Financial Statements of Organization

ALDERAN RESOURCES PVT LTD

INTRODUCTION OF THE REPORT
Auditing is an independent examination of financial information of an entity whether profit making or not and
irrespective of its size that is small, medium or big or its legal form whether it is a company(whether listed or
unlisted), partnership or any other body corporate and when such examination is conducted with a view to an
express an opinion thereon on the financial statements of the company. This report will describe how the
audit program in practicality is made considering all the important criteria for audit report and taking on the
bifurcated responsibility of management in construction of accounts and auditor’s responsibility to express a
qualified or an unqualified opinion. It will also help in framing an audit programme which will describe the
steps in audit of material account balanced and selected assertions and providing sufficient and appropriate
audit evidence which shall further in turn lead to expressing an opinion thereon.
TEST OF CONTROLS,SUBSTANTIVE TESTS OF TRANSACTIONS AND
SUBSTANTIVE TEST OF BALANCES
Test of controls
Test of controls are that compliance procedures to verify the designing, operation, effectiveness and
continuity of internal control system in the company. Auditor performs the audit procedure with respect to
following assertions:
1. Existence : Whether there are actually internal controls existing in the company or not.
2. Operating effectiveness: It is done to check if the internal controls exist in the company whether
they are operating effectively or not.
3. Consistency: It is also to be checked whether or not the existing internal controls are operated
through out the period.
Substantive procedure
Substantive procedure are performed to check completeness, accuracy and validity of transaction and
balances.
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Differentiating Substantive test of transactions and substantive
test of balance
Substantive test of transactions Substantive test of balances
These tests are done for the measurement
purpose that is whether the transactions are
recorded in proper period and at proper
amount.
Whether the item is disclosed and
classified as per relevant accounting
policies and relevant statutory laws
and requirement.
Test of balances are done to check
that there is no assets and liabilities
left to be recorded.
It also verifies that event actually took
place during the relevant period.
Identifying and assessing the auditors need to perform
substantive audit procedure
The auditor shall identify and assess the risk of material misstatement at financial level and assertion level
for class of transactions.
The auditor shall identify, evaluate and assess identified risk and perform substantive audit procedure in
following cases:
a) If there is a risk of fraud.
b) Considering whether the transaction is of complex nature.
c) Whether there is transaction which gives rise to related party transaction.
d) The materiality of transactions or the subject matter.
e) When there is risk of significant unusual transaction.
Cases in which the substantive procedures only are not sufficient
The risks which are inaccurate and lead to high risk to significant account balances and where there is high
automation involved and no or minimal manual intervention. In such cases substantive procedure alone are
not sufficient.
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Understanding relation of assertions with account balances
Relationship of assertion with respect to account balances:
 Valuation: In this it shows whether the asset or liability is recorded at an appropriate value.
 Existence: Whether the asset or liability exists at a given date.
 Rights and duties of auditor: Whether the assets is a right of entity and liability is a duty of the
entity.
FRAMING AN AUDIT PROGRAMME
Objective of audit
PRIMARY OBJECTIVE:
Audit is conducted to express an opinion
on financial statement that is the primary
objective is reporting. Reporting on
whether the financial statement provides
true and fair view.
SECONDARY OBJECTIVE:
The secondary objective is to detect the
misstatement in financial statement and not to
frame such an opinion if the auditor is unable to
confirm or refute the risk of fraud.
NATURE OF BUSINESS ENTITY:
 Business operations: Alderan resources ltd is company that is involved in natural
resources. The company is popularly known in natural resources industry for providing
metal exploration and production services.
 Investments and Investments activities: Alderan resources ltd is investing and expanding
aggressively and decided to begin drilling at Accrington and Perseverance which is
company’s current high drilling program.
 Financing and financing activities: Recently the company has raised $3 million through
placement of 5 million shares in which maximum are solid and reliable shareholders for
the investment purpose mentioned in above point.
 Financial reporting practices: The Company follow the practice of generating quarterly
cash flow statement which shows cash generated from operating activity, investing
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activity and financing activity. So for the quarter ending 31st march 2018 net cash and
cash equivalent was $A6, 43,000.
