Auditing: Arena Reit

This report represents the outcomes of an audit of financial statements of Arena Reit which deal in real estate industry in Australia. It includes a review of the internal control structure in place to confirm conformity with Australian Auditing Regulations, and to ensure that auditing procedures are capable, and offer value for money and financial integrity in accordance to the ASX. The report discusses the key business risks, identifies the materiality of the items, and carries out analytical procedures over the last three years of Arena Reit, using ratios and metrics.

1
Auditing: Arena Reit

2
Executive Summary
Auditing refers to an independent and systematic examination of information, reports, and
regarding the activities and performance on the accurate and fair view or in material respect of
the financial state of a company in accordance with the applicable reporting standards. It is a sort
of documented process for searching for audit evidences and analyzing it impartially for
determining the level to which the audit criteria established by the companies are met out. This
report represents the outcomes of an audit of financial statements of Arena Reit which deal in
real estate industry in Australia. For the purpose, it includes a review of the internal control
structure in place to confirm conformity with Australian Auditing Regulations, and to ensure that
auditing procedures are capable, and offer value for money and financial integrity in accordance
to the ASX. In summary, the report has found that Arena is complying with the relevant
guidelines as well as areas where improvements are necessary. It was also observed that the
company is performing well in its operations and is able to meet its liabilities on time. However,
the key business risks for Arena are operational, external, and regulatory risks.

3
Table of Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Key business risks in Arena Reit.................................................................................................................5
Application of the Audit Risk Model...........................................................................................................7
Analytical procedures................................................................................................................................10
Audit work steps using predominantly substantive approach....................................................................13
Sampling Plan...........................................................................................................................................16
Conclusion.................................................................................................................................................18
References.................................................................................................................................................19

4
Introduction
The following report is designed to gain an insight of auditing concepts in context to a company
listed on ASX. The report aims to perform the required auditing steps and design a risk-based
audit program in context of Arena Reit that owns, and manages specific real estate assets
throughout Australia. For this purpose, the substantial tests of balances of the company’s assets
and liabilities are performed using substantive approach. Moreover, the report discusses the key
business risks, identifies the materiality of the items, and carries out analytical procedures over
the last three years of Arena Reit, using ratios and metrics. Finally, a sampling plan is prepared
for each material account to complete the audit process.

5
Key business risks in Arena Reit
Business risks refer to the factors that have ability to prevent a company from the achievement of
its goals (Baatour et al., 2017). These factors, if not taken into consideration and managed
timely, could result in business failure. Since Arena Reit is a real-estate company, its key
business risks are divided into: location risks, operational policy risks, regulatory and external
risks, and appearance risks. These risks are mentioned as below:
Development risks
 Ground acquisition risk
 Zoning plan risk
 Nuisance risk
 Financing risk
 Social unethical development risk
 Workspace design risk
 Temporary housing risk
 Tender risk
 Planning risk
 Development budget risk
Financial policy risks
 Solvability risk
 Liquidity risk

6
 Cost of capital risk
 Budget cut risk
 CRE budget risk
 Real estate investment risk
 Book value risk
Operational & business policy risks
 Facility management risk
 Maintenance risk
 Real estate flexibility risk
 Office layout risk
 Health and safety risk
 Malfunctioning installation risk
 Occupancy rate risk
 Expansion profile risk
Location risks
 Supplier risk
 Uptime of production facility risk
 Preferred location risk
 Accessibility risk
 Stakeholder risk
Appearance risks

7
 Maintenance risk
 Design risk
External & regulation risks
 Real estate data availability risk
 Terrorism risk
 Natural failure risk
 Contracts hazard
 Political and social unrest risk
 Property market risk
 Exchange rate risk
 Market risk
 Legal risk
 Technology development risk
Importance of determining business risks for auditing
As per the guidelines of International Accounting Standard (ISA) 315 auditors are need to gain
proper knowledge of the Arena and its environment for purpose of evaluating the risks of
substantial misstatement within its financial statements (Shariman et al., 2017). This would help
the auditor to strengthen the importance of gaining a bird's eye view of the business operations
and related key risks by at the stage of audit planning.

