ProFESSIONAL AUDITING. PROFESSIONAL AUDITING Name of the University Author Note

The five operational activities, which have been discussed are Trade and other receivables, Goodwill, Intangible assets, Capitalization of development Costs and Foreign Exchange Risk. Introduction 3 Key information: 3 Discussion on Probiotec Limited: 3 Risk related to Materiality Misstatement: 4 Trade and other receivables 5 Goodwill 5 Intangible assets 6 Capitalization of development costs 6 Foreign exchange risk 7 Planning Materiality 7 Audit Risk Assessment 8 Trade and other receivables 8 Goodwill 9 Intangible assets 9 Capital

Running head: PROFESSIONAL AUDITING.
PROFESSIONAL AUDITING
Name of the Student
Name of the University
Author Note

1PROFESSIONAL AUDITING
Executive Summary
The report mainly focuses on the risks of certain accounts, where there is a possibility of
being materially misstated. The report is based on Probiotec Limited. This report is divided
into four parts. The first part comprises of the background and the operations of the Probiotec
Limited. The second part is related to five accounts of the material misstatement, which is
taken from the consolidated financial statement of the annual report. The five accounts which
have been discussed are Trade and other receivables, Goodwill, Intangible assets,
Capitalization of development Costs and Foreign Exchange Risk. In the third part, planning
materiality has been evaluated with the total revenue of the organization. Lastly, the five
accounts which are selected for having the most risk of being materially misstated is
discussed further with the concept of audit risk assessment.

2PROFESSIONAL AUDITING
Table of Contents
Introduction................................................................................................................................3
Key information:........................................................................................................................3
Discussion on Probiotec Limited:..............................................................................................3
Risk related to Materiality Misstatement:..................................................................................4
Trade and other receivables...................................................................................................5
Goodwill.................................................................................................................................5
Intangible assets.....................................................................................................................6
Capitalization of development costs..........................................................................................6
Foreign exchange risk................................................................................................................7
Planning Materiality...............................................................................................................7
Audit Risk Assessment..........................................................................................................8
Trade and other receivables...................................................................................................8
Goodwill.................................................................................................................................9
Intangible assets.....................................................................................................................9
Capitalization of development costs........................................................................................10
Foreign exchange risk..............................................................................................................10
Conclusion................................................................................................................................11
References................................................................................................................................13

3PROFESSIONAL AUDITING
Introduction
The report focuses on the risk of material misstatement of Probiotec Limited. The risk
is classified in relation to the five significant accounts, which is taken from the financial
statement of the organization (Mališ, 2016). The risks are assessed to two different levels,
one is financial statements, and the other is assertions level. Different audit approaches are
used to control the risk in the material misstatement. Through planning materiality, the risks
of the organization are being covered in the financial statement (Beasley et al., 2018). The
concepts which are used while auditing, are almost the same for the financial reporting
frameworks. Lastly, regarding the five accounts, audit risk assessment is to be discussed of
Probiotec limited.
Probiotec Limited manufactures and distributes high quality pharmaceuticals
products. It is one of the leading pharmaceutical company in the Australian market. In
November 2006, Probetic was listed in the Australian Stock Exchange. The organization has
built its reputation through its process of innovating pharmaceutical products and meet the
needs of consumers. Probetic has an advantage over the rest of the competitors as they mainly
focus on their Research and Development Program and the technology which they utilize is
well advanced. The employees who work for the organization are of high calibre, and it
assures that quality is maintained as per the standards.

