Auditing and Ethics: Materiality Principles, Analytical Procedures, Cash Flow Statement Analysis

This article discusses the application of materiality principles in audit, analytical procedures as an auditing tool, and analysis of the cash flow statement. It also includes draft notes and disclosures and analysis of the auditor's report.

Running head: AUDITING AND ETHICS
Auditing and Ethics
Name of the Student:
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Author’s Note

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Table of Contents
Section 1..........................................................................................................................................2
Application of Materiality Principles in Audit............................................................................2
Draft Notes and Disclosures........................................................................................................3
Section 2......................................................................................................................................5
Application of Analytical Procedures as Auditing Tool..............................................................5
Section 3..........................................................................................................................................9
Analysis of the Cash flow Statement...........................................................................................9
Analysis of Auditor’s Report.....................................................................................................11
Reference.......................................................................................................................................12

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Section 1
Application of Materiality Principles in Audit
This section focuses on the materiality aspect of the auditing process which is used by the
auditor for determining whether the financial statements which is prepared by the company is
free from material misstatements or not. The company which is considered for this assessment si
Treasury Wine Estates ltd which is engaged in wine production and distribution business in
Australia (Tweglobal.com. 2018). As per the annual reports of 2017, the management has
effectively prepared the financial statements of the company.
The concept of materiality states that the auditor should consider items more closely
whose misstatement can affect the whole financial statements and the interpretation for the same
as well. The materiality of an item depends on the significance of the item or nature of the item
(Eilifsen and Messier Jr 2014). Similarly, items which are complex in nature are also considered
to be material in some respect and also items which are shown to be of high value as
demonstrated in the financial statements of the company (Christensen, Glover and Wood 2013).
Materiality can be of both types which are qualitative and quantitative in nature. The qualitative
materiality items which are considered in the financial statements of the company and some
examples for the same is net profit estimate, cost of goods sold estimates (Legoria, Melendrez
and Reynolds 2013). On the other hand, there are also certain quantitative aspects in financial
statements which are measured with the help of planning materiality which is estimated by the
auditor at the initial planning stages of the audit.
The concept of planning materiality is related to the materiality estimate which the
management of the company utilizes during the initial planning stage for the purpose of

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estimating the performance materiality of different items which are shown in the financial
statements of the business. In order to arrive at the estimate of planning materiality, the auditor
consider the highest value which is shown in the financial statement and which according to the
auditor will make an efficient base for computing planning materiality of the business. In
addition to this, the auditor uses his judgement for estimating a percentage which can be used for
calculating an overall accurate estimate of planning materiality of the business (Todea, Joldos
and Cioca 2013). In the case of Treasury Wine Estates ltd, the planning materiality of the
business is computed considering the total assets of the business as the base as the same
represents the highest value which is shown in the annual reports of the company. The
percentage which is decided by the auditor considering the nature of the business and records of
the past auditor is taken to be 2% The computation of planning materiality of the business is
shown in the equations which is presented below:
Planning Materiality=Total Assets of the Company × Percentage estimated
¿ $ 5279.3 million ×2 %
¿ $ 105.586
The planning materiality of the business is computed in the above equation and the figure
shows $ 105.586 million is to be considered to be performance materiality. With the help of
planning materiality the auditor can compute the performance materiality of different items of
the financial statements (Moroney and Trotman 2016).
Draft Notes and Disclosures
The notes to accounts part of a financial statement is an important part as it contains
explanation and interpretation of treatments of accounting transactions of the business. As per

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the annual reports which are prepared for by Treasury Wine Estates ltd, the management has
prepared the notes to accounts effectively considering all relevant accounting standards and
principles. The relevant disclosures and notes to accounts which are shown in the annual reports
of the business are discussed below:
 Property, Plants and Equipment: The notes to account section shows the valuation of
property plants and equipment for the business as per 2017. The main property of the
company is the vineyards which is owned by the business and the valuation for the same
is shown in the notes to account section of the annual report of the business. The auditor
needs to check whether the values which is shown in the annual reports for property,
plant and equipment are showing true and fair view or not.
 Intangible Assets: The intangible assets of the business are showing in the balance sheet
of the company and also covered in the notes to account section of the annual report
which shows intangible assets such as goodwill and rights of vineyards. The auditor
needs to ensure that the valuation of such intangible assets is properly done with proper
amortization and impairments for the same judging from the annual reports of the
company. The auditor also needs to ascertain whether the accounts are prepared
according to the accounting standards which is in for intangible assets of the business.
 Leases and Commitments: The notes to accounts section of the annual report also
shows entries of leases and commitments which are undertaken by the management of
the company during the year. The auditor needs to check the balances for the same and
also identify whether the management has provided proper classifications for the same in
the annual reports of the business.

