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

Running head: AUDITING AND ETHICS
Auditing and Ethics
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AUDITING AND ETHICS
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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AUDITING AND ETHICS
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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AUDITING AND ETHICS
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 theCompany × 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