Importance of Auditing and Ethics

The assignment provides an overview of auditing and ethics, highlighting their significance for any business entity. It draws on the example of Speedcast International Limited's year 2017 audit report, showcasing how audit procedures follow specific rules of conduct and behavior norms. The study concludes that auditing and ethics are crucial concepts in business entities, emphasizing the importance of internal auditors adhering to codes of conduct and behaviour norms.

AUDITING AND ETHIC

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
1.1 Level of materiality with its quantitative estimate................................................................1
1.2 Representing different notes and disclosures with significance of audit..............................2
SECTION 2......................................................................................................................................3
2.1 Trend and changes in ratio with audit risk............................................................................3
SECTION 3......................................................................................................................................6
3.1 Reviewing statement of cash flows.......................................................................................6
3.2 Reviewing audit report by stating its expressed opinion......................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
The main objective of code of ethics of any institute is for promoting an ethical culture
with context of profession of internal auditing. There are various principles which are relevant
for perspective of profession and internal auditing practice. There are different rules of conduct
which helps in describing behaviour norms with context of internal auditors. The present report
is giving brief review for developing critical analysis skills linked to materiality with application
of audit, its procedures, analytical review and framing an opinion. It also helps in determining
level of materiality which is used by audit group for Speedcast International Limited of year
2017. It had also discussed about various drafts and disclosures in its annual report related to
contingency and its significance. In the same series, it had also presented preliminary analytical
review with its information of balance sheet and profit and loss statement. It had also discussed
about its business risks and audit procedure which had been undertaken. It had also articulated
statement of cash flow and recommendation to follow audit procedure.
SECTION 1
1.1 Level of materiality with its quantitative estimate
The framework of financial reporting elaborates concept of materiality with reference to
presentation and preparation of financial report. Materiality could be explained as misstatements
along with omissions are termed to be material if they are influencing economic decisions with
respect to user on basis of financial report. The materiality is determined when audit is planned
without need of establishing amount below uncorrected misstatements Hoque, & Pearson,
(2018). It could be on individual or aggregate basis for evaluation of immaterial. There are
various circumstances linked to misstatements which might give impact to auditor for evaluating
its level below materiality. The procedure of audit could not be designed practically for
extracting misstatements which might be material solely due to its nature. The assessment and
identification of risk of material misstatement includes application of professional judgement for
determining classes of transactions, disclosures and account balances. It consists of qualitative
disclosures and misstatements which might be material. While there is possibility that material
misstatement exists in qualitative disclosures and auditor should be capable to determine some
relevant factors like:
 The circumstances of business entity for given duration.
 The framework of applicable financial reporting which consists of various charges.
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 Qualitative disclosure which is very important for users of financial reports due to entity's
nature.
Speedcast International Limited had undertaken materiality for the objective of audit
which was around $3000000 which signifies approx. 2.5% of EBITDA of group as it does not
consider acquisition linked to expenses and revenue. EBITDA was adjusted for items of revenue
and expense which was associated with different acquisitions along with cost of transaction,
restructuring and integration for removing impact of item to recur from every year. They have
utilised 2.5% threshold on basis of professional judgement within particular range of thresholds
which is acceptable. In the same series, they have applied threshold along with different
qualitative considerations for identifying scope of audit with its nature, extent and timing of
procedure for evaluating impact of misstatement on its financial report.
1.2 Representing different notes and disclosures with significance of audit
Auditing is referred as very important function of business which includes appropriate
evaluation of evidence and documentation of various transactions and economic activities of
organisation. The audit system helps in evaluating internal control of organization with its
application linked to organization for adhering its goals Laing & Hoy, (2018).
Generally, auditors have requirement by management for stating acknowledging
statement which is disclosed as contingent liabilities. It is referred as possibility of a particular
liability which had been raised with respect to future event. Liability is known as contingent if
event is occurred or not. The common source for contingent liabilities are identified as
outstanding lawsuits and warranties about product.
In the present scenario, all contingent liabilities are disclosed by management to its
auditors. Generally, it does not happen in continuous series, as auditors must be capable to
perform its extended search procedure after primary inquiry. The internal revenue service reports
could be reviewed by auditor for purpose of unsettling income and tax liabilities. Auditors must
lay special emphasis on content of legal expense account with reference to accounting system.
Further, supporting documentation with context of transactions of legal expense might be
capable for revealing contingent liabilities.
In the same series, for identifying correct treatment of accounting there is requirement of
evaluation of materiality by auditors with reference to contingent liabilities Hutabarat, (2018). If
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contingent liability is considered in immateriality limit with absence of special treatment or
disclosure is necessary.
