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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.

Description of ARAFURA Resources Limited

Substantive Tests of balances are used to decrease the threats so that the audit risks can be accomplished. They are implemented to examine the dollar value of transactions. They are tests of audit which are used to justify the closing balance of ledger accounts. They assure the authenticity of the transactions and recognize any substantial misstatements in them, if any.

Arafura Resources Limited is mineral extraction company based in Australia. Its major business transactions comprise of extracting the rarest of the rare minerals of earth. Its headquarters are situated in Perth, Western Australia. It was listed on the Australian Stock Exchange in the year 2003. One of its flagship projects is Nolans Rare Earths Project which is situated in the Northern Territory of Australia.

In the implementation of the audit programs for account balances, the auditors are concerned about the overstatement or understatement of the account balances of the ledger accounts.  In this regard, the tests of controls and substantive tests of transactions are two major processes for collection of evidences. The responsibility of the auditor is to coordinate the audit approach specified in the audit program ensuring that the effective methods of audit processes are implemented.  In the process, the auditor must apply the substantive tests and make use of direct tests of balances.

The business transactions of the company comprise of extraction of the rarest of the rare minerals present on this earth. It will become the permanent supplier of neodymium and praseodymium (NdPr) from Noland which is one of the major projects of the company. It is situated almost 135 Km in the Northern Territory of Australia.

The mineral tenure over the Nolans project is secured by three major extraction licenses and it has also applied for four mineral leases. Once these leases are granted, the company shall initiate the mineral processing extractions and many other infrastructure elements related to the project.

The major asset of the project is the phosphate deposits which are the biggest and most extensively   explored deposits on this earth (ARAFURA Resources Limited, 2017).

In the year 2015, the company had invested in the property, plant and equipment amounting to $110,010. The payments for extraction and evaluation amounted to $6,189,149 and it had received the Research and Development rebate on its capitalized part amounting to $2,263,935. So, the net cash outflow from investing activities in the year 2015 was $4,035,224 (ARAFURA Resources Limited, 2015).

Understand the nature of the entity and its industry

In the year 2016, the company invested $523 in property, plant and machinery and the investments in extraction and evaluation activities amounted to $4,072,639. Moreover, it received $ 2,515,992 as a Research and Development Incentive Rebate on its capitalized portion. The expenses on other investment activities were $51,229. So the net cash outflow from investing activities was $1,608,469 (ARAFURA Resources Limited, 2016).

In the year 2017, the company invested $55396 in property, machinery and equipment and it invested $3,364,107 in its extraction and evaluation activities. It received $ 313,250 from the sale of its tenements and $905,760 from the R&D Incentive rebate. So, the company invested $2,200,493 at the end of the financial year 2017.

The company invested $ 182500 as provision for lease incentive in 2015 and $ 421,693 as lease commitments in the year 2016 whereas it invested $ 629,761 in the year 2017.  

In the year 2017, the company had financed its activities from the proceeds from issue of shares amounting to $6,764,740 whereas it paid $309,099 as transaction costs of the shares .However, there were no financing activities in the years 2015 and 2016 (Demirel, and Ero, 2016).

Its total equity amounted to $130,385,162 in 2015 whereas $98,494,227 was reported as total equity in the year 2016.  While it amounted to $101,564,849 in the year 2017.  The company raised $ 3.6 Million through institutional investors in Australia and abroad in the year 2017.

It had fully paid up shares amounting to $194,128,196 in the year 2015 and 2016 whereas $200,590,837 in the year 2017.

The company prepares and lodges the financial reports in accordance with the Australian Securities and Investment Commission (ASIC). Furthermore, the company is adopting the Australian equivalent of the International Financial Reporting Standards. The company is also complying with the AASB 101 Presentation of Financial Statements which provides for the presentation of the general purpose financial statements in such a way that they can be compared with the financial statements of the previous years as well as with the financial statements of the companies operating in the same industry (Lourenço and Branco, 2015).