8
Application of the Audit Risk Model
Audit risk refers to the threat that the auditor may issue an unqualified audit view if the financial
statements are extensively overstated or understated. This opinion could also be the result of the
significant flaws in the internal controls of the company.
In this view, the auditor needs to apply the Audit Risk model while carrying out audit in Arena
Reit. This model has three aspects called, Internal Risk (IR), Control Risk (CR), and Detection
Risk (DR) (Anantharaman et al., 2016). The IR represents the vulnerability of a group of
transactions or an account balance to the significant misstatement when there exist no related
controls. On the CR refers to the risks which the internal control processes find unable to identify
or prevent the material misstatements. DR signifies risk of auditor’s inability or failure to
discover the major errors in the accounts that are not even captured by the related internal
controls. The formula for determining the audit risk in Arena is:
AR = RMM*DR
AR = (IR*CR)*DR
DR= AR/ IR*CR
Or
AR = IR*CR*DR
Let the planned audit risk for the accounts receivables of Arena be at 0.05. Further, the
assessment of inherent risk is at 0.80 while the control risk is at 0.60. In order to find out the
degree of detection risk for this accounts receivable balance, the above audit risk model would be
used:

9
0.05 = 0.80*0.60*DR
0.05/DR = 0.80*0.60
0.05/DR = 0. 48
DR = 0.05/0.48
DR = 0.10
Result: From the equation of audit risk model, the detection risk or DR is determined at 0.10.
This shows that detection risk is lower or minimum while the internal risk is higher or maximum,
and the control risk is moderate or medium for the Arena Reit (Chan et al., 2018). Since the
internal risk rate is high in the company, it indicates that the accounting transactions of Arena
Reit might be exposed to the aspects of external environment along with the internal
environment within the organization, such as political & legal factors, and economic conditions.
On the other hand, the key areas where deception is expected to arise due to weaker internal
controls in the organization include:
 Payroll fraud
 Cash & other valuable assets
 Third party fraud
 Banking transactions
Therefore, while carrying out the audit program in Arena Reit, the auditor would require
reviewing those types of risks and applying the procedures for addressing the inherent risks in
the best possible way. Also, for this purpose, the auditor requires to employ relevant audit

10
approach and policy in order to calculate the impact of frauds and errors on the financial
statements, along with rectify these timely.
Analytical procedures
In accordance with the section 330 of International Accounting Standards, the auditor requires to
perform analytical procedures (Miglani et al., 2015). Here, the analytical procedures for Arena
Reit are performed as below, using the ratios and metrics for the three years’ financial statements
of the firm:
Calculation of ratios:
Ratios Year 2015 (AUS$) Year 2016 (AUS$) Year 2017 (AUS$)
Net profit ratio
Net profit/net sales*100
60966/73879*100
= 82.5%
72621/81732*100
= 88%
96791/106832*100
= 90%
Operating ratio
Operating expenses/net
sales*100
1875/73879*100
= 2.53%
3249/81732*100
=3.97%
3535/106832*100
=3.30%
Return on Capital
Employed
EBIT/Capital
employed*100
31676/(450623-
15509)*100
=7.27
33954/(513951-
15374)*100
=6.81%
38126/(621282-
16814)*100
=6.30%

11
Asset turnover ratio
Sales/total assets
73879/450623
=16.39
81732/513951
= 15.90
106832/621282
=17.19
Current ratio
Current assets/current
liabilities
18051/15509
=1.16
10415/15374
=0.677
17695/16814
=1.05
Quick ratio
Quick assets (CA-
Prepayments/current
liabilities
(18051-410)/15509
= 1.13
(10415-503)/15374
=0.644
(17695-459)/16814
=1.02
Comment on Net profit ratio:
From the above table, it can be analyzed that reasonable cost control has been maintained in
Arenas regardless of the substantial rise in sales (Arena Reit, 2016). In order to test this, it is
essential for the auditor compare operating costs to sales.
Comment on Operating ratio:
The above table shows that operating costs are low in comparison to revenue. It means the
expenses might be understated by Arena, or the high sales might be the result of increased
business (Arena Reit, 2017). Thus, it is important for the auditor to identify why this has
happened. The common causes might be inefficient business operations or overstretched

