Auditing Meridian Energy Group Limited: Determining Materiality and Analyzing Financial Ratios

This report examines the 2017 annual report for Meridian Energy Group Limited and determines the level of materiality that should be used for the group accounts for the fiscal year ending 2017. It also includes a preliminary analytical review on the information provided by the company, key balance sheet and profit and loss ratios, and recommended audit procedures.

Running head: AUDITING 1
Auditing
Name
Professor
Institution
Date

AUDITING 2
Introduction
Meridian Energy Group Limited is among the largest organizations in New Zealand.
It earns a revenue of $2,762 million in the financial year 2018 and realizes net assets
amounting to $4,823 million. This paper is primarily purposed to examine the 2017 annual
report for Meridian Energy Group Limited and determine the level of materiality that should
be used for the group accounts for the fiscal year ending 2017. This report also represents a
preliminary analytical review on the information that is provided by the company. Key
balance sheet and profit and loss ratios over the period 2014 to 2017 have been addressed.
Additionally, the report gives a review of the cash flow statement of the company and
discusses its primary cash receipts and cash payments during the year ending 2018 (Meridian
Energy Group, 2018).
Section 1: The Level of Materiality to Be Used For the Audit
a. Nature of Materiality
According to International Standards on Auditing (ISA) 320, materiality refers to
misstatements or omissions of key financial items that are considered significant either
individually or collectively, in influencing the financial and economic decisions of various
users of financial statements presented by an entity. However, the nature and magnitude of
materiality is highly dependent on the size of the reporting company or entity, the nature and
size of the financial item. (Reding, & Institute of Internal Auditors Research Foundation.
IIARF, 2013). In Meridian Energy Group Limited, determination of the level of materiality
to be used in the audit is very important (Media, 2012).

AUDITING 3
b. What Materiality Represents In Terms of the Audit of a Set of Financial
Statements
Materiality in the audit of financial statements represents significant errors or
misstatements in the amounts reported. Misstatements or errors in financial statements are
often considered as misstatements that have not been recorded or corrected. In normal
financial statement audits, auditors often consider identifying and reporting the dollar amount
of such errors and misstatements on a schedule which normally provides a listing of two
main categories of errors in financial reports (Reding & Institute of Internal Auditors
Research Foundation, 2013). These include:
i. Amounts reported in financial statements which have been recorded
incorrectly. These are transactions which were generally not recorded
correctly since they were posted in incorrect amounts or in wrong accounts.
ii. Amounts that should have been recorded in the financial statements but were
not (Moeller, 2016).
The auditor is responsible for calculating and determining the exact dollar amount of
the financial statement misstatements and errors that are considered to have been unrecorded
or uncorrected in such reports. For errors that are based on an adjustment which is based on
estimates, the auditor must consider them to have been caused by deficiencies or weaknesses
in the internal controls of Meridian Energy Group Limited. Therefore, the auditor must make
a consideration to review each and every financial statement item against an acceptable level
of materiality which is determined prior to the audit, with an aim to determine whether
adjustments should be made to financial statements or not Liu, 2015).

AUDITING 4
c. Different Bases and Considerations Employed in Arriving at Materiality
In determining the levels of materiality for Meridian Energy Group Limited, the
auditor must consider various bases and factors. For example, the materiality level used
should relate to the various uses and purposes intended for the audit of the company’s
financial statements audit. Therefore, it is essential for the auditor to understand the financial
information which is considered important and useful to decision makers and users of such
reports (VALLABHANENI, 2018). For example, with respect to issues relating to solvency
or regulation, the materiality level is highly dependent on the benchmarks in solvency ratios
derived from the industry in which the group company operates. In addition to this, for
appraisal purposes, the materiality level is specifically determined by the net income or net
worth of the company, as well as it’s per share earnings. Furthermore, for general purposes
which are related to financial statements of the company, the materiality level is highly
dependent on the net surplus and the net capital or net income of the company as well
(Meridian Energy Group, 2018).
The level of materiality is also influenced by other features or characteristics of the
company which include its size and access to capital, as well as the stage of organizational
life cycle. A company’s financial strength is also critical in determination of the level of
materiality that should be adopted for the financial audit. It is generally agreed that as an
entity approaches a given level of materiality, the materiality standard for work relating to
that threshold becomes more rigorous (Meridian Energy Group, 2018).
d. The Rationale behind Your Choice of a Certain Level of Materiality

