Audits and Ethics

This study material provides an in-depth understanding of audits and ethics. It covers topics such as materiality level, quantitative estimate for materiality, significant items to be considered for audit, preliminary analytical review, review of cash flow statement, and audit report. Gain valuable insights into the concept of materiality and its application in auditing. Explore the importance of analytical review and its role in risk assessment. Analyze the cash flow statement and learn about key audit matters mentioned in the audit report.

Running head: AUDITS AND ETHICS
Audits and ethics
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Table of Contents
Section 1..........................................................................................................................................2
Materiality level...........................................................................................................................2
Quantitative estimate for materiality.......................................................................................3
Rational behind choosing the level of materiality...................................................................3
Significant items to be considered for audit................................................................................4
Section 2..........................................................................................................................................6
Section 3..........................................................................................................................................9
Review of cash flow statement....................................................................................................9
Review of audit report...............................................................................................................10
References......................................................................................................................................11

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Section 1
Materiality level
As basis for auditor’s opinion, auditing standards require the auditors for obtaining
reasonable assurances regarding whether as a whole the financial statement are free from the
material misstatements. Hence, the materiality concept is fundamental to audit that is applied by
the auditors at the stage of audit planning (Christensen, Glover & Wood, 2013). In accordance
with AUS 202 the main objective of carrying out audit for the financial statement is to express an
opinion on the same that will state whether the material aspects are taken care of in accordance
with the recognised framework for the financial reporting. Based on the level of materiality the
auditor determines the nature and timing of audit procedure and the extent of the same. Further,
the relationship between risk and the materiality level is taken into consideration while
determining the nature and timing of audit procedure and the extent of the same (Auasb.gov.au,
2019).
Planning materiality is the amount of misstatements that is set by the auditors at stage of
audit planning based on the materiality. It is used by the auditor for assessing whether
misstatements individually or in aggregate misstated materially in financial statements. To
ascertain the preliminary materiality assessment various factors are taken into consideration.
These factors are qualitative as well as quantitative information, reliability of the information
provided by the management and any other factor that may signify divergence from normal
activities (Coetzee & Lubbe, 2014). Materiality is calculated taking into consideration the
following bases –
 Net profit – 5% to 10%

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 Gross profit – 0.5% to 1%
 Shareholder’s equity – 2% to 5%
 Total asset – 1% to 2%
Quantitative estimate for materiality
Applying the above mentioned bases for the performances of Boral Ltd for the year
closes at 30th June 2018 the materiality is calculated as follows –
Basis Amount
(million)
Materiality
Low level High Level
5% to 10% of the net profit $ 441.00 $ 22.05 $ 44.10
0.5% to 1% of the gross revenue $ 5,731.10 $ 28.66 $ 57.31
2% to 5% of the shareholder’s equity $ 5,730.80 $ 114.62 $ 286.54
1% to 2% of the total assets $ 9,510.30 $ 95.10 $ 190.21
It can be found from the above table that the high level of amount that can be considered
for determining materiality is $ 286.54 million. However, the tolerable level of misstatement that
is set by the auditor varies between the ranges of 20% to 70% based on the level of assumption,
judgement and amount involved in the financial statement. In case of Boral Ltd if the tolerable
misstatement is set at 60%, the amount of misstatement will be approximately $ 286.54 * 60% =
$ 172 million (Boral.com, 2019).
Rational behind choosing the level of materiality
As per the above computation the level of materiality is $ 172 million that is the level of
materiality is determined at quite higher level. Higher level of materiality signifies lower risk
level. This level of materiality is determined taking into consideration the report provided by the
auditor regarding previous year’s financial statement. In accordance with the audit opinion
expressed by the auditor the financial statement of the entity are prepared and delivered in true

