Audit Report on Gold Mountain Ltd

This report analyses the statement of authenticity of an Australian-based corporation Gold Mountain Ltd which is listed in ASX, and deals in mineral exploration and development sector. For the purpose, the audit is conducted to evaluate the nature of business risk through a procedure of substantive and control tests, in accordance with the Auditing Regulations of Australia, and guidelines defined by ASX.

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Auditing: Gold Mountain Ltd

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Executive Summary
Audit refers to an objective assessment of financial activities and performance of a firm, which is
carried out to ensure that all the information and records are in confirmation with the relevant
accounting principles and standards. The audit report is helpful for the stakeholders such as
investors, creditors, bankers, government, and for the entire society for the purpose of making an
intelligent decision. This report analyses the statement of authenticity of an Australian-based
corporation Gold Mountain Ltd which is listed in ASX, and deals in mineral exploration and
development sector (Gold Mountain Limited, 2016). For the purpose, the audit is conducted to
evaluate the nature of business risk through a procedure of substantive and control tests, in
accordance with the Auditing Regulations of Australia, and guidelines defined by ASX. The
report has found that Gold Mountain adheres to all the statutory obligations while recording and
maintaining the financial documents. It was also observed that the firm is performing well but
the internal controls are not much strong that needs to be taken into consideration by the auditor
while preparing the audit report and giving opinion on that.

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Table of Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Key business risks in Gold Mountain Ltd....................................................................................................5
Audit Risk Model........................................................................................................................................6
Audit work steps..........................................................................................................................................9
Analytical procedure.................................................................................................................................14
Sampling Plan...........................................................................................................................................17
Conclusion.................................................................................................................................................19
References.................................................................................................................................................20

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Introduction
The following report is prepared with an aim to obtain an understanding of the auditing
procedures in context to an organization listed on Australian Security Exchange. The report
contains the required auditing steps and audit program for Gold Mountain Ltd that is principally
engaged in extracting and developing a range of highly valuable mineralized zones across the
Australia. In order to perform assessment of audit risk for the company, the key business risks
have been examined. The report also discusses the analytical procedures for determining the
financial health of Gold Mountain for the last three consecutive years, by computing ratios and
metrics. In addition to this, the audit risk model is also applied to the company for identifying the
materiality, and degree of detection and inherent risks. A comprehensive series of audit steps
have also been adopted, along with the preparation of a sampling plan for the effective testing of
material misstatement.

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Key business risks in Gold Mountain Ltd
A risk is an integral element of any business whether it is operating at a small or large level.
Business risks refer to those unpredictable events which can cause a substantial loss to a
company, including the failure of business (Gold Mountain Limited, 2017). In context of Gold
Mountain Ltd, there exist general as well as some specific risks associated with its operations,
which are largely not in the control of the Company and its Directors. The Business risks in Gold
Mountain are mentioned below, which have the potential to affect the future the market value of
the Company’s shares, and its entire financial state.
Operating Risks
The operations of Gold Mountain are affected by numerous risks. These include inability to
locate mineral deposits, letdown of predicted grades in mining, operational and procedural
complications, sovereign risks, problems in operating plant and tools, automatic failure or plant
collapse, unexpected metallurgical risks increasing extraction costs, industrial accidents and
clashes, and sudden rise in the costs of spare parts, consumables, plant and machinery.
Environmental Risks
The activities of the Gold Mountain are bound by the Australian laws and guidelines of Papua
New Guinea concerning the environment. Since the firm deal in exploration and mining projects,
the Company’s business is expected to have an impact on the ecology through pollution, and soil
degradation (Gold Mountain Limited, 2016). Thus, the company is bound to conduct its activities
by adhering to the established environmental standards.

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Economic Risks
The economic risks of Gold Mountain include General economic surroundings, fluctuations in
the inflation and interest rates, changes in currency exchange rates affecting the firm’s
exploration and production functions, along with its ability to subsidize these activities.
Market conditions
Irrespective of the Gold Mountain’s operating performance, the share market also affects the
value of its listed securities. These risks include general economic position, changes in investor
attitude towards a particular market sector, the demand and supply of capital, establishment of
tax reform or new law, and terrorism or other warfare.
In order to identify the significant risks in the misstatement of financial accounts of the company
and issue fair opinion, the auditor should consider and analyze all the related business risks of
the company, as required by ISA 315.
Audit Risk Model
Audit risk model refers to a concept that consists of inherent risk, control risk, and detection risk,
assisting the auditor in applying the suitable auditing procedures for transactions revealed in the
client’s financial statements. In context of Gold Mountain, this model is applied with respect to
three elements namely IR, CR, DR (Lenz, and Hahn, 2015). Inherent risk indicates the risk
occurred due to complicated transaction when there is no internal controls in the company, while
control risk signifies the risk of unrecognizing and non-prevention of major error or fraud timely
by the existing internal control system (Gold Mountain Limited, 2017). On the other hand,