AUDITING 5
Determining and ascertaining the dollar amounts that are considered material
misstatements and errors in the financial statement is highly influenced by objectivity of the
auditor. The auditor usually applies a specific percentage or range of materiality to dollar
amounts of each item in the financial statements taken as a whole. This percentage is
normally chosen as a benchmark for ascertain the maximum level of materiality beyond
which financial statements and reports must not me misstates, since they would significantly
influence decision making capabilities of users. These chosen benchmarks are based mainly
on financial statement items such as gross profit or total revenues (Meridian Energy Group,
2018).
In determination of the materiality level relating to unrecorded as well as uncorrected
misstatements and errors in the financial statements of Meridian Energy Group Limited, the
auditor should use the 5% rule. This rule is very essential in providing a general level of
materiality that should be adopted in financial statements audits. According to this rule, the
value of misstatements in dollar amounts is determined with key consideration to a specified
percentage of materiality level which should not exceed this limit (Verschoor, 2008). The
auditor must therefore, is therefore a need to take appropriate audit tests and measures for
ascertaining whether or not the actual misstatements happened. In the audit of Meridian
Energy Group Limited, 5% is therefore considered the maximum level of materiality which
must not be exceeded in the financial statements audit. Misstatements which exceed this limit
in the financial statements of Meridian Energy Group Limited are thus considered material
(Key, Riddle & Institute of Internal Auditors, 2012).
e. Review the Various Draft Notes and Disclosures

AUDITING 6
After reviewing several draft notes and disclosures that accompany the draft annual
report of are thus considered material, various significant issues were observed. For instance,
the Hydro inflow is a significant matter in the financial year of the company. The dry
conditions that were experienced during the start of the financial year continued to January.
However, the conditions changed abruptly in February. This is believed to have caused
material and significant changes in the revenues realized by Meridian Energy Group Limited
since the weather changes enabled the catchment areas to deliver more water into river
Waitaki than in any other time in the previous five years. The company has therefore
experienced a good storage of water since the onset of winter. The Meridian Energy Group
Limited was however affected significantly by the dry conditions since it was forced to
reduce materially its hydro generation production, thus calling of electricity swaptions during
the first half of its 2017 financial year (Wells, 2014).
In addition to this, Meridian Energy Group Limited makes a review of its tangible
and intangible assets at each balance date. These assets are grouped by the company as per
the cash generating units with cash flows that can be identified separately. The recoverable
amount is considered as the higher of the fair value of the asset less the selling costs and the
resent value of the projected cash flows of the asset. In the financial year 2018, Meridian
Energy Group Limited there was a significant impairment in the book value of the central
wind consent. This is because development at the particular location of the item was not most
likely to happen before the existing resource consent had expired (Jubb, 2010).
Section 2: A Preliminary Analytical Review on the Information Provided
a. Key Balance Sheet and Profit & Loss Ratios

AUDITING 7
Return on Shareholder Equity 2017 2016 2015 2014
Net profit 197.00$ 185.00$ 247.00$ 230.00$
Total Equity 5,082.00$ 5,050.00$ 4,748.00$ 4,634.00$
Return on Shareholder Equity 3.88% 3.66% 5.20% 4.96%
Earnings Per Share (EPS) 2017 2016 2015 2014
Basic and Diluted EPS (Cents) 7.70 7.20 9.60 9.00
Debt to Equity Ratio 2017 2016 2015 2014
Total liabilities 3,583.00$ 3,488.00$ 2,913.00$ 2,956.00$
Total Equity 5,082.00$ 5,050.00$ 4,748.00$ 4,634.00$
Debt to Equity Ratio 70.50% 69.07% 61.35% 63.79%
Current Ratio 2017 2016 2015 2014
Current assets 431.00$ 406.00$ 334.00$ 523.00$
Current Liabilities 579.00$ 513.00$ 478.00$ 466.00$
Current Ratio 0.74 0.79 0.70 1.12
Based on the results obtained from the above ratios as well as the nature of Meridian
Energy Group Limited company’s business and its markets, there are apparent trends and
changes its key ratios. For instance, the return on shareholders’ equity for the company
increased from 3.66% to 3.88% during the year 2016 and 2017 respectively. The Earnings
per Share (EPS) also increased by 0.50 cents in the financial years ended 2016 and 2017.
Additionally, there was an increase of 1.43% in debt to equity ratio during the year 2016 and
2017. However, the current ratio of the group company dropped by 0.05 n the two years
(Hayes, Gortemaker, & Wallage, 2014).
a. Relevant Assertions and Audit Procedures

