Control - Substantive test & Audit distinctions

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.

About Schrole Group Ltd

This report emphasises upon the financial performance, audit and assurance and material account balance of company. In this report, Schrole group ltd software company has been chosen. The real success of a company depends on the number of stakeholders the entity s able to satisfy. Satisfaction of the primary stakeholders, i.e. shareholders comes from the increase in their wealth. They are ready to invest more and potential investors are also attracted only when they are certain regarding the company’s financial standing. The certainty cannot be provided by the company through oral publicity. Solid evidence is required to be given to the users. In the light of this requirement, the audit function comes into the whole scenario. The entity presents its financial position to the users with the help of financial statements. However, the users cannot blindly rely on those financial statements and need some independent body to confirm the truth behind.

To do with this requirement the company does the function of external audit. An independent professional accountant is hired. The responsibility of that independent professional is to do an unbiased checking and appraisal of the internal control and the financials. An opinion is referred to the shareholders as a result of the appraisal (Chintrakarn, Treepongkaruna, Jiraporn, & Tong, 2017). The opinion relates to the fairness of the financial information and related controls. However, to give this opinion certain audit procedures are required to be done on the part of the auditor and the same are discussed in the report below. The discussion shall revolve around audit risk model, materiality, financial risk assertions, analytical procedures, sampling, and etc. The company chosen for preparation of report is Schrole Group Ltd (Schrole Group Ltd, 2018).

Being listed on Australian Stock Exchange, Schrole Group Ltd is a company in the industry of Software & Services. The company is in the business of providing the facility of providing best skilled teachers required with requisite skills to the international schools.

The company makes use of the unique software that it possesses. This helps the schools in recruiting the teachers in the lowest time span with lower costs (Schrole Connect). Further, the company is engaged in provision of customised training and assessment facilities (Schrole ETAS). The function of background screening of the required school administrators is also provided (Schrole Verify). Moreover, the facility of casual staff is also provided (Schrole Cover)

The company being in the software and services industry uses information technology to provide and administer its business. All kinds of solutions for technology and training are being provided. Dual parties are benefitted by the business the company is transacting in. The job seekers get job opportunities and the schools get the staff requirement fulfilled (Schrole Group Ltd, 2018).

Audit Risk Model

This audit risk could be defined as risk that an auditors express an inappropriate opinion on the financial statements.

Audit Risk = Inherent Risk x Control Risk x Detection Risk

Audit risk is associated with the inherent risk, control risk, detention risk faced by auditors in the audit report.

Inherent risk- Schrole Group Ltd has been facing inherent risk of material misstatement in financial statement. It might happen due to the error and mistakes while recording the financial statements.

Control risk- This is the risk which reflects the issues and manipulation in the financial statements. It is the risk which happens due to the material misstatement recorded by the accountant to Schrole Group Ltd.

Detention risk- This risk arise material misstatement in the financial statements which happen due to the fraud and errors, misapplication, fraud, omission, and other issue in the financial statements.

Audit risk model reflects the audit risk associated with the financial statement.

Practical implication for Schrole Group Ltd to identify the risk associated with the prepared financial statement.

In case of Schrole Group Ltd, it could face high inherent risk due to complex legal compliance and there may be chances of misstatement in the prepared financial statements. The control risk in Schrole Group Ltd is too high due to the oversight of the audit committee. The lack of internal audit department in its auditing of the financial statement may also increase its detention risk high. Therefore, the inherent and control risk of the audit program would be 90% and detention risk would be set to 27.8%. The detention risk has been set to 27.8 % with a view to control the audit risk from 10% (Vita Group Limited, 2017).

Audit Risk = Inherent Risk x Control Risk x Detection Risk

0.10 = 0.60 x 0.60 x Detection Risk

0.10 = Detection Risk = 0.278 = 27.8%
0.36 Vita Group Limited, 2017).

The inherent risk and control risk would be high in inherent and control risk assessment.

If the inherent risk and control risk is kept high then it will also exceed the audit risk and detention risk as they all are interlinked to each other.

The analytical procedures are being performed by the auditors as per the ASA 520, Analytical Procedures. As per this ASA the analytical procedures are incorporated by the auditor in the audit plan as the substantive procedures. While, ASA 315 Identifying and Assessing the Risks of Material Misstatements through Understanding the Entity and Its Environment, also specifies the use of analytical procedures but focuses on using them as risk assessment procedures (Noble, & Smith, 2015). The table below is showing the analytical procedures performed on the consolidated group of Schrole Group ltd (Schrole Group Ltd, 2017).

Liquidity ratio

CURRENT RATIO

Current ratio helps the user to assess the ability of an entity to pay the current obligations as and when they fall due for payment. This ratio is used to find out the liquidity for current time span (Heikal, Khaddafi, & Ummah, 2014).

