THE AUDITING AND ETHICS

Running head: AUDITING AND ETHICS
Auditing and ethics
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Table of Contents
Introduction......................................................................................................................................2
Section 1..........................................................................................................................................2
Materiality level...........................................................................................................................2
Significant amount for audit........................................................................................................4
Section 2..........................................................................................................................................6
Preliminary analytical review......................................................................................................6
Key ratio computation of CS Limited.........................................................................................7
Section 3........................................................................................................................................10
Statement of cash flow...............................................................................................................10
Audit report................................................................................................................................10
Conclusion.....................................................................................................................................11
Reference.......................................................................................................................................12

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Introduction
In accordance with ASA 320 materiality is the misstatements that includes omissions and
are accounted for as material if the same in association with other or individually are likely to
have its influence on the economic decision taken by the users based on the annual report.
Judgments regarding the concept materiality are made depended on the contiguous
circumstances and are impacted by the nature or the size of misstatements or by both size as well
as nature (Eilifsen & Messier Jr, 2014). Major purpose of the task is to focus on the materiality
concept and analysing the financial report of ASX listed entity CSL Limited to estimate the
amount of materiality. Further the task will prepare the preliminary analytical review in
association with the information provided by the entity. In addition the report will go through the
cash flow statement and auditors report of CSL Limited for extracting various information.
Section 1
Materiality level
In accordance with AUS 202 objectives as well as general principles that administrates
the financial report audit is to allow the auditor in expressing the opinion in context of whether
the annual statement has been prepared in conformity with the framework of financial reporting
in all the material aspects. Relationship among materiality and audit risk indicates that with
higher level of risk level of materiality becomes lower. Thus, the auditor shall take into
consideration the association among audit risk and materiality while determining the nature,
timing and extent of audit procedure (Louwers et al., 2015).

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Planning materiality is setting of the amount for misstatement by auditors at the stage of
planning dependent on the materiality in the annual statement. It is used by the auditor for
evaluating the impact of misstatement in aggregate or individually in context of the financial
statement. Once the materiality in annual statement is acknowledged as well as assessed by the
auditor, the auditor establishes the performance materiality that is the tolerable misstatement.
However, while establishing the level of materiality the auditor considers various factors
including the level of reliance that can be placed on the information provided by the management
and other factors if any that may signify any deviation from normal activities of the entity
(Glover & Prawitt, 2014). Quantitative factors considered for computing materiality level are as
follows –
 0.5% - 1% of the gross revenue
 1% - 2% of the total assets
 2% - 5% of the shareholder’s equity
 5% - 10% of the net profit
If the financial report of CSL Limited for the year ended 2019 is taken into consideration,
level of materiality shall be computed as below –
It can be recognized from above presented table that highest amount is 5% of
shareholder’s equity that is $262.57 million. However, the maximum level of misstatement that

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can be tolerated is assumed to be 50% to 75% of highest amount for material misstatement. Thus
the tolerable amount for material misstatement will be $262.57 * 75% = $196.92 million. It can
be identified that the computed amount for tolerable misstatement is quite high and hence the
level of audit risk is expected to be lower in context of the financial report for the year ended
2018. The auditor of CSL Limited for the period under concern has stated that the entity’s
financial report is offering true and fair view in context of its financial performance as well as
financial position (Arens et al., 2016)
Significant amount for audit
Looking into the financial report of CSL Limited for the year 2018 below mentioned
items are considered to be noteworthy for the purpose of audit –
Contingencies –the entity is involved in the litigation in ordinary business course that includes
litigation on account of breach of contract claims. In some of the cases, the entity recognized
legal provision that is expected to be utilized in case any settlement is required. In addition, the
entity is subject to few patent infringements action those are brought in by the competitors. The
entity is highly confident in context of intellectual property status those are the product for more
than the decade as a result of innovative research by the entity (Byrnes et al., 2015). However,
the entity is defending the claims vigorously. Procedure of audit for the contingencies will be as
follows –
 Analysing the event’s probability – auditor is required to project the likelihood of taking
place of the event. This likelihood can be of different level such as probable, remote or
reasonably probable. In addition the auditor is required to enquire that whether the entity

