Understanding Auditing: Computation of Planning Materiality, Analytical Procedures, and Special Considerations

In this task we will discuss about auditing and below are the summaries point:- Part 1: Computation of Planning Materiality: Learn about the calculation of planning materiality and its importance in assessing misstatements in operating statements. Part 2: Analytical Procedure and Special Area of Consideration: Explore the use of analytical procedures in auditing and the considerations for compensation disclosures. Conclusion: Summarize the findings and implications of the study on auditing, with references provided.

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Author’s Note

1AUDITING
Table of Contents
Part 1..........................................................................................................................................2
Computation of Planning Materiality:...................................................................................2
Part 2..........................................................................................................................................4
Analytical Procedure:.............................................................................................................4
Special Area of Consideration:..............................................................................................7
Compensation Disclosures:....................................................................................................7
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11

2AUDITING
Part 1
Computation of Planning Materiality:
Planning Materiality could be defined as the estimates, which would be considered by
the auditor for regulating the misstatement level of the operating statements of the
organization. It is calculated at the very beginning level of audit. The planning materiality is
calculated and depending on similar parameters, various performance materialities of various
commodities are calculated and evaluated for recognizing material misstatement of the
company (Amin & Mohamed, 2016). It is to be noticed that the materiality is a crucial
consideration for an auditor while developing a statement, whether the operating statement of
the organization is depicting true and honest view or not.
In this study, the business that has been taken into account is Cloud 9 Inc, which
manufactures basket ball shoes. The parent organization functions in many other countries
and hence, it could be cited that the company has a large scale business. The auditor is
required to take into consideration the materiality of each and every commodity before
developing audit strategy for the organization. In this procedure, the auditor is required to
decide upon the planning materiality of the company in order to point out the misstatement
which could be present in the operating statement. So that, the auditor would be able to
immaculately evaluate them. The calculation of the performance materiality depends upon
the planning materiality. The planning materiality of Cloud 9 Inc is calculated and depicted in
the following table -

3AUDITING
Figure 1: Planning Materiality of Cloud 9 Inc
(Source: As created by author)
The planning materiality of Cloud 9 Inc has been calculated after considering the
figure of total assets. The total assets figure has been taken into account as it is a notable
element here and that is why it has been treated as material in nature (Audsabumrungrat,

4AUDITING
Pornupatham & Tan, 2015). The total assets of Cloud 9 Inc mainly consists of current assets
such as- (stockpile, debtors, cash balance) and so on, which requires to be taken into account
by the auditor as these are more vulnerable to material misstatement. The figure of the total
assets is taken into account for calculation of planning materiality as the functions of the
company is wide spread (Baldauf, Steller & Steckel, 2015). The management of this
organization depends on the assets for earning revenue and owing to international
functionalities; the figure of assets is authentic for calculating the planning material for the
audit purposes (Ali et al., 2018). The auditor requires to focus on a notable figure here it is
the total assets of Cloud9 Inc.
Part 2
Analytical Procedure:
The examination of the operating statement of Cloud9 Inc would be evaluated with
the help of detailed process which incorporates calculation of the main financial ratios of the
company. The crucial financial ratios are calculated after taking into account the financial
outcomes that are covered in the annual reports of the organization (Strawser et al., 2015).
These ratios are also helpful in recognizing the risks, which are encountered by the
management and also for evaluating whether they are critical in nature or not. These ratios
have been calculated in the table below and they cover areas like- (solvency, liquidity,
profitability and efficiency).

5AUDITING
The profitability ratios of the business are presented by (gross and net profit margins)
of the company. The gross profit margin has declined slightly in 2016, which points out that
the profit of the company would also decline. The main factor that has led to the decline of
profit is due to the decline in the volume of sales. The net profit margin of the company has
risen notably during the period and the same is calculated to be (5.06%). This is owing to the
decline in the costs of the organization (Rydin & Natarajan, 2016). The auditor needs to
assure that the expenses of the organization are accurately represented in the annual reports as
they could directly influence the revenue of the company.
The liquidity ratios are calculated after taking into account the (current assets and
liabilities) of the organization. The current and quick ratios of the company have been
depicted to have notably enhanced during the year, which shows that the management are
paying attention to liquidity of the business (Sarapaivanich & Patterson, 2016). The liquidity
ratios are taken into consideration, as they are vital financial indexes of the company and

6AUDITING
hence the auditor requires to give special attention to them while taking into account the
material misstatement of the organization.
The efficiency ratio is covered with the help of "stockpile and debtor's policy" of the
company. The inventory turnover ratio is observed to have declined notably and the same
could be noticed in case of receivables turnover ratio of the organization (Schramm, 2016).
The reduction in the inventory and debtor's turnover ratios depict that there has been a change
in the "stockpile and debtor's policy" of the company.
The solvency ratios are calculated to point out the utilization of (debt capital) in the
business of Cloud9 Inc. The examination of the ratios could be observed from the above table
that the debt capital has raised (Xu et al., 2014). The rise in the (financial leverage) of the
company depicts that the level of the debts of the organization has risen, which the auditor
requires to take into consideration for examining the authenticity.

