Audit and Ethics: Materiality, Analytical Review, and Audit Procedures

This report provides a comprehensive analysis of audit and ethics, focusing on the application of materiality in financial statement auditing. The assessment involves analyzing the financial statements of Dulux Group, evaluating the company's materiality assessment processes, and reviewing the draft ...Read More

Running head: AUDIT AND ETHICS
Audit and Ethics
Name of the Student:
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Author’s Note:

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Section 1
Materiality
The assessment would be analysing the application of materiality aspect in a business and
different processes which is undertaken by the management of the company for assessing the
materiality of the business (Elder et al., 2013). The concept of materiality is fundamentally
applied in the course of auditing for identification of material misstatement. An item which is
presented in the financial statement would be considered to be material if the same has a
significance over the financial statement or is important to the nature of the business of the
client. The concept of materiality is considered to be important for the scope of audit as the same
determines the accurateness of the financial statements of the business (Eilifsen & Messier Jr,
2014). The important material misstatements which are shown in the financial statements are
related to important decisions which are related to the business. The company which is
considered for this assessment is Dulex Group which is engaged in the marketing and sales of
paints products which effectively help in maintaining appropriate quality of products which is
offered by the business (About Us - DuluxGroup . 2019).
The concept of materiality is widely applied by most the auditors for assessing whether
the financial statements are free from material misstatement or not. The auditor has the option of
choosing materiality computation on the basis of qualitative characteristics or quantitative
characteristics. In case of qualitative computation, items which are pivotal to the nature of the
business is considered such as sales, machinery. On the other hand, if quantitative characteristics
are considered than the items which represent the highest value in the financial statements are
considered for computing the materiality of the business. The first step which is required for
computing the planning materiality of the business which is considered on the basis of

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percentage which is estimated by the company and the same is applied to the highest figure
which is shown in the annual report of the business. The planning materiality of the business is
computed at initial stages of the business for effectively planning of the audit process which is to
be applied by the management of the company. As per the income statement which is prepared
by the management of the company, the sales figure is shown to be maximum in value and the
same is shown to be $ 1,843,714,000. The sales of the business show improvement in
comparison to previous year analysis. In order to derive the planning materiality of the business,
a percentage of 5% is considered. The computation of planning materiality of the business for the
year 2018 is shown below:
Planning Materiality=Sales Revenue∗5 %
¿ $ 1,843,714,000∗5 %
¿ $ 92,185,700
The planning materiality of the business is shown to be computed to $ 92,185,700 for the
year 2018 on the basis of the sales figure which is represented in the annual reports of the
business. It is to be noted that it is on the basis of planning materiality that performance
materiality of the business is computed.
Review of Draft notes and Disclosures
The draft notes and disclosures are also included in the annual report which is prepared
by the business with an objective to provide an appropriate presentation of the financial
statements of the business. The disclosures which are provided in the annual report of the
business also has an impact on the overall audit process which is conducted by the business.

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 Impairment: The impairment disclosures which is provided in the notes to accounts
shows that the same requires significant judgement and estimation of the CGU, cash
flows from the asset. The annual report further shows that the impairment test is
appropriately conducted by the management of the company for estimating the amounts
for impairments of the business. The auditor needs to assess the basis of the judgements
which are considered by the management
 Business Acquisition: The annual reports of the business effectively show that the
management has acquired another business. The business acquisition of the company
considers appropriate judgement and estimation. The auditor needs to appropriate
conduct verification practices for ascertaining the appropriateness of the disclosures and
valuation which is done by the auditor of the business.
 Subsequent Events: The annual report of the business shows that the management of the
company has declared final dividend after the reporting date of the business which can be
considered as subsequent event for the business. The auditor of the business needs to
check the accuracy of the disclosure which is provided and whether the management of
the company has followed relevant accounting standards.
Section 2
Analytical Review of the Financial statements
Analytical Review of the financial statements can be regarded as a tool which is used by
the auditor for checking the accuracy of the financial information presented in the final accounts
of the business. The ratios which are presented reflect profitability, liquidity and activity ratios of

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the business. The chart which is presented below effectively shows the key financial ratios which
are associated with the business:
Liquidity Ratios
Figure 1: Liquidity Ratios of the Business
Source: (Created by the Author)
The above figure effectively shows the liquidity ratios of the business which represents
the current ratio and quick ratio of the business. The current ratio of the business is shown to
have improved significantly and the same is shown to be 1.66 which has improved significantly
from previous year analysis (Results & Reports - DuluxGroup . 2019). The quick ratio of the
business also shown similar result which reflect that the management of the company
appropriately manages the current liabilities of the business. The working capital of the business
is also shown to be appropriate. The auditor of the business needs to check the values of current