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has provided required disclosures or footnotes in context of the possible or reasonably
possible contingent liabilities (Ruhnke, Pronobis & Michel, 2014).
 Considering likely events – the auditors are required to look into contingent liabilities
under probable or likely segment as the same shall be accounted with special treatment.
In case it is found that the contingent liability is likely, amount for which is not able to
be forecasted, same liability is required to be only disclosed through notes. However, in
case the likelihood of liabilities is certain and the value for the same can be forecasted, it
requires particular journal entry to be passed. Under such circumstances, the auditor
shall ensure that the entity passed both debit as well as credit entry for the likely as well
as measurable amount of contingent liability, if any (Coetzee & Lubbe, 2014).
Provisions – CSL Limited reports provisions while all the below mentioned criteria fulfilled –
 It is likely that the entity is required make payment through outflow of the economic
resources for resolve obligation
 It has constructive or current obligation on account of past event or past transaction
 Amount of the obligation can be forecasted reliably
Provision that is reported by the entity is the best forecast by the management for the
expenses required for resolving the obligation. It is determined through discounting likely future
cash flow required for resolving the obligation at pre-tax discount rate (Wali, 2015). Producer for
the provisions those shall be followed by the auditor must include –
 Auditor must assure that all the provisions are passed through charging the same in
profit and loss account.
 The auditor shall ensure that amount reserved as provision is sufficient

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 Auditor shall further verify that the amount used only for the purpose for which they
were originally created.
 The auditor shall also verify that the disclosure for all the provisions have been provided
by the entity in the financial report.
Section 2
Preliminary analytical review
It involves analytical procedure as well as inquiry procedure of management those are
applied under the audit planning stage. Auditors shall carry out the procedure for risk assessment
that includes observation as well as inspection procedure those are primarily focussed on gaining
understanding of the organisation’s internal control in addition to significant agreements or
contracts fundamentals to the entity (Jans, Alles & Vasarhelyi, 2014).

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Key ratio computation of CS Limited
Above presented ratios can be interpreted as follow for the purpose of analytical review
procedure –

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Liquidity ratio –these ratios are considered as an important metrics those are used for
establishing the ability of the debtor in paying off the short-term debt obligation without raising
additional capital from outside. Major ratios used for measuring the ability are current ratio and
quick ratio. Current ratios measures the amount of current assets against current liabilities of the
entity under which if the resultant ratio is more than 2 that signifies that the liquidity position of
the entity is good. On the other hand, the quick ratio only considers the current assets readily
convertible into cash for analysing the liquidity position where if the resultant ratio is more than
1 that signifies that the liquidity position of the entity is stable (Uechi et al., 2015). Looking into
the computation it can be identified that the current ratio of CSL Limited over the years from
2016 to 2019 has been reduced from 2.78 to 2.63 and quick ratio for the same period has been
reduced from 1.21 to 1.14. However, current ratios of more than 2 and quick ratios of more than
1 over the 4 years period are signifying that the liquidity position of the entity is good.
Leverage ratio – it measures the proportion of debt that company has as against its equity. Debt
to equity ratio of 1 suggests that the company has proper balance among the amount of debt and
equity. Looking into the computation it can be acknowledged that the debt to equity ratio of CSL
Limited over the years from 2016 to 2019 has been reduced from 1.95 to 1.35that is signifying
that the leverage position of the entity over the years has been improved (Faello, 2015). Times
interest earned signifies the operating profit available to the firm for meeting the interest
obligations. Though the same has been reduced to 14.25 times from 22.73 times over the period
of 4 years, the entity still has sufficient earnings to meet its interest obligation
Profitability ratio – it is used for measuring the entity’s capability of earning profit from the
revenue earned by it. Net profit margin represents the proportion of profit left with the entity
after paying-off all the expenses. On the other side, return on equity represents the entity’s

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capability to create earnings from shareholder’s investment (Dokas, Giokas & Tsamis, 2014).
Looking into the computation it can be identified that the current ratio of CSL Limited over the
years from 2016 to 2019 has went up from 21.02% to 23.38% and ROE for the same period has
been reduced from 48.40% to 36.54%.
Looking into the entity’s entire financial performance for the period covering last 4 years
areas which shall be analytically reviewed are –
 Cash – this item is considered as material on account of its most liquid nature. Major
assertion associated with cash are – (i) existence that is all the cash balance reported are
actually exist on balance sheet date (ii) completeness that is all the transaction associated
with cash have been reported in the books. While auditing, cash balance shall be
reconciled with bank records and all the ash related records shall be verified with
associated documents (Kharisova & Kozlova, 2014).
 Interest bearing liabilities – it has been found that this item involved largest amount under
long term liabilities. Major assertion associated with interest bearing liabilities are – (i)
cut-off that is liabilities related to the current period only has been reported (ii) existence
that is all the interest bearing liabilities reported are actually exist on balance sheet date.
While auditing, the auditor shall verify all the documents related to the same along with
the amount, interest rate, lender’s name and repayment schedule (Leung et al., 2014).
Section 3
Statement of cash flow
 Operating activities provided the majority of cash inflows amounting to $1644.4 million
and investing activities had greatest cash outflows amounting to $1287.3 million