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detection risk is the risk that the auditor would fail to point out a misstatement existing in any
transaction or account balance.
For auditing the financial statements of Golden Mountain, the auditor would apply the audit risk
model in the following steps:
1. Establishing a planned audit risk level for every type of transaction such as bills payables,
investments, cash, etc.
2. Assessing the degree of CR and IR in the view of business risks, and other risks imposing due
to any misstatement (Gold Mountain Limited, 2016).
3. Resolving the audit risk equation for the required level of audit risk (AR).
4. The result could either be qualitative or quantitative, and the auditor has the right to give
qualified opinion in case he finds greater risk level.

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The formula for Audit Risk Model is:
AR = IR x CR x DR
Outcome: The following table shows the results of AR model for Gold Mountain Ltd, along
with the needed audit evidences, on the basis of the Annual Report 217:
AR IR CR Planned audit
risk
Need of audit
evidence
Sales and
Receivables
Maximum
(80%)
Maximum
(94%)
Minimum
(2%)
Minimum MAXIMUM
Purchases and
payments
Minimum
(30%)
Minimum
(40%)
Maximum
(6%)
Maximum MINIMUM
Inventory or
Stock
Minimum
(40%)
Maximum
(6%)
Medium Medium MEDIUM
Implication: The implication from above is that inherent risk is not required to be set at a
maximum automatically in order to reduce the likelihood that risk aspects will be reviewed
independently. As an alternative, the auditor needs to be competent enough to make collective
measurements of the risks to effectively decide the degree of substantive test (Rashidfarokhi et
al., 2018).

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Audit work steps
In order to conduct audit program in Gold Mountain Ltd, the auditor would require to discover
the business risks first in order to analyze the company's response to those risks, and gather
evidence of their implementation (Shariman et al., 2017). Then after, the auditor would review
the risk of major misstatement for the purpose of determining the required audit procedures. The
assessment of the errors and frauds in financial statements would also be done by the auditor. For
recognizing the type of misstatement, the auditor would find out:
The variation between the amount, presentation or classification of the constituents of financial
statement accounts, and Australian Auditing principles:
 The exclusion of any item in financial statement, or account,
 A disclosure note in financial statement that is not shown in accord to Australian
Auditing principles.
After the above steps, the auditor would collect the required and reliable audit evidences in the
Gold Mountain in order to arrive at accurate conclusions. Since one method to gather evidences
does not fit in all situations, therefore the auditor would require exercising professional care
while selecting the method or combination of methods according to the type of risk and audit
tasks. For this purpose, the auditor would carry out:
 Analytical procedures: to see the difference between the amounts recorded in company's
accounts and the 'should be' amounts.
 Confirmations: to ask for verifying management assertions.

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 Scrutinize the records: to ask the company for relevant papers and compile with
management assertions
 Observation: monitoring the activities of company's staff and managers to gain an
understanding of their jobs and related processes (Hossain eta l., 2017).
 Recalculation: to confirm the accuracy of mathematical calculations in company's
financial records.
 Re-performance: to conduct Companies accounting and internal control system ensuring
that the applicable rules are complied with effectively.
 Scanning: to monitor the transactions recorded on the general ledger or reports.
 Client tour: examining to ensure the existence of all assets and liabilities in the balance
sheet.
Account
balance
Amount in ($AUD
thousand)
Assertions Audit procedures
Assets:
1. Accounts
Receivables
115.4 Existence, Accuracy,
Rights and Obligations,
1.Obtain and monitor
bank documents
2. Carrying out of tests
of bank reconciliation,
and matching.
2. Cash at 2693.3 Subsistence, Recording, 1. outline the journal

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bank Valuation and ledger accounts
2. Compute and
compare the balances
3. Net
property,
plant and
equipment
108.6 Existence, Disclosure 1. check the physical
inventory
2. Analyze the value of
each item
4.
Investments
500.6 Occurrence,
Correctness,
Presentation and
Disclosure,
Completeness
1. Scrutinize the check
register
2. Compare with the
respective invoices
5. Intangible
assets
6005 Presentation and
Disclosure,
Completeness
1. Compared with the
entire financial
statements
Liabilities:
1. Accounts
payable
108.4 Occurrence, ,
Valuation,
Completeness
1. account balances
checked which are
prepared by the
management