AUDITING 8
In the audit of Meridian Energy Group Limited, it is important for the auditor to make
various assertions regarding the classes of transactions and related disclosures for the
financial year ending 2018 (Meridian Energy Group, 2018).
i. Accuracy
The accuracy of the amounts reported in the financial statements of Meridian Energy
Group Limited need to be examined by the auditor. This can be accomplished by
critically examining the financial records to ascertain that the transactional amounts have
been recorded appropriately and necessary disclosures made (Fiedler & Fiedler, 2010).
ii. Completeness
The auditor must ensure that the all events and transactions that took place in the year
ending 2017 have been recorded in the financial reports. The auditor can do this through
critical examination of the financial records against the original documents (Fiedler &
Fiedler, 2010).
iii. Occurrence
It is necessary for the auditor to verify that the recorded events and transactions have
actually happened and they pertain to Meridian Energy Group Limited. This can be done
by examining and inspecting the original books of accounts such as purchase vouchers
(Arens, Elder & Beasley, 2016).
Section 3: Review the Statement of Cash Flows
After reviewing the cash flow statement of Meridian Energy Group Limited in the
year ended 2018, it has been observed that the majority of the company’s cash inflows

AUDITING 9
were generated from its cash flows from operating activities, totaling to $2,675 million.
The company generated net cash flows amounting to $427 million from its operating
activities in the year ending 2018. The company’s largest cash outflows were also
reported from its operating activities, which totaled to $2,339 million (Meridian Energy
Group, 2018). During the year ending 2018, Meridian Energy Group Limited received
primary cash receipts of $5,589 million. The company also reported primary cash
payments amounting to $3,520 million (Meridian Energy Group, 2018).
The Main Non-Cash Financial and Investing Activities
According to the cash flow statement of Meridian Energy Group Limited, the
company has several non-cash financial and investing activities. For instance, it receives
significant amounts from sale of its property, plant and equipment amounting to $23 million.
Meridian Energy Group Limited also purchases these items for an amount totaling to $33
million. In addition to this, the group company purchases one of its subsidiaries for $182
million (Crain, Hopwood, Pacini & Young, 2018).
Evaluation of the Going Concern Risk of This Company and Recommended Audit
Procedures
According to question 2 and 4, Meridian Energy Group Limited is experiencing key
risks in regard to ascertainment of its going concern. For instance, the group company is
depends highly on cash inflows from its operating activities because its investing and
financing activities reported a negative net cash flows of $224 million and $225 million
respectively during the year ended 2018 (Meridian Energy Group, 2018). In addition to this,
the greatest cash outflows of the company were reported from its operating activities. This is

AUDITING 10
an indication that Meridian Energy Group Limited makes exceedingly huge payments which
may lead to significant stoppage of its operations in future should the cash outflows exceed
the inflows. This may highly contradict the going concern of Meridian Energy Group
Limited (Aicpa, 2017).
Recommendations
There are several audit procedures that recommended in order to help Meridian
Energy Group Limited address these risks. For instance, its management should diversify the
operations of the group company in order to ensure that operating activities are not the only
main sources of its cash inflows (Meridian Energy Group, 2018). It should also be ensured
that the huge costs and expenses are cut or reduced materially. This is very essential in
ensuring that the company recognizes an increased amount of free cash flow that can be used
for its future expansions in order to guarantee its going concern and eliminating the
associated risks (Dennis, 2015).
Review of the 2017 Financial Report for the Company
After reviewing the financial statements of Meridian Energy Group Limited for the
year ended 2018, it was observed that the independent auditor issued an unqualified opinion
with regard to its consolidated financial statements. In their opinion, it has been certified that
the financial statements of Meridian Energy Group Limited are prepared in accordance with
the GAAPs. The financial reports of the group company present fairly the financial position
of the group as well as its financial performance for the year ended 2018 (Meridian Energy
Group, 2018).

AUDITING 11
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