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 Primary cash receipts were receipts from customers amounting to 8603.2 million and
primary cash payments were towards suppliers and employees amounting to $6304.5
million (Annual Reports, 2020).
 Major non-cash financial and investing activity was variations in the exchange rate on
account of foreign cash as well as cash equivalents
 Cash from operating activities reduced from $1902.1 million to $1644.4 million over
2018 to 2019. Further the closing cash balance over the same period reduced from $812.7
million to $657.8 million. These indicate going concern issue for the entity. Hence, the
auditor must verify the receipts of this year against preceding year and verify the reason
of difference (CSL Limited, 2020).
Audit report
Auditors Ernst & Young expressed unmodified opinion. However, the following matters
have been recognised as key audit matter –
 Valuation and existence of inventories
 Complexities of tax (Annual Reports, 2020).
Conclusion
It is determined from above discussion that materiality shall be determined by the auditor
while the nature, timing and extent of audit is determined by them along with the audit procedure
and evaluating effect of the misstatement. Looking into financial overview of CSL Limited it is
observed that cash and interest bearing liabilities shall be reviewed analytically. Further, the cash
flow statement is signifying that there is going concern issue in the entity that shall be taken into
consideration while carrying out the audit.

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Reference
Jans, M., Alles, M. G., & Vasarhelyi, M. A. (2014). A field study on the use of process mining of
event logs as an analytical procedure in auditing. The Accounting Review, 89(5), 1751-
1773.
Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector dominance
ratio analysis of financial markets. Physica A: Statistical Mechanics and its
Applications, 421, 488-509.
Faello, J. (2015). Understanding the limitations of financial ratios. Academy of Accounting and
Financial Studies Journal, 19(3), 75.
Dokas, I., Giokas, D., & Tsamis, A. (2014). Liquidity efficiency in the Greek listed firms: a
financial ratio based on data envelopment analysis. International Journal of Corporate
Finance and Accounting (IJCFA), 1(1), 40-59.
Arens, A.A., Elder, R.J., Beasley, M.S. & Hogan, C.E., 2016. Auditing and assurance services.
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Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. &
Vasarhelyi, M., (2015). Evolution of auditing: From the traditional approach to the future
audit. Audit Analytics, 71.
Coetzee, P. & Lubbe, D., (2014). Improving the efficiency and effectiveness of risk‐based
internal audit engagements. International Journal of Auditing, 18(2), pp.115-125.

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Eilifsen, A. & Messier Jr, W.F., (2014). Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Glover, S.M. & Prawitt, D.F., (2014). Enhancing auditor professional skepticism: The
professional skepticism continuum. Current Issues in Auditing, 8(2), pp.P1-P10.
Kharisova, F.I. & Kozlova, N.N., (2014). Applying the category of «Assertions (or
preconditions)» In audit of financial statement. Mediterranean Journal of Social
Sciences, 5(24), p.180.
Leung, P., Coram, P., Cooper, B.J. & Richardson, P., (2014). Modern Auditing and Assurance
Services 6e. Wiley.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. & Thibodeau, J.C., (2015). Auditing
& assurance services. McGraw-Hill Education.
Ruhnke, K., Pronobis, P. & Michel, M., (2014). Audit materiality disclosures and credit lending
decisions.
Wali, S., (2015). Mechanisms of corporate governance and fixed asset revaluation. International
Journal of Accounting and Finance, 5(1), pp.82-97.
Auasb.gov.au. (2019). Retrieved 9 May 2019, from
https://www.auasb.gov.au/admin/file/content102/c3/AUS_306.pdf
Annual Reports. (2020). Retrieved 3 January 2020, from
https://www.csl.com/investors/financial-results-and-information/annual-reports
CSL Limited. (2020). Retrieved 3 January 2020, from https://www.csl.com/

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