Auditing and Ethic

Running head: AUDITING AND ETHIC
Auditing and Ethic
Name of the Student
Name of the University
Author’s Note

1AUDITING AND ETHIC
Table of Contents
Introduction................................................................................................................................2
Section 1: Materiality.................................................................................................................2
Determination of Level of Materiality...................................................................................2
Review of the Draft Notes......................................................................................................4
Section 2: Preliminary Analytical Review.................................................................................4
Section 3: Review of Statement of Cash Flow and Audit Report..............................................7
Cash Flow Statement Review................................................................................................7
Audit Report Review..............................................................................................................8
Conclusion..................................................................................................................................9
References................................................................................................................................10

2AUDITING AND ETHIC
Introduction
Auditing is the process of methodical and independent examination of the financial
statements of the companies in order to examine the fact that whether there is any material
misstatements in those financial statements which can affect the financial outcome (William
Jr, Glover & Prawitt, 2016). There are certain aspects that the auditors are needed to
considered while providing the professional services. The auditors must ensure to determine
the level of materiality for the identification of material misstatements in the financial
statements. After that, the auditors must apply the appropriate analytical procedures for the
testing of the financial statements in order to find the risk areas that need attention (Knechel
& Salterio, 2016). Moreover, the auditors are needed to ascertain the going concern status of
the companies in order to provide the appropriate audit opinion. There are three sections in
this report. Section 1 involves the determination of materiality for the audit of Sonic
Healthcare Limited. Section 2 involves in the application of analytical procedure in the form
of ratio analysis. Section 3 analyses the cash flows of the firm for the determination of going
concern status of the company.
Section 1: Materiality
Determination of Level of Materiality
Materiality is considered as a crucial aspect for the auditors and the concept of
materiality is considered as fundamental to the audit. Materiality is applied by the auditors at
the audit planning stage and when audit is performed and at the time of the evaluation of the
effects of identified misstatements on the audit (Mio, 2013). Determination of the level of
materiality is considered as a crucial process for the companies and there is not any exception
of this fact in case of Sonic Healthcare Limited.

3AUDITING AND ETHIC
While there is not any mandatory approach for the determination of materiality, it is
needed follow three specific steps in the process. They are:
i. Selection of the appropriate benchmark;
ii. Determination of a level that is a percentage of this benchmark; and,
iii. Provide justification of the choice (icaew.com, 2019).
At the planning stage of the audit of Sonic Healthcare Limited, it is needed to follow
these three steps for the determination of materiality. It is shown below:
Step 1 –Certain factors are required to be considered while selecting the benchmark which
includes the nature of the entity and the nature of the industry in which it operates. Some of
the commonly used benchmarks are profit before tax, total income or total expenses, gross
profit, net assets and others. Profit before Income Tax is selected in case of Sonic
Healthcare Limited because this is commonly used to measure the performance of the
companies under this industry (Eilifsen & Messier Jr, 2014).
Step 2 – The selection of this percentage largely depends on the professional judgment of the
auditors. Generally, the use of 1% to 5% of threshold can be seen because of the large
acceptability of this range. In case of Sonic Healthcare Limited, 5% is considered as the
percentage of this benchmark (Legoria, Melendrez & Reynolds, 2013).
Determination of Materiality Level – On the basis of the above discussion, the materiality
of Sonic Healthcare Limited is shown below:
Profit before Income Tax × 5% = Overall Materiality
$616,981,000 × 5% = $30,849,050 that is $30 million approximately.