Auditing and Ethics: Analyzing Financial Statements of Santos Ltd

This report analyzes the financial statements of Santos Ltd and discusses the materiality and scope of audit, key disclosures, and draft notes. It also includes an analytical review of liquidity ratios, profitability ratios, asset management ratios, leverage ratios, and valuation ratios. The report provides insights into the auditing and ethical practices of the company.

Running head: AUDITING AND ETHICS
Auditing and Ethics
Name of the Student
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Table of Contents
Section 1:....................................................................................................................................2
Materiality and Scope of Audit:.............................................................................................2
Key Disclosures and Draft Notes:..........................................................................................3
Section 2:....................................................................................................................................4
Analytical review of the financial statements:.......................................................................4
Liquidity ratios:......................................................................................................................4
Profitability Ratios:................................................................................................................6
Asset management Ratios:.....................................................................................................7
Leverage Ratios:.....................................................................................................................8
Valuation ratios:.....................................................................................................................9
Section 3:..................................................................................................................................10
Analysis of the Cash Flow Statement:.................................................................................10
Review of the Auditors Report:...........................................................................................11
References:...............................................................................................................................12

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Section 1:
Materiality and Scope of Audit:
The present report is based on understanding the process of audit with the objective of
determining the degree of materiality in the financial statement of the Santos Ltd to assess
whether the financial statements are containing any material misstatements. The
“International Auditing Standard 320” is related with the responsibilities of the auditor in
implement the concept of materiality while planning and carrying out the audit of a financial
statement (Hayes et al., 2014). According to the “ISA 450” explanations the materiality is
implemented in assessing the impacts of the identified misstatement on the audit and any
unrectified misstatement in the financial statements. The report would be assessing the
aspects of materiality for Santos Ltd carrying out the business activities under ASX.
As stated under the “ISA 320” the financial reporting framework regularly discusses
the materiality concept in context of the presentation and preparation of the financial
statement (De Paula, 2016). Misstatement along with the omissions are treated as material
given an individual or in aggregate could be reasonably anticipated to create an influence on
the economic decision of the users undertaken based on the financial statements. Based on
the quantitative materiality aspects the auditor is required to take into the account the
percentage that is used in calculating the materiality in business. The computation of
percentage is carried out during the planning stages of audit and materiality of planning. As a
general rule qualitative materiality aspects for an item is considered that are of business
significance and items involving complexities.
At the time of planning audit, it is necessary to calculate the materiality planning and
materiality performance. While computing for the materiality planning, the auditor should
take into the account a specific base that are present in the financial statement of an

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organization (Kumar & Sharma, 2015). A widespread practice has been adopted by most of
the audit firms to take into the account the items of highest value to calculate the materiality
planning for a company. Based on the materiality planning, materiality performance of the
business is also calculated.
The yearly financial statement of the Santos Limited is considered in calculating the
materiality planning. During the financial year ended 2017 the company reported a total asset
of $13,706 and the same is taken into the consideration in determining the materiality
planning of the business. Furthermore, while computing the materiality planning the auditor
is required to take into the assumption a percentage based on which the values of the
materiality planning is obtained (Zeff, 2016). The materiality planning is computed below;
Planning Materiality = Total Assets x Percentage Considered
$13,706 million x 5%
= $685.3 million.
The computed figures of planning materiality stand approximately $685.3 million that
would be used by the auditor in recognizing the materiality performance that is ultimately
used for determining any probability of material misstatement in the financial reports of a
business.
Key Disclosures and Draft Notes:
The key events and performance of the company was specifically impacted by the
following events and disclosed transactions that took place during the year;
a. The company reported the production of 59.5(mmboe) and 83.4 mmboe
b. The sale of non-current assets lead to $145 million of proceeds with profit on the
disposal of $79 million.