ACTIVITY RATIO

DEBTOR TURNOVER RATIO

This ratio helps in assessing the ability of the company to make collections from its debtors. The collection efficiency is highlighted by this ratio (Barman, & Sengupta, 2017).

PROFITABILITY RATIO

NET MARGIN RATIO

The ratio helps in analysis the percentage of margin earned by the company on the sales made by it. This ratio helps in analyzing the financial performance.

SOLVENCY RATIO

DEBT-EQUITY RATIO

This ratio is an effective measure to understand the leverage position. The ratio of total assets by total debt is taken here.

FORMULA

Current assets

Current liabilities

Net credit sales

Average account receivables

Net income

Total revenues

Total liabilities

Total equity

Analytical Procedures Using Ratios

The above table is showing the relationship that exists between the different financial indicators of the company. The trend analysis shows that the company is declining as far as the net profits are concerned. There is recovery in the current liquidity of the company. But the current ratio is too high as compared to the standard ratio (Schrole Group Ltd, 2017).

Liquidity/Financial Health	2008-06	2009-06	2010-06	2011-06	2012-06	2013-06	2014-06	2015-06	2016-06	2017-06	Latest Qtr
Current Ratio	1.33	0.81	2.5	1.77	3.76	1.11	0.98	0.77	0.68	0.94	0.79
Quick Ratio	1.27	0.75	2.34	1.6	2.33	0.69	0.62	0.47	0.44	0.57	0.65

This is indicating that the company may have idle stock stuck in its stores or is having very slow debtor recovery. The leverage position is very weak too. The profitability ratio is accompanied with the net profit earning capacity of company. The net profit margin capacity of company has gone down and reflected negative outcomes. The financial leverage of company has also shown negative business risk.

Margins % of Sales	2008-06	2009-06	2010-06	2011-06	2012-06	2013-06	2014-06	2015-06	2016-06	2017-06	TTM
Operating Margin	29.92	38.9	32.11	32.39	42.16	35.39	20.85	11.42	25.06	8.05	-0.25
Net Int Inc & Other	0.51	-8.12	0.23	0.96	-0.31	5.65	1.15	-0.17	-3.91	5.67	6.29
EBT Margin	30.43	30.78	32.34	33.35	41.85	41.04	22.01	11.26	21.15	13.71	6.05

The efficiency ratio of company is based on how well company has managed its capital. It is analyzed that company has managed. Company has decreased its efficiency by blocking more funds in its inventory turnover and extending the timing of the inventory turnover. The inventory turnover has increased to 24 times in 2017 which is 8 times higher as compared to last three year data. The debtor turnover ratio has increased to 114 times in 2017 which is 87points higher as compared to last three year data. It shows high amount of capital blockage in its business.

Solvency ratio

The solvency ratio of company is not very good as it is facing high issue due to the high debt funding. Company may face high business sustainability risk and it has been maintaining very high financial leverage since last three years. The debt to equity ratio has increased to 22 points in 2017 which is 12 points higher as compared to last three year data.

Market based ratio

The market based ratio has also decreased to 12% in 2017 which is 20% lower as compared to last three year data. Due to the less profitability, it has decreased its profitability.

Materiality helps the auditor to perform a focused audit. Due to time constraints the auditor is not in a position to do absolute evaluation of all the transactions. At some place, he needs to cut short the transaction number to provide the reasonable level of assurance in the opinion that he provides. This requires quantification of materiality. However, quantifying materiality involves deciding on a balance that can provide a base amount for further calculation. This balance is chosen after assessing the volatility attached. The balance among the revenue, expenses, equity, net asset value, or the net income which is lease volatile gets selected (Lakis, & Masiulevi?ius, 2017).

Looking at the income statement of the company for certain previous years, the most stable balances is operating expenses of value $ 9,638,226. Using the percentage as 1 %, the base amount comes down to $ 96,382. As the company is high on losses, there is a requirement to set materiality even below this level. So the exact materiality level is decided at $ 80,000. The table presented in the next section lays down the material account balances, both for assets and liabilities (Robb, & Robinson, 2014).

