Auditing: Understanding the Nature of Entity and Key Business Risks for Vmoto Ltd

This report provides an understanding of the nature of entity and key business risks for Vmoto Ltd. It includes analytical procedures for developing the statement of financial position, relevant financial report assertions, and sampling plan. The report also includes materiality for planning purposes and associated assertions.

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Table of Contents
Introduction:...............................................................................................................................3
Content:......................................................................................................................................4
Understanding of the nature of the entity and its industry and then identify key business
risks along with the risk metrics:...........................................................................................4
Conclusion:..............................................................................................................................19
References:...............................................................................................................................20

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Introduction:
The report will be providing learning over the diverse concepts of auditing. The organization
selected for the process is Vmoto Ltd. Which is an Australian company dealing with scooter
manufacturing and distribution. The report will be providing the nature of the entity and key
risks that are faced by the company in the particular market segment. The performance
analytical procedures for developing the statement of financial position will be taken into
consideration in the report. Relevant financial report assertions and the reasons for their
selections will also be done in the task. The sampling plan will also be provided in the report
and audit evidence will be provided for Vmoto Ltd. The report will include the overall
findings and analysis about the company in respect of the auditors and recommendations will
be made after a critical evaluation have been made of the financialposition of company. The
overall report will help in gaining a briefunderstanding about the various aspects and
performance measures of company.

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Content:
Understanding of the nature of the entity and its industry and then identify key business
risks along with the risk metrics:
The organization Vmoto Ltd. is occupied with the matter of assembling and offering bikes.
The significant business of the organization is to take part in assembling, creating and
marketing universally the electric controlled two-wheel vehicles, off-road vehicles and oil
vehicles. The business to which the organization has a place relates to the vehicle business
and there is mind-boggling rivalry winning in the car business of China and Australia. The
organization has been offering its items based on a unique producer hardware premise. The
geological fragment where the organization is working its business incorporates Australia and
China. The organization from the ongoing past years have been putting forth green electric
controlled bikes and has been occupied with assembling the western designed electrical bike
to cover an extensive variety of items. There are two kinds of brands through which
organization is working in the market one is Vmoto which is gone for making and creating an
incentive in Asia and the other one is Emax which is worried about focusing on western
markets (Kim, 2016).
There are roughly 40 units from where the organization is working its business which
comprises the blend of different retail outlets and the outsider merchants among China. The
organization has a limit of assembling and creating no less than 450000 of units for each
annum. The material hazard related to the business which is looked at by the organization and
that can affect the future prospects of the organization incorporates the hazard related to
innovative technological obsolescence (Lee, 2014). The tending of these issues has been
made through an interest in promoting and research, patent and enrolling the equipped and
productive experts in the workforce of an organization.

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The hazard can affect the long-haul maintainability of the organization in the vehicle segment
as the out-dated items won't be favoured by the clients in this industry. It tends to be seen that
the organization has been working in the business comprising of green and electric vehicle
innovation and any sort of mechanical out of date quality will significantly affect the
budgetary aftereffects of the organization in future. The danger of material misquote can be
available in the valuation of the benefits where the valuation systems as embraced by the
organization requires different suspicion to be made whose precision and adequacy can be
influenced by the objectivities and judgment of the administration making the fitting
presumptions. Anyway, the organization has been tending to this as a negligible hazard as the
organization is always checking available and building up the innovations and capacities
which are in concurrence with the most recent innovation(Vmoto Limited, 2017).
The different kinds of hazard influencing the business will incorporate natural hazard that
speaks to the defencelessness of the declaration to susceptibility accepting that there are no
inside controls working inside the endeavour. The control hazard will be related with the
actuality that the material errors won't be controlled and forestalled on an auspicious premise.
The discovery hazard, on the other hand, is related to the hazard that material error won't be
recognized by the inspectors. The different components influencing intrinsic and control
hazard includes:
Nature of the business: This will incorporate the elements, for example, nature and many-
sided quality of exchanges related to maintaining a business.
Cultural rehearses: The components influencing the related party exchanges and the
deceitful budgetary detailing will likewise shape some portion of the elements.
Experience of inspectors: The underlying review commitment and the earlier review results
will shape a premise of distinguishing and evaluating the danger of material error in the
organization and setting controls for the same (Petty, et. al., 2015).

