Audit Procedures for Materiality Level of Financial Statements of Met Cash Limited

This article discusses the audit procedures for materiality level of financial statements of Met Cash Limited. It covers the computation of planning materiality, key disclosures, and analytical review of financial statements.

Running head: COMPANY ACCOUNTS
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Author’s Note

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Table of Contents
Section 1..........................................................................................................................................2
Materiality and Scope of Audit....................................................................................................2
Key Disclosures and Draft Notes................................................................................................3
Section 2..........................................................................................................................................4
Analytical Review of the Financial statements...........................................................................4
Section 3..........................................................................................................................................9
Analysis of Cash Flow Statement................................................................................................9
Review of the Auditor’s Report.................................................................................................11
Reference.......................................................................................................................................12

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Section 1
Materiality and Scope of Audit
The objectives of this assignment is to conduct audit procedures for the purpose of
ascertaining the materiality level of the financial statements of a company in order to review
whether the financial statements are free from misstatements. The materiality concept is
fundamental to the scope of audit as the auditors determine whether the financial statements are
showing true and fair view on the basis of judgement of the auditor. The company which is
considered for this assessment is Met Cash Limited (Mars-metcdn-com., 2018).
The concept of materiality states that the auditor needs to considers items which forms a
major part of the financial statements and also affects the decision-making capabilities of the
investors. In order to estimate materiality of an item of a financial statement, the auditor needs to
apply his expertise skills and judgements. Materiality is determined on the basis of qualitative
and quantitative aspects of financial statements (Legoria, Melendrez & Reynolds, 2013). The
auditor considers qualitative aspects such as net profits, changes in accounting principles, assets
of the business. As per quantitative aspect of materiality, the auditor considers a percentage
which is used for the purpose of computing the materiality of the business. Normally this is done
at the planning stage for the audit process and planning materiality is computed (Vîlsănoiu &
Buzenche, 2014). Generally qualitative materiality for an item is considered for items which has
a significance in the business or the items which are complex in nature.
During the planning stage of audit, planning materiality and performance materiality is to
be computed. In the calculation of planning materiality, a particular base is considered which is
an item present in the financial statements of the company (Elder et al., 2013). It is normally the

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policy of most of the auditing firms to take the item which has the highest value for the
computation of planning materiality of a business (Eilifsen & Messier Jr, 2014). On the basis of
planning materiality, performance materiality of a business is computed.
The annual report of Metcash ltd shows the financial performance of the business for the
year 2018. The figure of total assets which is shown in the balance sheet of the company is
shown to be $ 3,719 million which is considered for the purpose of calculating the planning
materiality of a business. In addition to this, the calculations of planning materiality require the
auditor to assume a percentage on the basis of which the planning materiality figure is to be
derived. The computation of planning materiality is shown below:
Planning Materiality=Total Assets of the Business × Percentage considered
¿ $ 3,719 million ×5 %
¿ $ 185.95 million
The planning materiality comes to about $ 185.95 million which will be used by the
auditor to identify performance materiality which is ultimately used for ascertaining if there are
any material misstatements in the financial statements of the company (Jacoby & Levy, 2016).
Key Disclosures and Draft Notes
The key disclosures which are shown in the annual reports of Met Cash ltd which can
affect the audit process are listed below in details:
 Commitment, Contingencies and other financial exposures: The operating lease
commitments of the business which is related to warehouses and retail stores is shown to
have decreased significantly from $ 1491.7 million to about $ 1373.1 million in 2018.