ACCOUNT BALANCE	AMOUNT	ASSERTION	AUDIT PROCEDURE	AUDIT EVIDENCE
1. Cash & cash equivalents	$ 3039416	Existence, completeness	1. Asking for confirmation from banks for confirming the bank balance. 2. Preparing a bank reconciliation statement to reconcile the balances. 3. Making internal enquiries from staff members who handle the cash acceptance and cash depositions.	· The confirmation received in written form from banks. · The bank reconciliation statement prepared. · Recording of oral enquiries made from the company executives.
· Existence	The balance of cash stated in the balance sheet is a sum total of physical cash and the deposited cash in bank (Ehiedu, 2014).
· Completeness	All the cash amount that the entity has transacted inwards or already had is mentioned.
2. Trade and other receivables	$ 235723	Completeness, existence	1. The sales registers must be checked to match the balance of the cash and debtors with the sales made in cash and credit. 2. Asking for balance confirmation from debtors selected as per the material balances.	· External confirmation received from debtors. · The debtor ledger copies maintained by the entity as an evidence of pending recoveries. · Extracts of sales book relating to credit sales.
· Existence	The debtors represented in the account balance are still debtors and not bad debts represented as debtors.
· Completeness	The information and amount relating to all the debtors and receivables is being included.
3. Other receivables	$ 231100	Completeness, existence,	1. The details regarding the generation of these receivable must be checked. 2. All the transactions leading to receivable generation other than the debtors must be enquired for. 3. The entity’s policies regarding these kinds of receivables must be checked in line with the applicable accounting standards. 4. The parties mentioned in the other receivables must be asked to give in written the balance they owe to the entity.	· Written confirmations received from the other receivables. · The contracts or agreements under which the receivables are generated.
· Existence	The receivables represented in the account balance are still receivables and not unrecoverable parties represented as receivables.
· Completeness	The information and amount relating to all the other receivables is being included. There is no receivable party that has been missed neither due to human error nor for incepting any fraud.
4.Intangible assets	$ 581133	Valuation, rights & obligations	1. The value determined by the entity must be looked carefully to inspect the valuation method used and the way valuation policies are being deployed. 2. The purchase agreement should be checked in case the entity asserts the intangible assets as being purchased. 3. If any doubts exist regarding the valuation accuracy, experts must be called to take help from (Yahoo finance, 2018).	· Copy of entity’s valuation report. · Copies of purchase agreements · Report of expert, if any called for rechecking valuation.
· Rights & obligations	The entity stands in a position to completely deploy the assets without the permission of any outside party. The assets stands owned.
· Valuation	The policies followed for valuation are accepted as per the applicable regulations and Australian accounting standards. No earning management followed.
5. Property, Plant & equipment	$ 130675	Completeness, Existence, rights & obligations (Owens, 2018).	1. The assets lying physically with the entity, and those ascertained as lying in third party possession must be matched with the list provided by the management of owned tangible assets. 2. The ownership must be checked by using the purchase agreements.	· Third party possession confirmation. · The management asset list cross checked with physically present assets.
· Completeness	All the owned assets are being recorded (Robb, & Robinson, 2014).
· Rights & obligations	Entity is the real owner and there are no restrictions in using the assets for the purpose of business.
· Existence	All the assets mentioned in the asset list are physically present in the premises of the organisation or are lying in the possession of third party, if any.
1. Trade and other payables	$ 281223	Completeness, existence	1. The purchase registers must be cross checked to confirm the balance of the cash paid and creditors with the purchases made in cash and credit. 2. Confirming the balance from creditors selected as per the material balances	· Written confirmation asked for from creditors. · The purchase book extracts as far as they relate to credit purchases.
· Existence	The creditors represented in the account balance are still creditors outstanding.
· Completeness	The information and amount relating to all the creditors and payables is being included.
2. Deferred revenue	$ 623470	Completeness, existence	1. Management written assertion must be obtained that they agree regarding the existence of this account balance. 2. The transactions pertaining to the creation of this account balance must be closely checked.	· Written assertion obtained from the management side confirming the balance. · Any agreements, if relating to the transactions that generate this account balance.
· Existence	The transactions that are indicated by the deferred revenue must exist at the balance sheet date. These balances are not creditors forged as deferred revenue.
· Completeness	All the transactions that must come under this account balance have been entered. No transaction has been missed.
3. Current Financial liabilities	$ 95192	completeness, rights & obligations	1. The statement of financial liabilities must be checked along with simultaneous enquiries. 2. The publications if any issued by the company in relation to the financial liabilities must be checked.	· The written record of enquiries. · Statement of financial liabilities
· Completeness	All the financial liabilities have been included to form the balance.
· Rights & obligations	The entity has an obligation to pay off these financial liabilities. This right cannot be deferred.
4. Current Provisions for employee benefits	$ 80735	Valuation, completeness	1. All the employee details must be checked to ensure whether provision has been made in respect of all the eligible employees. 2. The employee benefit plan must be checked to see whether the valuation is done correctly.	· List of employees · Remuneration policies
· Valuation	The balance of current provisions is valued using the applicable standards and policies. There is no contravention of the applicable standards.
· Completeness	The current provision has reflected the effect of all the provisions that the company is required to make. There is no mistake done on the part of the company.
5. Non-current financial liabilities	$ 129182	rights & obligations, valuation	1. The statement of financial liabilities must be checked along with simultaneous enquiries. 2. The publications if any issued by the company in relation to the financial liabilities must be checked.	· The written record of enquiries. · Statement of financial liabilities
· Valuation	The valuation of financial liabilities is done consistently with the applicable policies.
· Rights & obligations	There is an obligation on entity to pay these financial liabilities as and when they fall due for payment.