4PROFESSIONAL AUDITING
Key information:
Discussion on Probiotec Limited:
Probiotec is one of the leading manufacturers in the pharmaceutical product market.
The manufacturing process which Probiotec use is advanced, through which it can maintain a
world class quality of the products. It does have many manufacturing plants overall in
Australia (Probiotec.com.au, 2019). The products they are offering is affordable for
consumers. The formulations which are offered to the consumers are categorized as follows:
 Cosmeceutical and Nutraceuticals
 OTC Pharmaceuticals and Prescription
 Human Nutrition- products related to sports nutrition
The main objective of the organization is to Research and Development of the products.
The organization assures that they maintain the quality, which is best in the market. In the
financial year of 2018, they have 25% growth in the sales revenue, which amounts to $74.7
million. EBITDA has a growth of 42%, which amounts to $10 million. Probiotec has
acquired many properties which will be used as the manufacturing facility in future. Through
the increase of manufacturing plants, it can meet the needs of the consumers, which is
growing day by day. It can achieve efficiency in the operational activities, and through this, it
can increase their production capacity in the future.

5PROFESSIONAL AUDITING
Risk related to Materiality Misstatement:
The concept of material misstatement is that if there is any manipulation of the
financial statements is done and it can have an impact through the economic decisions. The
study of the annual report of Probiotec is to be done if there is any material misstatement in
the financial statement (Reid, Nelson & Carcello, 2019). As an auditor, it is necessary to go
through the material misstatement to find the accounts where it has occurred. Material
Misstatements means if there is any data omitted or irrelevant, that will affect the
organizations in taking any decisions. The concept of materiality provides both qualitative
and quantitative. Thus, it helps in determining a fair view of the data which is provided by the
organization.
As an auditor, it is the duty to keep all the historical experiences and other factors in
mind, to assess the risks that can happen in the future and have an impact on the financial
statements of the organization. All these risks are believed to be reasonable since the
accounts are backed with explanations of why they are being doubted in the first place.
The accounts that can have materiality risk and can be misstated are listed below -
Trade and other receivables
As Probiotec Limited does trading of pharmaceuticals products in most part of the
world, so there is an exchange of the currency. It gets exposure to foreign currency exchange
(Miculescu & Grui, 2018). The organization comes to face currency exposures when there
are purchase and sale of products and services in currencies other than the home currency of
the organization. To avoid the risk of currency exchange, it does try to maintain bank
accounts in the country where the operations are going on. Through this approach, the

6PROFESSIONAL AUDITING
organization reduces the risk of foreign currency exchange (Dritsas & Petrakos, 2018). From
the report, it is seen that receivables are measured at a fair value rate. The valuation of the
current trade receivables, which is impaired is $80,918. The impaired receivables are related
to the consumers, which is not easy in the economic situation.
Goodwill
Goodwill is one of the valuable assets, in which the inventors invest in the
organization by seeing this. It is not related directly to the valuation of the assets and
liabilities, but it is included in the intangible assets. It is easy for the accountant to manipulate
the Goodwill account, and if the amount is shown overvalued, then it is beneficial for the
organization (Elmahgoub & Smith, 2019). The discounted cash flow is calculated based on
units that are cash-generating based on the forecasts of the management for various accounts
such as sales, gross profit and the results obtained for the earnings. The management made
assumptions for the year 2018 based on prior years; only the discount rate was not estimated;
rather, it was charged directly at the balance date. Therefore, goodwill is checked every year
to prevent manipulation.
Intangible assets
There is a policy to amortize intangible assets that has a life period that ranges from 3
to 20 years. The assets that are subject to fixed-term licenses are not included in it. The useful
life of such intangible assets is determined based on the knowledge of each category of such
assets (Mayes, Landes & Hasty, 2018). Total assets are also taken into consideration when
quantitative misstatement is being figured out. Since there are high chances that the