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This is a material disclosure and therefore the auditor needs to verify the same as the
same can affect the financial statements of the business (Lewis, 2013).
 Tax: The items of tax which is shown in the financial statements of Met cash ltd shows
current tax expenses of the business, deferred tax expenses. The disclosures which is
shown in the annual reports of the business for tax shows that the company has complex
tax treatments and has introduced a tax funding program. This needs to considered by the
auditor as the complexity of the treatments makes the situation more material in nature
from the perspective of audit.
 Interest Bearing Borrowings: The financial statements which is prepared by the
company shows that the business has taken interest bearing borrowings during the year.
The interest-bearing borrowings of the business shows that it comprises of Financial
leases, US private placements, Bilateral loans and also bank loans. The borrowings of the
business are shown in the balance sheet of the company and has the capability of
affecting the entire financial statements of the business. The borrowings of the business
represent a material amount and therefore has the capacity of affecting the financial
statements of the company.
Section 2
Analytical Review of the Financial statements
Analytical procedures are one of the practices which is used in auditing which considers
significant financial ratios to get an overview of the financial performance of the business.
Analytical procedures require the auditor to consider key financial ratios which are indicators of
the health of the business (Sharma & Panigrahi, 2013). Some of the ratios which are considered
are profitability ratios, liquidity ratios, solvency ratios and capital structure ratios.

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In this case, in order to apply analytical procedures for the business of Met Cash Limited,
financial statements are considered for a period of 4 years starting from 2014 to 2017. The table
below shows the computation of key financial ratios of Met Cash Limited for the four years
period.

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Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Current Assets 1863.10 1,850.10 1,724.30 2,300.80
Current Liabilities 1638.10 1,642.10 1,544.20 1,959.90
Current Ratio 1.14 1.13 1.12 1.17
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Total Current Assets 1,863.10 1,850.10 1,724.30 2,300.80
Less: Inventories 743.50 712.50 673.60 759.20
Quick Assets 1,119.60 1,137.60 1,050.70 1,541.60
Current Liabilities 1,638.10 1,642.10 1,544.20 1,959.90
Quick Ratios 0.68 0.69 0.68 0.79
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Current Assets 1,863.10 1,850.10 1,724.30 2,300.80
Less: Current Liabilities 1,638.10 1,642.10 1,544.20 1,959.90
Net Working Capital 225.00 208.00 180.10 340.90
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Gross Profit 1,248.20 1,158.30 1,129.00 1,236.30
Sales 13,392.70 13,369.80 13,541.30 14,121.90
Gross Profit Margins 9.32 8.66 8.34 8.75
Net Profit 170.70 -382.80 218.20 173.70
Sales 13,392.70 13,369.80 13,541.30 14,121.90
Net Profit Margin 1.27 -2.86 1.61 1.23
Net Income 170.70 -382.80 218.20 173.70
Average Assets 4,168.50 3,985.30 3,557.50 3,639.95
Return on Assets 4.09 -9.61 6.13 4.77
Net Income 170.70 -382.80 218.20 173.70
Shareholders Equity 1,594.00 1,156.60 1,369.10 1,637.40
Return on Equity 10.71 -33.10 15.94 10.61
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Cost of goods sold 12,145 12,212 12,412 12,886
Average Inventory 748.8 728.15 693.05 716.4
Stock Turnover 16.22 16.77 17.91 17.99
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Sales 13,392.70 13,369.80 13,541.30 14,121.90
Average Net Fixed Assets 293.45 292.2 263.95 247
Fixed Asset Turnover 45.64 45.76 51.30 57.17
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Sales 13,392.70 13,369.80 13,541.30 14,121.90
Average Total Assets 4,168.50 3985.3 3557.85 3640.3
Total Asset Turnover 3.21 3.35 3.81 3.88
Met Cash Ltd
Liquidity Ratios
Profitability Ratios
Asset Management Ratios