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assets and current liabilities of the business (Bhandari & Iyer, 2013). The net working capital of
the business shows that the financial statements of business is appropriate. The auditor needs to
ensure that the values which are represented in the financial statements are showing true and fair
view of the business
Profitability Ratios
Figure 2: Profitability Ratios of the Business
Source: (Created by the Author)
The above table effectively shows the profitability ratios of the business for the period
2018. The operating profit margin is shown to be appropriate as the same is shown to be on the
rise which suggest that the profitability of the business is appropriate for the business. The net
profit margin of the business is shown to have also increased which may be due to an increase in
the sales of the business (Amin, Krishnan & Yang, 2014). This is a positive factor for the
business as the business is trying to expand the operations of the business for making more
profits. The return on equity estimates shows a slight decline which needs to be improved by the

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management of the company. The auditor needs to check all the income and expenses of the
business so that the same are showing true and fair view of the financial statements of the
business. The auditor of the business needs to apply vouching practices for the business so that
appropriate steps can be taken in order to assess the financial position of the business.
Activity Ratios
Figure 3: Activity Ratios of the Business
Source: (Created by the Author)
The activity ratios of the business needs to effectively set up by the management of the
company so that efficiency level in the business can be maintained in the business. The inventory
turnover ratio of the business is shown to be on the rise which is the main reason that the
efficiency of the business has enhanced (Tepalagul & Lin, 2015). The receivable turnover ratio
of the business is also shown to be appropriate considering the financial estimates of the
business. The auditor of the company needs to assess the estimates of receivables and inventory
in the business so that the same are showing true and fair view.
Section 3

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Analysis of Cash Flow Statement
The cash flow statement of the business effectively shows the cash inflows and outflows
of the business and reveals to the users of the financial statement whether the annual reports of
the business are showing appropriate presentation of the cash position of the business. The cash
flow statement of Dulux Group Ltd is considered for the assessment of liquidity position of the
business.
The cash which is generated by the business from operating activities shows that the
management of the company appropriately shows maximum cash is generated from operating
activities of the business. The cash flow from operating activities of the business shows positive
results which is appropriate for the business (Brasel et al., 2016). The cash flow from investing
activities off the business shows that the management has made purchases for the business. The
cash flow from financing activities shows that the management has made repayments of
borrowings which is shown to be more for the business (Krishnan & Wang, 2014). This is the
reason that the cash outflows of business are more and the cash from financing activities of the
business is shown to be negative.
The going concern principle of the business shows that the accounting principle which is
followed by the business for appropriate presentation of the financial data of the business. This
principle is fundamental to accounting process and the auditor needs to consider the same for the
purpose of reporting of the business (Goh, Krishnan & Li, 2013). The profitability of the
business is shown to be on the rise which suggest that the business structure of the company is
appropriate. In addition to this, the business is trying to reduce the debt capital which is used by
the management so as to reduce the risks of the business (Cordoş & Fülöp, 2015). Further, the

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liquidity position of the business is positive. All these signs indicate that the overall going
concern principle of the business is not affected.
Review of the Auditor’s Report
The auditor of the business is KPMG which is considered to be one of the big fours in
auditing profession. The opinion of the auditor is clear that the financial statements which is
prepared by the management of the company are showing true and fair view regarding the
financial position of the business (Lamoreaux, 2013). In addition to this, the business has also
adhered to provisions of Corporation act 2001 and relevant accounting standards for preparing
the audit report.
The key audit matters which is shown in the annual report of the business shows key
items which the auditor considers as important and the same can affect the financial statements
of the business (Chen, Eshleman & Soileau, 2016). The auditor has recognized the impairment
recognition criteria as key audit matters as the same requires significant judgements on the part
of the auditor of the business.
Conclusion
The above discussion effectively shows the role of planning materiality in estimating
whether there exists misstatement in material items which are shown in the financial reports of
the business. The discussion also shows that the business has effectively presented the financial
statements but the accuracy of the same would be judged from conducting analytical review of
the information. The discussion also includes analysis of cash flow statement and going concern
principle whether the same are appropriate for the business or not. In an overall estimate the
reporting framework of the business is appropriate and the business is also performing well.

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Reference
About Us - DuluxGroup . (2019). Duluxgroup.com.au. Retrieved 27 May 2019, from
http://www.duluxgroup.com.au/about-us
Amin, K., Krishnan, J., & Yang, J. S. (2014). Going concern opinion and cost of
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Bhandari, S. B., & Iyer, R. (2013). Predicting business failure using cash flow statement based
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