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In connection to Vmoto Constrained the risk model [AR = f (IR x CR X DR)] has been
connected and the outcomes are drawn as under:
AR = f (IR x CR X DR)
AR = .05 (.80 x .60 X .25)
AR = .006
The risk rating in which the organization is working as a place with the medium level of
hazard as the intrinsic and control chance is making a moderate effect on the material error
occurring. The location hazard should be tried all the more oftentimes for this situation as the
controls are not executed adequately in the organization and along these lines, the recognition
of hazard winds up essential for this reality.
Analytical procedures for analysing the financial Position and financial Performance
over the last three years using appropriate ratios and metrics.
The ratio metrics will be a useful tool in analysing and assessing the company’s financial
position and performance in comparison to the industry averages and past performers. The
various ratios presented in the report will help in assessing the position concerned with
profitability, liquidity and capital position of thecompany(Vmoto Limited, 2017). The ratios
will be calculated after considering the latest annual reports and financialstatements as
presented by the company and the result will be drawn accordingly. The calculation ofvarious
in respect of Vmoto Limited for the period ending 2017, 2016 and 2015 are presented below:
Calculation of gross profit ratio:

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Calculation of net profit ratio:
Calculation of current ratio:

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Calculation of debt equity ratio:
Analytical review:
The analytical review is concerned with preparing and presenting a report in which various
ratio trends will be identified and the results will be drawn accordingly. The performance of
the company in relation to different years will be critically assessed for thepurpose of
drawingrecommendation and audit conclusions.
Ratio Description Analytical review
Gross profit ratio The gross profit ratio
represents the critical
profitability ratio which helps
in identifying the
performance of company in
relation to
productioncapacities and
controlling the cost of goods
sold. The gross profit is
The trend analysis shows that
the gross profit was 17% in
the year 2015 which reduced
significantly with a decrease
of about 30% and it became
12% in the year 2016. The
gross profit ratio further
decreased to 10% in the year
2015 which shows that the

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worked out after considering
the cost of goods sold and it
is deducted from the
revenues obtained by
thecompanyduring the period
of reporting. The ratio is
calculated by dividing the
gross profit with revenues
obtained by the
company(Pavlova, 2017).
company was not achieving
the efficient level of cost of
goods sold in relate to
revenues achieved by
thecompany. The same can
be improved with identifying
and implementing the cost
reduction and cost control
strategies in the company.
The application of these
strategies will help in
achieving an appropriate
level of cost of goods sold
under which the gross profit
ratio will be maximum for
the company Vmoto Limited.
Net profit ratio The net profit ratio is another
way of identifying and
assessing the operational
efficiency of thecompany in
relation to industry averages
and other market factors. The
net profit ratedescribes the
operationalperformance of
The net profitability of
thecompany shows the trend
analysis associated with
operational efficiency of
thecompany. The net profit
ratio in the year 2015 was
only -2% which increased to
the loss of 82% in the year

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the company during the
reporting period. It is worked
out in the same manner as of
gross profit ratio of the
company that is by dividing
the net profitwith the
revenues achieved by the
company during the
year(Vmoto Limited, 2017).
2016. The loss further
remained at a significant
level of 54% in the year
2017. Therefore it can be
established that the company
is facing financial crunch due
to increased losses in the
current years and therefore it
is required to establish and
implement the appropriate
controlling policies to ache
higher margins of net profit.
The approach to increased
net profit can beefficient
achieved with controlling the
operating expenses and
achieving higher grossprofits.
Current ratio The liquidity position and
aspect of the company
Vmoto limited can be
analysed with the help of this
ratio. The current ratio is
determined by dividing the
current assets with the
The current ratio of the
company Vmoto limited is
1.79 in the current year 2017
which shows an adequate
position of liquidity. The
same ratio is 1.96 in the year
2016 which was significantly

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current liabilities of the
company. The ratio helps in
establishing the working
capital position of company.
higher in the year 2015 that
is 5.16. The ratio above 1
represents that there are
enough and adequate assets
covering the current debt
liabilities of thecompany
Vmoto limited.
Thusthecompany is operating
sufficiently in this
aspect(Pavlova, 2017).
Debt to equity ratio The capital structuring ratio
helps in determining the
capital base with which the
company is operating I the
financial market. The debt
equity ratio helps in
assessing the efficiency with
which the capital employed
has been utilized in
thecompany associated. The
debt equity ratio of 2:1 is
considered optimum for the
companyoperating in
automobile sector(Petty,
The ratio of debt equity
remained constant in the year
2017 and 2016 in respect of
the company Vmoto limited.
The ratio was .45
whichrepresents that the debt
is employed at only half of
the amount of equity
employed in thecompany.
This has been resulting in
excessive pressure on the
operational capability as the
shareholders are expecting
higher returns. The debt