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c. The average amount of realised oil prices stood $57.85 per barrel in comparison to the
$46.43 per barrel during the year 2016.
d. The company reported an issue of US $800 million 10 year Reg-S bond during the
year 2017 (Santos, 2018).
e. Santos reported the redemption of €1 billion of subordinate notes that was redeemed
on the first call during September 2017.
f. The net debt of the company reduce to $2.731 million during the financial year ended
31 December 2017 from the previous year figures of $3,492 million in 2016.
g. The company completed the share repurchase program during the month of February
2017, leading to rise of $163 million in the issued capital.
Section 2:
Analytical review of the financial statements:
The analytical review of financial statement is referred as the procedure of reviewing
and analysing the financial statements of the company’s so that a better economic decision
can be made (Ridley, 2017). These statement comprises of the income statement, balance
sheet, statement of cash flows and statement of changes in the equity. The analytical review
of the financial statement is regarded by the auditor as the medium of assessing the
reasonableness of the accounting balances.
The auditor uses the analytical process to take into the account the vital financial
ratios that are reflectors of the business (Appelbaum & Nehmer, 2017). The ratios that are
computed for Santos to perform the analytical review of the financial statement includes
liquidity ratios, profitability ratios, asset management ratios, leverage or solvency ratios and
valuation ratios.

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Liquidity ratios:
Liquid ratio can be defined as the ratio between the liquid assets and liabilities of the
bank and other institutions (Warren & Jones, 2018). It is useful in determining the ability of
the debtors in paying off the debt without raising any external capital. The current ratio for
Santos Ltd stood all through the four-year span stood strong. The ratio during the year 2016
stood 1.90 while in 2017 it increased to 2.07. The quick ratio for the business stood
impressive over the four-year span as it increased to stand 1.79 in 2017. This signifies that the
business has sufficient amount of cash to meet its short term debt obligations.
The auditor is under the obligation of assessing whether the current ratio and the
current liability of Santos is representing the true and fair view of the business. Similarly, the
net working capital of the company represents a declining trend as the net working capital of
Santos in 2016 stood 1,394 which subsequently declined to 1,021 in 2017. The auditor is
required to evaluate the position of liquidity for Santos by taking into the account the
financial report of Santos Ltd.
Particulars 2014 2015 2016 2017
Current Assets 2,065 2,921 2,950 1,972
Current Liabilities 1,946 1,273 1,556 951
Current Ratio 1.06 2.29 1.90 2.07
Particulars 2014 2015 2016 2017
Total Current Assets 2,065 2,921 2,950 1,972
Less: Inventories 443 495 321 266
Quick Assets 1,622 2,426 2,629 1,706
Current Liabilities 1,946 1,273 1,556 951
Quick Ratios 0.83 1.91 1.69 1.79
Particulars 2014 2015 2016 2017
Current Assets 2,065 2,921 2,950 1,972
Less: Current Liabilities 1,946 1,273 1,556 951
Net Working Capital 119 1,648 1,394 1,021
Santos Ltd
Liquidity Ratios

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Table 1: Table representing Liquid Ratios
(Source: As Created by Author)
Profitability Ratios:
The profitability ratio can be defined as the ratio that is used to evaluate the ability of
the business in generating the revenue with respect to the related expenditure (Zhu, 2018).
The gross profit ratio for the company stood fluctuating over the period of four years. The net
profit of the company in 2016 stood 17% while in the following year it significantly
increased to 27%. The gross margin represents that the operational efficiency of the business
has improved from the previous year. The net profit margin of Santos Ltd over the period of
four years has stood negatively as the net profit margin in 2016 stood -40% however in 2017
the net profit margin stood negatively at -12%. This primarily due to the rise in the
impairment of non-current assets and finance costs.
The auditor must assess the reason behind the significant increase in the non-current
assets and finance costs. The return on assets of the company also stood negatively in 2016
and 2017 as the ratio stood -6.11 while in 2017 the ratio stood -2.49. Similarly, the return on
equity for Santos represented a declining trend with the ratio falling to as low as 14.79 in
2016 however in 2016 it stood -5.03. The audit is under the obligation of implementing the
appropriate audit process to understand the viability of the expenditure that is occurred by the
business in the accounting year. This should be done to make sure that the losses that are
reported by the business are not ambiguous. Furthermore, it is necessary for the auditor to
gain a clear understanding of the impairment of the non-current assets and finance costs
reported by the business (Hoskin et al., 2014). The auditor should implement vouching
procedure in order to defend the amount of impairment cost and finance costs in the yearly
reports of Santos Ltd.

