Audit assurance and practice Assignment

ARAFURA Resources Limited-
Audit assurance and
practice
Audit Planning and Internal Control
Name of the Author

EXECUTIVE SUMMARY
The purpose of this report is to elaborate the initial phases of work in conduct of any
audit. Before any audit work is commenced, the auditor must complete some preliminary
works and they are to be discussed herein. This report is written from the view point of the
manager of an accounting firm. The client here is ARAFURA Resources Limited engaged in
the business of leasing and servicing large mining machinery to that region’s gold mines. The
first section deals with the significant risk areas and accounts being, Plant and equipment,
Machinery Finance Liabilities, Accounts Receivable and Lease income. These areas are
being analysed by the auditor and the audit risk that may exist and the steps to alleviate that
risk is mentioned. The second section shows the outlined analysis of the different ratios done
by the auditor using the additional information obtained. Moving ahead the report deals with
potentially effective internal controls in the client’s business and states the kind of risk they
can alleviate and at the same time the test of control required for every kind of internal
control is stated. In the last the contract payroll’s internal weakness is stated.

Table of Contents
EXECUTIVE SUMMARY...........................................................................................................................1
Introduction...........................................................................................................................................3
Description of ARAFURA Resources Limited......................................................................................3
Understand the nature of the entity and its industry............................................................................3
Business Transactions of the company..............................................................................................3
Investments and investment activities..............................................................................................3
Financing and financing activities......................................................................................................3
Financial reporting practices..............................................................................................................3
Analytical procedures of the Statement of Financial Position and of Financial Performance over the
last three years......................................................................................................................................4
Consideration of the account balances are considered “material”.......................................................4
Ten different material account balances, five assets and five liabilities................................................6
List the relevant financial report assertions and explain why the selected assertions are applicable to
each account..........................................................................................................................................7
Comprehensive set of audit work steps for each material account balance.........................................8
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10

Introduction
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.
Description of ARAFURA Resources Limited
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.
Understand the nature of the entity and its industry
Business Transactions of the company
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).
Investments and investment activities
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).
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.
Financing and financing activities
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.
Financial reporting practices
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).
Analytical procedures of the Statement of Financial
Position and of Financial Performance over the last
three years
Ratio Analysis
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).
Consideration of the account balances are considered
“material”
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
Receivables
Lease undertaken
Hire purchase
Machines
Investment in mining business
Creditors
Lease payment
Lease
Bank loan
These accounts are considered as material on the basis of risk and flow of cash required for
the same.

Ten different material account balances, five assets and five
liabilities
Investment in the research and development department
Numbers Current assets
Current Assets Receivables
Lease undertaken
Hire purchase
Machines
Investment in mining business
Current libiliteis Creditors
Lease payment
Lease
Bank loan

List the relevant financial report assertions and explain
why the selected assertions are applicable to each
account
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.
ACCOUNT ANALYSIS AUDIT RISK AUDIT STEPS TO
REDUCE 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
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

may stand a stand a
risk that all the
equipment required
to be disclosed in the
balance sheet aren’t
done so.
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
Completeness: there
may stand a risk that
the obligations
To remove the
chances of this risk,
the purchase

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.
undertaken by the
management for
purchasing new
machinery have not
been recognised as
liability in the
financial statements.
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
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.

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.
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.

Comprehensive set of audit work steps for each
material account balance
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.
INTERNAL CONTROL RISK ALLEVIATED TEST OF CONTROL
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).

Conclusion
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..

References
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