The accounting standards adopted by the company must be harmonized by the International Financial Reporting Standards (IFRS). The accounts of the company are audited by BDO Audit (WA) Pty Ltd (Baki, Uthman, and Sanni, 2014).



Liquidity ratio

The liquidity and the financial health of the company can be assessed with the help of Current ratio, Quick ratio, Financial Leverage and the Debt /Equity Ratio.

The current ratio is Current assets /current liabilities of the company. The ideal current ratio should be 1:1. While the current ratio of the company in the year 2015 was 11.47 and it has increased to 12.70 in the year 2016 which was further increased to 12.81 in the year 2017 which is a good indication of the growth of the company. The ratio has increased with 0.11 points which means that it has invested more in its operating activities which will result in the increase in its production activities (Svitlík and Poutník, 2016).

The quick ratio is cash +marketable securities + accounts receivable /current liabilities. The ideal quick ratio should be 1.1. The quick ratio of the company in the year 2015 was 11.47 and it has increased to 12.70 in the year 2016 and 12.81 in the year 2017. (Billah,2015)  .

Solvency ratio

The debt to equity ratio is the proportion of the shareholder’s equity and debt to finance the assets of the company. The ratio is also called as risk, gearing or leverage. It shows that the equity and debt the company has employed to finance the assets of the company and the extent to which shareholder’s equity can repay the debts in case of winding up of the company. It can be calculated as Total Liabilities/Total Shareholder’s equity. The debt to equity ratio of the company is 1.01 in all the three years. The ideal debt to equity ratio should be 2. The company has lower debt to equity ratios which means the company is not taking advantages of the enhanced profits (Bake,  Uthman, and Sanni,2014)  

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

· This ratio shows the risk of poor credit policy followed. Even new contracts have been defined on a set price, yet the credit period given to the debtors has increased. This is adverse about the need because ARAFURA Resources Limited needs cash in hand to pay off the new finances raised (Ooghe, & De Prijcker, 2008).

The account balance material consideration could be done by using the internal control system it refers to the mechanism that is practised by the organisation itself to ensure that the possible risk hovering over the entity can be managed (Perry, 2011). There are several accounts are considered materials which are given as below


Lease undertaken

Hire purchase


Investment in mining business


Lease payment


Bank loan

Business Transactions of the company

These accounts are considered as material on the basis of risk and flow of cash required for the same.

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

In ascertaining the risk concerned with significant accounts related to any client, the auditor is required to verify the various assertions made by the management regarding the assets, liabilities and equity balances on the grounds of existence, completeness, rights & obligations and valuation, and regarding the transactions on grounds of occurrence, completeness, accuracy, cut-off and classification. These assertions are the management’s representation which they believe to be true and in good faith. They pave the ground of audit risk.





Plant and equipment

Its observed that due to changes in market scenario and customer’s demands, the demand for already owned machines has radically declined and new computer-controlled equipment have been purchased.

Existence: it’s related to the representation given by the management regarding the physical availability of assets that are purchased and that already existed. There may stand a chance of forged purchase documents to abscond cash and no actual purchases being made.

Completeness: there may stand a stand a risk that all the equipment required to be disclosed in the balance sheet aren’t done so.

To reduce the risk regarding the actual existence and disclosure completeness of assets, physical verification should be undertaken, and a checklist of assets reflected in the balance sheet should be made.

To ensure the correct valuation, valuation experts in the concerned field can be contacted. They may help in assessing the true valuation in ARAFURA Resources Limited’s context (Dow, et al...2013).

Investment in mines

As a result, many used and huge mining machines are lying shiftless in ARAFURA Resources Limited‘s yard (Graham, Bedard, & Dutta, 2018).

Valuation: the management may although have represented to have correctly valued all the assets and liabilities but, there may be chances of manifestations being done and improper valuations adopted to window dress the balance sheet figures (Askary, Goodwin, and Lanis, 2012).