7PROFESSIONAL AUDITING
management misstates assets 1 to 2% and this range cannot be easily noted by the auditors
since considering the figures of the balance sheet, such changes are almost negligible.
Capitalization of development costs
The company also has the policy to capitalize development costs under certain
circumstances. Judgement by the auditors is needed to determine and validate the
circumstances under which these costs were found suitable to capitalize in technical regards.
Adequate resources must be available to complete the project on time (Knechel & Salterio,
2016). It may be categorized as a qualitative factor involved in noting material misstatement
to the financial statements. Some immaterial accounts can also be manipulated, such as
illegal payments related to development costs may be added.
Foreign exchange risk
The company may face an unforeseen financial market risk that may arise due to
exposure to various foreign currencies when sale and purchase of goods and services are done
in currencies other than the currency primarily used by the company. It has exposure to the
currencies that are primarily British pound, Euro, dollars, etc. It is continuously trying to
mitigate or minimize the risk that may occur due to exposure to foreign currencies. This, it
can also manipulate the amount invested based on different currencies. Huge risks are
involved when the company deals with debts based on market interest rates relating to long-
term debt obligations (Hussin et al., 2017). Borrowings are issued at different interest rates
causes exposure of the company to interest rate risk-based fair value. Constant analysis is
needed to keep a check on the interest rates. Currently, it is using an approach to maintain 25-
50% at a fixed rate. Long-term borrowings are made by the company at floating rates.

8PROFESSIONAL AUDITING
Planning Materiality
It is important for the auditor to verify the financial statement. As an auditor, it is
important to check that there should be no materiality misstatement with any accounts in the
financial statement (Brown et al., 2018). All the accounts are to be investigated to avoid the
risk of the materiality misstatement. For the year of 2018, planning materiality is computed
on the total revenue of the organization. From the annual report, total revenue is valued at
$75,724,762. The calculation is represented through an equation:
Planning Materiality = 0.5% of Total Revenue
= 0.5% of $ 75,724,762
= $ 378,623.81
From the above calculation, it is shown the planning materiality of the organization. Thus,
the accounts which are shown in the annual report of the organization is considered on this
planning materiality which is $ 378,623.81.
Audit Risk Assessment
The value in calculations of goodwill and other assets are subject to changes that may
occur in the company at any time. The calculations are based on the key assumptions made
by the management. Therefore, there are high chances that the figures may be misstated by
the management itself. If there are changes like assumptions when the calculations are also
subject to alterations and this result in generating various units that can be easily converted

9PROFESSIONAL AUDITING
into cash (Bhattacharjee, Maletta & Moreno, 2015). There are some factors to which the units
are sensitive at a very high level. They are most sensitive to the discount rates, gross profit
etc. Goodwill is reviewed by the management, and the key assumptions are based on keeping
future trends in mind.
Trade and other receivables
The risk which is related to the trade and other receivables can be usually be
controlled with the implications of the assertions. The assertions which are applicable to
control the risk of trade and other receivables are existence, occurrence and valuation. The
way it can be treated is with the receivable confirmations (Wright, 2016). The uncollected
amounts should be rechecked, which exceeded beyond 90 days. The organization should
recheck their estimate of collectivity and should balance their account through the
verification of the doubtful accounts.
Goodwill
The value in calculations of goodwill and other assets are subject to changes that may
occur in the company at any time. The calculations are based on the key assumptions made
by the management. Therefore, there are high chances that the figures may be misstated by
the management itself. If there are changes in the nature of assumptions when the
calculations are also subject to alterations and this result in generating various units that can
be easily converted into cash (Bryan, 2017). There are some factors to which the units are
sensitive at a very high level. They are most sensitive to the discount rates, gross profit etc.
Goodwill is reviewed by the management, and the key assumptions are based on keeping
future trends in mind.

10PROFESSIONAL AUDITING
Intangible assets
Misstating the value of the assets can have a bad influence on the financial statements
disclosed at the end of the year. It is not possible for the management to declare the value of
amortization beforehand and determine whether it could be material or not (Brasel et al.,
2016). The useful life of intangible assets is assessed by the management on every reporting
date, or a future date may also result in the change of useful life of the asset on the basis of
the information available on that date. The carrying may have a carrying value of both
definite useful life or indefinite useful life. Since the value is disclosed on the basis on the
assumption completely, there are chances that it can be manipulated to bring a difference in
the figure if total assets. Since the figures are mentioned based on assumptions, no one can be
sure what should be the exact figure that can be mentioned in the final statement (DeFond,
2017). Easy misstatement can be done to the final amount noted, and the auditors will not be
able to note such major changes made to the figure of such accounts. The misstatement is not
materially stated since actual figures are not known to anyone.
Capitalization of development costs
Costs of capitalization in regards to adequate resources that are available in the
company to complete the project in the given time frame. It is expected that benefits will be
generated in the future and profitability will be earned because of the economic benefits
(Ahlawat & Nouri, 2015). The expenditures related to the attributes of the project can be
measured, relying on the transactions carried. Because of the economic decision of the user,
financial statements can have a great impact since the figures can be manipulated, and
misstatements may also take place while noting the figures down.

