Auditing and Ethics: Materiality, Audit Materiality, Disclosures, Ratios, Cash Flow Statement, and Audit Report

Running head: AUDITING AND ETHICS
Auditing and ethics
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1AUDITING AND ETHICS
Table of Contents
Section 1.....................................................................................................................................2
Materiality..............................................................................................................................2
Audit materiality for Perpetual Limited.................................................................................3
Disclosures and draft notes....................................................................................................4
Section 2.....................................................................................................................................5
Ratio computation..................................................................................................................5
Section 3.....................................................................................................................................8
Cash flow statement...............................................................................................................8
Audit report............................................................................................................................8
Reference..................................................................................................................................10

2AUDITING AND ETHICS
Section 1
Materiality
While the auditor carries on the audit procedure the main objective is to express the
opinion regarding whether the financial reports are presented in all the material aspects, as
per the applicable framework for financial reporting. This is separate decision and separate
responsibility that is made by the company while preparing the financial reports (Christensen,
Glover & Wolfe, 2014). In auditing context, the term materiality is the threshold limit above
which the incorrect or missing information related to financial statement is deemed to have
impact on the user’s decision making aspect. Sometimes it is construed in terms of the total
impact on the profits reported or changes in percentage for some specific items included in
financial statement (Moroney & Trotman, 2016). Steps involved in determining the
materiality are as follows –
 Identifying external as well as internal shareholders
 Conducting initial outreach for the shareholders
 Identifying and prioritizing what needs to be measured
 Designing the materiality survey
 Launching the survey and starting with insight collection
 Evaluating the insights
 Putting the insights into action (Legoria, Melendrez & Reynolds, 2013).
At the stage of planning the auditor is required to analyse the materiality with regard
to the financial statements. Calculation of the materiality involves both qualitative as well as
quantitative methodologies. Once the materiality involved in financial reports are identified
and assessed by the auditor, performance materiality that is the tolerable misstatement with

3AUDITING AND ETHICS
regard to financial statements are set (Eilifsen & Messier, 2014). However, the planning
materiality must be higher than the performance materiality. The quantitative factors used for
computing the materiality planning are –
 2% of sales revenue
 1% of total assets
 2% of shareholders equity
 5% of net profit
Therefore, for Perpetual Limited the planning materiality amount will be as follows –
 2% of sales revenue = $ 520,881 * 2% = $ 10,417.62 thousand
 1% of total assets = $ 11,71,545 * 1% = $ 11,715.45 thousand
 2% of shareholders equity = $ 634,381 * 2% = $ 12,687.62 thousand
 5% of net profit = $ 137,238 * 5% = $ 6,861.90 thousand (Perpetual.com.au, 2018).
While calculating the materiality planning the auditor may choose to take highest
amount from the above. However, the auditor must understand qualitative factors related to
materiality involved in the financial statements before concluding the planning materiality
size. Therefore, in the given case of Perpetual Limited materiality can be planned at the
amount of $ 11,000 thousand. However, an amount ranging from 50% to 75% of materiality
planning is considered as the performance materiality or tolerable misstatement for Perpetual
Limited (Johnstone, Gramling & Rittenberg, 2013). It is based on the determination of lower
level of significant items involved in the financial reports like cash and cash equivalents,
receivables and payables.