Being an auditor following steps will be considered for the purpose of financial investigation
such as:
 Requesting for documents: At the first step, auditor requests to higher management team
for official documents such as bank statement, previous receipts, ledgers and accounts for
auditing purpose.
 Audit plan preparation: Once documents have been received then auditor prepares plan
for the purpose of auditing.
 Organizing meeting: In the third step, meeting is conducted for doing discussion
regarding financial or accounting matters.
 Doing fieldwork: At this, auditor assesses whether business unit has complied with all
the policies and procedures or not.
 Drafting report: Auditor drafts report at this stage by including all the findings derived
through investigation.
 Conducting closure meeting: In the last step, auditor presents report to the team of
higher management to assess whether they are agreed with the issues identified or not.
SECTION 2
2.1 Trend and changes in ratio with audit risk
Ratio analysis
Ratio Analysis
Profitability ratio
analysis 2014 2015 2016 2017 Formula
Operating profit -6835 6598 10209 6973
Sales revenue 117679 167591 217991 514173
Operating profit ratio -5.81 0.04 0.05 0.01 operating
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profit / sales
* 100
Liquidity ratio
analysis 2014 2015 2016 2017
Current assets 37012 63573 517444 226349
Current liabilities 32045 53435 72535 171548
Inventory 3238 5171 5807 15661
Quick assets 33774 58402 511637 210688
Current ratio 1.16 1.19 7.13 1.32
Current
assets /
current
liabilities
Quick ratio 1.05 1.09 7.05 1.23
Current
assets - (stock
+ prepaid
expenses)
Solvency ratio
analysis 2014 2015 2016 2017
Long-term debt 41278 99354 368310 432213
Shareholder's equity 28599 27243 290253 306121
Debt-equity ratio 1.44 3.65 1.27 1.41
Long-term
debt /
shareholders’
equity
Change in Ratio
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Profitability
ratio analysis
%
change
Increas
e or
decreas
e 2017 2016
%
change
Increas
e or
decreas
e 2015 2014
%
change
Increase or
decrease 2015 2016
Operating profit 31.70% 3236 6973
1020
9
196.53
% -13433 6598 -6835 35.37% 3611 6598 10209
Sales revenue -135.87% -296182
51417
3
2179
91
-
42.41% -49912
1675
91 117679 23.12% 50400 167591 217991
Operating profit
ratio
0.710421
8711
0.03327
06253 0.01 0.05
1.0067
7832
-
5.84754
27369 0.04
-
5.8081
73081
0.15934
65906
0.00746255
28 0.04 0.05
Liquidity ratio
analysis
%
change
Increas
e or
decreas
e 2017 2016
%
change
Increas
e or
decreas
e 2015 2014
%
change
Increase or
decrease 2015 2016
Current assets 56.26% 291095
22634
9
5174
44
-
71.76% -26561
6357
3 37012 87.71% 453871 63573 517444
Current liabilities -136.50% -99013
17154
8
7253
5
-
66.75% -21390
5343
5 32045 26.33% 19100 53435 72535
Inventory -169.69% -9854 15661 5807
-
59.70% -1933 5171 3238 10.95% 636 5171 5807
Quick assets 58.82% 300949
21068
8
5116
37
-
72.92% -24628
5840
2 33774 88.59% 453235 58402 511637
Current ratio
0.815040
2708
5.81426
48085 1.32 7.13
-
0.0300
649624
-
0.03472
5055 1.19
1.1550
007802
0.83322
4922
5.94398892
33 1.19 7.13
Quick ratio 0.825883
5464
5.82549
91385
1.23 7.05 -
0.0370
-
0.03899
1.09 1.0539
553753
0.84505
14281
5.96070279
9
1.09 7.05
5

022128 86811
Solvency ratio
analysis
%
change
Increas
e or
decreas
e 2017 2016
%
change
Increas
e or
decreas
e 2015 2014
%
change
Increase or
decrease 2015 2016
Long-term debt -17.35% -63903
43221
3
3683
10
-
140.69
% -58076
9935
4 41278 73.02% 268956 99354 368310
Shareholder's
equity -5.47% -15868
30612
1
2902
53 4.74% 1356
2724
3 28599 90.61% 263010 27243 290253
Debt-equity ratio
-
0.112673
9198
-
0.14297
50301 1.41 1.27
-
1.5267
520526
-
2.20361
80015 3.65
1.4433
371796
-
1.87404
54568
-
2.37802772
82 3.65 1.27
Audit risk areas and matters with its procedure
Matters Audit procedure
Revenue Recognition
Due to various revenue streams, each
adjustment was made at every balance date but
fees were invoiced in advance of that particular
service. So, amount which was invoiced in
advance was not properly traced as sales as its
main significance of audit is revenue
recognition.
