Auditing Process and Risk Matrix

This assignment delves into the auditing process, specifically focusing on Metcash Limited's financial statements. It analyzes the inherent, control, and detection risks associated with key accounts such as inventories, interest-bearing borrowings, cash and cash equivalents, sales revenue, and dividends. The assignment emphasizes the importance of understanding a company's business to effectively evaluate its financial information and practices. Additionally, it discusses various audit procedures and techniques used to mitigate risk and ensure the accuracy of financial reporting.

AUDITING

1: Executive Summary
Financial statements are made to know the financial condition of any firm or company. These
statements are correct to what extent is very important to know that. Very statement should be
checked and to check these statements auditing is required. Managing the financial records of the
company as these reports and statements provide the information of each and every detail
working of the company. Auditing is very essential it should be performed in every company as
it helps the company to be fraud free and also saves the company from misrepresentation with
in correct data (Cheney, 2006). Funds management could also be done with the help of auditing
as it provides a competitive market details. Proper information should be provided to the auditor
as he is the one who prepares the financial reports and gives a clear picture to the management.
The company should have a proper support system for financial accounting of business which
will result in reduction of any kind of fraudulent activity will reduce. The audit reports provides
and finds the risk accounts by the rectification of which the company can benefit a lot. These
reports also provide information those benefits of auditing to the Clients availability in which
market. This information is helpful for the sales purpose and profits increase.

2: Introduction
The decisions of finance are very important and are taken after a very deep study and market
research. The information provided in the market are the base of such financial decision marking.
The investor gathers all the information about the company before he invests in it. The decision
to invest in any company is dependent on the correct information gathered from the market. The
audit report provides such information to the market. Auditing is very useful and important for
both the investor and the company. With the auditing the financial report are prepared and this
gives a clear picture to the market. Information’s accessed by the audit report of a particular
company. In this assignment, the importance of understanding the client by auditor is highlighted
and the auditor is done (Chow & Ho, 2006). A further, discussion is done on those accounts
which can be the reasons to cause risk the financial statements which could be misstatement of
the material. Such misstatements can affect the financial statements. Which gives an incorrect
image in the market? The materiality is set which helps in cost reduction. The risk related to
assessment which are related to those five accounts pertain to risk of incorrect setting of
materiality are also a part of discussion in this assignment.

Metcash is an Australian company established in the year 1927. He started this company as a
small family business naming (Metcash Limited). This company mainly deals in grocery items,
liquor hardware items and other consumer goods at a reasonable price compared to other
companies in the market. Metcash believes in providing better products and services to its
wholesalers and consumers. Its headquarter is in Sydney. Metcash has three divisions which are
also called its base or business pillars working in wholesale industry.
 Metcash food and grocery
 Australian liquor market
 Independent hardware group
(Mason, Zhu & Van, 2017)
These three segments are completely owned by Metcash. Metcash deals in wholesale,
distribution, through retail operations, merchandising etc.
Metcash supply products in their brand name in the market which includes supermarkets and
convenience divisions which helps in supplying to individual stores all over the Australia
including 1434 IGA branded stores and 250 friend grocers/ Egiway stores. Its two divisions
naming Campbells wholesale and CDS C Store Division helps in providing grocery , non-food,
soft drink , dairy products, liquor in the market. ALM Australian Liquor Market it is Australia's
largest liquor wholesale. And another is IBA independent brands Australia (Dunn, 2006). It can
be analysed that, Metcash Limited has diversified of risk and rewards from their business
operations as they are operating in different business lines under different industry.
These two has a large network of supply over 12500 hotels, clubs, restaurants, and other
government licensed places. These two not only works in Australia but also in New Zealand.
IBA is a subsidiary company established by Metcash in December 2003 (Gay, 2007). Its Main

purpose was to develop natural brand. ALM and IBM provides retailers the best price.
Customers also feel good to get full order from one place.
3 independent hardware groups were formed in November 2006 with Mitre, Home Timber and
Hardware Group. It is Australia's single independent hardware wholesale. It has over 500 non
branded hardware stores. Home Timber was established in 1953. Metcash Trading Limited
became official on 4th September 2000 changing its name Davis Limited. Metcash business is
also spreading in other countries. It is operational in Hong Kong, China, Singapore, Malaysia,
Philippines and over southern and central Pacific (Kend, 2008). Its staff and management has
the very large amount of experience regarding the market, consumers demand their taste, about
the price structure, the quality of the product, how to attract the consumers etc.
ASA315 is an auditing standard was being issued by AUASB; which confers to understand the
entity as well as its environment in order to identify and evaluate the risks related to material
misstatement. This standard of auditing forms requisites and provides application and other
explanatory material in context to the responsibilities of auditor. The auditor is required to carry
out risk assessment through analytical procedures in order to gain understanding about the entity
and its internal control which is relevant for audit purpose. ASA520 portrays the analytical
procedure that can be used to assess the significant accounts which are at risk of material
misstatement. In this section, ASA230 Audit Documentation shall also be used in order to
document each and every aspect of audit and all these identified accounts shall be properly
documented (Hauke, 2012). The risks of material misstatement at the financial statement are
important to be carried out by the auditor. Beside this, the vulnerability of the financial report of
entity in regards to material misstatement, counting those caused by error or fraud, shall be
discussed with the engagement team. Analytical Procedures includes analysis of financial
statement and ratios. ASA230 i.e. Audit Documentation is also going to be used in this section,
to document every single aspect of audit. All the accounts which are at risk in relation to material
misstatement are important to be documented.

