This study material covers the topics of auditing and assurance. It explains the concept of materiality and provides an overview of analytical procedures. Additionally, it explores the remuneration pattern of executives in mining industries. The material also includes case studies and financial ratios for analysis.
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Running head: AUDINTING AND ASSURANCE Auditingand Assurance Name of the Student Name of the University Authors Note Course ID
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1AUDINTING AND ASSURANCE Table of Contents Answer to Part 1: Materiality.....................................................................................................2 Answer to question 1:.............................................................................................................2 Answer to Part 2: Analytical Procedure.....................................................................................3 Answer to A:..........................................................................................................................3 Answer to B:..........................................................................................................................6 Case Study 2:..............................................................................................................................6 How are executives paid in Mining Industries?.....................................................................6 Executives of companies that are paid most and the range of pay:.......................................7 Linkage with Executives pay with the company’s profit and share price performance:.......7 Overall conclusion of Australian company executive’s remuneration:.................................8 References:...............................................................................................................................10
2AUDINTING AND ASSURANCE Answer to Part 1: Materiality Answer to question 1: Planning Materiality is generally referred to the misstatement amount that is set by the auditors during the stage of planning audit depending upon the materiality of the financial statements (Hayes et al., 2014). The planning materiality for cloud 9 here is computed by taking into the total amount of sales revenue derived from the sales receivables. The planning materiality for cloud 9 are as follows; ParticularsAmount ($) Sales Revenue Revenue - Stores2764163 Revenues - Wholesales45594829 Other Revenues9971 Total Sales Revenue48358992 Planning Materiality: Single Rule Method 1% of total Revenue96727955 Materiality967279.55 The concept of materiality is implemented by the auditors in planning and performing the audit of Cloud 9 in order determine the impact of misstatements on the audit and of uncorrected misstatements (De Paula, 2016). By adhering with the international standards on auditing to evaluate the financial statement materiality of Cloud 9. The planning materiality of Cloud 9 has been computed by setting the performance materiality or the tolerable misstatement of the financial statements. In computing the planning materiality of Cloud 9 the assumption here involves taking into the account the highest amount of trade receivables in the form of sales revenue to determine the planning materiality. The amount of $967,279.55 as the planning materiality sum is set by the auditors to determine the materiality of the financial statements during the process of audit for Cloud 9.
3AUDINTING AND ASSURANCE If any kind of material misstatement is noticed and the sum is equivalent to or higher than computed amount, then in such situation adjustment would be required. Evidences from the case study obtained suggest that Cloud has set the goal of increasing the sales revenue by 3 per cent for the first five years however one of the success critical factors for cloud 9 is to attain a 3 per cent increase in its growing share of Australian footwear market (Louwers et al., 2015). The main purpose of setting the planning materiality for Cloud 9 here is to recognize the performance materiality to assist the auditors in designing the audit procedure forming a clear trivial threshold for the accumulating misstatements. The present year decline in the revenue of Cloud 9 because of the fall in the specific exceptional orders which appears difficult to rise in future. Furthermore, the overall decline in the profit prior to tax results in conclusion that more appropriate basis for the materiality this year would stand around 1% of the revenue (Kumar & Sharma, 2015). The justification for the basis of computing the planning materiality for Cloud 9 is to set the overall level of materiality to the accepted level. The planning materiality here reaches the conclusion that adjustment is made to make sure that the financial statements of cloud 9 are true and fair. Answer to Part 2: Analytical Procedure Answer to A: By using the analytical procedure and ratio analysis the financial position and business risks of cloud 9 is assessed. Profitability Ratios:
