Auditing and Ethic

Running head: AUDITING AND ETHIC
Auditing and Ethic
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Table of Contents
Introduction................................................................................................................................2
Section 1.....................................................................................................................................2
Section 2.....................................................................................................................................4
Section 3.....................................................................................................................................6
Conclusion..................................................................................................................................8
References..................................................................................................................................9

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Introduction
Auditing is considered as such a profession where the auditor have the responsibility
of appropriate examination and inspection of the financial reports, accounting books and
others of the audit clients in order to make sure that they are free from material misstatements
(Ojala et al., 2014). This profession puts some obligations on the auditors when conducting
the audit. Determination of the level of materiality is considered as one of those crucial
aspects that the auditors need to undertake in auditing. For ascertaining the risky areas, the
auditors perform preliminary analytical review of the financial statements of the clients. In
addition, they also undertake the analysis of cash flows to ascertain whether there is the going
concern risk or not (Hay, 2015). This report is divided into three sections. The first section
sheds light on the aspects of determination of materiality. The second section undertakes the
analysis of ratios as preliminary analytical review. The third section discusses about going
concern risk from the analysis of cash flows. Oil Search Limited 10 Toea (Oil Search) is
considered for the report.
Section 1
Materiality Level Determination
Determination of the level of materiality is considered as a fundamental aspect in the
audit process that helps the auditors in the determination of the areas of material
misstatements. The auditors have the responsibility to determine the materiality level in the
stage of audit planning (Boiral, Heras-Saizarbitoria & Brotherton, 2019). In case of Oil
Search, it is required to determine the materiality level in the audit planning stage. For the
determination of the materiality level, the auditors should follow two steps. Appropriate
benchmark for materiality needs to be selected in the first step. The auditors are required to
determine a particular level that is a percentage of the prior selected benchmark. In case of

3AUDITING AND ETHIC
both the steps, proper justification should be provided from the auditors’ end (Chong, 2015).
The following discussion shows the materiality level determination of Oil Search.
First Step – It is needed to take into consideration some aspects at the time to determine the
benchmark regarding materiality; these aspects are nature of the firm and the nature of the
firm’s industry. Wide use of benchmarks such as net asset, gross profit, PBT (profit before
tax), total income and total expenses can be seen can be seen by the auditors. In case of Oil
Search, the selected benchmark is PBT. It needs to be mentioned in justification that PBT is
the most used performance indicator in this industry (Kristensen, 2015). The value of PBT in
2018 is US$507,392,000 for Oil Search.
Second Step – This is another crucial part that is solely dependent on the auditor’s
professional judgment. In most of the cases, the auditors select this percentage within a range
of 1% to 5% (Tritschler, 2013). This is a large acceptable base to the auditors all over the
world. For this reason, this materiality threshold for the audit of Oil Search is considered as
5% of the PBT.
Materiality Level – By considering the above-selected benchmark and materiality threshold,
the determined materiality level of Oil Search is shown below:
Overall Materiality Level = PBT × 5% = 25,369,600.
On the basis of the above discussion and calculation, the level of materiality of Oil
Search is $25,000,000 approximately.
Areas that May Have Significance to the Audit
Adoption of New Accounting Standards – It can be seen from Note 1(a) (i) in the annual
report that Oil Search that there has been the adoption of two new accounting standards in the
year 2018 that are IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with