Developing an Audit Program

This presentation provides an overview of the development of an audit program for a publicly listed company, with a focus on Thorn Group Ltd. It covers key business risks, substantive audit procedures, and the relationship between assertions and account balances. The presentation also includes a sampling plan and concludes with references for further reading.

DEVELOPING AN
AUDIT PROGRAM
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TABLE OF CONTENTS
 Executive Summary
 Introduction
 Company overview
Tests of control, substantive test of transactions and balances
 Key Business Risks
 Substantive Audit Procedures
 Relationship between assertion and account balances
 Audit Program
 Sampling plan
 Conclusion
 References

Executive Summary
This report summarises a detailed account in regards to how Audit
Program is developed in relation to a publicly listed company. For this
purpose, an ASX listed business, Thorn Group Ltd. Has been taken
into account. Here, it can be seen that the company has a high Audit
risk with negative profitability in the current year. For resolving this,
five assets viz. Inventories, small investment, cash, debtors, Financial
investment and liabilities viz.

Audit program helps an auditor to validate compliance and risk
management practices of an organisation. It also ensures that
proper attention is given tocritical business matters so as to
prevent the possibility of material misstatement. Thus, to perform
all the operation of business explicitly proper planning of audit is
required. To better understand the topic of substantive audit
procedure in response to assessed risk of material misstatement
and determine assertion in relation to account balance, Thorn
Group Limited has been selected.
Introduction

COMPANY OVERVIEW
Thorn Group Ltd company is an organization that offers various financ
ial services as well as solutions to the consumer. It basically provide the
services to various people in various divisions such as consumer leasin
g, commercial finance, receivable management as well as consumer fin
ance within or across the nation. Within consumer leasing the electroni
c equipment or appliance are offered as rentals to both household and o
ffice purposes. It includes kitchen appliance, office equipment, laundry
or appliance, furniture and so on.

Continue...
Thorn Group Ltd company is an organization that offers various financ
ial services as well as solutions to the consumer. It basically provide the
services to various people in various divisions such as consumer leasin
g, commercial finance, receivable management as well as consumer fin
ance within or across the nation. Within consumer leasing the electroni
c equipment or appliance are offered as rentals to both household and o
ffice purposes. It includes kitchen appliance, office equipment, laundry
or appliance, furniture and so on.

TEST OF CONTROL, SUBSTANTIVE TESTS OF TRANSACTIO
NS AND BALANCES
Test of control Substantive test of transaction Substantive test of balances
Such audit procedure is used
by client to detect material mi
smanagement. It is therefore a
n essential part of auditing pe
rformed by auditor to control
as well as manage internal ent
ity that helps to mitigate the c
hanges of risk
Within substantive procedure
of balance all the data is mana
ged electronic form and access
ed by auditor to control all the
operations related to financial
statement. Such model can be
further used to substantive tran
saction of testing as well as co
ntrol test.
Such procedure come into use
to determine the misstatement
in financial statement that pre
vails at the end of financial ye
ar. Thus, the role of auditor is
to ensure that the entries of fin
ancial startement can again be
tracted as a source of documen
tation

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Test of control Substantive test of transaction Substantive test of balances
It include enquiry as well as o
bservation that helps to verify
the internal control. If the inte
rnal control is ineffective in t
hat case substantive procedur
e come into use.
It includes deep analyses of ev
ery entry made in journal entr
y to make sure each things are
record significantly. Substanti
ve test of transaction take mor
e time in audit activity as it inc
lude the role of various transa
ction that helps in determine a
ctual capability of firm.
It involve inspection for each t
ransaction such as fixed asset t
o ascertain the existence of pr
ocedure. This procedure is mo
re effective in comparison to i
nternal control as it only come
s into use if test of control giv
es ineffective result.

KEY BUSINESS RISKS
A business risk, in auditing, is an event that results in non-acheieveme
nt of goals and objectives by an organisation due to various reasons.
These reasons may pertain to:
 Change happening in the national, state or territorial regulations
 Changes in economic conditions
 Rise of competition in the Market
 Nautre of Business

TEST OF CONTROL
These entail essential Audit procedures which complement in the assess
ment of operations as well as other business processes. Other than this,
Test of Control also ensures that they are effectively implemented, thu
s, helping in taking corrective measure at predetermined level of asserti
ons. In the context of Thorn Group Limited, its auditor, KPMG perfor
ms this test in those circumstances wherein substantive audit procedure
s fail to deliver required evidence regarding the assertive level. Section
314 states that an auditor must understand the business entity as well as
risk associated with material mismanagement.