12
management. However, there might exist other implications too, which must be examined by the
auditor.
Comment on Capital Employed ratio:
It can be observed that the ROCE of Arena Reit has been decreased from the year 2016 in the
year 2017. However, the ratio was higher in 2015. It indicates that the company might has
stopped issuing more equity shares or borrowing loans (Arena Reit, 2017). However, the auditor
is required to check all the assertions properly to see if there exists any misstatement in the
financial statements.
Comment on Asset turnover ratio:
Asset turnover ratio indicates the ability of a company to generate sales using all its assets
efficiently. The above table tells that this ratio of Arena has been increasing for last three years
thus showing how hard the company has worked on its assets (Arena Reit, 2016). However, the
auditor needs to check all the assertions of the company related to this ratio so as to identify of
there is any overstatement of sales or understatement of assets in the balance sheet.
Comment on Current ratio:
Current assets are used by a company to oblige its current liabilities. The current ratio shows
how effectively the current assets are used by a company to pay off its debts (Arena Reit, 2016).
If the ratio is less than 1, it creates worries as the company does not have sufficient assets to
discharge debts. The above table shows that in 2016, Arena Reit’s current ratio was low and it
substantially increased in 2017. Thus, the auditor needs to check all the assertions before making
any conclusion.

13
Comment on Current ratio:
The quick ratio is valuable to determine an entity’s liquidity position when the inventory reduces
over time. This is because the discharging of current liabilities mainly depends on the cash and
receivables (Arena Reit, 2016). This ratio of Arena Reit is good in 2017. However, in order to
ensure the reliability, the auditor should analyze the business and comparatives of the company.
Audit work steps using predominantly substantive approach
In auditing tanti e approac i propo ed to pro ide e idence t at t e collected data o t e a ditor, subs v h s s v v h h f h u
a e acc rac completene and alidit o inancial tatement o an or ani ation n t i concern t eh v u y, ss v y f f s s f g z . I h s , h
tanti e approac in a ditin i e ec ted t e a ditor to di tin i t e material mi tatement insubs v h u g s x u by h u s gu sh h ss
t e inancial record nder t e tanti e approac di erent cla e o te tin t e tran actionh f s. U h subs v h, ff ss s f s g h s s,
di clo re and acco nt alance are incl ded T e o rnal entrie and di erent ad tment entrie ares su s u b s u . h j u s ff jus s
in inancial tatement are e amined t e a ditor o n tone et al tanti e approac can ef s x by h u (J h s ., 2013). Subs v h b
ed or ot internal and e ternal a dit acti itie o Arena eit T i approac i al o called a o c inus f b h x u v s f R . h s h s s s v u h g
approac a mo t o a dit acti itie are per ormed eri in and o c in doc ment T eh, s s f u v s f by v fy g v u h g u s. h
tanti e a dit approac i e l or t e companie in mana in ea internal control o er t esubs v u h s us fu f h s g g w k v h
inancial record T e e ample o tanti e a dit approac are an con irmation acco ntf s. h x s f subs v u h b k f , u
recei a le o er ation o p ical in entor o er e i ed a et con irm acco nt pa a le con irmv b , bs v f hys v y, bs v f x ss s, f u y b , f
de t anal i o lia ilitie a et e pen e and re en e lo er et al n t i concern t eb s, ys s f b s, ss s, x s s v u (G v ., 2014). I h s , h
tanti e approac in a dit or tep impro e t e relia ilit o t e collected data d rin t e a ditsubs v h u w ks s s v s h b y f h u g h u
proced re o an or ani ation T e a dit or tep or Arena eit are di c ed a elou f g z . h u w k s s f R s uss s b w:
Steps Description
Planning Planning is an essential tool of obtaining the desired outcomes from a specific

14
activity. It is the first step of audit for an organization. An auditor commences to
audit procedure with understanding the organizational activities, identifying
potential risks and establishing the objectives of audit. At initial stage, the
auditor gets in touch with the management and updates the management about
the audit scope and causes of audit. The auditor meets with the management and
obtains specific information about different departments of the organization. In
addition, the risk assessments are performed to determine scope of audit and
objectives. After that the auditor prepares an effective audit plan and program
(Hyatt and Taylor, 2013). At planning stage, it is analyzed that the management
of Arena Reit take interest in discussion with the auditor and provided required
information to precede the audit process in better manner. The management
provided entire information about entire required financial statements of the
organization that are demanded by the auditor.
Entrance
meeting
This step has importance for the auditor to accomplish the objectives of audit.
The internal audit staff and management communicate with each about different
functional areas of audit. In this meeting, the participants of Arena Reit converse
about the objectives and scope of audit that are based on risk assessment. The
concerns of department are discussed in this meeting that plays an essential role
in success of audit. As well as, the meeting participants analyze audit and
reporting procedure in the financial statements. The meeting provides essential
information about different financial issues in the organization (Lenz and Hahn,
2015). This step is also known as a communication step in audit process in which
different individuals of different departments communicate with each other about

