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Audit and Ethics: Materiality, Scope, and Analytical Review of Financial Statements

Develop critical analysis skills in relation to materiality used for the audit, analytical review, audit procedures and forming an opinion.

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Added on  2023-06-10

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This article discusses the importance of materiality and scope in the audit process, as well as the analytical review of financial statements. It includes a review of draft notes and disclosures, and provides a chart of significant ratios for Caltex Australia Ltd from 2014 to 2017.

Audit and Ethics: Materiality, Scope, and Analytical Review of Financial Statements

Develop critical analysis skills in relation to materiality used for the audit, analytical review, audit procedures and forming an opinion.

   Added on 2023-06-10

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Running head: AUDIT AND ETHICS
Audit and Ethics
Name of the Student:
Name of the University:
Author’s Note
Audit and Ethics: Materiality, Scope, and Analytical Review of Financial Statements_1
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AUDIT AND ETHICS
Table of Contents
Section 1..........................................................................................................................................2
Materiality and Scope of Audit....................................................................................................2
Review of Draft notes and Disclosures.......................................................................................4
Section 2..........................................................................................................................................5
Analytical Review of the Financial statements...........................................................................5
Section 3..........................................................................................................................................9
Analysis of Cash Flow Statement................................................................................................9
Review of the Auditor Report....................................................................................................10
Reference.......................................................................................................................................12
Audit and Ethics: Materiality, Scope, and Analytical Review of Financial Statements_2
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AUDIT AND ETHICS
Section 1
Materiality and Scope of Audit
The main purpose of this assessment is to undertake audit procedures for the purpose of
reviewing the materiality which is to be considered by the auditor for detecting material
misstatements in the financial statements (Louwers et al., 2015). The concept of materiality is
considered to be important in the scope of audit as the same determines which misstatements are
to be considered minor misstatements and which are to be considered significant misstatements.
Significant misstatements are judged on the level of materiality of the item and how it will affect
the decisions taken by potential investors and also other estimates which are shown in the
financial statements (Reid, 2015). The company which is selected for this assessment is Caltex
Australia ltd which is engaged in operations in Australia (Caltex Australia., 2018).
The concept of materiality is fundamental in the scope of audit as the auditor needs to
consider material items and if the same are reported accurately by the management or not. The
auditor needs to apply his judgements for the purpose of setting the materiality of the business.
The auditor considers materiality on the basis of qualitative characteristics and quantitative
characteristics. In qualitative aspect of materiality, the auditor considers significant items of the
business such as net profit, inventory of the business, changes in accounting method and
significant legislations. In the quantitative aspect of judging materiality, the auditor considers
estimated percentages which are charged on appropriate bases in order to determine the
materiality level for different items which are shown in the annual report of the business. The
percentage which is to be charged for determining materiality are up to the judgements of the
auditor depending on the size of the business and nature of its operations. The auditor compute
the planning materiality at the initial planning stage of the audit and on the basis of such
Audit and Ethics: Materiality, Scope, and Analytical Review of Financial Statements_3
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AUDIT AND ETHICS
planning materiality estimate performance materiality of different items are computed (Eilifsen
& Messier, 2014). Therefore, it is clear that the concept of materiality is essential in the overall
planning process of the audit process.
In quantitative materiality estimation different bases may be considered for the purpose
of estimating the planning materiality and performance materiality of the business. The different
bases which are considered are based on significant items which are shown in profit and loss
statement and balance sheet of the company. As per profit and loss statement, the bases which
are to be considered net profit before tax, total revenue, total sales generated. As per the balance
sheet, the bases which are considered are the total assets of the business.
The annual report which is shown for Caltex ltd for the year 2017 is considered for
estimating the materiality of the business for the year. The annual reports of the business shows
that the sales revenue of the business have improved significantly from the last year estimates. It
is usually the practice of most of the businesses to consider the item which highest value as bases
for estimating materiality level of the business (Jacoby and Levy, 2016). The total asset can be
considered to be the base for calculating the planning materiality of the business and the same is
shown to be $ 6,355,220 for the year 2017. An estimate which is assumed to be the percentage
for calculation the planning materiality is considered to be 5% of the bases. The computation of
planning materiality is shown below:
Planning Materiality =Total Asset5 %
¿ $ 6,355,2205 %
¿ $ 317,617
Audit and Ethics: Materiality, Scope, and Analytical Review of Financial Statements_4

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