A sampling plan never tells on how many transactions to be checked with a certainty. But it does tell what transactions should be checked. The auditor is always stuck in the notions relating to time and efficiency when it comes to a good audit. There is reasonably no time to check all the transactions and of course no affordability to lack efficiency on this account. This fix calls the auditor to do sample checking of the financials to accumulate efficiency.

Sampling helps the auditor in setting the transactions that are must to be checked and to lay an opinion for the whole set of financials based on that sample check. Sampling may be done randomly or statistically. However, keeping materiality in mind, a statistical sample is must effective as it shall incorporate selection of transactions based on materiality. All the transactions that fall in the sphere of materiality along with the transaction that involve high risk potential are to be checked. This accumulates the number of items that are required to be checked for each material account balance (Jones, 2017).

However, the sample plan may be revised by the auditor as the audit progresses and the auditor generates new information that was earlier not available to him. No matter how the audit plans progresses, all the sampling work needs to be done in accordance with the requirements of the ASA 530, Audit Sampling. Proper documentation is also required to be maintained by the auditor regarding the sample chosen and the criteria involved (Delen, Kuzey, & Uyar, 2013).

Conclusion

There are several information which have been assessed to determine the Materiality and financial performance of company. In order to determine the assertion test, the balance among the revenue, expenses, equity, net asset value, or the net income which is lease volatile gets selected which will assist in determining the value on the recorded assets. Audit procedure and assurance program have been followed to determine the key audit risk faced by company. The analytical procedures are being performed by the auditors as per the ASA 520, Analytical Procedures to determine the true and fair view of the assets and liabilities and comply with the audit and assurance program. In order to determine or set materiality the balances are operating expenses of value $ 9,638,226 is evaluated and it is depicted that by using the percentage as 1 %, the base amount comes down to $ 96,382. As the company is high on losses, there is a requirement to set materiality even below this level. So the exact materiality level is decided at $ 80,000 in the reported projects.

References

Barman, A. N., & Sengupta, P. P. (2017). Determinants of profitability in Indian telecom industry using financial ratio analysis. International Journal of Research in Management & Social Science, 5(5), pp.81-90

Chintrakarn, P., Treepongkaruna, S., Jiraporn, P., & Tong, S. (2017). Does board independence substitute for external audit quality? Evidence from an exogenous regulatory shock. 8(2), pp.11-20

Delen, D., Kuzey, C. & Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Ehiedu, V.C., (2014). The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.

Jones, P. (2017). Statistical sampling and risk analysis in auditing 4^th ed, USA. Routledge.

Lakis, V., & Masiulevi?ius, A. (2017). ACCEPTABLE AUDIT MATERIALITY FOR USERS OF FINANCIAL STATEMENTS. Journal of Management, 2(31).

Mwangi, M. & Murigu, J.W., 2015. The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, 4(5), pp.21-30

Noble, H., & Smith, J. (2015). Issues of validity and reliability in qualitative research. Evidence-Based Nursing, 2^nd ed., Australia, ebnurs.

Owens, D. (2018). Simply Wall ST. Retrieved from https://simplywall.st/stocks/au/banks/asx-ben/bendigo-and-adelaide-bank-shares/news/what-makes-bendigo-and-adelaide-bank-limited-asxben-a-great-dividend-stock/

Robb, A.M. & Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.

Schrole Group Ltd, 2016, Annual report, retrieved, from https://www.investsmart.com.au/shares/asx-scl/schrole-group-ltd

Schrole Group Ltd, 2017, Annual report, retrieved from https://www.investsmart.com.au/shares/asx-scl/schrole-group-ltd

Schrole Group Ltd, 2018, Annual report, retrieved, from https://www.investsmart.com.au/shares/asx-scl/schrole-group-ltd

Susilowati, Y. (2017). Pengaruh debt to equity ratio, current ratio, Dan total asset turnover Terhadap Roa (Studi Empiris Pada Perusahaan lq 45 Non Bank Yang Terdaftar Di Bursa Efek Indonesia). Students' Journal of Accounting and Banking, 6(1, pp.11-26

Yahoo finance, 2018 Available at https://in.finance.yahoo.com/., Accessed on 17^th September 2018

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