By a cross check of the list with the physical equipment property, any discrepancy in the existence or disclosure shall be highlighted automatically.

Machine Finance Liabilities

The liabilities obligated to purchase the machinery stands for the machine finance liabilities.

Its observed that due to the obsolete old machinery, new computer-controlled equipment are purchased that are backed by increased borrowings. This clearly means that debt has increased, which should bring an advancement to the debt equity ratio but same has not been observed.

Completeness: there may stand a risk that the obligations undertaken by the management for purchasing new machinery have not been recognised as liability in the financial statements.

To remove the chances of this risk, the purchase documents are required to be obtained regarding both old and new machinery along with the financing arrangement documents. The machinery that are backed with finance must be checked for regarding the debt amount and the total debt repaid till date should be deducted. This will tell the exact figure of machine finance liability.

Accounts Receivable

As from the information gathered, it’s evident that ARAFURA Resources Limited has contracted to give on lease certain machinery at a set price, which must have increased the figure of accounts receivable. In other words, the current assets must have increased. But a close examination of current asset ratio shows a decline in the same which is inverse to what is required.

Completeness: the most probable risk in this situation seems to be that, the asset created because of opening of new account receivables have not been recognised in balance sheet.

External confirmations can be sought from the new debtors regarding their account balances by on looking the agreement of lease contracted with them by ARAFURA Resources Limited.

Lease Income

This account being the most significant regarding ARAFURA Resources Limited’s business is supposed to have suffered both negative and positive implications. On one hand the lease income must have increased due to the entitlement to new contracts of lease, while at the same time ARAFURA Resources Limited is currently under pressure and facing high competition (Khwaja, Awasthi, & Loeprick, (2011).

Completeness: there are chances of all the lease incomes not being recognised.

Accuracy:  there may lie a risk that the lease incomes are not recorded at their true or accurate amount.

Proper scrutiny of the lease agreements undertaken with the debtors should be made in terms with the lease income’s amount, time of realisation and years of lease. If required, inquiry or external confirmation can be used as an audit tool.

The above given tables includes all the audit work steps for each material account balance which will be taken by the ARAFURA Resources Limited for reducing the risk.




Physical safeguard of the entity’s machinery is much required in form of using CCTV cameras that monitor activity and proper guarding of all the assets.

The existence and completion assertion of management shall be rechecked by this step. All the financial entries and actual asset presence would be matched.

Observation of the assets lying in the client’s place should be done by physical verification and confirmation should be sought from ARAFURA Resources Limited’S clients to whom machinery had been forwarded on lease.

Authorisation of transactions and general IT control

In ARAFURA Resources Limited’s system for any task if employees are allocated then the employees themselves enters their working hours and that’s validated by the clerk later. There stands a chance of the entry being manipulated between the time lap. If transactions are authorised at the same time when entered, then chances of data manipulation come down to nil.

Surprise check of the data entry system should be done to ensure if that nobody but only the employee can access his hour entry part and the same cannot be manipulated once entered by the employee. Proper id and password should exist for every employee/

Segregation of duties: much required as the same manager who approves the pay makes the payment from his own bank account (Laities, 2012).

The approver and payer should be different to alleviate the chances of cash absconding in name of manipulated payroll (Sharma, & Mahajan, (2012).

Performance of the payroll and inspection of all the accounts should be done. Payroll data should be matched with employee accounts with regards to their names, pay off and respective managers should be asked to confirm about the working hours.

Entity machines an plants

High investment in the plants and machines of the ARAFURA Resources Limited needs to be assessed.

Management work program and evaluating the risk process system.