 They have developed proper
understanding about significant revenue
streams.
 Testing of sample of revenue
transactions for purpose of evaluation
which are traced as revenue or not with
its supporting evidence.
 With context of deferred revenue
amount had been checked with current
period and consistent with its supplied
services according to agreement.
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 By following FRS 102 concerned
authorities can recognize revenue
effectually.
Accounting for business combination
(Harris CapRock and UltiSat)
Estimation of purchase consideration with
reference to payable of contingent
consideration for attaining various operational
performance targets. Appropriate estimation of
acquired assets and liability's fair value. It also
consists of judging about over the value of
relationships which had been acquired.
Procedure for Harris CapRock
 With purchase and sale agreement for
determining consideration of contingent
purchase. It depends on attaining
various operational performance target.
 Agreed on fair value of assets and
liabilities which were acquired.
 With reference to customer relationship
tangible asset they had considered rate
of customer attrition and discount. In
the same series mathematical accuracy
had been assessed.
 They had considered input of cash flow
to market contract and rate data.
 Assisted through valuation experts
along with assessment of used discount
rate.
Procedure for UltiSat Acquisition
 Presence of payable of contingent
consideration for purpose of attaining
future level of EBITDA, gross margin
and revenue.
 Group's provisional was assessed with
appropriate estimation of fair value of
assets and liabilities which were
acquired.
By doing evaluation, it has identified that ASA
545 helps in investigating aspects related to
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asset’s fair value.
SECTION 3
3.1 Reviewing statement of cash flows
Majority of cash inflows  Cash receipts from customers
 Receipt of funds held in Escrow
Greatest outflows  Cash paid to suppliers
 Payments for acquisition of businesses
Primary cash receipts Primary cash payments
 Cash receipts from customers
 Interest received
 Cash paid to suppliers
 Finance cost paid
 taxes paid
Non cash financial activity Non cash investing activity
 Repayments of obligations under
finance leases
 Dividend paid
 Issuing shares
 Payments for acquisition of businesses
Evaluation of going concern risk of company
 The financial targets have been compromised through ongoing global reduction with cost
of bandwidth due to oversupply, huge competition and technological innovation.
 The satellite service industry is consolidated as it could alter its competitive landscape.
 The providers of satellite services face competition with particular range of
communication services along with innovative technologies (Auditing standard ASA 701,
2015).
Audit procedure
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Analytical procedure is recommended for auditors to extract and confirm major business
indicators, relationship of financial statements, business performance and operating trends.
Generally, they perform with financial analysts for reviewing its historical data and comparison
of current data from its future. Generally, auditors lay special emphasis on relationships of
accounts for verifying completeness and accuracy of reporting data.
In the same series, it could use internal control testing, guidelines and mechanisms for
controlling effectiveness and adequacy for detecting its trends of operating performance and for
assessing its major productivity ratio of business. The specialists evaluate controls for verifying
adherence to its guidelines by regulators, operating principles and governance of committee
procedures in particular industries where business entities are performing. Controls are referred
as effective if correct weakness had been built along with adequate policies, clear hierarchy lines
and step by step procedures for resolving its issues (List of audit procedures, 2018).
3.2 Reviewing audit report by stating its expressed opinion
It provides true and fair aspect of financial position of group on its ending of year. It also
complies with Corporations Regulations 2001 and Australian Accounting Standards. Their main
responsibility in these specific standards is to describe responsibility of auditor for the purpose of
audit with financial report. Their audit helps in providing reasonable assurance with context of
financial report from its material misstatement. Generally, it might arise because of error or
fraud. It is referred as material from individual or aggregate aspect which might influence
economic decisions with context to users on basis of financial report. The scope of audit is
ensured for performing sufficient work to provide opinion about whole financial report. It
considers geographic and management structure of particular group with its processes of
accounting and control along with operation of industry.
The activities of group consist of provisions of satellite bandwidth services to its
government, enterprise, maritime energy and emerging markets. Scope of audit report is too wide
due to the presence of various operations and business entities in various countries such as US,
UK, Australia and Hong Kong.
CONCLUSION
From the above study it had been concluded that auditing and ethics is very important
concept for any business entity. In this report it had shown with reference to Speedcast
International limited of year 2017 with its official accounting inspection procedures. It had
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shown audit procedure follows specific rules of code of conduct with its behaviour norms with
context of its internal auditors.
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