7AUDITING
Special Area of Consideration:
The auditor needs to examine the area of comprehensive revenue that is produced
from store and whole-sale that has notably declined in the current period. The auditor needs
to carry out vouching process in order to evaluate whether the same has not been overstated.
This requires to be done as the net profit gets directly affected by the revenue of the
company. The auditor also needs to give prominence to the stockpile and debtors figure as the
same could skeptically affect financial position of the company. The auditor also requires
examine the debt figures and assure that the same has been accurately depicted in the
operating statements. The auditor needs to examine whether the raise in the debts during the
current period is authentic.
Compensation Disclosures:
Introduction
The organizations that are examined for this part are BHP Billiton Ltd, Boral Ltd and
Ausdrill Ltd as they belong to the mining industry. The annual balance sheets of these
companies are examined for recognizing the payment strategies of these businesses and also
the payment reports that are being developed by them.
Payment Mode of Executives
The payments made to the executive and non-executive directors of BHP Billiton Ltd
consist of basic payments, perks, STI and LTI and early retirement payments (Bhp.com
2019). The payment strategies of the company are formed for boosting the functioning of the
directors of this organization and in order to inspire them to viable practices in the company.

8AUDITING
Figure 1: (Excerpt from annual report of BHP Billiton ltd)
In case of Ausdrill ltd, the payments are directly associated with the functioning of the
company and from the annual report of this company for the year 2018, the payment consists
of monetary earnings, non-monetary perks, long service leave, post-employment perks, STI
and service rewards and other alternatives (Ausdrill.com.au, 2019).

9AUDITING
Figure 2: Excerpt from annual report of Ausdrill ltd
When it comes to Boral ltd, the payment made to the executives and CEO of this
company are directly linked with the functioning and is very much identical to Ausdrill ltd
and BHP Billiton ltd payment strategies having cash and non-cash perks alongside rewards
(Boral.com 2019).
Figure 3: Excerpt from annual report of Boral ltd
Highest Pay-Scale of Executives

10AUDITING
In case of Andrew Mackenzie, the CEO of BHP Billiton ltd receives the highest
payment that amounts to ($ 8,106). In case of Ausdrill ltd, R.G Sayers the CEO and one of
the executive directors gets the highest payment which amounts to ($ 803,681) according to
the annual report of this company. In case of Boral ltd, the annual report of the company
points out that the highest payment is made to Mike Kane, who is the CEO and Managing
Director of this company and the payment amounts to ($4,913).
Linking Remuneration with Profit/Share Price of Business
The annual reports of the three organizations which have been examined point out
that the functioning of these companies is very closely associated to the payment made to the
executives. The earnings of the CEO and Managing Directors of all three organizations have
been observed to be high, which advocates that they play a major role in managing and taking
crucial decisions for their respective companies.
Conclusion:
The annual reports of all the three organizations depict the payment strategies
followed by them accurately. The payment reports are being constructed by the management
of BHP Billiton ltd, Ausdrill ltd and Boral ltd follow the standards prescribed by ASX and
hence, they satisfy the regulations that are appropriate for a listed Australian organization.
The payments of the executive directors and non-executive directors are immaculately
represented in the profit and loss statements of the company.

11AUDITING
References:
Amin, H. M., & Mohamed, E. K. (2016). Auditors’ perceptions of the impact of continuous
auditing on the quality of Internet reported financial information in
Egypt. Managerial Auditing Journal, 31(1), 111-132.
Audsabumrungrat, J., Pornupatham, S., & Tan, H. T. (2015). Joint Impact of Materiality
Guidance and Justification Requirement on Auditors' Planning
Materiality. Behavioral Research in Accounting, 28(2), 17-27.
Ausdrill.com.au. (2019). Annual Reports: Ausdrill. Retrieved 30 January 2019, from
http://www.ausdrill.com.au/investors/annual-reports.html
Baldauf, J., Steller, M., & Steckel, R. (2015). The Influence of Audit Risk and Materiality
Guidelines on Auditors’ Planning Materiality Assessment. Accounting and Finance
Research, 4(4), 97.
Bhp.com. (2019). BHP Annual Report 2018. Retrieved 30 January 2019, from
https://www.bhp.com/investor-centre/annual-report-2018
Boral.com. (2019). Annual Reports | Boral. Retrieved 30 January 2019, from
https://www.boral.com/news/annual-reports
Haddara, M., Su, K. L., Alkayid, K., & Ali, M. (2018). Applications of Big Data Analytics in
Financial Auditing-A Study on The Big Four.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C.
(2015). Auditing & assurance services. McGraw-Hill Education.
Rydin, Y., & Natarajan, L. (2016). The materiality of public participation: the case of
community consultation on spatial planning for north Northamptonshire,
England. Local Environment, 21(10), 1243-1251.
Sarapaivanich, N., & Patterson, P. G. (2016). A contingency model of client repatronage in a
financial auditing services context. Accounting Research Journal, 29(1), 106-130.

12AUDITING
Schramm, S. (2016). Flooding the sanitary city: Planning discourse and the materiality of
urban sanitation in Hanoi. City, 20(1), 32-51.
Xu, W., Xiao, Z., Dang, X., Yang, D. & Yang, X., (2014). Financial ratio selection for
business failure prediction using soft set theory. Knowledge-Based Systems, 63, 59-
67.