Auditing and Ethics

This assignment analyzes Altium Limited, a software company, focusing on auditing and ethics. It examines the materiality concept, financial analysis, and cash flow study of the company. The assignment also discusses the going concern risk and audit procedures for addressing it.

Auditing and Ethics Answers for
questions given

Table of Contents
INTRODUCTION................................................................................................................................2
MAIN BODY ......................................................................................................................................3
SECTION 1 Materiality Concept for Altium Limited..........................................................................3
SECTION 2. Financial Analysis of Altium Limited........................................................................4
SECTION 3 Cash Flow study..........................................................................................................7
CONCLUSION....................................................................................................................................9
REFERENCES.....................................................................................................................................9

INTRODUCTION
The term Auditing is defined as a process of making detailed examination or observation of the
financial statements, accounts, reports or records related to any business organization or company.
Auditing process helps the stakeholders as well as investors of the company in seeking confidence
related to the preparation of accounting reports and statements by ensuring that they are accurate,
correct and reliable for making investment related decision. Auditor should always comply with
applicable rules and acts while conducting audit. Also, auditor should conduct its auditing function
in an ethical manner by complying with code of conduct. The present report is based on Auditing
and Ethics norms related to Altium Limited which is an American, Australian domiciled owned
public software company which is engaged in business of PC based electronics design software for
those engineers who design the printed circuit boards. Report will discuss about materiality concept
and its relevant application in auditing procedure. Also, the report will provide financial analysis of
the company for the period 2015 to 2018. On the basis of financial ratios of last 4 years, a
preliminary analytical review on the financial information will be provided. At last, the report will
streamline about the Statement of Cash Flows related to the Company determining area creating the
highest inflow as well as outflow of cash.
MAIN BODY
SECTION 1 Materiality Concept for Altium Limited
The materiality concept of accounting refers to concept where financial information of a
company is considered to be material for preparation of the financial statements, having impact on
the decision making process of the end users of the financial statements. The Financial information
is ma be of material importance for one company & immaterial for another (Duska, Duska and
Kury,2018).
The main objective behind materiality concept is to determine whether the financial
information disclosed in the financial statement will have any significant impact on the opinions of
financial statement users such as auditors, shareholders, investors etc.
Materiality Level of Company
Particulars Materiality
Level
2018 (in
$000)
Materiality
Amount
Operating Profit 5.00% 39703 1985.15
Total Assets 1.00% 233991 2339.91
Net Profit 3.00% 37489 1124.67
Shareholders Equity 4.00% 36353 1454.12

According to the Materiality concept,
1. Operating profit – The materiality level is 5% and the materiality amount is $1985.15,
which is considered as material and has to be disclose while preparing the financial
statement as it will help investor in assessing the financial position of the company.
2. Total Assets – The materiality amount for Company is $2339.91 which is of crucial nature
and disclosure has to be made about it in the financials, though the materiality level is only
1%.
2. Net profit – In case of net profit, investor can evaluate about the net amount of profit
available to them as profit, therefore it is required to be a part of financial statement.
3. Shareholders equity – With the help of shareholders equity, investors can determine the
amount of earning per share. So, it is required to have disclosure in financials of the
company.
SECTION 2. Financial Analysis of Altium Limited
Particulars 2015 (in $000) 2016 (in $000) 2017 (in $000) 2018 (in $000)
1. Current Ratio
Current Assets 84565 70093 79806 95429
Current Liabilities 41718 45703 57223 63692
Current Ratio = Current Assets/
Current Liabilities 2.03 1.53 1.39 1.50
2. Acid Test Ratio
Quick Asset 82365 67979 76904 91258
Current Liabilities 41718 45703 57223 63692
Acid Test Ratio = Current
Assets/ Current Liabilities 1.97 1.49 1.34 1.43
3.Debtor days
Trade Debtors 20459 29840 32631 38799
Revenue Sales 80535 93699 110957 140368
Debtor days = (Trade
Debtors/Revenue Sales) * 365 92.72 116.24 107.34 100.89
4. Creditor days
Trade Payables 5988 7137 10179 12147
Cost of Sales 80535 93699 110957 140368
Creditor days = (Trade
Payables/Cost of Sales)*365 27.14 27.80 33.48 31.59
5. Operating Profit Margin
Operating Profit 21587 24610 29472 39703
Total Revenue 80535 93699 110957 140368

