Audit Materiality, Financial Ratios, and Cash Flow Analysis for Whitehaven Coal

INTRODUCTION
The following assignment is aimed at discussing the audit materiality, financial ratios, cash
flow analysis, and review of audit opinion, The Company allocated for the assignment is
Whitehaven Coal.
The company Whitehaven Coal is principal producer of the coal in North West New South
Wales, and the chief independent producer of the coal in Australia. The company’s current
production is computed to be more than 20 million tonnes per annum, which comprises of
metallurgical coal metallurgical coal and the saleable thermal coal. The journey of the coal
begins from Gunnedah Basin through rail networks, to the Port of Newcastle. The coal is
further shipped varied customers belonging to the regions of in Korea, Taiwan, Japan, and
India.
The overall objectives of the conduct of an audit of a financial report, for the auditors are to
attain reasonable assurance that the financial statements as a whole do not involve the risk of
the material misstatement, which is conveyed by the auditor with the help of an expression of
an opinion (Carlon et. al, 2015). The reasons for the said material misstatement may be either
fraud or error, or a combination of both.
The auditors further express an opinion on whether the preparation of the financial
statements, in done in all material respects, as prescribed by the applicable financial reporting
framework. In addition, the objectives of the auditors are the preparation of the report on the
financial statements in accordance with the findings of the audit, and communicate the same
in the manner prescribed by the Australian Auditing Standards (CAANZ, 2017).
SECTION 1

As per ASA 320 ‘Materiality in Planning and performing an audit’ materiality is referred
to as in context of the preparation and presentation of a financial report. It has been explained
that if the misstatements which includes omissions have the potential capacity either
individually or in combination with other misstatements to influence the economic decisions
of the users on the assessment of the financial statements, must be considered material
(AASB, 2015).
It is significant to note that the judgements about materiality are made taking into
consideration a number of surrounding circumstances. The size or nature of a single
misstatement, or the aggregate effect of both further influences the same (Moroney, Campbell
and Hamilton, 2014). In addition, the judgements about materiality in relation to the matters
useful to users of the financial report are on the line of the common financial information
needs of the various stakeholder groups.
Determining materiality involves the implementation of professional judgement on part of the
auditors. The first step is to set a benchmark. This is followed by the second step of
application of a percentage to the assessed benchmark as above, to determine the materiality
for the financial report all together. The following factors play a significant role in the
identification of appropriate benchmark.
 The assets, liabilities and likewise, commonly referred to as the elements of the
financial report.
 Any existence of items of the financial report of a particular entity, which are a point
of focus, for instance profits or revenue.
 The nature of the entity, where the entity is in its life cycle,
 The entity’s capital, ownership, and financing structure.
 The comparative unpredictability of the benchmark

The benchmark determined for the Whitehaven Coal should be revenue. The materiality
level should be 0.5% of revenue. The revenue of the company for they year 2018 was
$2,257,446,000.
Quantitative estimate of materiality = $2,257,446,000*0.5%
= $11,287,230
The reason behind choosing 0.5% of revenue are -
 The company reported a high growth `27% in revenue this year, so all items should be
checked in line with the revenue.
 The major costs of the company are operating expenses and coal purchases which are
majorly variable in nature.
The company made disclosures in the notes to financial statements. The audit procedures to
the relevant disclosures are mentioned below along with the disclosure -
 As per Note no. 3.1 Trade receivables have decreased from 113,278 to 97,698
although revenue has increased by 27%. Audit procedure – Checking the balance
confirmations of debtors and whether cash inflows have increased from debtors.
 As per Note no. 3.3 Trade payables have increased from 166,054 to 223,984. Audit
procedure – Whether increase in trade payables have been backed by purchased
invoices and whether purchases have been made from authorised suppliers.
 In note no. 5.1 Interest bearing Loans and Borrowings the Group has entered into
a refinancing arrangement of its senior bank facility which was extended by a
syndicate of Australian and international banks. The new facility is comprised of a
$1.0 billion draw able revolver and a $0.2 billion guarantee facility. Audit
procedure – Who authorised the refinancing facility for the company?

 The company reported contingencies of $315,191 for bank guarantee given to
government departments, rail capacity providers, port capacity providers. In addition,
there exist numerous legal and potential claims against the Group for which the
company has not made any provision since it believes there is no liability for the
same. Audit procedure – The areas where the cases are pending should be checked
and legal opinion should be sought for the same if the legal matter is not the subject
matter of expertise (Laslett, and Steinberg, 2012).
SECTION 2
This section talks about the preliminary analytical review about the Whitehaven coal. The
balance sheet and profit and loss ratios have been calculated from the respective year’s
annual reports and the basis of calculation is mentioned in the table.
Profitability ratios Formula 2015 2016 2017 2018
Gross margin Gross profit /Net sales 53 56 67 63
Operating margin Operating profit/Net sales -54 8 30 35
PAT margin PAT/Net sales -45 2 23 23
Return on equity Net profit/Equity -11 1 14 16
Coverage ratios Formula 2015 2016 2017 2018
Interest coverage ratio EBIT/Net financial expense -6.07 1.41 10.5 27.3
Tax rate Taxes/PBT 0.29 0.26 0.15 0.31