KEY BUSINESS RISKS (CONTD).
Operational Risk: Lack of business orders, physical assets and misse
d opportunities may hamper day to day activities of a busines. For
Thorn, the company rents out financial lease under which it supplie
s equipments to its clients. Loss incurred on such products may res
ult in operational risk for the company itself.
Compliance Risk: As business risks are directly impacted by such cir
cumstances, hence, companies are highly susceptible to such situati
ons. Also, in the context of given case scenario, one of the Key Au
dit Matters considered by the independent auditors of the company
are its 'regulatory provisions'.

SUBSTANTIVE AUDIT
PROCEDURES
Such procedures are performed in order to identify material misstateme
nts at a given assertion level. Under this, an Audit Risk Model is imple
mented by the Auditors which has been depicted below:
[AR = f (IR x CR x DR)]; where
AR = Audit Risk
IR = Inherent Risk
CR = Control Risk
DR = Detection Risk

SUBSTANTIVE AUDIT
PROCEDURES (CONTD).
Application of Audit Risk Model:
While assessing the level of Audit Risk present in Thorn Group Limited,
both Inherent and Control Risks are assessed based on certain criterion. F
or Inherent Risk Assess0.15ment, the efficiency as well as effectiveness o
f Internal Control is taken into account whereas in case of Control Risk A
ssessment, both physical assets and risk management practices are taken i
nto account.

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Audit Risk Assessment in
Thorn Group Limited
Items Inherent
Risk (IR)
Control
Risk (CR)
Detection
Risk (DR)
Audit Risk
(AR)
Credit Risk High High High High
Liquidity Risk Moderate Low Medium Medium
Market Risk Low Low High Medium
Foreign Currency Risk Medium Low Low Low
Interest Rate Risk Medium High High High

Assertion are related to account balance
Material account balance: It refer to the account balance that helps to
determine the immaterial balance that can leads to the chance of
materiality or exceed it. For instance, in case of financial statement
materiality auditor will identify the larger amount that has caused
misstatement or chances of materiality.
Asset
Inventory: It refer to the stock of company which needs to be stated in
the statements of company so that the interest investor of company
can come to know about the real figures of stock. Thus, auditor
consider these inventory during the time of substantive procedure to
tract the actual inventories of company and posted figure to determine
whether it leads to materiality.

Combination of audit procedures to achieve
the audit objective
In order to carry out proper audit work, firstly, an three year analysis of Thorn Group's
Financial Ratios has been undertaken.
Ratio 2017-18 2016-17 2015-16
Current
Ratio
Current Assets/
Current
Liabilities
201484 ÷126535
=1.59
167326/871
50 = 1.92
144438/61
428 = 2.35
Debt To
Equity
Ratio
Debt / Equity 345728÷202878 =
1.70
186979÷18
9488 = 0.99
248361÷1
97533 =
1.26
Net Profit
Margin
Net
Profit/Revenue
(3624)÷236193=
(0.015)
20059÷303
999 = 0.066
30593
÷293846
= 0.10
Gross
Profit
Margin
Gross
Profit/Revenue
(221201)÷236193
=(0.94 )
(265018)÷3
03999 =
0.87
44663÷29
3846 =
0.15

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AUDIT PROGRAM FOR THORN GROUP LIMITED
Identification of Material Balances:
The following account balances have been considered as
material:
Inventory;
Account receivable;
Small investment;
Cash balance;
Financial investment;
Account payable;
share capital;
Provisions;
Debenture; and
Wage payable

Sampling plan
All the steps of this plan are as follows:
Sampling methods: First of all auditor of Thorn Group will analyse
best suitable methods for the purpose of sampling. There are two
different types of sampling methods which are used for auditing
Sample size: When method for sampling is analysed by auditor then at
second stage sample size is analysed in which those accounts are
identified which are highly affected by material concept. The sample
size which is being used by auditor is 10 in which identified
accounts are inventory, account receivable, small investment, cash
balance, financial investment etc.

CONCLUSION
From the above report it has been determined that auditor are the
significant part of an organisation that helps in better management
of business by making the decision related to internal well as
external stakeholders of business. Thus, there are various procedure
such as test of control, substantive test of transaction and substantive
test of balances which helps to reduces the chances of misstatement
as it measure the internal control of business. Along with that it
helps in detail analysis that leads to reduce the level of assertion.

References
Furman, G., 2012. Social justice leadership as praxis: Developing
capacities through preparation programs. Educational
Administration Quarterly. 48(2). pp.191-229.
Laing and et. al., 2014. The design, construction and implementation of
a computerised trauma registry in a developing South African
metropolitan trauma service. Injury. 45(1). pp.3-8.

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