Identifying Risks of Material Error in AGL Energy

The assignment discusses the importance of identifying and evaluating risks of material error in audit work. The auditor should document identified risks and their evaluation at the level of financial statements and assertions. The risk assessment consists of two parts: identification of risks, which involves identifying possible weak points, and risk assessment, which determines the relative importance of each risk. Business risk is a significant risk that can lead to material errors in transactions, balance sheet accounts, and disclosures of assertions and financial statements. The assignment also highlights the need for comprehensive ratio analysis to understand the industry trends and performance of AGL Energy. Finally, it emphasizes the importance of analytical procedures in audit work, including substantive analytical tests and detailed tests.

Running head: AUDITING 1
Auditing and Assurance
Name:
Institution:
Date:

AUDITING 2
Executive summary
In this report, the new auditor, NY partner will report on the financial reports of AGL Energy
limited a public company that generates retails and distributes energy in Australia. This report
is a pre analysis of the auditor’s report basing on the audit plan, the clients business,
preliminary analytical procedure and the clients business risks. In assessing all these, the
main objective is to give a briefing on whether the company is able to be audited by NY
partners without any audit risk.

AUDITING 3
Table of Content
Introduction................................................................................................................................5
Initial audit planning..................................................................................................................5
Clients business and Industry.....................................................................................................6
Business risk- Risk assessment phase . Identification of risks.................................................6
Comprehensive ration analysis in relation to the industry.........................................................7
Substantive analytical procedures............................................................................................10
Types of analytical procedures.................................................................................................10
References................................................................................................................................12

AUDITING 4
Introduction
AGL Energy (AGL in the ASX), is a publicly listed Australian company that deals with
services and products pertaining to energy. It has been audited for the past decade by a
different audit firm and now wants to be audited by NY partners. It is involved in the
generation and retailing of gas and electricity for commercial and residential use. It is in the
energy and utilities industry where the Australian government has put a lot of measures and
policies to encourage the liberalization of the sector and its growth (Chambers and Rand,
2011).
For initial audit planning strategy, the company has to conduct preliminary investigations on
the audited accounts prior to the company’s transfer of auditors. In the planning phase of the
company audit, the attention will be on key areas of the audit and ensuring that there is
sufficient resources that are allocated for the audit engagement. The planning phase should
ensure that the audit being carried out will be well directed, supervised and adequately
affected to highly reduce the audit risk involved. This is well articulated in ISA300, planning
and auditing of financial statements (Ridley, 2008).
Initial audit planning
Planning begins shortly or after the completion of the previous audited work. This begins
with a review of discussed issues with AGL Energy management and the issues that were
previously reviewed under the previous audited accounts such as deficiencies in control or
the unadjusted errors. These matters are very essential to the audit of the current financial
reports and should be considered when planning. AGL Energy is a very big company and
therefore NY partners should consider the size of the company, the nature of business and the

AUDITING 5
complexity of the company (Arens et al., n.d.). There is also other factor that may arise like
previous engagements with the company if there was at all.
The audit plan will also be revised in progress with the audit and should not be viewed as
fixed in one constant phase.
Clients business and Industry
As earlier stated, the client is in the manufacturing and retailing of energy in Australia. It is a
big energy company that is also listed in the Australian stock exchange and performs
considerably very well. It operates in the gas and utilities industry. Key people in the
management include the CEO, Andrew Vesey who also doubles up as the MD. The products
that the company deals in include, wind power, Hydro electricity, natural gas, wind power
and coal gas. This is generated, retailed and eventually distributed to retailers. Its revenue as
at FY 2016 was $ 11.150 Billion while the income for the same period was $ 1.211 Billion.
The number of employees as at 2016 was 3,358 and it owns a 25% stake in Actew AGL a
subsidiary (Halpert, 2011). It is Australia largest and private owner of renewable assets and
energy.
Business risk- Risk assessment phase
The objective of the risk assessment phase in the audit of financial statements is to identify
sources of risk and then assess whether they could result in material misstatement in the
financial statements. The auditor should then identify and assess the risks of material error at
the level of the assertions included in the financial statements for the various types of
transactions, balance sheet accounts and disclosures. This process provides the auditor with
the information needed to focus auditing efforts on areas where the risk of material

AUDITING 6
misstatement is highest.
On the other hand, the auditor does not need to audit all control activities related to each type
of transaction but must focus on significant risks; that is, in the risks of material error
identified and evaluated that, in their opinion, require special audit attention. Subsequently,
the auditor should clearly, timely and consistently document the identified risks and the
material error evaluation at the level of the financial statements and assertions (Halpert,
2011).
The risk assessment consists of two parts: the identification of risk, which consists of
identifying possible weak points, and the risk assessment, which is to determine the relative
importance of each risk.
Identification of risks
Business risk: Business risk is the result of events, circumstances, actions or inactions that
adversely affect the entity, which impairs its ability to achieve its objectives. Business risk
also includes events that arise from changes in the company, complexity in specific areas or
lack of timely changes. A business risk can have immediate consequences and generate a risk
of material error pertaining to transactions, balance sheet accounts and disclosures of
assertions and financial statements (Rupert and Kern, 2016).
For AGL Energy the business risks involved include change in foreign exchange currency
where the currency falls resulting in losses that compounds the business. Energy is mostly
affected by nature and lack of strong winds or rainy seasons will lead to little or no
generation of wind and solar energy. Changes in the company management structure are also
a business risk that can lead to business risk. Material error in transaction of business may

