REH Company Audit Report and Analysis - ACCT20075

This report provides an audit report and analysis of REH Company for ACCT20075 - Auditing and Ethic. It covers materiality, significant matters for audit, cash flow statement, and more. The report concludes that the company has established harmonization in its domestic and international reporting frameworks and auditors have passed an unqualified audit report for the prepared financial statements.

REH Company
ACCT20075 – Auditing and Ethic
Assessment Task 2 - Term 2, 2018
Name of the author-
University Name-

Table of Contents
INTRODUCTION......................................................................................................................3
SECTION 1................................................................................................................................3
MATERIALITY........................................................................................................................3
ANY SIGNIFICANT MATTER FOR AUDIT.........................................................................4
SECTION 2................................................................................................................................4
 INVENTORY.................................................................................................................5
 FIXED ASSETS..............................................................................................................5
 PAYABLES....................................................................................................................5
SECTION 3................................................................................................................................5
CASH FLOW STATEMENT....................................................................................................5
AUDIT REPORT.......................................................................................................................6
REFERENCES...........................................................................................................................6
1

INTRODUCTION
The annual report of a company depicts the overall results that company has achieved
during the financial year. It is published for the stakeholders to get knowledge about the
affairs of the entity. The report is prepared so that it can be used by the users to help them in
making powerful decisions. However, the report is prepared by the entity itself for its own
results. Hence, it is difficult for the stakeholders to believe on the reliability of the same. To
establish credibility of the report it has become necessary and mandatory as per law to get the
financials audited. This function of auditing is to be performed by a professional and
independent Chartered Accountant. The opinion laid by the professional is unbiased and
hence generate trust of the users over the financials issued (Pool, 2017).
The current report accommodates the study of a company named REH Company
(Reece Limited). The company is listed on Australian stock exchange. The company deals in
plumbing and bathroom products. The concept of materiality is defined in the upcoming
section of the report with the help of this company. Later, the analysis of the cash flow
statement of the company and the auditor’s report is also done. In between, the key ratios
relevant for the analysis of company’s balance sheet and profit and loss account are observed
to get an understanding of prevalent trend. The going concern risk is also checked for.
Written representation must be called from management. Further external confirmation must
be obtained from the two parties with whom agreement is made (REH, 2017).
SECTION 1
MATERIALITY
When the independent professional conducts an audit function, he is not able to check
100 % of the transactions that takes place. This is the inherent limitation an audit faces. As a
result only a reasonable assurance can be provided by the auditor. This reasonable assurance
however is not given on the basis of ambiguous transactions. Selection of transactions is done
on the basis of the importance they hold in influencing the decision of user. That level of
importance is called materiality. The level at which the auditor believes that the
misstatements, including the omissions are able to bring a change in the decision of users, is
set as the materiality level. The materiality level can be reached by the misstatements either
individually or as a sum total. This all is a simplified version of materiality as defined by
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ASA 320, Materiality in Planning and Performing Audit. This standard makes the auditor
responsible for determining the materiality before commencing any audit (Moroney &
Trotman, 2016).
Materiality is not a matter of fact and that is why there is no fixed amount that can be
called materiality threshold in every case. It is highly judgemental and depends on the
functioning of the entity. It is a matter of professional decision of the auditor. Materiality is
calculated in quantifiable terms to be called as materiality threshold. To compute materiality,
the foremost requirement is of a base amount. There can be different base amounts that are
used in different audits. The selection of a particular base amount depends on the volatility of
the same in case of that entity. E.g. revenue, expenses, equity, net earnings, etc. are all base
amounts. The most commonly used is although net earnings. But if in case of a certain entity,
the net earnings are highly volatile and are drastically different for every financial year, and
then a different base is required to be used (Choudhary, Merkley & Schipper, 2018). The
main purpose of the REH Company is to increase the overall outcomes and eliminate the
quantifiable issues in the financial statement (Karapetrovic, & Willborn, 2010).
