Auditing and Assurance: Analyzing Materiality and Business Risks in Cloud 9 Pty Ltd

The article discusses auditing and assurance in the context of a case study of Cloud 9 Pty Ltd. The article covers the following points: The concept of materiality and how it is established. Analytical procedures for identifying potential risk areas in the business operations of the company, including profitability, liquidity, and efficiency ratios. Specific areas of risk, including revenue recognition, inventory management, and financial reporting. The research question and conclusion of the case study.

Running head: AUDITING AND ASSURANCE
Auditing and assurance
Name of the student
Name of the university
Student ID
Author note

1AUDITING AND ASSURANCE
Table of Contents
Case study – Cloud 9 Pty Ltd.....................................................................................................2
Part 1 – Materiality.................................................................................................................2
Part 2 – Analytical procedure.................................................................................................2
(a) Analysing business risks..........................................................................................2
(b) Specific areas to be specially emphasised...............................................................4
Research question.......................................................................................................................5
Introduction............................................................................................................................5
Discussion..............................................................................................................................5
Conclusion..............................................................................................................................8
Reference....................................................................................................................................9

2AUDITING AND ASSURANCE
Case study – Cloud 9 Pty Ltd
Part 1 – Materiality
Preliminary estimate for the materiality at the level of financial report is generally
called as the planning materiality (PM). It is considered as the maximum amount by which it
is believed by the auditors that the financial report can be misstated through unknown or
known fraud or error. Misstatement involved in the financial report is likely to mislead the
decision of the users taken on the basis of the financial reports. Once the materiality level is
established by the auditor in planning stage, they must set the level for performance
materiality that is the level of tolerable misstatement for the client’s financial reports. PM
shall be larger than the tolerable level of materiality (Amiram et al., 2017).
In give case study of Cloud 9 Pty Ltd it is mentioned that the company basically deals
in supplying athletic shoes to various customers including rebel Sports, Myer, David Jones,
and Foot Locker. For carrying out the audit of the entity, Cloud 9 appointed W&S Partners
accounting firm based in Australia. While planning for the audit the auditors were
considering the financial statement for establishing materiality level.
Materiality level are generally based on 1% of total equity, 0.5% of total assets, 2% of
gross profit, 0.5% of total turnover or 5% of profit before tax. Most acceptable criteria for
materiality is taking profit before tax as base. However, this cannot be considered if the profit
is impacted significantly by the amount of any particular transaction or if the company
reported loss for the particular period (Audsabumrungrat, Pornupatham & Tan, 2015). In case
of Cloud 9, it can be identified from its financial report that during the year 2017 it received
significant amount that is 15,76,859 as disposal proceeds that have likely impact on net profit
for the year. Hence, net profit before tax cannot be considered for establishing the materiality
base. In this case, total asset will be better criteria for establishing the materiality level. Total
asset of the company is 32,864,958 and 0.5% of total asset will be 164,324.79. Hence, it will
be considered as the level for materiality (Lakis, & Masiulevičius, 2017).
Part 2 – Analytical procedure
(a) Analysing business risks
Analytical procedures are used for financial audit for assisting the auditors to gain an
insight for the business operations and identifying the potential risk areas those require

3AUDITING AND ASSURANCE
special attention. Various approaches those can be applied for carrying out the analytical
procedures are trend analysis and ratio analysis. For Cloud 9 Pty Ltd’s various ratios like
profitability ratios, liquidity ratios, efficiency ratios and leverage ratios will be analysed.
Profitability ratio – profitability ratio shall be analysed for profit earning capability of the
company from the revenue earned by it. Gross profit ratio indicates the earning left with the
firm after meeting costs for selling the goods and net profit margin indicates the earning left
with the firm after meeting all the operational, financial and tax related expenses. Net profit
has been increased from 3.70% to 5.06%. However, the reduction in gross profit due to
reduction in sales level is indicating that the company is not taking the necessary steps to
increase its sales that would have increased the gross profit margin (Barndt, Fuller & Flynn,
2016).
Liquidity ratio – liquidity ratios are analysed to gain the insight regarding whether the entity
has sufficient money to pay the dues payable within one year period of time. Current ratio
compares the amount of current assets of the company with the amount of current liabilities.
On the other hand quick ratio compares the quick assets of the company against its short term
liabilities. The quick ratio of the company increased from 1.26 to 1.98 whereas the current
ratio has been increased from 1.69 to 2.62. Both the ratios are indicating that the liquidity
position of the company have been improved in 2017 as compared to the previous year
(Williams & Dobelman, 2017).

4AUDITING AND ASSURANCE
Efficiency ratio – efficiency ratios are analysed to measure the efficiency level of the entity
with which it is replacing its inventories or collecting the dues from debtors. Inventory
turnover ratio that indicates the times the company replaces or sells its inventories within the
specific period under concern. On the other hand, receivables turnover ratio indicates the
times it collects the dues from its debtors. As both ratios have reduced in 2017 as compared
to 2016 it can be stated that the efficiency of the company is reduced (Uechi et al., 2015)
Leverage ratio – it indicates the solvency position of the company though focusing on the
debt component and equity component of the capital structure. Debt to equity ratio of the
company reduced from 1.10 to 1.07 over the years from 2016 to 2017. On the other hand,
debt ratio that indicates the assets of the company financed though debt is reduced from 0.52
to 0.47 over the years from 2016 to 2017. Both the ratios are indicating that the solvency
position of the company has been improved in 2017 (Greco, Figueira & Ehrgott 2016).
(b) Specific areas to be specially emphasised
Looking into the financial report of Cloud 9 Pty Ltd and materiality level projection it
can be stated that the auditor shall pay special attention for revenues, trade receivable,
inventories and cash. Cash shall be paid special attention as being the most liquid asset it is
always susceptible to fraud, error or misstatement. Further, looking into the ratio analysis it
can be stated that the problematic areas are revenues, trade receivables and inventories and
hence these items shall be paid special attention.