Operating Profit Margin =
Operating Profit /Total
Revenue
0.27 0.26 0.27 0.28
6. Net Profit Margin
Net Profit 92398 23020 28077 37489
Net sales 80535 93699 110957 140368
Net Profit Margin = (Net
Profit/ Net sales)*100 115 25 25 27
7. Return on Assets
Net Income 92398 23020 28077 37489
Total Assets 171572 196372 210796 233991
Return on Assets = Net
Income/ Total Assets 0.54 0.12 0.13 0.16
8. Return on Capital
Employed
Net Operating Profit 92398 23020 28077 37489
Total Assets 171572 196372 210796 233991
Current Liabilities 41718 45703 57223 63692
Total Assets – Current
Liabilities 129854 150669 153573 170299
Return on Capital Employed =
Net Operating Profit/ (Total
Assets – Current Liabilities)
0.71 0.15 0.18 0.22
(Source: Annual Report of Altium Limited, 2018)
Trends and changes in key Financial Ratios of the company:
Particulars 2015 2016 2017 2018
Current Ratio 2.03 1.53 1.39 1.50
Acid Test Ratio 1.97 1.49 1.34 1.43
Debtor days 92.72 116.24 107.34 100.89
Creditor days 27.14 27.80 33.48 31.59
Operating Profit Margin 0.27 0.26 0.27 0.28
Net Profit Margin 115 25 25 27
Return on Assets 0.54 0.12 0.13 0.16
Return on Capital
Employed 0.71 0.15 0.18 0.22
Interpretation :
1. Current Ratio – It is considered as a liquidity ratio which helps the company in measuring the
ability of a company to pay its short term obligations or which are going due within one year with
the available resources. The current trend of this ratio depicts that company is having the highest
ratio of 2.03 in year 2015 as compared to other 3 years. After 2015, ratio started declining and reach
to 1.50 in year 2018. This can be understand that company is having enough current assets and

resources to meet all its short term and day to day business obligations.
2. Acid Test Ratio – Also known as Quick Ratio, which is considered as a type of liquidity ratio
measuring the ability of company related to writing off of its current liabilities by using its cash or
quick assets immediately. For Altium, this ratio is having a declining trend till year 2017. In 2018,
Acid test ratio for the company is 1.43 which defines that company is having sufficient assets to
meet its short term obligations.
3. Debtor days – IT defines average time period which customers or debtors are taking for making
payment or time in which company is able to collect its cash amount. In this case, company is able
to collect its cash within a period of 110 days approx. which is not good for company as it will
affect the working capital and company will be having shortage of cash amount with itself.
4. Creditor days – Defines the time period in which company will make payment to its suppliers,
vendors and other business material provider. Company should always delay its payment for remain
liquid. Altium has improved it creditor period in comparison with year 12015 which is good for
company.
5. Operating Profit Margin -It depicts the amount of profit earned by the company after meeting
all the variable cost and business expenses. The operating profit for company is having a mixed
trend and is increasing.
6. Net Profit Margin – Defines the amount of profit remaining after meeting all business expenses
and tax amount. The net profit of company has started declining after 2015 and reach 27% in year
2018. For company, decrease in net profit can be because of high interest and tax payment.
7. Return on Assets – It helps in assessing the level at which company is able to use its business
assets for generating profit or earning more revenue amount. In 2015, Altium is utilising its business
assets at maximum for generating profit as compared to other period. Improper utilization can
leads to low profitability for company.
8. Return on Capital Employed – It is a measure which can be used for comparing the
profitability aspect of the company after taking into consideration the capital amount used. For
Altium, it can be said that the company is having a return of 22% in year 2018 as compared to year
2015 which means that company is lacking proper utilization of its capital amount.
Financial statement assertions are defined as the claims which are made by the management
of a business organization regarding its financial statements, accounts and records. These assertions
form theoretical basis by use of which external auditors can develop the procedures related to audit
which are as follows:
 Accuracy - Information provided by the financial statements of the company should be recorded
accurately so that it can be used by its investor. Also, business transactions compiled into the correct
reproting period.

Completeness – Information disclosed in financial statements should be complete and accompany
footnotes at last for better understanding of results and financial position of the entity (Hui, Nelson
and Yeung, 2016).
Existence - The information recorded is required to be occurred during the year. Any fraudulent
transactions will result in violation of this assertion.
Understandability & Valuation - The information should be clearly presented and recorded with
no intention of making financial results & position complicate to understand. Also, business
transaction should be correctly valued either at market or book value.
SECTION 3 Cash Flow study
Particulars 2015 (in
$000)
2016 (in
$000)
2017 (in
$000)
2018 (in
$000)
Cash flows from operating
activities 20398 14082 35861 48482
Cash flows from investing
activities -2338 -20009 -9041 -14708
Cash flows from financing
activities 24014 17674 -20842 -25642
(Source: Annual Report of Altium Limited, 2018)
The category of cash flows providing majority of cash inflows is Operating activities of the
business. In year 2018 cash inflow is highest at $48482. Also, the category having the greatest
outflows in overall 4 years is from the Financing activities of the company i.e. $(25642).
The primary cash receipts and cash payments during the year are as follows:
Cash Receipts -
1. Receipts from customers
2. Interest received
Cash Payments -
1. Payments to suppliers and employees
2. Payment for expenses relating to acquisitions
3. Interest and other finance costs paid
4. Net income taxes paid
5. Payment for purchase of business, net of cash acquired
6. Payment on contingent and deferred considerations
7. Payment for property, plant and equipment
8. Payment for intangibles
9. Dividends paid

