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

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).