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and fair manner and is representing true and fair view of the financial performance as well as
position of the company.
Significant items to be considered for audit
Going through Boral Ltd’ financial statement included in the annual report for the year
ended 2018 it can be identified that some of the items of the included in the financial statement
require management’s judgments and assumption. These items are impairment and contingencies
and will have significance to audit (Leung et al., 2014).
Impairment – goodwill and other intangible assets with indefinite useful life are annually tested
for the purpose of impairment and for other assets it is tested while any indication exists for
impairment. Impairment is reported in the income statement if the carrying of the item is more
than its recoverable value. However, the management require forming significant judgments,
assumptions and estimates to determine whether carrying value of the non-financial asset has
indication of impairment. It involves forecasting the cash flow for future period, discount rate to
be applied to the cash flows and expected growth rate for long term. Such judgments and
estimates can be changed with the change in operational and economic conditions. Hence, the
actual cash flow may vary with the forecasts and that may have impact on the recognition of the
impairment charges (Boral.com, 2019). Audit procedures to be carried out for evaluating
impairment charges are as follows –
 Review the fixed asset and ensure that AASB 136 is complied with while charging
impairment for any particular asset. Further, the auditor must review the processes and
procedures used by the management for assessing the impairments

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 Comparing the cash flows forecasted with the forecasts approved by the board and
considering the impact of past event on the forecasts.
Contingencies – contingent liabilities are disclosed in the note of the financial statements only
for those items for which the possibility for future receipts and future payments are negligible.
Contingency disclosed by the company is for bank guarantee. The entity delivered a letter of
responsibility for the accommodation provided by bank to the controlled companies of Boral Ltd
from time to time. However, the amount recorded as contingency for bank guarantee is only $
38.3 million, as the item requires significant judgments and assumption of the management it is
regarded to have significance to audit (Boral.com, 2019). Audit procedures to be carried out for
evaluating contingencies are as follows –
 Materiality of the transaction – disclosing of contingencies are dependent upon the fact
that whether the liability will have material impact on the financial statement of the
entity. Auditor shall determine the threshold for materiality before analysing individual
liabilities. If the liability is lower than the limit it is considered to have insignificant
impact on financial statement (Byrnes et al., 2015).
 Probability of occurrence – probability of the event shall be estimated for determining its
impact on financial statement of the entity. Levels of probability are remote, probable and
reasonably probable, however only the probable and reasonably probable items shall be
disclosed as contingencies.
 Journal entries for the probable events – while the contingency is probable, the entity
shall provide the same in the general ledger. For instance, pending lawsuit shall be
recorded as debit to the legal expenses and credit to the accrued liabilities. However, if

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the amount cannot be estimated it shall be mentioned in the disclosure that the amount
cannot be estimated.
Section 2
Preliminary analytical review is defined as procedure of management’s inquiry as well as
analytical procedure that are applied at the audit planning stage. Within the standard of risk
assessment he auditor shall perform the risk assessment procedure including the analytical
procedure as well as the management’s inquiry. The procedure of risk assessment further
includes performing inspection as well as observation procedure that is focussed on the gaining
understanding of internal control procedure of the organisation. Hence, the preliminary analytical
review procedure involves significant component of the procedure for risk assessment. One of
the procedures for preliminary analytical review is conducting ratio analysis to identify the areas
of significant changes (Christensen et al., 2016).

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Profitability ratios – profitability ratios indicates the capability of the organisation to generate
profits from the sales revenue earned by it. It can be determined from the profitability ratios of
the entity that both return on equity as well as net profit margin is in enhancing trend and

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increased from 7.29% to 7.70% and 5.98% to 7.69% respectively over the time period of last 4
years. Audit risk involved with increasing trend of profit is inflation of revenues (Lai, Melloni &
Stacchezzini, 2017).
Liquidity ratios – liquidity ratios determine the ability of the entity to meet its short term
liabilities upon becoming due. It can be determined from the liquidity ratios of the entity that
both quick assets as well current ratios are in reducing trend and increased from 1.88 to 1.74 and
1.89 to 1.75 respectively over the time period of last 4 years. Audit risk involved with reducing
trend of liquidity ratios is deflation of cash and other assets (Christensen et al., 2016).
Leverage ratios – it signifies the gearing position of the entity though focussing on the proportion
of equity and borrowing in its capital structure. It can be determined from the leverage ratios of
the entity that the debt equity ratio of the company remained at same level that is at 0.6 over the
past 4 year and the times interest earned increased from 4.60 times to 5.41 times (Knechel &
Salterio, 2016).
Going through the trend of the ratios calculated above it can be stated that the following
accounts shall be selected for analytical review –
 Revenues – revenues of the entity for the past 4 years are in improving trend and
increased from $ 4297.6 million to $ 5731.1 million. Assertions involved with sales
revenues are – (i) accuracy that is all the sales transactions are recorded at full amount
and without any error (ii) cut-off that is the recorded transaction for sales belongs to the
period for which the statement is prepared (Kharisova & Kozlova, 2014). Audit
procedure to be followed for assertion are (i) accuracy – reconcile the recorded balance