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Section 2
Application of Analytical Procedures as Auditing Tool
Analytica procedures are other names of key financial ratios which are also used in
auditing for the purpose of identifying any risks which the business is facing during the year. It is
a part of the compliance procedures which is applied by the auditor to judge the financial
position, liquidity and efficiency of the business. The computation of key financial ratios of the
business are shown in the below tables:

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The above table shows computation of key financial ratios of the business for the year
2017. The liquidity ratio of the business is shown in the above table which comprise of current
ratio, quick ratio and net working capital. Both quick ratio and current ratio of the business is
shown to be appropriate and shows that the liquidity position of the business is ideal considering
the estimates (Carraher and Van Auken 2013). The net working capital of the business is also
appropriate which clearly shows that the business can easily take care of any current obligations
of the business. The auditor needs to check the appropriateness of the current assets and
liabilities of the business.
The profitability ratios of the business as computed is shown in the above table comprise
of net profit ratio, gross profit ratio, return on assets and return on equity. The gross profit ratio
and net profit ratio of the business has improved significantly from previous year’s analysis. The
auditor need to assess the balances of revenues and expenses by applying vouching procedures.
This will allow the auditor to judge whether the financial statements of the business are showing

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true and fair view. The return on assets and return on equity of the business are considered to be
financial indicators for success of a business and both the estimates as calculated are showing
positive results.
The asset management ratio of the business shows the efficiency of the business in terms
of generating revenues with effective utilization of the assets of the business. The auditors needs
to check whether the balances of assets are showing true view and also the valuation of the assets
are appropriately done (Delen, Kuzey and Uyar 2013). The assets of the business show property
plants and equipment in the balance sheet of the company. The auditor should opt for physical
valuation of the assets of the business in order to ensure the value of assets are showing true
view. In this respect the auditor can also take assistance from expert.
The leverage ratio of the business shows the capital structure of the company. Debt ratio,
debt equity ratio computation is shown in the above figure. The debt ratio and debt equity ratio
of the business have declined as shown in the computation which is shown in the table above.
This suggest that the management has made significant changes in the capital structure of the
business and reduced slightly the debt capital usage of the business. The changes also suggest
that the business is relying more on equity capital of the business (Kim, Kraft and Ryan 2013).
The auditor needs to check the balances of equity share capital and also the debt capital in order
to ensure that no balance which is shown in the balance sheet of the company for the year. The
auditor needs to check relevant documents of the business regarding the debt capital which is
shown by the business in the annual report of the company.

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Section 3
Analysis of the Cash flow Statement
The cash flow statement of the company of the business shows the liquidity position of
the business and also the classification of activities of the business which generates cash inflows
for the business. The cash flow statement shows cash flow activities which are operating
activities, investing activities and financing activities of the business. An extract of the cash flow
statement of the company is shown below:

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The maximum cash is generated from operating activities of the business which is shown
to be $ 382.5 million and the same is shown to have reduced from the estimate which is shown in
2016. The maximum cash outflow of the business is shown in cash from financing activities of
the business which is due to the excessive amount of loan repayment which is undertaken by the
business during the year 2017. The main cash receipts for the business as shown in the cash flow
statement is from receipts from customers which is from operations of the business. The
maximum cash payments for the year is shown in the operating activities of the business which is
cash paid to the suppliers of the business.
The main cash flow from investing activity which is shown in the cash flow statement of
the company is purchase of property, plant and equipment which the management has
undertaken during the year 2017. The main cash flow from financing activity of the business is
payments for borrowings of the business and also the dividend which the business has
undertaken during the year.
The going concern principle of a business is important in determining whether the annual
reports are prepared for a continuity basis. The principle states that the business is carrying on its
operations with no intention to cease from operations in near future. (Goh, Krishnan and Li
2013) The principle is fundamental in accounting and therefore the auditor needs to look out for
the same.
As per the annual report which is prepared by the Treasury Wine Estates ltd, the business
is showing improvements in profits of the business and the cash position of the business is also
appropriate (Krishnan and Wang 2014). In addition to this, the company is meeting the
expectations of the shareholders and also not having much of debt capital in the capital mix of

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the business. Therefore, it can be said that the going concern principle of the business is intact.
The auditor needs to check for other indicators which can affect the going concern principle of
the business.
Analysis of Auditor’s Report
As per the opinion of the auditor, the financial statements of the business is showing true
and fair view with regards to the information which is shown in the annual reports of the
business. The annual reports also follow all relevant accounting standards and provisions of
Corporation Act 2001 of Australia. This signifies that the auditor has issued an unqualified audit
report to the company signifying every thing is all right with the annual reports of the business.
The key audit matters of the business which is identified in the audit report includes
inventories of the business which are wine products which are finished and semi-finished and
therefore the audit needs to value the same in order to estimate the inventory valuation process of
the business is accurate. The business has a policy of recording net sales when wine products are
actually shipped off to customers and this is considered to be a key audit matter considering the
circumstances of the business and auditor needs to check the quantity of wine which is shipped
off and the value for the same.

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Reference
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by
small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and
audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A
decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Goh, B.W., Krishnan, J. and Li, D., 2013. Auditor reporting under Section 404: The association
between the internal control and going concern audit opinions. Contemporary Accounting
Research, 30(3), pp.970-995.
Kim, S., Kraft, P. and Ryan, S.G., 2013. Financial statement comparability and credit
risk. Review of Accounting Studies, 18(3), pp.783-823.
Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees and
going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.
Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and earnings
management. Review of Accounting Studies, 18(2), pp.414-442.

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Moroney, R. and Trotman, K.T., 2016. Differences in Auditors' Materiality Assessments When
Auditing Financial Statements and Sustainability Reports. Contemporary Accounting
Research, 33(2), pp.551-575.
Todea, N., Joldos, A.M. and Cioca, I.C., 2013. Considerations Regarding Materiality Calculation
and Audit Risk in the Context of the Guidelines for Audit Quality. Anale. Seria Stiinte
Economice. Timisoara, 19, p.728.
Tweglobal.com. 2018. Annual Reports - Treasury Wine Estates . [online] Available at:
https://www.tweglobal.com/investors/annual-reports [Accessed 2 Sep. 2018].