Auditing: Key Risks, Analytical Procedures, and Substantive Approach

This report discusses the key risks associated with Resonance Health Ltd, a healthcare company in Australia. It also covers the application of the audit risk model, analytical procedures, and the use of the substantive approach in auditing. The report recommends that the company perform regular audits to identify and rectify weaknesses in its internal control to improve its performance.

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Auditing

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Executive summary
The systematic and independent evaluation of reports, information, and activities related to
performance with a fair view and in accordance with the relevant standards of reporting for
evaluating a company’s financial state is known as auditing. The process of auditing is
documented for effective search of evidences of auditing without any partiality to determine
the extent of auditing criteria which the organization has established. The report is developed
with an intention to represent the auditing outcomes in context of Resonance Health Ltd
which operates in invasive healthcare. In order to fulfill the purpose of the report, the
structure of the internal control is reviewed in the report. This depicts conformity in the
operations of the company with the regulations opted for auditing in Australia. It also
determined whether the procedures of audit are valid and worthy in context to Australian
Security Exchange. It was found in the report that Resonance Health Ltd comply with the
applicable guidelines. However, there are some areas which require improvements.
Moreover, it was found that the company’s weakness lies in its internal control. Due to this
reason, it company is exposed to risk which are external for to it. Therefore, it can be
recommended that the company shall perform audit on regular basis to identify its weakness
and rectify them to improve the performance.

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Table of Contents
Executive summary....................................................................................................................2
Introduction................................................................................................................................4
Key risks in the business of Resonance Health Ltd...................................................................5
Application of model of audit risk.............................................................................................6
Analytical procedures.................................................................................................................8
Use of substantive approach for audit approach......................................................................10
Plan for sampling.....................................................................................................................14
Conclusion................................................................................................................................16
References................................................................................................................................17

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Introduction
The report is developed with an aim for understanding the concepts of auditing in regard to
Resonance Health Ltd. In this report different steps for auditing are performed and a risk-
based program for audit is also designed in context of Resonance Health Ltd which is health
care Australian company specializes in developing and delivering software and services
related to medical invasive imaging. In order to fulfill the purpose of the report, a substantial
approach is used so that the balances of liabilities and assets of the company are substantially
tested. The report further provides discussion on the key risks associated with the business of
Resonance Health Ltd and item’s materiality is also identified. In addition to this, analytical
procedures are performed for evaluating the financial performance and position of the
company for the recent three years. In this concern, ratios and metrics are used. Moreover, a
sampling plan is included in the report which provides information on how sampling will be
used for each material account balance.

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Key risks in the business of Resonance Health Ltd.
The factors which hinder the company in achieving its goals are considered as business risks.
The success and failure of business are dependent upon these factors. If these factors are not
managed timely and taken care of, then it may lead to failure of the business. Since
Resonance Heath care is engaged in the business of digital health care there are different risks
associated with the company. Companies like Resonance Health Ltd operating in invasive
health care are revolutionized in health care which is consumer centric. Therefore, in order to
promise better outcomes for patients and breakthrough innovation a systematic approach for
management and risk identification shall be realized (Kerzner and Kerzner, 2017). In order to
reshape the industry, Resonance Health Ltd is with its venture, legal, IT, and HR partners
shall realize the risk to utilize the opportunities fully. There are four major risks whose
frequency is observed to be increasing and are as follows:
Patient Injury
It represents significant risks in relation to reputation and financial area for Resonance Health
ltd. Technological failure, human error or hack may result in injuries for patient. The support
and delivery of health care is powered by technology, therefore claims can be made through
number of ways.
Cyber risk
Highest privacy and security level is required for managing the personalized data in the
digital health care. Due to increasing number of ransomware, breaches in data, and DDoS
attack it is important for Resonance Health Ltd to use extreme in the management of non-
medical or medical data (Padmanabhan, 2017).
Regulatory risk