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Particulars 2014 2015 2016 2017
Gross Profit 1,138 733 441 835
Sales 4,037 3,246 2,594 3,107
Gross Profit Margins 28% 23% 17% 27%
Net Profit -935 -2,698 -1,047 -360
Sales 4,037 3,246 2,594 3,107
Net Profit Margin -23% -83% -40% -12%
Net Income -935 -2,698 -1,047 -360
Average Total Assets 21,477 20675 17134 14484
Return on Assets -4.35 -13.05 -6.11 -2.49
Net Income -935 -2,698 -1,047 -360
Shareholders Equity 9,413 10,202 7,080 7,151
Return on Equity -9.93 -26.45 -14.79 -5.03
Profitability Ratios
Table 2: Table representing Profitability Ratios
(Source: As Created by Author)
Asset management Ratios:
Asset management ratio makes an attempt to assure that the firms obtains success in
managing the assets to produce sales revenue (Barth & Landsman, 2018). The receivables
turnover of the company stood strong over the period of four years as the ratio stood
relatively similar in 2016 and 2017 at 7.07 and 7.06. The auditor should assess the inventories
of Santos Ltd as they are held as the essential element of financial statement and highly
vulnerable in material misstatement.
The net fixed asset turnover of the business represented a rising trend as in 2016 0.25
while in 2017 ratio stood 0.32. The auditors fall into the obligations of performing a check on
the assets to make sure that assets are impartially represented. Furthermore, the auditor
should perform the physical stock take of inventories to value the inventory balances. While
the valuation of asset can be performed by obtaining the expert opinion.

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Particulars 2014 2015 2016 2017
Sales 4,037 3,246 2,594 3,107
Accounts Receivables 633 539 367 440
Receivables Turnover 6.38 6.02 7.07 7.06
Particulars 2014 2015 2016 2017
Sales 4,037 3,246 2,594 3,107
Net Fixed Asset 18,689 17,301 10,533 9,662
Fixed Asset Turnover 0.22 0.19 0.25 0.32
Particulars 2014 2015 2016 2017
Sales 4,037 3,246 2,594 3,107
Average Total Assets 21,477 20,675 17,134 14,484
Total Asset Turnover 0.19 0.16 0.15 0.21
Asset Management Ratios
Table 3: Table representing Asset Management Ratios
(Source: As Created by Author)
Leverage Ratios:
A leverage ratio is regarded as the financial ratio which help in indicating the extent
of debt that is incurred by the business entity against numerous other accounts in balance
sheet, income statement and cash flow statement (Flesher et al., 2018). Debt ratio for the
company has been computed to understand the level of debt. In 2016 the debt ratio stood 0.54
while in 2017 the ratio stood marginally lower at 0.48. This represents that the degree of
borrowings for the company has declined representing that the company has less reliance on
the equity capital of the business. The debt to equity ratio for the company represented the
identical trend as the ratio in 2016 stood 0.49 while it significantly declined to 0.38 in 2017.
The auditor should assess the debt repayment schedule of Santos as whether the company has
undertaken any added loan for business operative functions.

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Particulars 2014 2015 2016 2017
Total Liabilities 12,932 11,724 8,182 6,555
Total Assets 22,345 21,926 15,262 13,706
Debt Ratio 0.58 0.53 0.54 0.48
Particulars 2014 2015 2016 2017
Total Debt 6,128 4,749 3,492 2,731
Total Equity 9,413 10,202 7,080 7,151
Debt – Equity Ratio 0.65 0.47 0.49 0.38
Particulars 2014 2015 2016 2017
Net Debt 6,128 4,749 3,492 2,731
EBITDA 2,076 1,454 1,199 1,428
Gearing Ratio 2.95 3.27 2.91 1.91
Leverage Ratios
Table 4: Table representing Leverage Ratios
(Source: As Created by Author)
Valuation ratios:
The valuation ratio is regarded as the financial process of ascertaining whether the
company is worth for investment (Henderson et al., 2015). The price earnings ratio for the
company stood negatively at -0.23 in 2017 while the price to book ratio also represented a
declining trend over the years as it stood 0.93 in 2017. No dividend was paid by Santos in
2017 as it reported loss over the last four years. The auditor must check into the earnings per
share of the company as this would enable the investors in taking the investment decision.