11PROFESSIONAL AUDITING
Foreign exchange risk
The company is involved in a lot of investment plans that include investments in the
foreign market as well. These accounts are exposed to higher risk since the rates of foreign
currency may fluctuate at any point in time (Dritsas & Petrakos, 2018). The management can
misuse the information and can misstate the figures that may be concluded as a result of
adding up the investments made. The auditors have to figure out whether the account details
are misstated or mentioned correctly. The financial statements of the company can change the
mind of the auditors if they find that the figures mentioned are misstated.
Conclusion
As far as materiality is concerned, it may be both qualitative and quantitative. Among
the various accounts listed above in which misstatements can be noted while they are
mentioned in the balance sheet. This is generally done to manipulate the figures concluded in
the financial statements.
Considering the risk which is associated with foreign exchange, it can be said that
when a company is involved in investment plans, it gets interested or returns in foreign
currency. This company is into various investments that involve currencies ranging from
pounds, dollars, etc. Sudden fluctuations may result in figures that are not fixed. So
misstatements done to them cannot be notes easily since the figures themselves are at high
risks.

12PROFESSIONAL AUDITING
Coming to amortization, this figure is fully assumption based. Tangible assets are
amortized by the company to check future events and sudden changes that may take place in
future. This process is done keeping the lifespan of the assets at the base. Since the lifespan is
not fixed, the figures keep changing based on the different lifespan of different assets. This
type of misstatement is categorized at qualitative misstatements since the figure is not stable
or constant. Such misstatements are material in terms of the amount but not in terms of nature
since amortization cannot be seen; it is just a provision made by the company.
Interest rates again may vary based on different factors that are taken into
consideration. Interest in a company are charged on various debts and borrowings, and they
are received by the company as well. Misstatements can be easily done to them since they are
not fixed every year, and the interest is purely calculated based on the time. Illegal payment
of interests may be shown, or the received interests may be recorded lower than what was
received. If the changes are caught, then the auditor or accountant may note that
misstatements are observed in the financial statement.

13PROFESSIONAL AUDITING
References
Ahlawat, S., & Nouri, H. (2015). AN EXAMINATION OF ACCOUNTANTS AND NON-
ACCOUNTANTS'PERCEPTIONS OF AUDITOR NOT REPORTING A
MATERIAL MISSTATEMENT. Journal of Business and Accounting, 8(1), 51.
Amoah, N. Y., Anderson, A., Bonaparte, I., & Tang, A. P. (2017). Internal Control Material
Weakness and Real Earnings Management', Parables, Myths and Risks (Advances in
Public Interest Accounting, Volume 20).
Beasley, M. S., Blay, A. D., Lewellen, C., & McAllister, M. (2018). The Association
Between Board Risk Oversight and the Risk of Material Misstatement.
Bhattacharjee, S., Maletta, M. J., & Moreno, K. K. (2015). The role of account subjectivity
and risk of material misstatement on auditors' internal audit reliance
judgments. Accounting Horizons, 30(2), 225-238.
Brasel, K., Doxey, M. M., Grenier, J. H., & Reffett, A. (2016). Risk disclosure preceding
negative outcomes: The effects of reporting critical audit matters on judgments of
auditor liability. The Accounting Review, 91(5), 1345-1362.
Brown, V. L., Coram, P. J., Dennis, S. A., Dickins, D., Earley, C. E., Higgs, J. L., ... &
Tatum, K. W. (2018). Comments of the Auditing Standards Committee of the
Auditing Section of the American Accounting Association on International Auditing
and Assurance Standards Board Exposure Draft, Proposed International Standard on
Auditing 315 (Revised): Identifying and Assessing the Risks of Material