PERFORMING ANALYTICAL REVIEW PROCEDURE
As per ASA 520 analytical review procedure means evaluation of financial information
through analysis of relationship of both financial and non-financial data.
It includes comparing:
a) Information with prior period
b) Future results such as budgets and forecast
c) Analyzing industry information for the sake of comparing results.
d) Analyzing financial information using appropriate ratios and key areas
which may be affected due to risk of material misstatement.
This may contain either simple comparison policies or complex analysis that
advanced automated or statistical techniques.
Performing substantive procedure shall involve:
1) Considering suitability of substantive analytical procedure that is
determining suitability of such procedures for a particular item.
2) These procedures are usually used for those events or transactions
which are tend to be predictable that is which may regularly occur at
regular intervals. It can be used to estimate or compare ratios such as
gross profit ratio and other profit related ratios.
3) Reliability of data also plays an important role in performing analytical
procedure for example information obtained from external source shall
be more reliable than information obtained from internal source as it
may be modified or filtered by the management or internal
personnel’s.
4) Such procedures are also influenced by measuring comparability of
information available that is whether the information available is
comparable or not.
5) The information available for performing such procedures shall be
relevant. For example profit ratios for nonprofit organizations.
6) It involves developing expectation for recorded values and such
expectations should be accurate and precise so that many
misstatements can be easily accessed and identified.
Key ratios which can help in analyzing financial performance and financial position of last
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3 years:
1. Return on assets=Net income or loss/Total assets*100
2. Return on equity= Net income or loss/shareholders equity
3. Current ration=current assets/current liabilities
4. Cash ratio=cash +liquid securities/current liabilities
Where invested capital=total equity + long term debt involved to finance the company
RATIOS FOR THE YEAR ENDING 2017 FOR THE YEAR ENDING
2016
RETURN ON
ASSET% =(15,65,689)/9109604*100
=(17.19)%
=(2,18,328)/
8,82,286*100
=(24.75)%
Return on
equity
=(15,65,689)/8868438
=(.17)
=(2,18,328)/6,13,780
=(.35)
Current
ratio
Cash ratio
=7924824/241166
=32.86
=7681175/241166
=31.85
=192148/613780
=.31
=30527/613780
=.049
Explanation of selected four ratios
A. Return on assets is ratio that shows the percentage of income earned on total
assets employed. It is a very effective ratio which let us know whether the assets
employed are facilitating the company in generating revenue or not.
In case of Alderan Resources pvt ltd the ROA is (17.19%) which is due to highly
incurred losses which are due to increase in expenses such as administration
expenses, depreciation expenses and impairment of exploration and evaluation
expenditure which may be due to investment in heavy drilling project but ROA
has improved as compared to previous year which was (24.75%) that is 2016.
B. Return on equity can be said to as net income earned or attributable to
shareholders directly. It helps the shareholders whether the money invested in
the company are providing them regular return or not but in this case the ROE is
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(.17) which means that there are no profits and in turn means that zero dividend
payout ratio.
C. Current ratio is liquid ratio which shows that current asset will be sufficient to pay
off the current liabilities. Most appropriate current ratio is 2:1 but Alderan
resources ltd has 32.85 which is more than satisfying for a loss incurring company
and which is mostly due to humongous cash and cash equivalent.
D. Cash Ratio is the ratio that identifies whether the current cash and cash
equivalent is able to repay short term liabilities. As discussed above the cash
available is more than sufficient to repay short term debt and long term debt to
some extent.
If compared with previous year(2016) the cash and cash equivalent has increased
and short term liabilities have decreased concluding high cash ratio as compared
to previous year.
PERFORMING ANALYTICAL PROCEDURE FOR FINANCIAL STATEMENT AND
FINANCIAL PERFORMANCE
Following are the procedures to be performed:
INSPECTION: This step incorporates examining of records,
documents and also the tangible assets. Analytical procedure
consist of obtaining documentary evidence originating from third
party and also which are remained with third party which is usually
called the External evidence which is far more reliable than internal
evidence.
It also contains documentary evidence from the entity and also
contained with entity which is usually known as internal evidence.