15
the organizational concerns.
Fieldwork At this step, the internal controls are reviewed, evaluated and tested in an
effective manner. The department staff of Arena Reit is communicated in an
effective manner to gain understanding about the internal control structure. As
well as, different audit tests are implemented to identify the misstatement in
financial records. Through these audit tests the weaknesses in business
operations and organizational procedures can be identified in better manner.
Based on the collected data the audit report is summarized and communicated
the areas of organizational concern with the management.
Draft report At this step, the audit documentations are reviewed and draft report is prepared
to communicate the objectives, scope and termination of the audit. Possible
suggestions and comments are provided to the management to improve the
internal control and reduce the misstatements in financial records (Glover et al.,
2014). In addition, the internal audit staff shared the draft report to the
management. Different causes of misstatement in financial records and issues in
operational activities are discussed to the management.
Exit meeting The audit staff and the management meet to talk about the audit report and
conclude the audit. The participants of the meeting evaluate the draft report and
argue about the possible changes. In addition, they determine the due date for the
response of management on concluded audit.
Response of
management
At this step, the management responded to audit recommendations in written
form with including a corrective action to improve the accuracy of financial
statements and productivity of business process. As well as, the management

16
also responded about the execution timeframe of the corrective action for further
development (Cohen et al., 2013). The audit staff reviewed and added the
response of the management to the audit draft report.
Final report
and follow
up
At this step, a final report is prepared to distribute the management and state
office of auditor. In addition, the management is communicated to establish
implementation status of the audit suggestions.
Account
balance
Amount AU ($) Assertions Audit procedures
Cash at
bank
80000000 Existence, Valuation and
Allocation, Accuracy,
Completeness, Rights
and Obligations,
1.Request and examine
bank verifications
2. Take on tests of bank
reconciliations, follow-
up reconciling items.
Accounts
Receivables
1000000 Subsistence,
Occurrence, Accuracy,
Classification,
Recording
1. Trace the general
ledger.
2. Calculate and
reconcile the balances
Inventory 250000 Existence, Valuation,
Completeness,
Disclosure
1. Observe the physical
stock
2. Review the coast of
each item
Accounts 200000 Occurrence, 1. Examine the check

17
Payables Correctness,
Presentation and
Disclosure
register
2. Reconcile with the
related invoices
Creditors 150000 Occurrence,
Completeness,
Valuation, Disclosure
1. Balances made by
management are verified
2. The ledger accounts
are checked
Bank loan 175000 Recording, Valuation,
Rights and Obligations,
Presentation &
Disclosure
1. Review loan
documentation
2. Conducting test
reconciliation process
Outstanding
Commission
1400000 Recording, Rights and
Obligations, Valuation
Presentation &
Disclosure
1. Obtain confirmation
from the responsible
officer
2. Investigate the
nominal accounts
Sampling Plan
Sampling refers to the application of an audit procedure by the auditor to below 100% of the
items within a group of transactions or accounting balances for the purpose of analyzing some
basic characteristic. In context of Arena Reit, the auditor should take following steps:
1. Defining the attributes of the population

18
Since repairs and maintenance is a risky expense account inherently, for the audit, the auditor
would examine the accuracy level and categorization of assertions for repairs and maintenance
(Rashidfarokhi et al., 2018). The accuracy can be verified if transactions are recorded properly in
the correct accounts. At the final analysis, the auditor needs to confirm that these accounts are
correct materially or do not contain any material misstatement.
2. Identifying the sample size
Despite the nature of the sampling method adopted, before determining the number of those
transactions the auditor is required to sample, he has to reflect on the risk of mistaken
acceptance, tolerable error, confidence level, and expected fraud.
3. Choosing the sample items
For example, there exist 4,000 records in a group of transactions of small-dollar. The auditor
would divide 4,000 by 50 (the population size or sample size). It equals to 80, which would taken
as interval number. Then after, the auditor would organize these records in some sort of order
with the help of software or some other means to pick the starting point.
4. Carrying out audit procedures
After the selection of sample size and pulling of sample from the whole population of records,
the auditor would need to carry out the appropriate audit procedure that could differ from one
item to other (Hossain et al., 2017). For instance, the auditor could follow the transactions which
arise in the repairs and maintenance account to the records from the books, such as the paid bill
of lading.
5. Deriving at valid conclusions

19
The last step in sampling plan is to establish whether the account balance is considerably proper
(Andon et al., 2015). If the overall misstatements do not go beyond the reviewed acceptance
level, the auditor has the right to conclude that the account is not substantially misstated, and
there is no requirement for expanding the sample in order to examine more records.