14PROFESSIONAL AUDITING
Misstatement and Proposed Consequential and Conforming Amendments to Other
ISAs. Current Issues in Auditing, 13(1), C1-C9.
Bryan, L. E. (2017). Goodwill and Other Intangible Assets: An Exploratory Study into the
Effectiveness of the Accounting Standards Codification (thesis).
DeFond, M. L., & Lennox, C. S. (2017). Do PCAOB inspections improve the quality of
internal control audits?. Journal of Accounting Research, 55(3), 591-627.
Dritsas, S., & Petrakos, G. (2018). Risk of Material Misstatement in Fluctuated Economic
Environments: The Case of Greece. International Business Research, 11(6), 243-248.
Dritsas, S., & Petrakos, G. (2018). Risk of Material Misstatement in Fluctuated Economic
Environments: The Case of Greece. International Business Research, 11(6), 243-248.
Elmahgoub, M., & Smith, J. (2019, April). Extended audit reporting and audit quality:
evidence from goodwill impairment. In British Accounting & Finance Association:
Annual Conference.
Hussin, S. A. H. S., Iskandar, T. M., Saleh, N. M., & Jaffar, R. (2017). PROFESSIONAL
SKEPTICISM AND AUDITORS'ASSESSMENT OF MISSTATEMENT RISKS:
THE MODERATING EFFECT OF EXPERIENCE AND TIME BUDGET
PRESSURE. Economics & Sociology, 10(4), 225-250.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.

15PROFESSIONAL AUDITING
Lohrey, P., DiGabriele, J. A., & Nicholson, J. (2017). A Risk Assessment of Intangible Asset
Valuation: The Post-Hoc Association between Goodwill Impairments and Risk
Hazards in Mergers and Acquisitions. American Journal of Management, 17(1).
Mališ, S. S., & Novak, A. (2016, January). Assessments of the risks of material misstatement
due to fraud. In 5th International Conference “Vallis Aurea”: focus on Research and
Innovation.
Mayes Jr, C. R., Landes, C. E., & Hasty, H. (2018). Taking the Risk out of Risk Assessment:
Properly Considering a Client's Risks Is Essential to a Quality Audit — Journal of
Accountancy, 226(2), 38.
Mayes Jr, C. R., Landes, C. E., & Hasty, H. (2018). Taking the Risk out of Risk Assessment:
Properly Considering a Client's Risks Is Essential to a Quality Audit — Journal of
Accountancy, 226(2), 38.
Miculescu, M. N., & Grui, S. D. (2018). AUDIT OF TRADE RECEIVABLES. Quaestus,
(13), 53-68.
Moroney, R., & Trotman, K. T. (2016). Differences in auditors' materiality assessments when
auditing financial statements and sustainability reports. Contemporary Accounting
Research, 33(2), 551-575.
Probiotec.com.au. (2019). Retrieved 25 September 2019, from
http://www.probiotec.com.au/wp-content/uploads/2018/10/Probiotec_AR2018_FA_
Web_LR.pdf

16PROFESSIONAL AUDITING
Reid, L. C., Nelson, M. W., & Carcello, J. V. (2019). Does Reporting Risks of Material
Misstatement in the Audit Report Impact Audit Adjustments? Experimental Evidence
from UK Audit Partners and Senior Managers. Experimental Evidence from UK
Audit Partners and Senior Managers (August 19, 2019).
Reid, L. C., Nelson, M. W., & Carcello, J. V. (2019). Does Reporting Risks of Material
Misstatement in the Audit Report Impact Audit Adjustments? Experimental Evidence
from UK Audit Partners and Senior Managers. Experimental Evidence from UK
Audit Partners and Senior Managers (August 19, 2019).
Wright, W. F. (2016). Client business models, process business risks and the risk of material
misstatement of revenue. Accounting, Organizations and Society, 48, 43-55.