Auditing and Assurance

This study material provides an overview of auditing and assurance. It discusses the concept of materiality in audit and identifies the key assertions involved with revenue, cash and cash equivalent, plant property and equipment, and short-term trade and other payables. It also explores the main objectives of an audit and the role of an auditor in detecting frauds and errors.

Running head: AUDITING AND ASSURANCE
Auditing and assurance
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1AUDITING AND ASSURANCE
Table of Contents
Answer 5....................................................................................................................................2
Answer 6....................................................................................................................................5
Reference....................................................................................................................................6
Appendix....................................................................................................................................7

2AUDITING AND ASSURANCE
Answer 5
Materiality in audit is among the most important concepts for the auditors. Omissions
or misstatements are considered as material if in aggregate or individually they are expected
to impact economic decisions of the users on the basis of financial statements (Ruhnke,
Pronobis and Michel 2014). Based on the environment and understanding of Medibank’s
business following accounts are are at risks of the material misstatement –
Revenue –
Revenue reported in the income statement of the entity is comprised of the revenue
from health insurance premium amounted to $ 6,244.9 million and revenue from Medibank
Health amounted to $ 552.1 million. Revenue is an important item as the expenses for
business operation are paid from the revenues. Hence, it is always vulnerable to fraud,
misstatement or error. Sales revenue of the company over the years from 2016 to 2017 has
been increased by 0.82% However, irrespective of the amount involved with revenue account
revenues are always treated as a material item by its nature (Louwers et al. 2015).
Generally the revenues are misstated by – (i) recording revenues for the sales that has
not yet been taken place or for the goods those are not yet dispatched (ii) invoice not raised
for the goods delivered or sales made (iii) misstating the invoice amount at the time of
recording it in the books (iv) recording fictitious sales for fictitious customers.
Key assertions involved with the revenues are as follows –
 Accuracy – amount involved with the revenue generating sales transactions are not
recorded under appropriate account with appropriate amount (Ruhnke, Pronobis and
Michel 2014)

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 Occurrence – transaction recognized for sales are related to the entity and the
transactions recorded have actually taken place.
Cash and cash equivalent –
It can be identified from the annual report of Medibank for the year ended 2017 that
the amount of cash and cash equivalent has been reduced to $ 594.6 million from $ 438.70
million that is by 35.54% over the years from 2016 to 2017. However, irrespective of the
amount involved with cash, the cash account shall always be considered as material item as it
is highly susceptible to misstatement being the most liquid asset (Leung et al. 2014).
Cash account can be misstated through – (i) not recording all the cash transactions in
the books (ii) cash being the most liquid asset are exposed to risk of theft (iii) cash payment
is recorded where payment has not yet been made
Key assertions involved with cash are as follows –
 Completeness – all the cash related transactions and the account balance are not
recorded those should have been recorded in the financial statements.
 Existence – likelihood that all the cash accounts recorded are actually in existence on
the given date.
 Valuation, accuracy and existence – likelihood that all the cash related transactions
are not recorded in the financial statement accurately and classified properly
(Kharisova and Kozlova 2014).
Plant property and equipment –
It can be identified from the annual report of Medibank for the year ended 2017 that
the amount of plant property and equipment has been reduced to $ 87.3 million from $ 93.30
million that is by 6% over the years from 2016 to 2017. Possible reason of reduction in the

4AUDITING AND ASSURANCE
value of PPE may be sales of one or more of the items under PPE or may be one or more of
the items under PPE are not in existence that is useful life got over (Legoria, Melendrez and
Reynolds 2013).
PPE account can be misstated through – (i) showing fictitious sales of the item or
fictitious purchase (ii) charging higher rate of depreciation as compared to the standard rate
(iii) amount recorded as expenses instead of capitalising (iv) item already disposed but not
written off from the account
Key assertions involved with PPE are as follows –
 Existence – likelihood that all the items recorded under PPE are not exists physically
at the date of balance sheet (Coetzee and Lubbe 2014)
 Completeness – likelihood that all the items under PPE owned by the entity is
recorded.
Short-term trade and other payables –
It can be identified from the annual report of Medibank for the year ended 2017 that
the amount of short-term trade and other payables has been increased to $ 334.8 million from
$ 333.90 million that is by 0.27% over the years from 2016 to 2017. Trade and other payables
can be misstated through – (i) not reporting the period – end payables for increasing the
income (ii) recording the amount under payables for which payment is already made
(Christensen, Glover and Wood 2013).
Key assertions involved with short-term trade and other payables are as follows –
 Existence – likelihood that the all the transactions related to trade payables are not
exists physically at the date of balance sheet

5AUDITING AND ASSURANCE
 Occurrence – transaction recognized for trade payables are related to the entity and
the transactions recorded have actually taken place (Arens et al. 2016)
Answer 6
The main objective of audit is expressing opinion on the financial statement of the
entity on which the auditing is performed. Though it is not possible for the auditor to discover
and highlight all the frauds and errors contained in the financial statements of the entity
owing to limitations of the checking and audit scope, such discoveries are main purpose of
audit. Further, the primary objectives of the audit are examining the internal check system,
verifying the validity and authenticity of the transactions, checking the arithmetical accuracy,
casting, balancing and posting. Further, the auditor is responsible for confirming the value
and existence of liabilities and assets. The auditor is further responsible for mistakes or errors
created intentionally or due to negligence or carelessness through checking the errors of
principle, errors of commission, errors of omission and compensating errors. However, the
main job of the auditor is detecting frauds through analysing misappropriation of goods or
services provided, misappropriation of cash and manipulation of the accounts or falsification
of the accounts without the misappropriation. Hence, even if it is understood that some of the
accounts of the entity are likely to be misstated, audit for Medibank shall be accepted to find
out the possible reasons of misstatements, frauds and error.

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Reference
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance
services. Pearson.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and
audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Coetzee, P. and Lubbe, D., 2014. Improving the efficiency and effectiveness of risk‐based
internal audit engagements. International Journal of Auditing, 18(2), pp.115-125.
Kharisova, F.I. and Kozlova, N.N., 2014. Applying the category of «Assertions (or
preconditions)» In audit of financial statement. Mediterranean Journal of Social
Sciences, 5(24), p.180.
Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and
earnings management. Review of Accounting Studies, 18(2), pp.414-442.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and
Assurance Services 6e. Wiley.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015.
Auditing & assurance services. McGraw-Hill Education.
Ruhnke, K., Pronobis, P. and Michel, M., 2014. Audit materiality disclosures and credit
lending decisions.

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Appendix
Item 2016 2017 Amt change % Change
Revenue $ 6,741.80 $ 6,797.00 $ 55.20 0.82%
Cash and cash equivalent $ 438.70 $ 594.60 $ 155.90 35.54%
Property, plant and equipment $ 93.30 $ 87.30 $ (6.00) -6.43%
Trade and other payables $ 333.90 $ 334.80 $ 0.90 0.27%