HA3032 Auditing 1: Substantive Testing, Ratios & Assertions

This report provides a comprehensive analysis of auditing principles, focusing on substantive testing of balances for Alcidion Group Limited. It includes a detailed ratio analysis covering current ratio, fixed asset turnover, return on assets (ROA), and net profit margin, interpreting their implications for the company's financial health. The report further delves into materiality testing, establishing planning materiality levels based on total assets, and identifies material misstatements within the company's assets and liabilities. Finally, it addresses audit assertions related to material account balances, referencing ISA 315 to ensure financial statements align with applicable reporting frameworks. Desklib offers this assignment as a resource for students, alongside a wealth of other solved assignments and past papers.

HA3032 Auditing
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Table of Contents
Introduction......................................................................................................................................3
Nature of the entity and its industry:...........................................................................................4
Ratio analysis...............................................................................................................................5
Materiality testing........................................................................................................................8
Materiality testing of the financial information of the company...............................................10
Audit assertions.........................................................................................................................12
Audit work steps........................................................................................................................14
Conclusion.....................................................................................................................................16
References......................................................................................................................................17
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Introduction
Auditing is an important concept that is required to be followed in all the businesses. For this,
there are various tests which are to be performed so that the accuracy of the accounts can be
ensured. In this report, the substantive test of balances will be performed. The operations which
are carried in the business and all the investing and financing activities which are undertaken will
be taken into consideration. The ratio analysis will be performed and for that major ratios will be
calculated. The materiality test will be carried out in which all the accounts which are material
will be determined. All the assertion which are applicable in respect of the material items will be
considered. The work steps which are to be taken in relation to them will also be determined.
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Nature of the entity and its industry:
Alcidion Group limited is the company which deals in the healthcare technology. It provides the
software in the intelligent informatics and they are carrying the business in New Zealand and
Australia. In this, there are various equipment’s which are provided that are useful in the health
sector and one of them is Miya ED in which clinical dashboard is provided so that dedicated
display is made and by that risk management is made. In the current year, there are various
operations which took place by which growth has been achieved. The main technology of the
company is Miya by which safety is improved and risk is reduced (Alcidion group Limited,
2017). There are various benefits which will be received by the company with the help of this
such as fast recovery will be made as treatment of the patient is started earlier. Time and money
will be saved as the redundant test orders which are conducted are reduced.
The company makes various investments in the business and it is required that they shall be
managed in an appropriate manner. They are made so that returns can be earned from them and
they can again be used in the business so that further returns can be made with the help of that. In
the company, there is payment which is made in respect of plant and equipment in the current
year which amounts to 14567.
Financing activities are involved in this business in which the company will be obtaining funds
from various sources and then the transactions which are related to them will have to be recorded
by the company in the accounts. In the given case there are proceeds which are received from the
issue of shares and that is for the amount of 225000 and then the repayment has been made by
the company which amounted to 5104 (Alcidion group Limited, 2017).
The financial statements of the company are prepared by the company and in them, all the
standards which are made by the Australian accounting standard board have been followed.
Also, the reporting is made in accordance with the International financial reporting standards
which are issued by the IASB (Alcidion group Limited, 2017). The Corporation Act 2001 is also
followed by the company. By all of them, the reliable information is available in respect of the
events, transactions and which exist in the company.
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Ratio analysis
In the business there are various tools by the help of which it will be possible to analyse the
position of the business and for that all of the information will have to be collected. In the given
case ratios are being used and so that items which will be required in this process includes
following:
Particular 2017 ($
Million)
2016 ($
Million)
2015 ($
Million)
Total Asset 6831291.00 8067597.00 3911007
Net Sales 2378874.00 2842392.00 4843321
NPAT -
2060980.00
-2544717.00 -318264
Current Liability 1375332.00 1444758.00 1604954
Current Asset 6643412.00 7826904.00 3590430
Fixed Asset 97812.00 137818.00 190112
Particulars Formula 2017 2016 2015
Current Ratio Current 4.83 5.42 2.24
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Asset/
Current
Liability
Fixed Asset
Turnover Ratio
sales /
Fixed assets
24.32 20.62 25.48
ROA Net
Income /
Total Asset
-0.30 -0.32 -0.08
Net Profit Margin
Ratio
Net profit /
Sales
-0.87 -0.90 -0.07
There are several ratios which can be used and some of them are as follow for which the
calculations have been made by the company in the above part. The explanation for all of them is
as follows:
Current Ratio: In the company, there are various current assets and liabilities which are
required to be met by the company in the coming period. For that, the comparison will be made
so that it can be ascertained that whether the company will be able to meet all of the obligations
on time or not (Brand, et. al., 2014). The ratio was 2.24 in 2015 which was appropriate and after
that increase in that is made which reached to 5.42 and then 4.83 in 2016 and 2017 respectively
(Alcidion group Limited, 2017). This shows that company will be making the payments on time
but as it is very high so it can be said that company is not utilizing its assets in the proper manner
and they are lying ideal.