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4AUDINTING AND ASSURANCE Particulars20152014 EBIT29998393565974 Net Sales6057221659910912 EBIT Margin4.95%5.95% Net Profit Margin20152014 Net Profit22409593042608 Net Sales6057221659910912 Net Profit Margin3.70%5.08% Profitability Ratios - EBITDA Margin The profitability ratio for Cloud 9 is computed to determine the EBIT margin and Net Profit Margin. The EBIT is a form of profitability ratio that determines the amount of earnings generated by the business before interest and tax (Jacoby & Levy, 2016). The EBIT margin for 2014 stood 5.95% while in 2014 it declined to 4.95%. The ratio represents decline as Cloud 9 has witnessed an increase in the operating expenses. While the net profit margin also represents a significant fluctuation in the year 2015 where the net profit margin lowly stood 3.70% from the previous year figures of 5.08%. The decline in net profit margin is contributed by the fall in profit before tax with significant rise in income tax expenses for cloud 9 in 2015. Liquidity Ratio: Particulars20152014 Current Assets2511012927433729 Current Liabilities1483356317133035 Current Ratio1.691.60 Particulars20152014 Current Assets2511012927433729 Less: Inventory58303826263228 Quick Assets1927974721170501 Current Liabilities1483356317133035 Acid Test/Quick Ratio1.301.24 Liquidity Ratios - Current Ratio Quick Ratio
5AUDINTING AND ASSURANCE The liquidity ratio here represents the class of financial metrics that is used to determine the ability of the debtors to pay its current obligations for debt without raising any external capital (Zeff, 2016). To determine the financial position of Cloud 9 current ratio has been computed. The current ratio for the company represent a positive increasing trend. On the other hand, the quick ratio measures the ability of the company meet its both the short term and long term obligations. The quick ratio computed here for cloud 9 represents that the company has sufficient cash to meets its short term debt obligation as both current and quick ratio stood greater than one. Solvency Ratio: Particulars20152014 Current- Interest bearing liabilities45490075097005 Non-Current-Interest bearing liabilities900000950000 Total Debt54490076047005 Shareholders Equity1470324312671437 Debt to Equity Ratio0.370.48 Particulars20152014 Total Debt54490076047005 Total Assets3087561231169397 Total Debt to Total Assets Ratio0.180.19 Solvency Ratio - Debt to Equity Ratio Total Debt to Total Assets Ratio The debt to equity ratio for Cloud 9 represents that the company has lower proportion of debts. From the perspective of pure risks, ratios that is below 0.4 or lower are treated as the better debt ratios (Sin et al., 2015). The ratio for 2015 stood 0.37 which is below the risk level of 0.4 and can be considered better for cloud 9. While the total debt to total ratio provides an indication of financial leverage for cloud 9 as the ratio computed stood relatively stable for both 2014 and 2015. The ratio is below one representing that lower proportion of asset is financed by creditors or debt.
6AUDINTING AND ASSURANCE As cloud 9 has bought stocks in US Dollars the company may face the risk of fluctuations in the values of foreign currency. The variation in the exchange rate would affect Cloud 9 debt repayments and competitiveness of the footwear bought from US. Answer to B: While performing the audit of Cloud 9 it is noticed that the business may face certain glitches in determining the ideal amount of stock for its stores for minimum availability of the goods for its customers (Cook et al., 2016). Cloud 9 should place emphasis on the physical count of inventory by reconciling the inventory count with the general level. Case Study 2: To study the remuneration pattern of the key executives, the companies of mining industries have been considered (Levy, 2016). The annual reports of BHP Billiton, Rio Tinto and Newcrest mining for the financial year ended 2017 is studied. How are executives paid in Mining Industries? The executives at BHP Billiton, Rio Tinto and New Crest Mining provides that the executives are paid fixed remuneration in the form of base salary, long term and short term incentives. The executives are paid through the appropriate level of increasing shareholder value by meeting or exceeding the objectives of both the individual and company. The remunerationbenefitsgenerallyincludetheparticipationinthepensionplanorcash allowance to contributes towards the pension plan (Jeppesen, 2018). Apart from the short and long term incentives Rio Tinto pays is executives through bonus deferral where fifty per cent of the short term incentive plan is delivered with the bonus deferred shares under the employee investment program.