After a base amount is selected, a percentage is to be applied to calculate the basic amount of
materiality. Concrete adjustment for the past company failures, cases of non-compliances,
risk level assumed, etc. is to be made from this base materiality level. The percentages taken
fall in a window of 5-10%, if the base is revenue, or of ½-2% if rest other bases are taken. For
the company Reece Limited, the net income is increasing every financial year and that too at
an acceptable level. So the base taken is net income of $211,791,000. The percentage is
assumed to be 6%. So the materiality level comes to be $12,707,460. To make the contingent
adjustments incorporated, the revised materiality level is taken as $13,000,000.
ANY SIGNIFICANT MATTER FOR AUDIT
From the notes to accounts attached to the financial report of Reece Ltd information
of a business combination effected on 31 January 2017 is available. The company has
acquired of all the shares of Tarpit Communications Pty Ltd. To acquire the entire equity of
Tarpit, the company has entered into a Share Sale Agreement with Barolo Pty Ltd and
Numanar Pty Ltd. The purchase price was agreed at AUD 3.77 million. This is sure to have
an impact on the financials. Auditor need to formulate procedures to look into the accuracy of
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the combination. He must check the reliability of the sale agreement (Knechel & Salterio,
2016)
SECTION 2
ASA 300, planning an Audit of Financial Report, explains the requirement of making
an audit plan. The audit plan can be made only after the entity’s environment is understood
by auditor. For appropriate planning, it is also required for the auditor to analyse the
relationship that exists in the entity. The relationship is between the financial and non-
financial data. The preliminary analytical reviews are performed by the auditor to attain this
understanding only. These reviews help the auditor to assess the risk of material misstatement
that may exist in the entity (Jans, Alles & Varsarhelyi, 2014). The table presented below
represents the various ratios that are significantly related to the balance sheet and income
statement (Messier, Glover, & Prawitt, 2008).
CURREN
T RATIO
NET
MARGI
N (%)
RETUR
N ON
ASSETS
(%)
RECEIVABLE
S TURNOVER
FIXED
ASSETS
TURNOVE
R
DEBT
EQUIT
Y
RATIO
201
4
1.85 6.93 10.03 7.03 4.05 0.21
201
5
2.02 7.94 11.67 7.34 4.56 0.17
201
6
2.04 8.44 12.60 7.36 4.73 0.12
201
7
2.17 8.72 12.92 7.16 4.72 0.09
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The above table shows that the company has improved its return ratios. It means that
the profitability of the company has been improved. However, the turnover ratios have
declined. This has questioned the efficiency of the company. The current ratio however has
risen above the standard benchmark. This trend in the ratio certainly states that the company
is improving as far as the profitability is concerned. So it is ultimately a positive sign for the
success of the company and achievement of company’s goals. This can even show stagnancy
of stock. The key risk areas have assessed as follows: The REH Company needs to lower
down its financial leverage by reducing the debt funding. However, it will have to also
consider the overall profitability and solvency on both side (Knechel, & Salterio, 2016).
 INVENTORY
The current ratio has improved because of increased current asset. The same is
affected by risen inventory. There may be a risk that inventory is stagnant yet overvalued.
ASSERTION: valuation
AUDIT PROCEDURE: the auditor must call for physical verification of inventory and check
with the stock register.
 FIXED ASSETS
There may be high risk that the company’s claim of the ownership of assets lying with
third parties is false
ASSERTION: Rights & Obligations
AUDIT PROCEDURE: external confirmations must be obtained from third parties to
reduce the risk of forged ownership (Hecimovic, 2017).
 PAYABLES
Chances are there that the person handling cash have paid it to the creditors and still
showing them as creditors. For the next time when the management allows for cash payment
to the creditor, the cash handler abscond it (Van Beijsterveld, & Van Groenendaal, 2016).
ASSERTION: Existence
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AUDIT PROCEDURE: external confirmation must be obtained from the creditors. This
assertion is used to identify the true and fair view of the assets and libiliteis of company by
matching the book value and market value of the assets and liabilities.
SECTION 3
CASH FLOW STATEMENT
The activity providing highest cash inflows is operating activities. The cash inflow
accounted is $214,809. The activity that uses the highest cash is financing activity. The cash
outflow reported is $138,624. The deeper analysis is shown in the following table: However,
the primary cash receipts and primary cash payments have been showcased in this report for
identifying the cash inflow and outflow from the three different activities named operating,
financial and investing (Moroney, & Trotman, 2016).