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The organization can be exposed to increased expense and risks because it is important to
comply with the local, state, and federal regulators each having different priorities and
mandates.
Technological risk
There is always a danger of failure in system. With new updates in the technology, there is an
increased possibility of malfunction due to which the delivery of care could be negatively
affected (Berezina, Cobanoglu, Miller, and Kwansa, 2012). In such case, Resonance Health
Ltd will be held liable for the related expenses and damages.
Importance of evaluating business risks for the purpose of auditing
It is significantly important for the auditors to gain knowledge related to the business of the
organization and the environment in which it operates so that the misstatement with the
financial statements can be evaluated.
Application of model of audit risk
The audit risk is associated with the material incorrectness in the financial statements even
though it is stated by the auditor that there are no material misstatement in the financial report
(Gul, Wu, and Yang, 2013). Such statement from the auditor could also be due to flaws in the
organization’s internal control.
In this regard, the risk audit model is required to be applied while performing audit in
Resonance health Ltd. Control risk (CR), internal risk (IR), and detection risk (DR) are the
three different aspects of audit risk model. The IR shows vulnerability in multiple
transactions or balance of account to the misstatement in the absence of related controls. CR
represents risks that cannot be identified through the process of internal control. DR shows
risks related to the inability of the auditor to identify accounting errors which internal
controls are not able to capture (Blankely, Hurtt, and MacGregor, 2012). The equation for
calculating audit risk in Resonance Health Ltd is:

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Audit risk (AR) = RMM×DR
AR = (CR×IR) × DR
DR =
The planned risk for audit in context of accounts receivables for Resonance Health Ltd is
0.04. The inherent is assessed at 0.70 and control risk is assessed at 0.50. Therefore DR can
be evaluated by using the above formula:
DR =
DR =
DR = 0.11
Findings: The equation of model for audit risk depicts that the detection risk is evaluated at
0.11. This implies that internal risk is greater than the detection risk while the control risk is
relatively moderate for Resonance Health Ltd. Due to higher value of inherent risk it can be
concluded that transactions in Resonance Health Ltd are in the exposure of external
environment aspects in addition to organization’s internal environment like economic, legal,
and political factors. Since the internal control of the organization is weak there may be
different areas where it is expected that deception may occur. The areas can be cash, fraud in
the payroll, fraud from third party, valuable assets, and transactions related to banking.
In the process of carrying out the program for audit in Resonance Health Ltd it is significant
for the auditor to review the potential risks and apply procedures so that the inherent risks can
be addressed effectively (Alali and Yeh, 2012). Moreover, the auditor shall use relevant
approach for conducting audit as the success of audit is dependent on the selection of right
approach for conducting audit. The selected approach is then used for calculating the impact

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on financial statement due to the existence of errors and frauds. In addition to this, the errors
and faults can be rectified timely with the use of effective auditing.
Analytical procedures
Under International Accounting Standards, analytical procedures shall be performed by the
auditor. Metrics and ratios are used for performing the analytical procedures for three years in
context of Resonance Health Ltd. The details are provided below:
Ratios Year 2015 (AUS$) Year 2016 (AUS$) Year 2017 (AUS$)
Net profit ratio
Net profit/net sales×100
463234/2443476×10
0
= 18.9%
(384366)/
2547685×100
= 15%
304217/2485332×10
0
= 12.2%
Operating ratio
Operating expenses/net
sales×100
371733/2443476×10
0
= 15.21%
781540/2547685×10
0
=30.67%
269529/2485332×10
0
=10.8%
ROCE
Income before interest &
tax/(Total assets –
Current liabilities) ×100
248633/(5192448-
787160) ×100
=5.64%
483926/(4926819-
892897)×100
=11.9%
618722/(4618915-
884210)×100
=16.5%
Asset turnover ratio
Sales/total assets
2443476/5192448
=47%
2547685/4926819
= 51.7%
2485332/4618915
=53.8%
Current ratio
Current assets/current
liabilities
3501684/787160
=4.44
3042229/892897
=3.40
2325048/884210
=2.62
Quick ratio 2797203+662177/78 2512441+458331/89 1685375+577393/88

