million by using the investment of the institutional investors (ARAFURA Resources Limited, 2017).

Company has complied with the AASB 101 for the presentation of the financial statement. It states that the company must ensure that its assets are accounted at their recoverable amounts by using the assertion test and complied with the IAS 136. It implies that the company has invested more capital in its current assets which will block high cost of capital resulting in high cost of production. The company should deploy its funds from the current assets to pay its current liabilities Arafura Resources Limited should increase the overall turnover and transparency of its business if it wants to win over the market as compared to other rivals by establishing harmonization in its domestic and international reporting frameworks.  Furthermore, financial assertions of the various material account balances shall be executed. Lastly, the various steps of audit for each material account of the company shall be designed. The accounts of company are audited by BDO audit (WA) Private Limited (ARAFURA Resources Limited, 2017).



Liquidity ratio

The liquidity ratio of company reflects that company has maintained effective cash in its business. The current ratio of company was 11.47 in 2015 which has increased to 12.70 in 2016.  The quick ratio of company in 2015 is 12.70 which are already way too high and company has also increased this ratio to 12.81 points in 2017.

Solvency ratio

The financial leverage of the company is same in all the years viz. 2015, 2016 and 2017 i.e. 1.01 which is more than 0.5 which is an ideal figure. The company has financed more assets through its debt which are to be repaid back. Larger debt loads makes the company vulnerable during the economic downturn. In case the company is not able to make consistent interest payments, then the investors are likely to lose confidence in it. As a result, the share prices can go down

Profitability ratio

The profitability ratio shows company’s ability to earn profit on the investment. Even after new contracts have been entered, the ratios have fallen; the reason may certainly be the downfall in the prices due to high competition and the severe downfall in the mining industry. Even when the gold and coal industries have seen a rise in the recent year, but the iron industry remains at crash. ARAFURA Resources Limited stands at the risk to lose market share in the above discussed industries due to heavy competition or could lose the edge to bargain for high lease income from the new potential clients (Argenti, 2016).

Efficiency ratio

Anything that amounts to outflow or inflow of cash is recorded. Income tax paid is an item of cash flow statement and only represents the amount of cash paid to the income tax authorities for tax calls, be it for current, previous or future periods. While, the current tax expense relates to the tax expense for current year itself (Arens, Elder, and Mark, 2012).

The account balance material consideration are done to make the presentation accrues to the share of total comprehensive income formulated by the continuing operations

The internal control system helps to determine material consideration of account balances. It refers to the technique that is used by the organizations to ensure that the risk flying over the entity can be mitigated. There are various accounts are considered as material which are as follows


Lease undertaken

Hire purchase


Investment in mining business


Lease payment


Bank loan

The consideration of accounts as material account is determined on the basis of the flow of cash as per requirement and the risk for the same (Argenti, 2016).

Investment in the research and development department


Current assets

Current Assets


Lease undertaken

Hire purchase


Investment in mining business

Current libiliteis


Lease payment


Bank loan

Credit charges on the Assets

To ascertain the risk attached with the significant accounts related to any client, the auditor is required to check up the various assertions by the management pertaining to the liabilities, assets and equity balances on the basis of existence, fairness, completeness, obligations and valuation, and concerning to the transactions on the basis of the accuracy & occurrence, classification and cut-off. These assumptions are the representations for the management which they believe to be fair and in good faith. They streamline the way of audit risk (Boynton, and Johnson, 2016).






Plant and equipment

The demand for already owned machines has rapidly decreased and the purchase of new computer controlled equipment has been done due to the changes in market scenario and customer’s demand (Dow, et al.2013). 

Existence: It’s concerned to the portrayal given by the management related to the physical availability of already existed assets and the assets that are purchased.   

There is a chance that no actual purchase being done and fake purchase documents has been presented to abscond cash.                   

Completeness: There is also a chance that all the equipment required to be disclosing in the balance sheet aren’t done in real.

To avoid the risk and chance of fraud related to the actual existence and disclosure completeness of assets, a checklist should be made of the assets which are shown in the balance sheet and physical check or verification should be undertaken.

The valuation experts in the concerned field can be included in the valuation process to get the correct valuations. They may help to ascertain the correctness of valuation in ARAFURA Resources Limited’s context (Dow, et al…2013).

Investment in mines

It leads to the result, that many used and huge mining machines are lying idle and motionless in ARAFURA Resources Limited’s yard.

Valuation: Although it may be possible that the management have represent the correctly valued assets and liabilities but there may be chances that the improper valuation has been adopted and expressions have been done for the window dressing of the figures of balance sheet.

Any Discrepancy in the existence or disclosure of the existence of the assets is there, then it shall be highlighted automatically by a cross verification of the list with the physical equipment property.

Machine Finance Liabilities

The liability which becomes obligatory for the management for the purchase of the new machinery is known as machine finance liability.

As per the evaluation, the obsolescence of the old machinery leads to the purchase of new computer controlled equipment, which results into increase in the borrowings. Conclusively the debt has increased, which provides progress to the debt equity ratio that is not observed.

Completeness: There a risk may be arises that the liability on the management to purchase the new machinery has not been mentioned in the financial statement as a liability.

To avoid the risk, the documents related to the purchase of both old and new machinery are required to be obtained.

The machinery which is backed with finance must have a check regarding the debt. The amount repaid till the date should be deducted from the debt amount. It will show the exact figure of machine liability.

Accounts Receivable

From the above discussion, it is evident that ARAFURA Resource Limited was under an agreement to provide certain machinery on lease at a fixed price, which must have affect positively the figures of the receivables. It means the amount of current assets has increased. But for the same a cross verification shows a fall, which is adverse to the situation required.