PRIMARY CASH RECEIPTS PRIMARY CASH PAYMENTS
Sales Payments for purchases
Interest received Finance costs
Proceeds from sale of property Payment of income tax
Proceeds from borrowings Payment for property
Purchase of controlled entity
Payment of dividend
Repayment of borrowings
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Non-cash receipts and cash payment
The non-cash receipt would be Goodwill, increased in the business values strategic alliance
and noncash payment would be depreciation, charges on the assets and impairment loss.
When the annual report of the company for the financial year 2017 is analysed, there is no
evidence of any non-cash financing and investing activity. The company has not issued any
convertible instrument. Moreover no asset is purchased off cash. As far as going concern is
discussed, there seems no risk regarding the same. The business has just acquired another
company. Further the profitability has improved. The cash position is also well off. So there
is seriously no risk for the business continuation. Nonetheless, company has high cash
outflow from its financial activities which may be negative indicator for the future growth
and sustainable business practice of RHE organization.
AUDIT REPORT
The financial accounts for the company have been audited by a professional auditor
namely Pitcher Partners. They have issued an unqualified and clean opinion. Their report
states that the company has prepared its financials that give a true and fair view of the
company’s affairs as far as the company’s performance and position is concerned. It is
mentioned that the company has complied with the Corporations Act 2001. There is no
qualification exerted by the auditors. Just a few key audit matters are identified by the auditor
and mentioned in the report for better knowledge of the shareholders. The key audit matters
relate to the valuation of inventories and the impairment of intangible assets. Although, there
is no audit issue identified by the auditors. However, notes to accounts and other details have
been shared by company in its annual report to justify the recorded assets and liabilities. The
management representation letter has also been issued by the key managerial persons and
directors to justify the shared information with the auditors. On the basis of the same,
auditors give his report as per the shared information. The unqualified audit report given by
Auditors is the proof that company has been reflecting the true and fair view of its assets and
liabilities in long run. The existence test and materiality level check will also showcase that
company has valued all of its assets and liabilities at his market value.
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Conclusion
Audit is the process which is used to analysis and viability of the financial statements
of company. Auditors check the financial statements of company with a view to analysis the
true and fair view of the financial statements. The audit report given by Pitcher Partners has
reflected that company has complied all the rules and applicable accounting standards. The
unqualified audit remark with zero disclaimers divulges that company has been prepared
financial statements which reflect true and fair views of its assets and liabilities in long run.
The cash flow statement of company also reflects that company has high cash inflow and
outflow from its business. The existence test implemented by the auditors has shown that
company has reported only those assets and liabilities which it has been keeping at the time
of reporting of its financial statements. Now in the end, it could be inferred that company has
establish harmonization in its domestic and international reporting frameworks and auditors
have also passed unqualified audit report for the prepared financial statements.
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REFERENCES
Choudhary, P., Merkley, K. J., & Schipper, K. (2018). Auditors’ Quantitative Materiality
Judgments: Properties and Implications for Financial Reporting Reliability.
Hecimovic, A. D. (2017). Assurance of natural resource management: a case study. 66(4),
39-43.
Jans, M., Alles, M. G., & Vasarhelyi, M. A. (2014). A field study on the use of process
mining of event logs as an analytical procedure in auditing. The Accounting
Review, 89(5), 1751-1773.
Karapetrovic, S., & Willborn, W. (2010). Quality assurance and effectiveness of audit
systems. International Journal of Quality & Reliability Management, 17(6), 679-703.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge. 63(2), 56-
76.
Messier, W. F., Glover, S. M., & Prawitt, D. F. (2008). Auditing & assurance services: A
systematic approach. Boston, MA: McGraw-Hill Irwin.
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.
Pool, R. (2017). Independent Audit Report. Contemporary Accounting Research, 4(2), 55-65.
REH, 2017, Annual report, Retrieved from
https://www.reecegroup.com.au/assets/Uploads/FY2017-Annual-Report.PDF
Van Beijsterveld, J. A., & Van Groenendaal, W. J. (2016). Solving misfits in ERP
implementations by SMEs. Information Systems Journal, 26(4), 369-393.
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