Inspection also includes documentary evidence which originates
from third party and which can be founded with entity and vice
versa.
Observation: Next step in performing analytical procedures to
analyze the financial performance and financial statement is
observing the process and workings performed by others. Example
being overseeing the counting of stock done by management or the
stock department head.
Inquiry/Confirmation : It consist of enquiring or obtaining accurate
and appropriate information from a knowledgeable advisor who
may provide appropriate advice and on the basis of such response
further actions may be taken. For example applying ASA 505
external confirmation and asking for confirmation from debtors for
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balance statement or obtaining copies of balance in the books of
debtor/suppliers.
Calculation/workings: This step consists of verifying mathematical
or statistical accuracy of accounts and calculation solely done by
employees or professional in a company.
Reviewing analysis : This step of analytical procedure involves
reviewing the significant trends, ratios and comparing such trends
and ratios and performing further procedures for any unusual event
or transaction occurred during the review process.
Re-Performing the work done: Last step of this procedure is redo
the work which is performed by the management and the
company’s personnel’s so that the auditor shall get the idea of how
the work is performed in the company and if there is any fraud or
any misstatement is to be detected or need to be assessed or
communicated to the top management.
Concept of materiality of account balances as per ASA 320
Materiality: Material account balances are those which may affect the judgment of users of
financial statements. For e.g. for equity shareholders net profit attributable to equity
shareholders is of utmost importance as their dividend payment is dependent on such profits.
Usually percentage is used as benchmark for some material balances.
For e.g. any expense exceeding 2% of total revenue shall be disclosed separately rather than
shown as some additional information.
Determination of account balances which are material for planning purposes
As per ASA 320 Misstatement can be found in components of financial report or statement such
as assets , liabilities, equity , revenue or expenses.
Also it states that whether there are any items whether there are any items or account balances
which require attention of users of financial statement(such as sudden rise in profits and
consistent negative losses.
So if statement of financial statements is considered there are many expenses which can be
considered material for planning purpose which are administration expenses, employee benefit
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expense and also share based payments.
These components are considered material because there is quite a high increase in such
expenses if compared with previous year that is the year ending 30th June 2016.
Most important of them all is share based payment which is maximum of all and was not at all
opted by employees during the previous year. Here it is assessed that due to such consistent
losses the users of financial statement shall put their attention on such negative losses and
expenses which are giving rise to such consistent losses.
Capital structure also plays an important role in determining the materiality of account balances
in planning, in other words whether the company is financed by long term debt or shareholders
equity. If the company is financed by long term debt it may give rise to uncertainty of repayment
which may lead to company going into bankruptcy. But the Alderan Resources ltd is solely
financed with shareholders equity which includes mainly the shares issued through seed capital
raising that is $10,50,000 in which the money is raised from friends and family which may give
rise to related party transaction in future.
ASSETS ASSERTIONS EXPLAINATIO
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NS
CASH AND CASH
EQUIVALENT
EXISTENCE
ACCURACY
CONTINUITY
 As there is increase in cash
and cash equivalent as
compared to previous year
so it is to be checked
whether such amount of
cash actually exist or not
 It is also to be checked
whether the cash balance
are reconciled that is the
recording of cash is
accurate.
 Also it is to be verified
whether the continuous
internal controls are made
for cash as there is
maximum
misappropriation in cash.
TRADE RECEIVABLES OCCURANCE
RIGHTS
VALUATION
 It is to be checked in such
case whether the transaction
or event even took place or
not. For e.g. it can be done by
directly confirming from the
debtors.
 It is the right of the entity to
claim the amount from
debtor as asset can be
referred to as right of the
entity.
 Valuation of trade
receivables are also to be
verified whether valued at
proper amount.
PLANT AND
EQUIPMENT
EXISTENCE
VALUATION
 Existence of plant and
equipment should be
checked by verifying title
deeds, transfer deeds and
agreement with lessor in case
of lease.
 It is to be ensured that the
plant and equipment are
properly valued that after
proper depreciation and
amortization.
EXPLORATION AND OCCURANCE  It is to be checked in case of
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EVALUATION
EXPENDITURE
COMPLETENESS
DISCLOSURE
such expenditure whether
such expenditure took place
and for what purpose it took
place.