5AUDITING AND ASSURANCE
Research question
Introduction
The aim of the report is to extract information associated with executive remuneration
for 3 ASX listed companies. The companies those will be analysed are Rio Tinto Plc, Altura
Mining and BHP Billiton. The selected companies belong to Australian mining industry and
are among the leading mining companies of Australia.
Discussion
Payment to the executives –
Rio Tinto – Analysing the information related to executive remuneration from the annual
report of Rio Tinto Plc it can be identified that the company’s executive remuneration
includes base salaries, payment of STIP in form of deferred shares, STIP payment in form of
cash, pension benefits or superannuation benefits and other benefits (Riotinto.com, 2019).
BHP Billiton - Analysing the information related to executive remuneration from the annual
report of BHP Billiton it can be identified that the company’s executive remuneration
includes base salaries, benefits related to personal insurance, contribution for pensions,
relocation benefits, tax assistance, LTI for achieving sustainable creation of value over the
long term period and STI for providing strategic priorities of the company (BHP, 2019).

6AUDITING AND ASSURANCE
Altura mining - Analysing the information related to executive remuneration from the annual
report of Altura Mining it can be identified that the company’s executive remuneration
includes the following –
 Under long-term incentive plan the executives are granted share option and
performance right on equity
 Key benefits paid to executives includes salaries, fees, bonuses, non-monetary
benefits and motor vehicle provision
 Post employment benefits including retirement benefits and superannuation
(Alturamining.com, 2019).
Higher level of payment –
Payments made by the companies to its executives are as follows –
Rio Tinto Altura Mining BHP Billiton
$ 36,86,000.00 $ 19,48,603.00 $ 36,83,000.00

7AUDITING AND ASSURANCE
Rio Tinto Altura Mining BHP Billiton
$-
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$2,500,000.00
$3,000,000.00
$3,500,000.00
$4,000,000.00 $3,686,000.00
$1,948,603.00
$3,683,000.00
Series1
From the above table and graph it can be identified that total amount paid by Rio
Tinto towards executive remuneration is $ 36,86,000. Total amount paid by Altura Mining
towards executive remuneration is $ 19,48,603 whereas total amount paid by BHP Billiton
towards executive remuneration is $ 36,83,000. Hence, it can be stated that the total amount
spend towards executive remuneration is highest by Rio Tinto Plc as compared to other 2
entities.
Remuneration linked with profit and other performance –
Rio Tinto Plc – Rio Tinto’s remuneration policy is linked with target associated with
performance for long term as well as short term to ensure that rewards of the executives are
lined up with delivery of sustainable growth over long term period for shareholder’s value
and delivery of long term as well as short term strategic priorities for the company
(Riotinto.com, 2019).
BHP Billiton – the entity uses the performance measure to determine the CEO’s and other
employees STI outcomes and is linked with providing of the strategies and behaviours lined
with the charter clauses (BHP, 2019).
Altura Mining – any of the company’s executive’s package for personal remuneration is not
linked with the profitability or any other measure for performance directly. However, the
company maintains a long term plan for incentive as per which employees of the company
are granted the performance rights and the share options.

8AUDITING AND ASSURANCE
From the above it can be stated that executive payment of Rio Tinto is mostly linked
with profit and other performance as compared to other 2 entities.
Conclusion
Above discussion leads to the conclusion that the executives remuneration paid by the
Australian entities are in form of base salaries, benefits related to personal insurance,
contribution for pensions, relocation benefits, tax assistance, LTI, STI, post employment
benefits and superannuation. However, some of the companies pay the executives based on
the company’s profits and performance measures used for evaluation their performances.

9AUDITING AND ASSURANCE
Reference
Alturamining.com., (2019). Altura Mining | Charging Forward with Lithium. Retrieved 30
January 2019, from https://alturamining.com/
Amiram, D., Chircop, J., Landsman, W.R. & Peasnell, K.V., (2017). Mandatorily disclosed
materiality thresholds, their determinants, and their association with earnings
multiples.
Audsabumrungrat, J., Pornupatham, S. & Tan, H.T., (2015). Joint Impact of Materiality
Guidance and Justification Requirement on Auditors' Planning
Materiality. Behavioral Research in Accounting, 28(2), pp.17-27.
Barndt, R.J., Fuller, L.R. & Flynn, K.E., (2016). Teaching Inherent Risk and Tolerable
Misstatement in Auditing: A Modified Delphi Method as a Teaching Tool.
In Advances in Accounting Education: Teaching and Curriculum Innovations(pp.
125-140). Emerald Group Publishing Limited.
BHP. (2019). BHP | A leading global resources company. BHP. Retrieved 30 January 2019,
from https://www.bhp.com/
Greco, S., Figueira, J. & Ehrgott, M., (2016). Multiple criteria decision analysis. New York:
Springer.
Lakis, V. & Masiulevičius, A., (2017). Acceptable Audit Materiality For Users Of Financial
Statements. Journal of Management, 2(31).
Riotinto.com., (2019). Global home. Retrieved 30 January 2019, from
https://www.riotinto.com/our-business-75.aspx
Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector
dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and
its Applications, 421, 488-509.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific
Book Chapters, 109-169.

10AUDITING AND ASSURANCE