AUDITING 7
also lead to business risk
There are several firms of Public Accountants that, in carrying out their audit work, focus
their study on financial statements, in particular on the documentary review, by means of
detailed tests of the main items and elements that form the financial statements. This stems
from the fiscal approach of some of these audits and, as the case may be, due to the staff's
lack of knowledge of applicable auditing standards. This gives rise to several problems for
these firms:
Lack of identification and evaluation of the risks of material error, which causes failures in
the design and implementation of responses to evaluated risks (non-compliance with the
Auditing Standards [NA]).
Incur significant time investments to achieve established audit objectives (operational
inefficiency).In addition to the serious problem of noncompliance with NAs, the above
drawbacks are reflected in the need to apply additional audit procedures once completed,
resulting in a significant investment of time for the team.
Comprehensive ration analysis in relation to the industry
AGL Energy is doing better than its peers in the industry. This is a comprehensive ratio
analysis for the company
Ratios Formulae AGL Energy Industry Ratios
Net
profit
Net
Income *
189.875/3197.62= 196.733/3289.813=

AUDITING 8
margin Net Sales 0.059 0.006
Asset
turnover
Sales/ total
assets
3197.62/4302.23=
0.79
3289.813/4489.96=
0.74
Current
ratio
Current
Assets
Current
Liabilities
1249.17/876.46=
1.42
1332.96/706.71=
1.89
Quick
ratio
Cash +
Accounts
Receivable
Current
Liabilities
335.32+462.67/876.46=
0.91
387.18+504.77/706.71=
1.26
Debt
ratio
Total debt/
total assets
1701.6/4302.2=
0.395
1792.3/4489.9=
0.399
Reflection on this matter
How often do you notice that audit work programs are defined, without having made an
identification and evaluation of risks of material error? Even without having done the audit
planning? The use of analytical procedures allows the auditor to efficiently identify potential
risks of error, but not only this, but also allows him to know about the entity audited, its
financial development and the industry trends of the entity (Performance audit, 2005).

AUDITING 9
Substantive analytical procedures
According to their nature, analytical procedures provide different levels of security; to the
extent that the level of security decreases may require the incorporation of another type of
procedure or, where appropriate, non-application of that procedure. Likewise, it is necessary
to evaluate the possibility of applying together with substantive analytical procedures, details.
For example, for the validation of the client balance, it is possible for the auditor to perform
substantive analytical tests (evaluation of the seniority of balances) and to apply detailed tests
(check of subsequent collections). When evaluating the reliability of the information, the
auditor should take the following into account for the information available: the source,
comparability, nature and relevance and the controls established in the preparation.
Information obtained from independent sources of the entity is more reliable; and when it has
been audited or reviewed by independent external parties (Ridley, 2008). It is advisable to be
careful in the reliability of the information used for substantive analytical tests; therefore, the
auditor should make sure that you can trust it. Not every report provided by the revised entity
may have been prepared with diligence.
Types of analytical procedures
The types of analytical procedures are defined by the auditor's expectations classes, which
can be as follows:
1. Expectation of the industry
It refers to the procedures performed by the auditor in order to compare financial and / or
non-financial information with information from the industry in which the client develops its
object and / or with similar companies. Example: The auditor can compare key customer
performance indicators (liquidity, indebtedness, performance and activity) with customer

AUDITING 10
industry indicators.
2. Customer Expectation
It refers to the comparison of the accounting information with the expectations that the client
prepares (budget). Example: The auditor can make a comparison of the budgeted expenses
against the actual expenses to a certain date. Significant variations may indicate errors and
irregularities in the financial statements (Ridley, 2008).Before the auditor makes the decision
to carry out this type of analysis, it is necessary to evaluate the budget preparation and
approval process.
3. Auditor's Expectation
These are calculations performed by the auditor in order to determine the reasonableness of
an account of the financial statements. For these calculations, the auditor may use operational
or financial information.
4. Expectation of financial statements
It refers to analyzing the changes that occur in the balance sheet accounts and / or results
between two or more periods. Likewise, the trends of key performance indicators (Liquidity,
yield, indebtedness, activity) of the current period with previous periods can be analyzed
References
Arens, A., Elder, R., Beasley, M. and Hogan, C. (n.d.). Auditing and assurance services.
Chambers, A. and Rand, G. (2011). The Operational Auditing Handbook. New York, NY:
John Wiley & Sons.

AUDITING 11
Efficient auditing of private companies. (2012). London: Wolters Kluwer.
Halpert, B. (2011). Auditing cloud computing. Hoboken, NJ: Wiley.
Performance audit. (2005). Sydney: Audit Office of N.S.W.
Ridley, J. (2008). Cutting edge internal auditing. Chichester, England: Wiley.
Rupert, T. and Kern, B. (2016). Advances in accounting education. Bingley, U.K.: Emerald.
Vona, L. (n.d.). Fraud data analytics methodology.