 Also the completeness of the
expenditure is to be checked
whether all the expenditure
are complete or not.
 It is also to be examined
whether the such
expenditure has been
properly presented and
disclosed as per proper
standards and requirements.
EQUITY ASSERTIONS EXPLAINATIO
NS
TRADE PAYABLES MEASUREMENT
OBLIGATION
 In trade payables it is very
important that the payables
are recorded in proper period
and at proper amount.
 It is to be ensured that the
payables are liability of an
entity that is they are an
obligation to be paid at an
given date.
LOAN PAYABLES EXISTENCE
VALUATION
OBLIGATION
 It is to be examined whether
such long term loans exist
during the year or not.
 Valuation of such loan
payable should be at proper
amount as it may influence
the decision of users of
financial statement.
 It is to be made sure that
company has acknowledged
their obligation to be paid to
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other party from which the
loans has been raised.
AUDIT WORKSTEPS ADDRESSING SELECTED ASSERTIONS FOR
MATERIAL ACCOUNT BALANCES
It is the responsibility of auditor to collect sufficient and appropriate evidence and express
an opinion thereon and expressing such views to the directors or top management and
provide true and fair view of financial reports.
ASSETS ASSERTIONS AUDIT
PROCEDURES
CASH AND
CASH
EQUIVALENT
EXISTENCE
ACCURACY
CONTINUITY
In case of cash the internal
control system should be
checked and checking
counterfoils to check
whether actually cash
transactions existed or not.
For checking accuracy
examining high amount cash
transactions are utmost
important.
Also casual receipts are to be
recorded accurately.
Ensuring that internal
financial control over the
cash balances are done on
continous basis that is
throughout the year.
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TRADE
RECEIVABLES
OCCURANCE
RIGHTS
VALUATION
Trade receivables can be
verified by obtaining
confirmation from them
either through negative
confirmation or positive
confirmation.
Auditor shall confirm the
receivable amount by
obtaining account balances of
general ledger of debtor.
Valuation of trade receivables
are can be done by checking
entries posted in the ledger
and doing ageing analysis. For
e.g. Bifurcating debtor into
more or less than 180 days.
PLANT AND
EQUIPMENT
EXISTENCE
VALUATION
Existence can be done by
physical verification and
checking any agreement in
case of any acquisition or
sale.
Auditor shall check whether
the depreciation is charged
as per statutory
requirements and at proper
rates and valued after
separating the depreciation
component.
EXPLORATION
AND
EVALUATION
EXPENDITURE
OCCURANCE Auditor shall assess such
expenditure whether it
actually occurred by checking
the double effect of such
expenditure that is where it is
being used in the other place.
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COMPLETENESS
DISCLOSURE
Auditor shall examine stages
of such expenditure whether
it is in work in progress or at
its final stage.
Auditor is responsible to
report whether such
expenditure is properly
disclosed in the financial
statement separately.
EQUITY ASSERTIONS AUDIT
PROCEDURS
TRADE
PAYABLES
MEASUREMENT Auditor shall go through the
ledgers whether the payables
are properly booked and paid
and those who are not paid
are standing at the end of the
year end.
It is to be checked whether
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OBLIGATION the entity has recognized
their obligation to pay the
amount due to vendors. This
can be done by direct
confirmation from vendors or
suppliers.
LOAN
PAYABLES
EXISTENCE
VALUATION
OBLIGATION
Auditor shall go through the
loan agreements and other
terms of agreement such
interest rate, any collateral
security held and due dates.
Valuation of loan payables
can be checked by checking
that loans are valued after
deducting repayment which
can be done by checking
repayment schedule.
Auditor shall check the
obligation of the entity by
reconciling their books with
payments made with respect
to such loans.
CONCLUSION
The above report is constructed in accordance with the ASA specified by Australian Auditing and Assurance
Board s. Such Standards require complying with ethical and statutory requirements for plan and performing
the audit to obtain sufficient and appropriate audit evidence about whether the account balances are free
from material misstatement.
Such audit programme is made after taking into account various documentary evidences and previous
year’s critical information.
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