Auditing and Assurance

Running head: AUDITING AND ASSURANCE
Auditing and assurance
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1AUDITING AND ASSURANCE
Table of Contents
Case study – Cloud 9 Pty Ltd.....................................................................................................2
Part 1 – Materiality.................................................................................................................2
Part 2 – Analytical procedure.................................................................................................3
(a) Analysing business risks..........................................................................................3
(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
In planning of each audit, auditors shall consider the materiality for the purpose of
audit. Information is considered as material if misstatement or omission of particular
information can influence the user’s economic decision taken on the basis of the financial
report. Materiality is depended upon the size of item or error judged in specific circumstances
of the misstatement or omission of that item. Hence, materiality provides the cut-off point or
threshold, rather than just being the qualitative characteristics. One the auditor is able to
establish the materiality they shall set the level for performance materiality that is the
tolerable misstatement for the financial report of the client. However, the planning materiality
level more than the performance materiality level (Amiram et al., 2017).
In the given scenario it is stated that the Cloud 9 Pty Ltd’ main business is delivering
athletic shoes to its leading customers David Jones, Myer, rebel Sports and Foot Locker.
Recently the entity engaged W&S Partners, an Australian based accounting firm for carrying
out its audit. The auditor started the audit with planning the materiality level involved with
the financial reports of the entity. Though various items like revenues, total asset, gross
profit, equity and profit before tax can be taken into consideration for establishing the
materiality level, generally any single base is selected for financial report as a whole
(Audsabumrungrat, Pornupatham & Tan, 2015). This single base can be 2% of gross profit,
1% of total equity, 0.5% of total turnover, 0.5% of total assets, or 5% of profit before tax.
Profit before tax is considered as the most acceptable base for establishing the level of
materiality unless the profit is radically influenced by any specific transaction or the company
could not generate any positive earnings for the period. Looking into the income statement of
the company it can be noticed that the one amount of disposal proceeds involves significant
amount that increased the profit of the company significantly by 15,76,859. Therefore, profit
base cannot be considered for establishing the materiality level (Barndt, Fuller & Flynn,
2016). Next item that can be considered for the purpose of materiality establishment is total
asset. 0.5% of total asset of the company that is (32,864,958 * 5%) = 164,324.79 will be
established as level for planning materiality. However, 50% to 70% of the planning
materiality on the basis of the risk level of the financial report is used for computing the level

3AUDITING AND ASSURANCE
of tolerable misstatement. Lower level of risk will lead to less number of individually
significant items those will be required to audit 100% (Lakis & Masiulevičius, 2017).
Part 2 – Analytical procedure
Analytical procedures of audit assists in recognising the possible issues involved with
the financial reports of the client that can be investigated more precisely. It involves
comparison of different financial reports and the operational information to assess the
variation taken place in the current period’s financial reports with the part periods. Auditors
of Cloud 9 Pty Ltd can use ratio analysis approach as a tool for analytical procedure.
(a) Analysing business risks
Liquidity ratio – liquidity position of the entity shall be analysed to assess whether the entity
has sufficient liquid asset to pay off the obligation due within the period of one year. Current
ratio assesses the amounts of current assets against the current liabilities. However, the quick
ratio is stricter and dies nit consider the assets those take time to convert into cash like
inventories. Both the current ratios have improved in 2017 as compared to previous year.
Hence, the liquidity position of the entity is not an area of concern (Greco, Figueira &
Ehrgott, 2016).
Leverage ratio – leverage position or solvency status of the entity shall be analysed to assess
whether the entity is sustainable over the long term period. It is analysed through comparing