Following are five significant accounts which are identified utmost at risk of being
materially misstated are as follows:
Inventories: The business operations of Metcash limited are of different nature, which requires
consideration for management of varied inventories. Otherwise the inventory account of Metcash
limited can be at risk of materially misstated. In the year 2015, the inventory amount stated in the
company`s financial statement was $ 712.50 million, however the financial statement of year
2016, stated the reduced inventory amount i.e. $ 673.60 million. As Metcash Limited is carrying
out its business operations in fast moving consumable goods sector, therefore fluctuations can be
observed in levels of inventory and a set pattern cannot be established. It is not easy to verify the
inventory through manual procedure. Hence management of the company requires managing the
inventory in proper manner. Otherwise this can be accounted at risk of being materially
misstated (Mazé, 2016).
Interest bearing borrowings: The analysis of Metcash Limited`s financial position as well as
the analysis of financial statement`s disclosure; it can be evaluated that there is interest bearing
borrowing in non-current liabilities and current liabilities. It can be observed that interest bearing
borrowing in both current liabilities and non-current liabilities has significantly reduced from the
last year’s figure. The analysis of present and last year’s financial statement reveals that there is
significant drop in interest bearing borrowing in both current and non-current liabilities
(Hecimovic, Martinov‐Bennie & Roebuck, 2009). As interest bearing borrowing in the year 2016
stated in current liabilities was $ 15.70 million, whereas in the year 2015, it was $ 63.20 million.
On the other hand, the interest bearing borrowing (non-current liabilities) in the year 2015 was $
794.80 million; which has been fallen to $ 299.40 million in the year 2016. The analysis of
statement shows the enormous gap of interest bearing borrowing figures in context to year 2016
and year 2015. Hence this account is identified as at the risk of materially misstated.
Cash and cash equivalents: Manipulation of cash and cash equivalents can be done in easy
manner. Cash and cash equivalents are the most liquid form of current asset. The cash and cash
equivalent balance of Metcash Limited, has extremely changed (McCollum, 2006). As the cash
& cash equivalent has fallen down in the year 2016 to a great extent when compared to the year

2015. For that reason, it can be considered that, there is possibility of material misstatement at
high extent.
Sales account: One of the other accounts which are being identified as, at the risk of being
materially misstated is the sales account of Metcash Limited. Metcash Limited different
business, such as- food & grocery, liquor etc. Hence, they are required to manage the risks which
are involved in generating the revenue from sales through different business operations.
Statement that portrays the sales revenue being generated from various segments is given
below:
Segment Sales revenue in 2016 Sales revenue in 2015
Food & Grocery $ 9,265.4 $ 9,217.8
Liquor $ 3,219.3 $ 3,103.6
Hardware $ 1,056.6 $ 1,048.4
Segment results $ 13,541.3 $ 13,369.8
Dividends: The financial statement`s analysis of Metcash limited reveals that in the year 2015
dividend was being paid by the company. On the other hand, the analysis of the year 2016`s
financial statement depicts that dividends were not paid by the company. On this base, this
account has been identified at a risk of material misstatement. As the dividend balance can be
misstated in Metcash Limited`s financial statement.
Auditing tool which is related to the importance or significance of any transaction, amount or
discrepancy this is known materiality. The auditor sets s limit or level in any company small or

big in terms of amount figure or the items included in the financial statement. The can be defined
as materiality. The audit reports should give a clear status of the financial condition of the
company but still no audit or assurance device provides a 100% guarantee that the position in the
financial statements of the company is as it is given in the independent financial report prepared
by an auditor. These reports are helpful in providing path for marking decisions. Audit report
work as base for the management’s decision making by which they can analyze the different
business operation and financial position of the business organization. Financial statements can
be at material error or fraud that auditor has to identify from the audit and he / she needs to
analyse significant accounts or material amount (Moroney & Trotman, 2016). The limit finalized
by the auditor is materiality and beyond this limit will affect the decision making of the stake
holders. It is the duty of the auditor to identify while auditing, where the financial statement has
material misstatement. He/she also has to analyze that weather it is significant account or
material account.
There are two types of materiality that auditor has to manage or consider while he /she is
performing or planning materiality. These standards are stated by the ASA320 the organization
which sets the accounting standards. The first type of materiality can be defined as the standards
process set by the auditor to be used by the audit team or the planning materiality that is set by
the auditor at the initial level of planning audit. The second type of materiality can be said as not
any final thing, as the materiality can be decided or changes with the chance In situation or in the
identification of the particular issue (Udrea, 2010). The identification of materiality is purely a
professional experience. A level of analysis skill of audit is required to select the materiality.
In case of Metcash limited, the materiality level could be set on the bases of the revenue
generated from the sale of the company in the previous year till now respectively. When the base
of any company is not definite it is thought to calculate the materiality same is with Metcash. As
it is engaged in many businesses so there is no base for calculation in this case the sales revenue
would be considered as the base of the entire further audit (Park, 2012). After the financial
statement analysis by the auditor it is highlighted that a huge amount is involved in the Metcash
audits. This has result in a very less percentage of materiality of sales revenue.
Materiality level or amount

