Understanding a Client to Identify the Risk of Material Misstatements

Running head: UNDERSTANDING A CLIENT TO IDENTIFY THE RISK OF MATERIAL MISSTATEMENTS
Understanding a Client to Identify the Risk of Material Misstatements
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Author’s Note

1UNDERSTANDING A CLIENT TO IDENTIFY THE RISK OF MATERIAL MISSTATEMENTS
Executive Summary
It can be seen from the findings of the analytical procedures that there are certain areas in the
financial statements of Nine Entertainment that are at the risk of material misstatement. As per the
outcome of the simple comparison, major fluctuations are there in the revenue and net profit of the
company. The analysis of ratios shows that there are risks in the liquidity, efficiency, gearing and
profitability position of Nine Entertainment and the auditors are needed to consider these aspects in
the audit planning stage. After that, it can be seen from the analysis of inherent risk at the financial
report level that the company does not face any inherent risk from management’s integrity and
experience and knowledge of the management. However, inherent risk is high due to the unusual
pressure on management, nature of the business of Nine Entertainment and the major factors
affecting the media entertainment industry in Australia. The last part shows that three accounts are
at the risk of material misstatement; they are revenue, interest bearing loans and borrowings and
trade and other receivables. The main assertions related to these accounts are occurrence for
revenue; completeness, classification and obligation for interest bearing loans and borrowings; and
existence and valuation for trade and other receivables.

2UNDERSTANDING A CLIENT TO IDENTIFY THE RISK OF MATERIAL MISSTATEMENTS
Table of Contents
Requirement 1 – Results of Analytical Procedures................................................................................3
Simple Comparison............................................................................................................................3
Ratio Analysis.....................................................................................................................................3
Requirement 2 – Risk of Material Misstatement (Inherent Risk) at the Financial Report Level............6
Requirement 3 – Risk of Material Misstatement (Inherent Risk) at the Assertion Level.......................8
References...........................................................................................................................................11
Appendix.............................................................................................................................................13

3UNDERSTANDING A CLIENT TO IDENTIFY THE RISK OF MATERIAL MISSTATEMENTS
Requirement 1 – Results of Analytical Procedures
Simple Comparison
The following discussion shows the comparison of the main balances of the income
statement and balance sheet of Nine Entertainment.
Income Statement – fluctuation can be seen in the revenue of the company which decreases from
2016 to 2017 that is from $1,286,360,000 to $1,244,955,000; and then again increases in the year
2018 that is $1,403,945,000. This is a significant fluctuation which needs to be considered in the
audit planning for investigation (prod.static9.net.au, 2019). Significant fluctuations can also be seen
in the net profit which became negative from 2016 to 2017 that is from $57,049,000 to
($190,854,000); and then again massively increases in the year 2018 that is $274,978,000 which
indicates towards possible material misstatement regarding net profit (prod.static9.net.au, 2019).
This aspect needs to be investigated in the audit planning stage.
Balance Sheet – The presence of a decreasing trend can be seen in case of total assets which
decrease from 2016 to 2018 that is $2,148,040,000, $1,901,561,000 and $1,853,625,000 from 2016
to 2018 respectively. The reason for this continuous decrease in the total assets should be
investigated in the audit planning stage. Certain fluctuations can be seen in the case of total
liabilities which increases from 2016 to 2017 that $927,861,000 from$914,201,000; and it again
decreases in 2018 that is $744,586,000 (prod.static9.net.au, 2019). Major fluctuation can also be
seen in the balance of net assets since decrease in net assets can be seen in 2017 from 2016 that is
$973,700 from $1,233,839,000; and it again increases in the year 2018 that is $1,109,039,000
(prod.static9.net.au, 2019). The same fluctuation can be seen in case of the value of total equity of
Nine Entertainment. This value decreases from 2016 to 2017 and then increases in 2018. Since these
fluctuations can be seen in the major balances in the balance sheet, these balances need to be
tested in the audit planning stage.
Ratio Analysis
Liquidity Ratios