10. Repayment of borrowings
All the non cash transactions related to Investing and financing activities does not affect the
cash inflows or outflows of the company but takes into consideration only the equity of owners or
long term assets and liabilities of the company (Lewellen and Lewellen, 2016). It is mentioned at
the footnote of the cash flow statement. The main non cash financial and investing activities of the
business are as follows:
1. Depreciation and amortisation
2. Share based payments
3. Unrealised foreign exchange differences
The concept of Going concern defines that the company will carry own or continues its
business for longer period of time irrespective of its members. Company which is preparing its
financial statements on the going concern basis by taking assumption that they will continue their
business operations for the foreseeable future period. The assumption made by the company is
related to the fact that it does not have any intention of liquidating or winding up its business assets.
The Going concern risk means that business organisation will never be forced to halt its
business operations and/ or liquidate its business assets in near time period at the very low sale
prices. The Going concern risk for Altium Limited in this case is when the company has to conduct
its business operations by incurring a cash outflow of $(20009) in investing activity in the year
2016. With the help of following factors Going concern risk can be evaluated:
1. Negative trends such as decrease in sales level, increasing costs etc.
2. Internal matters such as work stoppages or other labour difficulties, inefficient accounting
system, inefficient accounting system etc.
3. External matters like legal proceedings, loss of principal customer or supplier, loss of
franchise, license or patent etc.
4. Other matters related to financial difficulties such as default on loan or similar agreements,
non compliance of statutory capital requirements etc.
Audit procedures for addressing the Going concern risk are as follows:
1. Analytical procedure of the company' business operations.
2. Making a review of occurring of all the Subsequent events such as Bankruptcy of major
customers, fall in the market price of inventory of company etc.
3. Reviewing the compliance made in respect of terms related to debt and loan agreements.

4. Having an overview of Minutes made of the meetings of the company (Baik and et.al.,
2016).
5. Responding to inquiry made by Legal counsel related to Litigation, claims, violations etc.
6. Seeking confirmation from the Related parties and third parties related to the financial
supports.
CONCLUSION
From the above report it can be concluded that for undertaking the auditing process, the
auditor should comply with all code of conducts and ethical norms. Also, it is the duty of auditor to
furnish accurate and correct financial information in the financial statements of the company so that
its investors and other stakeholders can make use of it in making decision related to the investment
options. The report has discussed that materiality concept is of very much importance for every
company in preparation of its financial statements and accounts, as all the material information has
to be disclosed in which are going to effect the decision making process of the investor. Further,
analytical review of the financial ratios form year 2015 to 2018 has been made for assessing the
trends. At last report has disclosed study made in context of the cash flow statement of Altium
Limited.

REFERENCES
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Penman, S. H., 2015. Financial Ratios and Equity Valuation. Wiley Encyclopedia of Management.
pp.1-7.
Lakshan, A. I. and Wijekoon, W. M. H. N., 2017. The use of financial ratios in predicting corporate
failure in Sri Lanka. GSTF Journal on Business Review (GBR). 2(4).
Morales - Díaz, J. and Zamora - Ramírez, C., 2018. The impact of IFRS 16 on key financial ratios:
a new methodological approach. Accounting in Europe. 15(1). pp.105-133.
Lukason, O., Laitinen, E. K. and Suvas, A., 2015. Growth patterns of small manufacturing firms
before failure: interconnections with financial ratios and nonfinancial variables. International
Journal of Industrial Engineering and Management. 6(2). pp.59-66.
Baik, B. and et.al., 2016. Who classifies interest payments as financing activities? An analysis of
classification shifting in the statement of cash flows at the adoption of IFRS. Journal of
Accounting and Public Policy. 35(4). pp.331-351.
Lewellen, J. and Lewellen, K., 2016. Investment and cash flow: New evidence. Journal of Financial
and Quantitative Analysis. 51(4). pp.1135-1164.
Hui, K. W., Nelson, K. K. and Yeung, P. E., 2016. On the persistence and pricing of industry-wide
and firm-specific earnings, cash flows, and accruals. Journal of Accounting and Economics.
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Online
Annual Report of Altium Limited. 2018. [Online]. Available through:
<http://www.annualreports.com/HostedData/AnnualReportArchive/a/ASX_ALU_2016.pdf>.
Auditing of Small entities. 2017. [Online]. Available through:
<https://www.intheblack.com/articles/2017/03/16/live-chat-small-entities-audit-manual>.
Statement of cash flows. 2019. [Online]. Available through:
<https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-of-cash-
flows/>.