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et .al., 2015). equity ratio should be
optimised at the level of 2:1
and thus more of long term
debt should be employed in
thecompany in order to
achieveminimum cost of
capital as required by
thecompany. This will also
help in maximising the
returns and increasing the
profitability of thecompany.
Materiality for planning purposes and the associated assertions in relation to Vmoto
limited:
The materiality in planning the audit work of company will be recognized as a crucial aspect
in which material accounts balances are determined with the appropriate amount of
materiality that should be examined to identify and consider the material misstatement in the
financial records of company. It can be established that there are different categories of
accounts balances as depicted in the accounts of the company and there are significant
amount of material balances which when exceeded can affect the performance and position of
the company in the industry and market concerned. The judgments about materiality will be
made in the light of the surrounding circumstances and will also be affected by the types and
nature of business transactions entered into by the company Vmoto limited. The auditors
while determining the level of materiality has to take into consideration the nature and
amount of the transaction which are happening during the reporting period. The materiality in

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the account balances will be considered crucial for ensuring the accuracy and completeness
of the accounts for auditing purposes(Christensen, et. al., 2014).
There are various types of audit procedures which have been applied while determining the
amount of materiality as associated with the material accountbalances of thecompany. The
process of determining the materiality will include identifying the risk of material
misstatement and assessing the exposure with which it can affect the long term position ad
performance of the company. There are certain kinds of predetermined steps which have been
followed by the auditors of Vmoto limited in order to set out the materiality levels:
1) The first step in determining the materiality will include determination of the
nature and extent of the audit procedures that should be applied in thecompany for the
purpose of assessing the materiality(Smith, et. al., 2017).
2) The next step in the process will be associated with assessing the risk of
material misstatement and the exposure with which it can affect the company and its
results.
3) The resultswill be drawn and recorded appropriately by the auditors of
company.
4) The results drawn will be assessed for the purpose of determining the
appropriate level of materiality in respect of various account balances as reflected in
the financial statement of thecompany.
Key assertions and respective audit procedures applied:
Account
Balance
Amount ($) Assertions Audit procedures Audit
evidence
Cash and
cash
3,172,792 Existence Reconciling the bank
statement it the cash
Certificate of
bank

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equivalents
Disclosure
Completeness
statementsprepared by the
company in order to
reconcile the
accounts(Smith, et. al.,
2017).
Obtaining an appropriate
and adequate confirmation
from the bankers by
preparing and asking for
confirmation certificates.
confirmation
Reconciliatio
n statement as
prepared by
the
management
Inventories 2,780,782 Existence
Valuation
Conducting the physical
stock taking in the
company at the time when
management places the
same.
Reviewing and examining
the inventory sheet and the
line items of thecompany
Preparing and
inventory
reconciliation
report
Physical
stock taking
report
prepared by
management
and notes as
prepared
Trade and 1,385,118 Accuracy Verifying the balances of Confirmation

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other
receivables
Completeness
Existence
debtors with the third
partiesand the debtors
themselves in order to
reconcile the same(Weil,
et. al., 2013).
Reviewing the general
journal and obtaining the
confirmation of invoices
amount from customers or
third parties
statement of
debtors
Ageing report
of the debtors
Other assets 3,119,683 Recoverability
and existence
Accuracy
Completeness
Identifying the ageing
report and confirming the
recoverability of the same
in regard to the specific
clients of thecompany.
Confirmation of the
balances of the suppliers
and customers in regard to
particular assets of the
company (Cavusgil, et. al.,
2014).
Confirmation
balance
reports
Ageing
reports
Intangible 595,533 Existence Validating and examining Contractual

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Assets
Completeness
Accuracy
Rights and
obligation
Valuation
the accuracy of the
recording of intangible
assets
Identifying and assessing
the valuation of intangible
assets in regard to
contractual agreements and
businesscombination
agreements(Weil, et. al.,
2013).
agreements
and legal
findings
Actuarial
valuation of
intangible
assets
Loans and
borrowings
1,966,878 Existence
Completeness
Rights and
obligations
Applying for confirmation
from third parties and
examining the valuation of
loans
Identifying and analysing
the interest rate agreements
so as to assess the validity
of same(Christensen, et.
al., 2014).
Agreements
associated
with the long
term
borrowings
Reconciliatio
n of interest
payments

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Trade and
other
payables
3,867,726 Existence
Completeness
Examining and reviewing
the suppliers agreed in
regard to payments and
supplies
Takingconfirmation from
the third parties which can
be acting as a guarantees
Guarantees
statement in
regard to
obligation
confirmation
Classification
statement f
theaccounts
payable of
thecompany
Deferred
tax
liabilities
Nil Existence
Accuracy
Identifying the
temporarydifferences
associated with taxation
matters of thecompany and
assessing the tax liabilityof
the same(Sirois, et. al.,
2018).
List of
temporary
differences
and
computation
records
Current tax
liabilities
Nil Accuracy
Completeness
The current
taxcomputationshould be
examined by the date in
order assess the accuracy
of the same.
Computation
records
maintained by
the auditors.