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Cash and equivalent +
Short term investment +
Current
receivables/Current
liabilities
7160
= 4.39
2897
=3.32
4210
=2.55
Findings from net profit ratio
Only in the year 2015, the company gained profit but in 2016 and 2017 the company has to
bear loss. The net profit ratio for the year 2015 was 18.9% but in 2016 and 2017 it was 15%
and 12.2% that to in terms of loss. Therefore company is required to focus on increase sales
and reduce operating expenses in order to recover itself from losses.
Findings from operating ratio
The company underwent heavy losses in the year 2016 and 2017. Moreover, the operating
expenses were too much in the year 2016. There was not much increment in the sales in 2016
rather it was again dropped in 2017. The reason for decreasing sales and increasing losses
shall be addressed by the auditor to improve the financial status of the company in significant
way.
Findings on capital employed ratio
Instead of profit, the company underwent losses in 2016 and 2017. Moreover, the return on
capital employed ratio has increased in 2016 and 2017 but as there was no profit received by
the company in 2016 and 2017 the return on capital employed is taken in a negative sense.
This shows that the losses have increased in 2016 and 2017 may be because the share price of
the company has lowered and are no more purchased by the people. However, the assertions

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can be properly checked to verify if any financial misstatement exists in the financial
statement of the company (Piskorksi, Seru, and Witkin, 2015).
Findings on asset turnover ratio
It depicts that the company is not able to generate enough sales with the use of its assets. The
ratio is high which shows that the company has to put strong focus in improving its sales
through the use of assets. The auditor shall check whether the assets are understated or the
sales are overstated in the balance sheet.
Findings on current ratio
The current ratio depicts whether the assets have been used effectively by the company to set
off its debts or not (Gitman, Juchau, and Flanagan, 2015). If the ratio is below 1 then it shows
that the assets of the company are not enough to discharge its debts. In case of Resonance
Health Ltd, the ratio is above 1 which shows that company as enough asset against its
liabilities. However the ratio is decreasing, therefore the auditor shall give a proper check to
the assertions to draw true conclusions.
Findings of quick ratio
In order to determine the position of liquidity with reduction in inventory for an entity quick
ratio is used (Owolabi and Obida, 2012). The current liabilities can be discharged mainly
through cash and receivables. Quick ratio of Resonance Health Ltd shows a decreasing trend
which means that soon company will lose all of its cash and there will no amount left to pay
off the current liabilities.
Use of substantive approach for audit
Substantive approach in auditing signifies that the data collected through the audit work has
completeness, validity and accuracy in relation to the organization’s financial statement. The
financial records are audited by the auditor using substantive approach so that the material
misstatement can be distinguished. The substantive approach includes testing of account

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balances, disclosures, and transactions (Johnstone, Gramling, and Rittenberg, 2013). The
auditor examines the journal entries as well as the entries related to adjustments. The
approach is applicable in the activities associated with internal as well as external audit of
Resonance Health Ltd. Vouching and verification of documents is done in most activities of
the audit. Therefore, this approach is known as vouching approach. The approach is
beneficial in cased where the organization has weak internal control management. The audit
work performed using substantive approach aids in improving the reliability of data collected
during the procedure of the audit (Gale, Heath, Cameron, Rashid, and Redwood, 2013). The
steps included while performing the audit for resonance Health Ltd are as follows:
Steps taken Description
Planning It is the initial step and forms the base for obtaining the required outcomes
in the out of a specified activity. The audit is commenced by understanding
the activities of the organization, exploring risk factors, and setting audit
objectives (Knechel and Salterio, 2016). The scope of the audit is updated
to the management firstly. Information related to different departments is
obtained by the auditor. Risk is assessed in setting the audit objectives.
Further, a plan for audit is prepared for processing audit steps. The
management of Resonance Health Ltd is involved with the auditor for
conducting audit effectively. The information related to the organization’s
financial statement is provided to auditor by the management.
Meeting This step involves communication between the individuals from different
departments related to organizational concerns. The functional area in
which the audit will be conducted is discussed between the audit team and
management. The audit’s scope determined through assessment of the risk
is conversed with the participants of Resonance Health Ltd. The