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Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Total Debt 824.90 794.80 299.40 187.10
Total Assets 4,203.70 3,766.90 3,348.10 3,931.80
Debt Ratio 0.20 0.21 0.09 0.05
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Long Term Debt 824.90 794.80 299.40 187.10
Total Equity 1,594.00 1,156.60 1,369.10 1,637.40
Debt – Equity Ratio 0.52 0.69 0.22 0.11
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Net Debt 824.90 794.80 299.40 187.10
Total Equity 1,594.00 1,156.60 1,369.10 1,637.40
Total Capital 2,418.90 1,951.40 1,668.50 1,824.50
Gearing Ratio 34% 41% 18% 10%
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Market Price per share 2.85 1.325 1.76 2.15
Earnings per Share 20.4 19.1 19.2 20.3
Price / Earnings ratio 0.14 0.07 0.09 0.11
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Market Price per share 2.85 1.325 1.76 2.15
Book Value per Shares 1.78 1.77 1.37 1.57
Price / Book Value Ratio (P/BV) 1.60 0.75 1.28 1.37
Particulars 2014 (in millions) 2015 (in millions) 2016 (in millions) 2017 (in millions)
Dividend per Share 0.26 0.15 0 0
Market Price per share 2.85 1.325 1.76 2.15
Dividend Yield 9.12 11.32 0.00 0.00
Valuation Ratios
Leverage Ratios
Liquidity Ratios
The liquidity ratio of the business is shown in the chart which is shown above which
comprise of current ratio and quick ratio. The current ratio of the business is shown to be
favorable for the year 2017 as the estimate which is computed is shown to be 1.17. In 2014, the
current ratio was not much significant and was shown to be 1.14 and the same has improved
tremendously as per the chart which is shown above. An ideal current ratio should be greater
than 1 and the same is shown for the business which also shows that the current assets of the
business is more than current liabilities of the business. The quick ratio of the business for the
year 2017 is shown to be 0.79 as per the estimate which is shown in the chart above. The quick
ratio of the business has improved slightly from the estimate of previous year which suggest that

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the liquidity position of the business is favorable. The quick ratio considers assets which are
more liquid in nature and does not include stock in the category of current assets (Khidmat &
Rehman, 2014). The quick asset of the business has also increased during the period in
comparison to previous year estimate which is computed. This shows that the business has an
efficient liquidity structure which can meet the current obligations of the business effectively.
The auditor needs to assess whether the current assets and current liabilities of the business are
showing true and fair view or not. The net working capital of the business shows there is an
increase in the same which is a positive sign for the business. The auditor needs to assess the
liquidity position of the business considering the financial statements of the company.
Profitability Ratios
The profitability ratios form an important part of the analysis which is conducted by the
auditor as most of the manipulations are generally in this area. The ratios which are computed
considering this area are gross profit margin, net profit margin, return on equity, return on assets.
The gross margin shows that there has been an increase in the gross profits of the business from
previous year estimates which shows operational efficiency of the business. The net profit
margin of the business is shown to have declined which suggest that there has been an increase
in the costs of the business. The estimate of net profit as calculated for the year 2017 is shown to
be 1.23 which was 1.61 in 2016 as computed in the table above. This can be due to the increase
amount of costs which are incurred by the business during the year (Al Nimer, Warrad & Al
Omari, 2015). The return on assets and return on equity of the business are key financial
indicators of the business and therefore should be considered by the auditor. The return on equity
and return on assets of the business is showed to be on a declining verge which can be attributed
to the fall in the profitability of the business. The auditor needs to apply audit procedures in order

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to check the viability of expenses which is incurred by the business during the period. This is to
be done in order to ensure that the profits or losses which are shown in the financial statements
are not vague in nature. In order to obtain a clear understanding of the expenses and sales figures
which the management of the company has shown in the financial statements, the auditor needs
to apply vouching procedures in order to justify the sales and different expenses figures which
are shown in the annual reports of the company.
Asset Management Ratios
The asset management ratios of a business comprise of stock turnover ratio, asset
turnover ratio which is related to the business. These ratios show how efficiently the
management utilizes the assets of the business for the purpose of generating revenues of the
business. The inventories of the business are always considered to be integral part of the
financial statements and are most vulnerable to material misstatement.
The auditor of business needs to verify the balances which are shown for inventories and
assets of the business in order to ensure that the same are fairly represented. The auditor can also
check the balances of inventory by conducting a physical take of the stock in order to value the
same. In case of valuation of assets of the business, the auditor can take the help of an expert in
the field in order to confirm the valuation of the assets of the business.
Leverage Ratios
The leverage ratios of the business are generally associated with the capital structure
which is used by businesses and the capital includes both equity capital and debt capital of a
business. The ratios which are considered in case of such a business are related to debt ratio, debt
to equity ratios and gearing ratio. The debt ratio shows that the level of borrowings of the