= 13,541.30 x 0.005 % = $ 0.677065 million or 677,065
The materiality level of the Metcash as per the audit report is $ 677,065. It is clear that any
amount or accounts or figures would be considered as material and a detail procedure of audit
will come into implementation.
Audit risk is mainly consists of three types of risks in auditing and assurance. Among these risks
there are controllable risks and uncontrollable risks. Audit risk is the combination of three risks
in auditing i.e. audit risk is overall risk in audit which is decided by considering all three risks
(Luo, 2011). Audit risk can be define as the risk of auditor’s inability i.e. financial statements of
the business organisation is materially misstated, but auditor is not able to identify the same.
Following is the formula of audit risk:
Audit risk = Inherent risk x Control risk x Detection risk
Inherent risk: Inherent risk can be defined as the risk which arises from where judgement or
estimations are required. In other words, where decisions are to be made on the basis of personal
experience and estimates then inherent risk will be at higher side. Inherent risk is uncontrollable
risk (or it can only be controlled if decisions are taken on non-estimated or judgements) and
occurs other than failure of control (Mindak & Heltzer, 2011).
Control risk: On the other hand, control risk is the risk which occurs only when there is lack of
strong internal control system implemented and because of these financial statements is
materially misstated. Trigger point of control risk is absence of adequate level of control system
in business operations.
Detection risk: Detection risk is the risk that auditor will not be able to detect material
misstatement in the financial statements of the business entity. Detection risk is based on
auditor’s ability or auditing skills.

Statement showing audit risk matrix
Account Inherent risk Control Risk Detection risk
Inventories account In inventory
valuation, many
judgement and
estimates are required,
therefore inherent risk
will at higher side.
Metcash Limited has
huge inventory base
from its three business
segment (Newman,
Patterson & Smith,
2001).
Internal control
system in inventory
management is quite
difficult because of
huge inventory base
of different segments;
control risk will also
be at higher side.
Detection here will
also be at higher side.
It is not possible for
auditor to physically
verify each and every
inventory of Metcash
Limited.
Interest bearing
borrowings account
Interest calculation or
outside borrowing is
based on judgments
and estimates by
outsider (bank /
financial institutions),
therefore inherent risk
is at higher side.
Control risk in this
case will be at
moderate side, since
internal control
system in outside
borrowing is limited
to finance section of
Metcash Limited
(Piercey, 2011).
Detection risk in this
case is at lower level
because there are
many audit
procedures that can
test material
misstatement in this
case.
Cash and cash
equivalents account
Inherent risk in case
of cash and cash
equivalents account is
Control risk in case of
cash and cash
equivalents account
Detection risk in cash
and cash equivalents
account is at moderate

at moderate level.
Since there is no
estimations or
judgement required in
this account.
will be at higher side.
Cash and cash
equivalents account
are highly liquid asset
therefore there is high
possibility of material
misstatement in Cash
and cash equivalents
account.
side, because there are
many test of controls
or through analytical
procedure auditor can
test appropriateness of
cash and cash
equivalents account.
Sales revenue account In terms of sales
revenue account,
inherent risk is at
moderate level. Since
there are many
business segments
from where Metcash
Limited generate
revenues.
Control risk in terms
of sales revenue
account is at higher
side (Ruthven, 2010).
Revenue is generated
form 3 different
segments and
managing them
requires special set of
skills.
Detection risk will be
at moderate side
because by applying
analytical procedures,
it can be tested.
Dividend account Higher level of
inherent risk. While
proposing and paying
dividend there are
many estimates and
judgements that
management made.
Moderate level of
control risk will be
there because internal
control weakness.
Detection risk will be
at lower side.
(Dow & Watson, 2013)

4: Conclusion
The process of auditing is use to carried out to make certain whether the financial transactions
are recorded appropriately or not in the financial statement of the company. This process make
sure that the books of accounts shall be maintained in proper manner and there shall be no place
of errors and fraud in company`s books of accounts. Auditing facilitates the business
organizations by establishing a pattern to assess the risk of manipulations in the books of
accounts. Besides this, auditing also helps in identifying the aspects related to exploitation of
business property. While carrying out an audit process, auditors consider the errors related to
both qualitative and quantitative aspects. As these errors can influence the audit process which in
turn may affect the audit report. It can be determined through the assignment that is important for
the auditors to understand the business of the client (entity). As through gaining understanding, it
becomes easy for the auditor evaluate the financial information, transactions events and practices
related to financial aspects. Auditor can gain understanding of the entity through a number of
sources such as: discussion with client and employees, company`s financial statement of current
and previous year, books of accounts etc.

5: Appendix