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department’s concern is discussed with for successful conduct of the audit.
The procedure for audit and its reporting is analyzed by the participants
who attended the meeting. Information related to the issues faced by the
organization in term of finance is provided in the meeting (Theaker, 2017).
Fieldwork This step involves review of the internal control by testing and evaluating
them effectively. The structure of the internal control is understood by
communicating effectively with the staff members of Resonance Health
Ltd. In addition to this, tests of audit are imposed to find out whether the
financial records are misstated or not (Christensen, Glover, and Wood,
2012). The purpose of doing this is to identify the weaknesses in the
operations and procedures of the business effectively. The data is then
collected and the report is summarized and after that it is communicated to
management for addressing concerns of the organization.
Drafting report In this step, a review of the audit documents is done and a report is drafted
so that the scope, objectives, and termination of the audit are
communicated.
Exiting the
meeting
The audit report is discussed with the management and audit team to form
conclusions. The draft report is evaluated and possible changes are argued
between the participants who attended the meeting. The due date is
determined for the feedback on the audit.
Management
response
The recommendations from the management is responded in writing which
includes the actions required to perform for correcting and improving the
financial statement’s accuracy in order to increase the business
productivity. The timeframe for the execution of the corrective actions are
told to management for future development. The response is reviewed and

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management’s response is added by the audit team in the draft report
(Blackburn, 2012).
Follow up This step includes the preparation and distribution of the final report to the
management and audit officer. Moreover, the suggestions related to audit
for implementation are communicated to management.
Account name Amount Assertions Procedure for audit
Cash and equivalent 1685375 Valuation, Existence,
allocation, completeness,
accuracy, obligations and
rights
1. Bank verification
analysis.
2. Testing rank
reconciliation and
taking follow up on
reconciled items.
Trade and other
receivables
577393 Occurrence, subsistence,
classification, accuracy,
and recording
1. Examining journal
ledger.
2. Calculation and
reconcilement of
balalnces
Inventory 50000 Valuation, existence,
disclosure, completeness
1. Observation of
stock.
2. Reviewing the cost
of every item.
Accounts payable 487040 Existence, correctness,
presenting, and
disclosing
1. Analyzing the
cheque register
2. Reconcilement of

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related invoices
Bank loan 200000 Note down, valuation,
obligations and rights,
presenting and disclosing
1. Reviewing
documents of loan
2. Conducting the
process of test
reconciliation.
Creditors 170000 Existence, completeness,
evaluation and disclosing
1. Verification of
balances
2. Checking ledger
accounts
Outstanding
commission
150000 Recording, obligations
and rights, valuation,
disclosure and
presentation
1. Taking
confirmation from
designated officer
2. Investigation of
nominal accounts
Plan for sampling
Sampling is the application of the procedure of an audit for all the items under different
transactions or balances in the accounts so that their basic characteristics can be analyzed.
The following steps shall be taken by Resonance Health Ltd in forming a sampling plan
Defining population attributes
The maintenance and repair is an account which is considered as a risky expense in context of
an audit. It becomes significant for the auditor to analyze the level of accuracy and assertions
categorizations for the maintenance and repair account. In order to verify the accuracy of the
account correctly the recorded transactions shall be properly analyzed (Penn and Pennix,

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2017). The material correctness of the account is what is required in the end. Therefore, the
auditor shall confirm the account if free from any material misstatement.
Identification of size of sample
Apart from the nature of the method adopted for sampling, the sample size is required to be
determined. The auditor shall reflect the risk related to mistaken acceptance, confidence
level, expected fraud, and tolerable error.
Selection of sample items
If 5000 records exist in multiple small dollar transactions then it will be divided by the
sample size i.e. 50. The resultant will be 100 and is considered as an interval number.
Further, the records are organized in sequence using software so that the starting point can be
picked.
Procedures for audit
Once the size of the sample is selected from the recorded population, the relevant process for
audit is required to be carried out in order to differentiate items (Robertson and Robertson,
2012). For instance, the account for repair and maintenance will be audited first and the book
such as bill of landing will be audited thereafter.
Drawing conclusions
The step includes determining whether the account balance is properly considered or not. If
the misstatements are under the level of acceptance then the auditor can conclude the account
as substantially correct.

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Conclusion
The report can be concluded by mentioning that audit plays an essential role in providing
transparency in the operations of the company. The analysis depicts that the operations of
Resonance Health Ltd are exercised according to the defined principles of ASX and
Australian Accounting Law. However, some variations exist in the accounting figures of the
company in the past three years with valid reasons. Moreover, the plan of sampling for
Resonance Health Ltd is beneficial in analyzing the features of different items and identifying
misstatements if any.

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