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2. The ledger accounts
are reconciled
2.
Miscellaneous
Current
Liabilities
17.6 Recording, Disclosure,
Presentation
1. Examine loan
confirmations
2. Conducting test
reconciliation process
3. Retained
earnings
(7521.4) Recording, Valuation,
Rights and Obligations,
1. Take verification
from the accountable
officer
2. look into the nominal
accounts
4. Total
Shareholders'
Equity
12,420.9 Recording, Disclosure,
Presentation
1.Analyzed from
different trade
transactions from
5.
Accumulated
Minority
Interest
0.1 Occurrence, ,
Valuation,
Completeness
1. Verified with
different bank
statements and financial
statements

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In addition to above, the auditor would also require to carry out additional substantive procedure
for determining the allocation and valuation of assertions and their existence, using following
testing:
 Positive confirmation from third party through more samples and receivables.
 Investigation of material account balances created at the closing of year to check the
credibility.
 Assessment of substantive receipts, and delivery records to verify the authenticity of
amounts in the books.
 Vouching of debtors' balances at the year-end through the source documents. The auditor
then requires to examine the omission of relevant information in the financial books of
the company that should be disclosed according to the applicable standards.
Responding to the misstatements would be the another audit step in Gold Mountain, which
would be based on the identification of risk factors affecting the business operations and the risk
of undervaluation/ overvaluation. The auditor then establishes the extent of detection risk and
plans audit procedures to effectively respond to the identified risk factors.
The final step in the audit program would be the documentation of auditor's findings in the audit
report. An audit report contains a written opinion of the auditor about the company's financial
statements, in a standard format, as per the guidelines of International Auditing Standards. The
following report opinion may be issued by the auditor:
 A clean opinion, if the financial statements show an honest results of the firm's financial
state.

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 A qualified opinion, if there exist any scope restrictions that were forced upon the
auditor's job (Johnstone et al., 2013).
 An adverse opinion, if there exist a lot of material misstatements in the financial
accounts.
 A disclaimer of opinion, which can be produced due to some situations. For instance, the
auditor might be pressurized by the management, or there was a any issue with the
company.
Analytical procedure
International Accounting Standard 330 states that Analytical procedures act as evidences during
an audit, and specify probable risks of deception or inaccuracy in the financial documents of a
client, which can be examined later, in detail (Gold Mountain Limited, 2016). The analytical
procedures for Gold Mountain Limited have been performed underneath, with the help of
computing ratios and metrics for the financial statements of 3 consecutive years:
Computation of ratios:
Ratio 2015 ($) 2016 ($) 2017 ($)
Operating ratio
Operating costs/net
sales x100
196137/5046 X100
= 38%
148734/4071 X100
= 36%
232255/32132 X100
= 72%
Net Loss ratio
Net profit/ net sales
x100
847685/5046 X100
= 16%
781772/4071 X100
= 19%
793152/32132 X100
= 24%

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Asset turnover
ratio
Sales/net assets
5046/2867526
= 0.0018
4071/15551328
= 2.6%
32132/112547000 =
2.9%
Return on Capital
Employed
LBIT/Capital
employed x100
847685/2460399 x100
= 34%
781772/15335178 x
100
= 5.09%
793152/12420975 x
100
= 63%
Quick ratio
Quick assets (CA-
Pre-paid/current
liability
(Note: there is no
inventory and pre
paid expenses in the
financial accounts)
985983/1235764
= 0.79
4060590/216150
= 18.8
2818776/126025 =
22.36
Current ratio
Current
assets/current
liability
985983/1235764
= 0.79
4060590/216150
= 18.8
2818776/126025 =
22.36
View on Operating ratio:

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The above table indicates that operating costs in 2017 are much higher in comparison to the past
two years. It means the expenses are perhaps misstated by Gold Mountain. Thus, it is essential
for the auditor to examine the its occurrence.
View on Net profit ratio:
From the above calculation, it can be stated that appropriate cost control has not been maintained
in Gold Mountain in spite of the substantial loss in sales. In order to check this, it is crucial for
the auditor to evaluate operating costs for all the three years of the company (Gold Mountain
Limited, 2017).
View on Asset turnover ratio:
Asset turnover ratio refers to the capacity of a firm to make sales using all its assets competently.
The above table shows that this ratio of Gold Mountain has been increasing for last three years.
Therefore, the auditor is required to test out all the assertions of the firm affecting this ratio
significantly so as to recognize that if there is any misstatement of sales or assets in the balance
sheet.
View on Capital Employed ratio:
It can be said that the ROCE of Gold Mountain has been varying extraordinarily from the year
2016 to 2015 and then to year 2017. It specifies that the firm might has been increased issuing
more equity shares or started raising loans. Thus, the auditor is needed to monitor all the
assertions carefully to ensure that there is no misstatement in the financial statements.
View on Quick ratio:

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The quick ratio is one of the useful tool to identify a firm's liquidity position when the stock
reduces over time. This is because the payment of current liabilities is dependent on the
receivables and cash (Gold Mountain Limited, 2017). This ratio of Gold Mountain is not ideal in
the three years. However, in order to check the reliability, the auditor needs to analyze the
business and constituents of the company.
View on Current ratio:
Current assets are employed by an entity to oblige its existing short term liabilities. The current
ratio tells how efficiently the current assets are used by the management to discharge its debts. If
the ratio is less than 1, it means that the situation is not good as the company may not have
enough assets to repay debts. The above table states that in all the three years, the company's
current ratios do not seem correct. Thus, the auditor should monitor all the assertions before
arriving at any conclusion.
Sampling Plan
Sampling refers to the execution of an audit course of action by the auditor to less than hundred
percent of the assertions within a set of transactions or account balances in order to evaluate
some crucial characteristic (Hyatt, and Taylor, 2013). In context of Golden Mountain Limited,
the auditor would go for following steps:
1. Specifying the attributes of the sample population
Since outstanding commission is a risky expense account in financial statements, for the audit,
the auditor would first inspect the exactness level and classification of assertions for this
particular account. This precision can be confirmed when the transactions are recorded correctly

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in the respective accounts. Finally, the auditor would require to confirm that these accounts are
truthful and do not include any substantial misstatement.
2. Determining the sample size
Before determining the number of transactions the auditor is needed to sample, he has to first
look into the risk of any wrong acceptance, error, confidence level, and probable fraud (Miglani
et al., 2015).
3. Selecting the sample items
For instance, there are 3500 records in a group of transactions of less amount. The auditor would
split 3500 by 50 (the population or sample size). It equals to 75, which would considered as the
interval number. Afterwards, the auditor would sort out these records in a proper order with the
help of computerized tools.
4. Implementing audit procedures
After the assortment of sample size and picking of sample from the entire selected population of
records, the auditor would need to carry out the suitable audit practices that could vary from one
assertion to other (Gold Mountain Limited, 2016). For example, the auditor could pursue the
transactions which occur in the outstanding commission account to the records from the journal
and ledger accounts.
5. Concluding with reliable decision making
The ultimate step in the process of audit sampling plan for Gold Mountain Limited would be to
find out whether the account balance is significantly correct or not (Cohen et al., 2013). If in
general the misstatements are beyond the reviewed defined extent, the auditor has the right to

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give negative opinion that the accounts are not largely overstated or understated, and there is no
necessity for increasing the sample for the purpose of checking more accounts.

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Conclusion
On the basis of above report, it can be concluded that auditing is crucial for a company so as to
get a clear picture of its functions to the stakeholders. The above discussions reveal that Gold
Mountain is operating in loss, however, the principles and guidelines specified by the Australian
Accounting Statue and Australian Securities Exchange are strictly followed.

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References
Gold Mountain Limited (2016) Annual Report 2016. [Online]. Available at:
file:///C:/Users/sd/Downloads/nASXggkJK_GMN_1475224200.pdf (Accessed: 20th September,
2018).
Gold Mountain Limited (2017) Annual Report 2016. [Online]. Available at:
https://www.asx.com.au/asxpdf/20180302/pdf/43s46j0z7jn9bp.pdf (Accessed: 20th September,
2018).
Cohen, J. R., Hoitash, U., Krishnamoorthy, G., and Wright, A. M. (2013) The effect of audit
committee industry expertise on monitoring the financial reporting process, The Accounting
Review, 89(1), pp. 243-273.
Hyatt, T. A., and Taylor, M. H. (2013) The effects of time budget pressure and intentionality on
audit supervisors' response to audit staff false sign‐off, International Journal of Auditing, 17(1),
pp. 38-53.
Johnstone, K., Gramling, A., and Rittenberg, L. E. (2013) Auditing: a risk-based approach to
conducting a quality audit. USA: Cengage learning.
Hossain, S., Yazawa, K. and Monroe, G.S. (2017) The Relationship between Audit Team
Composition, Audit Fees, and Quality, Auditing: A Journal of Practice & Theory, 36(3), pp.115-
135.
Lenz, R., and Hahn, U. (2015) A synthesis of empirical internal audit effectiveness literature
pointing to new research opportunities, Managerial Auditing Journal, 30(1), pp. 5-33.

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Rashidfarokhi, A., Toivonen, S. and Viitanen, K. (2018) Sustainability reporting in the Nordic
real estate companies: empirical evidence from Finland, International Journal of Strategic
Property Management, 22(1), pp.51-63.
Miglani, S., Ahmed, K. and Henry, D. (2015) Voluntary corporate governance structure and
financial distress: evidence from Australia, Journal of Contemporary Accounting &
Economics, 11(1), pp.18-30.
Shariman, J., Nawawi, A., Salin, P. and Azlin, A.S. (2017) Public Sector Accountability-
Evidence from the Auditor General's Reports, Management & Accounting Review, 16(2).

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