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7AUDINTING AND ASSURANCE Executives of companies that are paid most and the range of pay: The executives of Rio Tinto are paid the highest remuneration with the total fixed remuneration stood £1,444,000 while the executives of New Crest Mining stood second in the line of highest executive remuneration with total fixed remuneration for the chief executiveofficerstood$975,000.TheexecutiveremunerationfortheBHPBilliton executives stood low at $880,000. The range of pay for the executive remuneration stood as high as one million for Rio Tinto while for the BHP Billiton and New Crest were within the mark of one million. Figure 1: Figure representing remuneration range for Rio Tinto (source:Riotinto.com, 2019) Linkage with Executives pay with the company’s profit and share price performance: TheremunerationpackageofRioTintoandBHPBillitonislinkedwiththe profitability and share price performance. The Rio Tinto executive remuneration is linked with the short term incentive plans and bonus deferral. For Rio Tinto executives 25 per cent of the award is related to the threshold performance while 50 per cent of the executive’s remuneration is linked with target (Riotinto.com, 2019). While for the bonus deferral the executives at Rio Tinto are provided with bonus deferral under the Employee Investment Program while the remaining part of the short term incentives plan is delivered in cash with no deferral. On the other hand, BHP Billiton executive remuneration is linked with the
8AUDINTING AND ASSURANCE performance shares which provides the strong alignment between the remuneration outcomes and the interest of the BHP shareholders. Overall conclusion of Australian company executive’s remuneration: Chief executives at Australian companies are paid better than before as the executive pay have increased by 12.4% for the top 100 ASX listed companies. The median realised pay increased to $4.36 million mainly due to the strong equity markets with some executive bonuses are linked or paid with shares (Davies, 2019). The bonuses went up by 18% and one of the three ASX 100 chief executives received 80% of their maximum bonuses with the median pay outstanding 70.5%. Figure 2: Figure representing reported pay of ASX 100 CEO’s (Source: Davies, 2019)
9AUDINTING AND ASSURANCE Overall, the annual report provides a clear data of the executive’s remuneration patter by incorporating a detailed section relating to remuneration packages of executives. This enables the users of financial information to gain a better understanding of the remuneration policy and packages paid to the executives.
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10AUDINTING AND ASSURANCE References: Cook,W.,vanBommel,S.,&Turnhout,E.(2016).Insideenvironmentalauditing: effectiveness,objectivity,andtransparency.CurrentOpinioninEnvironmental Sustainability,18, 33-39. Davies, A. (2019). Australian top executive pay up 12% and bonuses up 18%, survey finds. Retrievedfromhttps://www.theguardian.com/australia-news/2018/jul/17/ceos-12- pay-rise-routine-bonuses-tone-deaf-investor-group-says De Paula, F. R. M. (2016).The principles of auditing a practical manual for students and practitioners. Isaac Pitman & Sons, Ltd (1919). Hayes, R. S., Gortemaker, H., & Wallage, P. (2014).Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times. Jacoby, J., & Levy, H. B. (2016). The materiality mystery.The CPA Journal,86(7), 14. Jeppesen, K. K. (2018). The role of auditing in the fight against corruption.The British Accounting Review. Kumar, R., & Sharma, V. (2015).Auditing: Principles and practice. PHI Learning Pvt. Ltd.. Levy, H. B. (2016). Unsolved Problems in Auditing.The CPA Journal,86(2), 24. Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015).Auditing & assurance services. McGraw-Hill Education. Riotinto.com.(2019).Retrievedfrom https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf
11AUDINTING AND ASSURANCE Sin, F. Y., Moroney, R., & Strydom, M. (2015). Principles‐based versus rules‐based auditing standards: The effect of the transition from AS2 to AS5.International Journal of Auditing,19(3), 282-294. Zeff, S. A. (2016).Forging accounting principles in five countries: A history and an analysis of trends. Routledge.