As per past engagements, the internal controls used to be strong and reliable. But for the present audit ARAFURA Resources Limited had made significant changes to its payroll system which is not much in line with auditor’s satisfaction. Certain ambiguities are there in the form of control exercised over the payroll contracts. The weakness of the ARAFURA Resources Limited is related to its high financial leverage and less profitable business. If company fails to manage these both factors then it will have to face high amount of losses. In addition to this, ARAFURA Resources Limited has blocked high amount of capital in buying in plants and machineries. The consideration of the present value factor will increase the overall cost of capital of organization and may result to destruction of the business in near future if company does not have profitable business (Kiviluoto, & Bergius, 2012).

Further down the line, there is no presence of separate bank account for payment processing. The same manager who approves the payroll, uses his bank account for payment. Escaping funds becomes easy this way (John, 2016). These are the process which could be used to lower down the business risk. However, the internal control procedure will also assist ARAFURA Resources Limited to double check its wrong doing and mistakes of the work which may eventually reduce the overall costing of the work process.  The effectives of the audit program is highly depends upon the transparency of the work process which company needs to make for the effective work program (Kangari, Farid, & Elgharib, 2012).


After analysing all the details and case study of the ARAFURA Resources Limited, it could be inferred that company has decreased its overall plants and machineries value due to the sluggish market condition and negative profitability. It is observed that the 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. If the auditors and accountants do not evaluate this work program for the better and effective work functions then it might result to collapse of the ARAFURA Resources Limited in the near future..

Investments and investment activities


ARAFURA Resources Limited (n.d.) The Nolans Project [online] Available from: [Accessed 21st May, 2018].

ARAFURA Resources Limited (2015) 2015 Annual Report [online] Available from: [Accessed 21st May, 2018].

ARAFURA Resources Limited (2016) Annual Report 2016 [online] Available from: [Accessed 21st May, 2018].

Appiagyei, K., Djajadikerta , H. and Xiang, E.(2016) Integrated Reporting and Firm Performance: A Research Framework [online] Available from: [Accessed 21st May, 2018].

Demirel, B. and Ero, I.(2016) Investigation of Integrated Reporting As a New Approach of Corporate Reporting. International Journal of Business and Social Research,6(10),pp. 32-46.

Baki, Z.A., Uthman, A.B. and Sanni, M.(2014) Financial ratios as performance measure: A comparison of IFRS and Nigerian GAAP. Accounting and Management Information Systems,13(1),pp. 82-97.

Billah, N.M.(2015) Liquidity Analysis of Selected Public-Listed Companies in Malaysia. International Economics and Business,1(1),pp. 1-20.

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].

Svitlík, J. and Poutník, L.(2016) Relationship between Liquidity and Profitability: Empirical Study from the Czech Republic. European Financial and Accounting Journal,11(3),pp. 7-24.

ARAFURA Resources Limited (n.d.) Nolans[online] Available from: [Accessed 21st May, 2018]

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

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.

John, A. 2016. Corporate collapse: The Causes and Symptoms.

Kangari, R., Farid, F., and Elgharib, H. M. 2012. Financial performance analysis for construction industry. Journal of Construction Engineering and Management, 118(2), 349-361.

Khwaja, M., Awasthi, R., and Loeprick, J. 2011. Risk-based tax audits approaches and country experiences (Directions in Development). Washington, D.C.: World Bank.

Kiviluoto, K., and Bergius, P. 2012. Exploring corporate bankruptcy with two-level self-organizing map. In Decision Technologies for Computational Finance (pp. 373-380). Springer, Boston, MA.

Laitinen, E. K. and 2012. Prediction of failure of a newly founded firm. Journal of Business Venturing, 7(4), 323-340.

Ooghe, H., & De Prijcker, S. 2008. Failure processes and causes of company bankruptcy: a typology. Management Decision, 46(2), 223-242.

Perry, S. C.2011. The relationship between written business plans and the failure of small businesses in the US. Journal of small business management, 39(3), 201-208.

Askary, S., Goodwin, D., and Lanis, R. 2012. Improvements in Audit Risks Related to Information Technology Frauds. International Journal of Enterprise Information Systems, 8(2), 52-63.

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.

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