Auditing and Assurance in Australia

This article discusses the use of analytical and substantive procedures in auditing and assurance in Australia. It explains how to identify possible material misstatements in financial reports of an entity. The article also provides a case study of IDP Education Limited to demonstrate the use of analytical and substantive procedures. The conclusion of the article is that the financial statements of the company have been prepared in accordance with the applicable accounting standards and show the true and fair picture of the company.

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and Assurance in Australia
Name of the Student:
Name of the University:
Authors Note:

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AUDITING AND ASSURANCE IN AUSTRALIA
Contents
Analytical procedures:.....................................................................................................................3
Conclusion:......................................................................................................................................8
References:......................................................................................................................................9

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Analytical procedures:
Use of analytical procedures helps auditor to identify possible area of material
misstatements in financial reports of an entity. In this case, the analytical procedures shall be
used for the audit of IDP Education Limited.
Analytical procedures as risk assessment procedures (ASA 315)
Analytical procedures Explanation `
1. Gross profit ratio Using gross profit ratio the auditor would be able to identify
significant fluctuations in gross profit ratio of an organization
without appropriate reason for such fluctuation (Carson, Fargher
& Zhang, 2016).
2. Net profit ratio Net profit ratio would enable the auditor to identify net profit
margin of an entity. Extra-ordinary increase or decrease in net
profit ratio would indicate possible area of material
misstatement in financial statements of an entity (Appelbaum,
Kogan & Vasarhelyi, 2018).
In case of IDP Education Limited the following information has been collected from the annual
reports of the company to calculate different financial ratios to carry out analytical procedures on
the financial statements of the company:

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The
profitability ratios of the company has been calculated on the basis of the information provided
about the company in its income statement for last three years.
IDP Education Ltd
All amounts are in Australian $' Million
2016-
06
2017-
06
2018-
06
Gross revenue 358
.00
391.
00
487.
00
Operating income 5
6.00
60
.00
75
.00
Net Income 4
0.00
42
.00
52
.00
Gross Margin % 5 53 55
All amounts are in AUD millions 2016-06 2017-06 2018-06
Revenue 358.00 391.00 487.00
Direct cost 173.00 181.00 218.00
Gross profit 185.00 209.00 269.00

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AUDITING AND ASSURANCE IN AUSTRALIA
1.60 .50 .30
Net Margin % 1
1.15
10
.63
10
.58
Gross profit ratio: Gross profit ratio calculated by dividend the amount of gross profit with the
amount of gross revenue. It indicates the ability of an organization to earn core revenue from
business operations. Significant fluctuations in gross profit ratio will indicate the possible error
in financial statements if there is no significant reason for such fluctuations in gross profit
margin. In this case, the company has continuously improved its ability to earn gross profit from
business. In 2016 the company earned 51.60% of gross profit which increased to 53.50% in 2017
and further to 55.30% in 2018. Thus, there has not been a huge fluctuation in the gross profit
margin of the company. However, the auditor should use necessary audit procedures on the items
of revenue and cost of revenue to ensure these have been correctly recorded in the books of
accounts and there is no misstatement in the financial statements (Chan & Vasarhelyi, 2018).
Net profit margin: Net profit margin shows the ability of an organization to earn net profit from
business operation. The higher the net profit the higher is the efficiency of the organization in
managing its resources. Unlike gross profit margin, the net profit margin of the company has
decreased continuously over the last three years. The reason for such decrease must be evaluated.
Despite the increase in gross profit margin the decrease in net profit margin of the company is
cause for concern. At 10.58% of net profit ratio in 2018 the company’s net profit ratio of 11.15%
of 2016 has deteriorated significantly. Though the fluctuation is not very significant however, the

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auditor should conduct necessary substantive procedures on items of expenditures recorded in
the income statements to verify their authenticity (Hay, Stewart & Botica Redmayne, 2017).
Analytical procedures as substantive procedures during audit (ASA 520)
Analytical procedures Explanation `
1. Asset turnover ratio (times) The total revenue is divided by the total average assets of
an organization, shows the ability of an organization to use
its assets in generating gross revenue for business. The
higher the turnover ratio the better it is for an organization.
Any inexplicable fluctuation in the ratio would indicate
possible material misstatements in financial statements
(Junior, Best & Cotter, 2014).
2. Return on equity in % Return on equity shows the amount of return earned on the
owners’ fund. Owners would obviously want high amount
of return on owners’ fund. Fluctuation in the return on
equity should be evaluated by an auditor to assess possible
area of material misstatement.
The following ratios have been calculated for IDP Education Limited, taking into consideration
the financial information of the company from its annual reports.

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2016-06 2017-06 2018-06
Asset Turnover (Average) 2.54 1.98 1.84
Return on Equity % 48.06 49.38 54.22
Asset turnover ratio:
There has been a constant deterioration in asset turnover ratio of the company. The decrease in
asset turnover ratio from 2.54 times to 1.84 time within 24 months is a significant decrease. In
fact in conjunction with the decrease in asset turnover ratio the continuous growth in return on
equity of the company raises more question about the financial statements (Knechel & Salterio,
2016). The auditor must verify the procedure used to value the assets of the company especially,
the non-current assets and inventories. The valuation method used by the company should be
evaluated by the auditor to ensure these are in accordance with AASB 13 and AASB 116. In case
there is any material departure from the guidelines enumerated in these standards the reason for
the same shall be verified. Proper explanation shall be asked from the management in case of
departure from standard accounting standards (Nisbet, Robertson, Mannil, Pincham & Mclennan,
2018).
Return on Equity:
One of the most important factors that the concerns the investors as well as an entity is return on
equity. Despite the continuous deterioration in asset turnover ratio of the company since 2016,
the rate of return on equity shareholders’ fund has increased with each passing year. The auditor
shall evaluate the changes in equity over the periods. The amount of profit attributable to the

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equity shareholders must be evaluated to check whether the amount has been correctly calculated
after deducting all necessary expenditures of the company (Jans, Alles & Vasarhelyi, 2014).
Conclusion:
Based on the evaluation of the analytical and substantive procedures on the financial
information of IDP Education Limited, it can be concluded that the financial statements of the
company have been prepared in accordance with the applicable accounting standards and show
the true and fair picture of the company. The analytical procedures definitely highlight some
fluctuations in profitability and efficiency ratios of the company however, the substantive
procedures shows there was no material error in the financial statements in relation to these
items.

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References:
Appelbaum, D. A., Kogan, A., & Vasarhelyi, M. A. (2018). Analytical procedures in external
auditing: A comprehensive literature survey and framework for external audit
analytics. Journal of Accounting Literature, 40, 83-101.
Carson, E., Fargher, N., & Zhang, Y. (2016). Trends in auditor reporting in Australia: a synthesis
and opportunities for research. Australian Accounting Review, 26(3), 226-242.
Chan, D. Y., & Vasarhelyi, M. A. (2018). Innovation and practice of continuous auditing.
In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing
Limited.
Hay, D., Stewart, J., & Botica Redmayne, N. (2017). The Role of Auditing in Corporate
Governance in Australia and New Zealand: A Research Synthesis. Australian Accounting
Review, 27(4), 457-479.
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.
Junior, R. M., Best, P. J., & Cotter, J. (2014). Sustainability reporting and assurance: A historical
analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), 1-11.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Nisbet, D., Robertson, A., Mannil, B., Pincham, V., & Mclennan, A. (2018). Quality
management of nuchal translucency ultrasound measurement in Australia. Australian and
New Zealand Journal of Obstetrics and Gynaecology.

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