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Particulars 2014 2015 2016 2017
Market Price per share 14.63 8.25 3.68 4.02
Earnings per Share -64.4 -169.5 -58.2 -17.3
Price / Earnings ratio -0.23 -0.05 -0.06 -0.23
Particulars 2014 2015 2016 2017
Market Price per share 14.63 8.25 3.68 4.02
Book Value per Shares 10.32 5.5 4.22 4.32
Price / Book Value Ratio (P/BV) 1.42 1.50 0.87 0.93
Particulars 2014 2015 2016 2017
Dividend per Share 0.35 0.2 0 0
Market Price per share 14.63 8.25 3.68 4.02
Dividend Yield 2.39 2.42 0.00 0.00
Valuation Ratios
Table 5: Table representing Valuation Ratios
(Source: As Created by Author)
Section 3:
Analysis of the Cash Flow Statement:
The cash flow is regarded as the financial statement that offers aggregate information
regarding the inflow and outflow of cash that is received by the company from its operations
and external investment sources (Macve, 2015). The cash flow statement of Santos represents
the cash flow from operating activities, investment and financing activities. The cash flow
from the operating activities represents a highest inflow of cash as receipts from customers
accounted to $3,217. The cash flow from the operating activities represents the highest cash
outflow as the payment to the suppliers that amounted to $1,611.
The cash flow from the investment activities stood $534 million. The company
reported an expense of $483 million. The cash outflow is primarily the payments for the oil
and gas. While the cash flow from the financing activities contained the highest cash outflow
in the form of repayment of borrowings.

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The concept of going concern is regarded as the fundamental principle of accounting.
It assumes that in the present as well in future the company would complete its present plans
by using its assets to meet the financial obligations (Carla & Accounting, 2017). The
significant ratio of Santos Ltd represents an unfavourable situation as the business has
reported a loss over the four-year span. The auditor should recognize the negative financial
reflectors as they form an indicator that the going concern may be impacted.
Review of the Auditors Report:
Earnest and Young are the auditors of the company. The auditor’s opinion include
that the company complies with the “Corporation Act 2001” that offers the true and fair view
of the consolidated financial position and complies with the Australian Accounting Standard
(Santos, 2018). The key audit matters included the issues in the estimation of oil and gas
resources which can create a material impact on the financial report primarily in classification
and capitalization of exploration expenditure. Another issue included the decommissioning
and restoration provision that can result in material impact on the financial statement.

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References:
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on Blockchain and Distributed Ledger Principles. Feliciano School of Business.
Barth, M. E., & Landsman, W. R. (2018). Using Fair Value Earnings to Assess Firm
Value. Accounting Horizons.
Carla, Y., & Accounting, A. (2017). AUDIT STYLE AND FINANCIAL STATEMENT
COMPARABILITY.
De Paula, F.R.M., (2016). The principles of auditing a practical manual for students and
practitioners. Isaac Pitman & Sons, Ltd (1919).
Flesher, D. L., Flesher, T. K., & Previts, G. J. (2018). The Financial Accounting Standards
Board: Profiles of seven leaders. Research in Accounting Regulation, 30(1), 38-48.
Hayes, R. S., Gortemaker, H., & Wallage, P. (2014). Principles of auditing: an introduction
to international standards on auditing. Prentice Hall, Financial Times.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial
accounting. Pearson Higher Education AU.
Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user
perspective. Wiley Global Education.
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Vision, Tool, Or Threat?. Routledge.
Ridley, J. (2017). Creative and Innovative Auditing. Routledge.
Santos - Home. (2018). Retrieved from https://www.santos.com/

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Santos - Investors. (2018). Retrieved from https://www.santos.com/investors/
Warren, C., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
Zeff, S.A., (2016). Forging accounting principles in five countries: A history and an analysis
of trends. Routledge.
Zhu, Q. (2018). Impact of Enterprise Investment Efficiency Based on the Quality of Financial
Accounting Data. JOURNAL OF ADVANCED OXIDATION
TECHNOLOGIES, 21(2).