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company has decreased significantly which shows that the company is relying more on equity
capital of the business. The debt to equity ratio also shows a similar figure during the year and
the estimate for 2017 is shown to be 0.11.
The auditor needs to assess the capital structure of the business and identify any risks
which can affect the business and overall audit process of the business. The figure of borrowings
of the business has decreased and this is the reason due to which the for the fall in the debt ratio
of the business. The auditor needs to check the repayment schedule for the company and also
check whether the business has taken any additional loan for the business.
Valuation Ratios
The valuation ratio of the business comprises of price-earnings ratio, price to book value
ratio which are considered important from the perspective of a business. The price earning ratio
of the company is shown to have increased and the same is shown to be 0.11 for the year 2017.
The price to book value ratio has also increased. The auditor needs to consider the earning per
shares which is shown by the business and ensure that that figure is correct. EPS is considered by
investors before taking investment decisions and therefore the auditor needs to check the same.
Section 3
Analysis of Cash Flow Statement
Cash flow statement is a part of the financial statements of a business and statement
reveals the cash position of the business. The statements show the various sources from which
cash comes in to the business and also the sources of cash outflows of the business. The cash
flow statement of Metcash ltd is effectively shown in the annual reports for 2018 classifying the
activities as operating, financing and investing activities.

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The cash inflows from operating activities of the business shows the maximum cash
inflows of the business which is receipts from the customers and the same is shown to be $
15,765.9 million. The category of cash activities which has the greatest cash outflow is shown in
cash from operating activities and the same is cash paid to employees and suppliers (Bhandari &
Iyer, 2013). The primary cash receipts and cash payments which are shown in the annual reports
of the business are cash received from customers and cash payments made to suppliers which are
shown in the cash from operating activities of the business.
The main cash flows which are related to investing activities of the business are shown to
be payments which are made by the business towards acquisition of assets and in case of
financing activities the major cash flows which is shown in cash flow statement of the business is
shown to be payments of dividends which are made to owners of parent companies.
The going concern principle is considered to a fundamental principle in accounting and
therefore the auditor needs to ensure that this principle of the business is not affected. As per the
significant ratios which are computed for Met Cash Ltd, the liquidity ratio of the business is
shown to be favorable which shows that the company is not facing any liquidity problems. The
business has incurred a loss in the current year but that is due to the increase in the expenses of
the business. The management has made dividend payments during the year which suggest that
the business has adequate reserves. Thus, only on the basis of the loss, it cannot be judged
whether the going concern principle of the business is in jeopardy or not. However, the auditor
needs to identify the negative financial indicators which are a sign that the going concern
principle is affected.

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Review of the Auditor’s Report
The audit of Metcash Ltd is undertaken by one of the big four auditing firms which Ernest and
Young (EY). As per the opinion of the auditor, the financial statement which is prepared by the
business are showing true and fair view and also complies with all relevant Australian
accounting standards and Corporation Regulations of 2001.
The auditor has recognized certain issues which were observed by the auditor during the
course of audit which are portrayed in Key audit matters of the business. One of the issue which
is recognized is impairment of intangible assets of the business which involves lot of assumption
and judgements which are made by the company in computing the impairment amounts. Another
identified issue is the accounting for rebates for suppliers for which the management doe not
have fixed criteria as it is some time estimated on volume, weight of products and even on
quantity basis as well.

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Reference
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profitability through return on assets. European Journal of Business and
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Bhandari, S. B., & Iyer, R. (2013). Predicting business failure using cash flow statement based
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Lewis, M. K. (2013). Off-balance sheet activities and financial innovation in banking. PSL
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Mars-metcdn-com. (2018). Retrieved from
https://mars-metcdn-com.global.ssl.fastly.net/content/uploads/sites/
101/2018/07/24145704/Metcash-Annual-Report-2018.pdf
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on data mining techniques. arXiv preprint arXiv:1309.3944.
Vîlsănoiu, D., & Buzenche, S. (2014). Determining Audit Materiality in the Banking Industry–A
Knowledge Based Approach. Procedia Economics and Finance, 15, 935-942.