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with sales register (ii) cut – off – verifying the balances of cash and account receivable
(Glover & Prawitt, 2014).
 Cash – cash and cash equivalent balance has significantly reduced from $ 237.8 million
to $ 74.3 million over the past 2 years. Assertions involved with cash balances are – (i)
existence that is all the cash transactions are recorded at full amount and without any
error (ii) completeness that is all the cash transactions have been recorded at the time of
statement preparation. Audit procedure to be followed for assertion are (i) existence –
reconciling the cash balance with bank balance randomly (ii) completeness – cash books
and cash registers shall be matched with the reported cash balance (Eilifsen & Messier,
2014)
Section 3
Review of cash flow statement
 Major amount of cash inflow provided by operational activities and the amount is $ 578
million
 Major amount of cash outflows was towards financing activities and the amount is $
398.2 million (Boral.com, 2019).
 Primary source of cash receipt is cash received from the customers and the amount was $
6,209 million and major amount of payments amounting to $ 5399.1 million that is made
to the suppliers.
 During the year closed on 30th June 2018 the entity did not report any non-cash investing
as well as financing activities (Boral.com, 2019).

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Going concern – it can be verified from the cash flow statement of the entity for the year ended
2018 that the cash used for financing activities amounted to $ 344.6 million whereas in 2017 the
cash inflow amounted to $ 3107 million from the same activity. Further, the cash and cash
equivalent balance has significantly reduced from $ 237.8 million to $ 74.3 million over the past
2 years (Boral.com, 2019). These facts will raise significant issue in going concern assumption.
Audit procedure that required to be followed for the same is 1st of all the reason behind this
major variation over the last 2 years shall be verified with the management. Further, the cash
books shall be reconciled with bank balance randomly and cash books and cash registers shall be
matched with the reported cash balance (William, Glover & Prawitt, 2016).
Review of audit report
Audit for the year 2018 has been carried out by KPMG and they expressed unmodified
opinion. As per the auditor’ opinion the financial statement of the entity are prepared and
delivered in true and fair manner and is representing true and fair view of the financial
performance as well as position of the company (Boral.com, 2019).
Additional issues mentioned by the auditor as key audit matters are –
 Availability as well as recoverability of US tax loss assets Carrying value for goodwill of North America PPA (purchase price allocation) accounting associated to acquisition of Headwaters Carrying value of investment made in Meridian bank JV and USG Boral JV (Boral.com,
2019).

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References
Auasb.gov.au. (2019). Retrieved 9 May 2019, from
https://www.auasb.gov.au/admin/file/content102/c3/AUS_306.pdf
Boral.com. (2019). Retrieved 9 May 2019, from
https://www.boral.com/sites/corporate/files/media/field_document/Boral-Annual-Report-
2018.pdf
Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. &
Vasarhelyi, M., (2015). Evolution of auditing: From the traditional approach to the future
audit. Audit Analytics, 71.
Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit
quality: Insights from audit professionals and investors. Contemporary Accounting
Research, 33(4), 1648-1684.
Christensen, B.E., Glover, S.M. & Wood, D.A., (2013). Extreme estimation uncertainty and
audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Coetzee, P. & Lubbe, D., (2014). Improving the efficiency and effectiveness of risk‐based
internal audit engagements. International Journal of Auditing, 18(2), pp.115-125.
Eilifsen, A. & Messier Jr, W.F., (2014). Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Glover, S.M. & Prawitt, D.F., (2014). Enhancing auditor professional skepticism: The
professional skepticism continuum. Current Issues in Auditing, 8(2), pp.P1-P10.

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Kharisova, F.I. & Kozlova, N.N., (2014). Applying the category of «Assertions (or
preconditions)» In audit of financial statement. Mediterranean Journal of Social
Sciences, 5(24), p.180.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Lai, A., Melloni, G., & Stacchezzini, R. (2017). What does materiality mean to integrated
reporting preparers? An empirical exploration. Meditari Accountancy Research, 25(4),
533-552.
Leung, P., Coram, P., Cooper, B.J. & Richardson, P., (2014). Modern Auditing and Assurance
Services 6e. Wiley.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic
approach. McGraw-Hill Education.