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Other
liabilities
Nil Right and
obligations
The third party
confirmations can be taken
by the parties to the
contract
Reconciliatio
n documents
and other
agreements in
relation to
liabilities
Sampling plan introduced in order to test the material account balances:
The sampling plan in relation to checking the accuracy of material account balances will be
related with identifying the risk of material statement on a sample basis and applying and
implementing the adequate testing in respect of each and every item under consideration. The
sampling in the case of Vmoto limited will include systematic sampling where the samples
will be determined n a systematic basis and the results will be drawn accordingly(Sirois, et.
al., 2018). In a systematic sampling plan the observations are identified and worked out for
the purpose of assessment in a careful manner and regular intervals are determined or
conductingthe sampling in an appropriate manner. The number of items of material
accountbalances which will be tested in this manner will be at least 2 and this will lead to
appropriate results and conclusions. The audit will have to apply the
substantiveauditorsprocedures in relation to the audit work performed. The sapling plan will
help the auditors in determining the substantive audit procedures which will be required for
planning the audit work of company and assessing the riskofmaterialmisstatements. The audit
procedures and audit process will be conducted in mannerwhich will beappropriate t the audit
sampling pan as framed by the auditors of company and this will lead to the appropriate
auditing results for the company(Christensen, et. al., 2014).

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Conclusion:
It can be concluded that audit procedures and applications will be needed for checking the
accuracy and comparability of the accounts that are prepared by Vmoto Ltd. The ration
analysis of company indicates that the liquid and capital position of the company is
satisfactory. The report provides with a comprehensive set of audit work for material account
balance that addresses the selected assertions. For all the material account balances that are
selected have been listing the relevant results in sufficient audit evidence. The conclusion
which can be drawn by this report can be summarised in the way that auditing procedures and
audit processes which are applied in the corporate accounting will relate to
identificationandassessment of risk of material misstatement. The sampling plan which is
drawn under the systematicsamplingwill help the auditors in identifying and assessing the
riskappropriately. The ratio allays will be regarded as an appropriate technique to compete
the analysis process of company’s financialpositionandperformed.

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References:
Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L.,
(2014) International business.Pearson Australia.
Christensen, B.E., Glover, S.M. and Wolfe, C.J., (2014) Do critical audit matter paragraphs
in the audit report change nonprofessional investors' decision to invest?. Auditing: A
Journal of Practice & Theory, 33(4), pp.71-93.
Collier, P.M., (2015) Accounting for managers: Interpreting accounting information for
decision making. USA: John Wiley & Sons.
Fields, E., (2016) The essentials of finance and accounting for nonfinancial
managers.AMACOM Div American Mgmt Assn.
Hartley, W.C., (2014) An introduction to business accounting for managers.USA: Elsevier.
Kim, J.B., (2016) Accounting flexibility and managers’ forecast behavior prior to seasoned
equity offerings. Review of Accounting Studies, 21(4), pp.1361-1400.
Köhler, A., Ratzinger-Sakel, N. V., &Theis, J. (2016) The Effects of Key Audit Matters on
the Auditor's Report's Communicative Value: Experimental Evidence from Investment
Professionals and Non-Professional Investors.
Lee, T.A., (2014) Evolution of Corporate Financial Reporting (RLE Accounting).Germany:
Routledge.
Pavlova, K., (2017) Revenue management system for the hospitality industry–essence and
elements. Economics and computer science, (1), pp.42-71.
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M.,
(2015) Financial management: Principles and applications. Australia: Pearson Higher
Education AU.

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Sirois, L. P., Bédard, J., &Bera, P. (2018) The informational value of key audit matters in
the auditor's report: evidence from an Eye-tracking study, Accounting Horizons. PP. 1-57.
Smith, S.B. and Thomas, N.A., Smith Steven B. and Thomas Nicholas A., (2017) Systems
and Methods for Managing Financial Transaction Information. U.S. Patent Application
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Vmoto Limited, 2017. Annual report 2017 .[Online]. Available at:
http://www.vmoto.com/assets/uploads/20180517/2018051712333861064.pdf, (Assessed
on: 21st September 2018).
Weil, R.L., Schipper, K. and Francis, J., (2013) “Financial accounting: an introduction to
concepts, methods and uses”,USA: Cengage Learning.