AUDITING AND ETHICS.

Running head: AUDITING AND ETHICS
Auditing and ethics
Name of the Student
Name of the University
Author’s note

AUDITING AND ETHICS1
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Section 1:....................................................................................................................................2
Determining the level of materiality to be used in the audit plan for the year 2018:.................2
Reviewing the various disclosures and draft notes in the annual report of the company:.........4
Section 2:....................................................................................................................................5
Identifying the key risk areas for audit matters to be addressed in the audit plan:....................5
Section 3:....................................................................................................................................7
Evaluating the going concern risk of the company by reviewing the cash flow:......................7
Reviewing the audit report and the opinions of the auditors of company for financial year
2018:...........................................................................................................................................8
Conclusion:................................................................................................................................8

AUDITING AND ETHICS2
Introduction:
The report is prepared to develop the audit plan for one of the chosen companies from
ASX by determining the level of materiality. For this purpose, the company that is selected is
Oil search limited is a biggest company operating in Papua New Guinea that is engaged in the
oil and gas assets development of the country for creating stakeholders value. The interest of
the company lies in the most prospective acreage of PNG that would support the high quality
and multiyear exploration drilling program by targeting gas resources for future
commercialisation. In this report, the quantitative estimate of the materiality has been
provided by discussing different bases and considerations involved in determination of
materiality (Oilsearch.com, 2019). Factors that are significant such as discloses and draft
notes are incorporated for determining materiality in the accounts. The report intends to
preliminary analytical review by addressing key balance sheet and profit and loss ratios for
the financial year 2015 to 2018. Later part of the report demonstrate the evaluating of the
ongoing risk of the company by reviewing the cash flow along with the auditors opinion.
Discussion:
Section 1:
Determining the level of materiality to be used in the audit plan for the year 2018:
The concept of materiality is determined in the context of presentation and
preparation of the financial statements as the discussion of the materiality by the auditors
would provide with a frame of references. At the planning stage of audit, the primary
objective of setting materiality is the identification of performance materiality and the
surrounding circumstances forms the basis of judgement of materiality. The fundamental
factor to the audit is the materiality concept which is applied by the auditors in evaluating the
effects of the material misstatements and when performing audits (Auasb.gov.au, 2019).

AUDITING AND ETHICS3
There are three key steps for determining materiality that is choosing the appropriate
benchmark, determination of the level which is usually the percentage of the benchmark and
justification of the choices. Some of the benchmark that can be used for determining
materiality is given by total income, total equity, total expenses, gross profit and profit before
tax (Icaew.com, 2019). However, for the determination of appropriate benchmark, it is
required by the auditors to have professional judgement by justifying such benchmark.
For the establishment of an appropriate quantitative materiality level to plan selection
strategies and audit strategies, a preliminary assessment of materiality is made by auditors.
The preliminary materiality for the audit planning is determined by auditors by considering
the financial results of prior year, year to year balances and results and budgets for the given
financial year. The initial step for preliminary materiality assumption is provided by the
quantitative materiality level that is applied to the audit procedures for evaluating the
outcome of the procedures (Brennan, 2016).
Materiality of Oil search limited has been determined with reference to the three years
benchmark that is from 2015 to 2018 of average group profit before profits. It also include
exceptional items for continuing operations and these are principal consideration in assessing
the financial performance. Given the volatility in the nature of prices of commodities and
cyclical nature of the industry impacting the profitability, the approach is regarded
appropriate. Materiality is represented by approximately 4% of the three year average profit
before taxation and 1% of the revenue of the group (Kaptein, 2015). Therefore, in the first
step, it is required to compute the average value of three years profit before taxation.
Average profit before taxation and the exceptional items=
(440874+185032-14251)/3= 611655/3=203885.3