Fixed asset turnover: By the help of this the company will be analyzing its revenue in
comparison to the fixed assets so that the ability of the assets can be evaluated and it can be
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determined that they are used in proper manner. This was 25.48 in 2015 and then a decline was
made in 2016 which made the ratio to be 20.62. There is again an increase in 2017 which made it
be 24.32. This shows that proper utilization is made by the company (Alcidion group Limited,
2017).
ROA: The return which is earned by the company will be evaluated on the basis of assets so that
the business will be ascertaining that all of them are providing the appropriate returns or not
(Kogadeeva & Zamboni, 2016). There is the negative earning which shows that company is not
able to make the required profits and the assets are not able to generate the needed income.
Net profit margin: the net profit which is earned in the year will be compared with the sales
which are made. By that, it will be identified that company maintains the profit ratio or not. If the
more expense is made on the sale then that will be considered as that affects the profit of the
company (Zolfani, et. al., 2018). In the given case there are losses and so the company is not
utilizing its sources in a proper manner. The loss is increasing and was highest in 2015 and after
that, there was a certain amount of decline (Alcidion group Limited, 2017).
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Materiality testing
Materiality: Materiality for auditors means all the information disclosed in the financial
statement are free from misstatement and fraudulent figures. The aim behind the determination
of materiality in financial accounts is to obtain reasonable assurance regarding the availability of
material misstatement in financial accounts of the organization. Auditors do not provide 100%
assurance regarding the information disclosed in the financial statement of the company,
materiality testing provides reasonable assurance to the users of the financial statement of the
organization.
Account balances which need to be considered as material: To check materiality in financial
statement materiality base and percentage range need to be determined. For materiality testing;
base must be considered from the elements of financial statements like sales/ revenue, income
from continuing operations, current assets and liabilities, total assets and total expenses or total
asset value.
Auditors normally assign a lower level of percentage in order to determine the materiality of
each account balance during the audit procedures Generally auditors can adopt following
percentage base for checking the materiality and availability of risk of misstatements in financial
accounts of the company. The percentage basis is as follows:
 5% of the cost of sales of goods
 5% of net income
 ½ to 1% of total asset value
 2% of revenue.
These materiality level or base are adopted by auditors as per their own assumption related
to the availability of risk. In case of testing materiality for Alcidion group limited we can
take material percentage base of 2% of total assets.
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The process of calculating materiality: using the percentage base and materiality base
preliminary figures are calculated in order to consider qualitative items like:
a. Availability of fraud or illegal acts
b. The amount which affects earning trend of the company.
c. A misstatement that may affect or increase management compensation.
d. Industry conditions
e. Past number of misstatements
Justification of decision making
While testing materiality 5% of total assets is assumed to be taken because the total asset is the
part of the working capital of the firm which is important to be available for the continued
operation of the organization. Availability of asset is required for the future financial planning of
the organization. materiality base of 2% of total assets for checking materiality provides the
understatement and overstatement of the amount in financial statement and determine the
availability of risk in terms of material misstatement, in the financial reports of the company.
After determining the same important steps need to be taken to remove the available amount of
risk.
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Materiality testing of the financial information of the company.
Alcidion Limited 3-7
Planning Materiality
Initial
Here
Audited
1. Benchmark Data 2016
Sales / Revenue $28,42,392
Expenses $66,54,167
Pre-tax income
($25,24,992
)
Current assets $78,26,904
Current liabilities $1,44,758
Total assets $80,67,597
Materiality
2. Establish Planning Materiality
Level
Measurement Base
80,67,59
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Total assets
Percentage Applied* 2.0%
Planning Materiality
$1,61,35
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Bases and Percentage Ranges:
Profit Oriented Entities
Pre-tax income 3 - 7%* Please use this template
in conjunction with
Willis & Adams
Materiality Guidelines.
The materiality factors
provided are guidelines
only and should be used
only as an aid as you use
professional judgment to
determine planning
materiality.
Total Revenue ½ - 1%
Current Assets or Liabilities 2 - 5%
Total Assets ½ - 2%
* For public companies, 5% is
typically the maximum.
Not-for-Profit Entities
Total Revenue ½ - 2%
Total Expenses ½ - 2%
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Mutual Fund Entities
Net Asset Value ½ - 1%
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Account Name Amount (in $) Materiality base
(in $)
Material Misstatement
Assets
Cash and Cash equivalent 5645357 161352 Material in Nature
Property plant and equipment 137818 Immaterial in Nature
Intangible assets and goodwill 5071 Immaterial in Nature
Trade and other receivables 2122173 Material in Nature
Other Assets 59374 Immaterial in Nature
Liabilities
Trade and other payables 370638 Material in Nature
Current Borrowings 5104 Immaterial in Nature
Non- current borrowings 0 Immaterial in Nature
Employee Provisions 48300 Immaterial in Nature
Other Liabilities 866722 Material in Nature
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