20
Conclusion
On the basis of above discussions, it can be concluded that auditing is essential for a company in
order to provide a transparent picture of its operations to its stakeholders, including the society.
The above analysis shows that Arena Reit is operating effectively in accordance to the principles
and guidelines defined by the Australian Accounting Law and Australian Securities Exchange.
Although there exist some variations in the figures of accounting items in the financial
statements of the company over the last three years, the reasons for such variations seem to be
valid. Also, the sampling plan made by the auditor for Arena Reit helps the auditor in
determining the characteristics of each item along with the identification of any material
misstatement.

21
References
Anantharaman, D., Pittman, J.A. and Wans, N. (2016) State liability regimes within the United
States and auditor reporting, The Accounting Review, 91(6), pp.1545-1575.
Andon, P., Baxter, J. and Chua, W.F. (2015) Accounting for stakeholders and making accounting
useful, Journal of Management Studies, 52(7), pp.986-1002.
Arena Reit (2016) Annual Report 2016. [Online]. Available at:
https://www.arena.com.au/arena/media/docs/Reports/Arena-2016-AR-FINAL-Web-version.pdf
(Accessed: 15th September, 2018).
Arena Reit (2017) Annual Report 2017. [Online]. Available at:
https://www.arena.com.au/arena/media/docs/Reports/Arena-2017-annual-report-Final-web.pdf
(Accessed: 15th September, 2018).
Baatour, K., Ben Othman, H. and Hussainey, K. (2017) The effect of multiple directorships on
real and accrual-based earnings management: Evidence from Saudi listed firms, Accounting
Research Journal, 30(4), pp.395-412.
Chan, D.Y., Chiu, V. and Vasarhelyi, M.A. eds., (2018) Continuous Auditing: Theory and
Application. Australia: Emerald Publishing Limited.
Cohen, J. R., Hoitash, U., Krishnamoorthy, G., and Wright, A. M. (2013) The effect of audit
committee industry expertise on monitoring the financial reporting process, The Accounting
Review, 89(1), pp. 243-273.

22
Glover, S. M., Prawitt, D. F., and Drake, M. S. (2014) Between a rock and a hard place: A path
forward for using substantive analytical procedures in auditing large P&L accounts:
Commentary and analysis, Auditing: A Journal of Practice & Theory, 34(3), pp. 161-179.
Hossain, S., Yazawa, K. and Monroe, G.S. (2017) The Relationship between Audit Team
Composition, Audit Fees, and Quality, Auditing: A Journal of Practice & Theory, 36(3), pp.115-
135.
Hyatt, T. A., and Taylor, M. H. (2013) The effects of time budget pressure and intentionality on
audit supervisors' response to audit staff false sign‐off, International Journal of Auditing, 17(1),
pp. 38-53.
Johnstone, K., Gramling, A., and Rittenberg, L. E. (2013) Auditing: a risk-based approach to
conducting a quality audit. USA: Cengage learning.
Lenz, R., and Hahn, U. (2015) A synthesis of empirical internal audit effectiveness literature
pointing to new research opportunities, Managerial Auditing Journal, 30(1), pp. 5-33.
Miglani, S., Ahmed, K. and Henry, D. (2015) Voluntary corporate governance structure and
financial distress: evidence from Australia, Journal of Contemporary Accounting &
Economics, 11(1), pp.18-30.
Rashidfarokhi, A., Toivonen, S. and Viitanen, K. (2018) Sustainability reporting in the Nordic
real estate companies: empirical evidence from Finland, International Journal of Strategic
Property Management, 22(1), pp.51-63.
Shariman, J., Nawawi, A., Salin, P. and Azlin, A.S. (2017) Public Sector Accountability-
Evidence from the Auditor General's Reports, Management & Accounting Review, 16(2).