Completeness: In this situation the most potential risk is that the assets purchased by the creation of new accounts receivables have not been admit table in the balance sheet.

By assessing the agreement between ARAFURA Resource Limited and its debtors, the external confirmation form the debtors related to their account balances can be solicit.

Lease Income

The account of lease income is most significant account for the business of ARAFURA Resources Limited, so it is deemed to have suffered from both positive and negative impacts. At one point the income form lease must have enhanced due to the entitlement of new lease contract, whereas at the same point, The company is chasing high competition and is under the stress (Karapetrovic, and Willborn, 2010).

Completeness: There is a chance that the entire incomes from lease not being admitted in the balance sheet.

Accuracy: There may be a risk of recording of lease income on unfair and non-accurate value (Graham, Bedard, and Dutta, 2018).

The lease agreements undertaken between the debtors and company should be go through a proper review. The scrutiny regarding the lease income, years of lease and time of realisation should be made. External confirmation and inquiry can also be used as per an audit tool, if it’s required (Elder, Beasley, and Arens, 2011).

Material Consideration of Accounts Balances

The prior given table has all the audit work steps for several material account balance which will be used by the ARAFURA Resources Limited for the reduction of risk (Kunz, 2017).




For physical safety of the machinery, the required measures such as CCTV cameras should be used. It provides guarding to assets and also monitors its activities.

By this step, all the financial entries of assets would be coincided with the actual presence of it. The existence and assertion made by the management shall be re-verified at this step (Lourenço, and Branco, 2015).

The evaluation of the leased assets which is in the client’s place should be done by physical inspection and the confirmation about the forwarding of machine on lease should be sought from the company’s client.

Authorisation of transactions and general IT control

In ARFURA Resources Limited, if any task is allocated to employees then the employees themselves have make an entry into their working hours and that is accredited later by a clerk. There is a chance of manipulation of entry between the time laps (Louwers, et al. ., 2008).

Surprise or sudden check of data entry system should be held to ensure that only employees can access their hour entry part and no one can manipulate it after once they entered. There should be an arrangement of proper id and password for every single employee.

Isolation of duties: It is much required as the same manager who provides approval for pay also makes payments form his bank account.

To avoid the chances of cash absconding by manipulation and payroll, the approver and payer should not be the same.

Inspection and performance of all the accounts and payroll should be done respectively.

The data regarding to the payroll such as the names of employees, pay off and their working hours should be verified by matching them with the employee accounts. To take the confirmation regarding to the working hours of employees, the respective managers should be asked.

Entity machines an plants

The investment of major nature which consist higher finance in the plant and machinery of ARAFURA Resources Limited needs to be examining properly.

Evaluation of risk process system to mitigate the concerned risk and management work program should be held properly.

According to the historic experiences, the internal control system used to be very firm and creditable. The ARAFURA Resources Limited has made several important changes to its payroll system for the recent audit, which is not fall under the way to satisfaction of auditors. Some vagueness is there as a control over the payroll contracts. The high financial leverage and less profitability are the weak points of the company. The company will face huge losses if it fails to manage these both factors. Further, ARAFURA Resources Limited has spent huge amount in the purchase of plants and machinery, As a result of which it has blocked high amount. When we consider the concept of net present value then the overall capital of the company will increase and it may leads to devastation of the business in near future if the company does not run the business with high profits (Rezaee et al., 2018).


The analysis of the details of the ARAFURA Resources Limited says that due to the adverse profitability and lethargic condition of market, company has reduced the value of its overall plant and machinery. According to the above discussion the ARAFURA Resources Limited stands at a point of risk to lose its share in the market due to high competition. Also it loses the bargaining capacity for lease income from the new possible clients. If the auditors and accountants do not control the work program for better business functioning, then it may be possible that it results into a collapse of ARAFURA Resources Limited.


ARAFURA Resources Limited, 2017, The Nolans Project [online] Available from: [Accessed 21st May, 2018].

Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.

Argenti, J. 2016. Corporate planning and corporate collapse. Long Range Planning, 9(6), 12-17.

Boynton, W.C. and Johnson, R.N., 2016. Modern auditing: Assurance services and the integrity of financial reporting. Wiley.

Dow, Kevin E., Weidenmier, Marcia, and Shea, Vincent J. 2013. Understanding the links between audit risks and audit steps: The case of procurement cards.(Report). Issues in Accounting Education, 28(4), 913-921.

Elder, R.J., Beasley, M.S. and Arens, A.A., 2011. Auditing and Assurance services. Pearson education.

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

Karapetrovic, S. and Willborn, W., 2010. Quality assurance and effectiveness of audit systems. International Journal of Quality & Reliability Management, 17(6), pp.679-703.

Kunz, R., 2017. Accounting practitioners' perspectives of professional skills and audit capabilities of first year trainee accountants (Doctoral dissertation, University of Pretoria).

Lourenço, I.M.E.C. and Branco, M.E.M.D.A.D.C., (2015) Main Consequences of IFRS Adoption: Analysis of Existing Literature and Suggestions for Further Research [online] Available from:,    [Accessed 21st May, 2018].

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2008. Auditing & assurance service., 17(6), pp.679-703.

Rezaee, Z., Sharbatoghlie, A., Elam, R. and McMickle, P.L., 2018. Continuous auditing: Building automated auditing capability. In Continuous Auditing: Theory and Application (pp. 169-190). Emerald Publishing Limited.

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