ACCT6006 Auditing Theory and Practice Report: AGL & Qantas Auditing

This report undertakes audit planning for two Australian companies, AGL Energy Ltd and Qantas Ltd, considering necessary audit planning strategies. It assesses the inherent risks of these companies, designs audit procedures, and includes analytical review, substantive audit procedures, and an audit report. The inherent risk analysis highlights risks due to market competition, complex accounting judgments, government dependence, and fluctuating fuel and exchange rates. The auditors are required to check opening balances and perform analytical tests to obtain relevant information. The report identifies and discusses inherent risks for each company, referencing ASA standards and providing examples from their financial reports. It then outlines audit procedures, including those for opening balances and analytical procedures, such as simple comparisons, ratio analysis, common-size statements, and trend analysis. The report references relevant auditing standards, including ASA 510 and ASA 520, to support its analysis and recommendations.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Author’s Note

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Table of Contents
1. Executive Summary...............................................................................................................2
2. Identification of Inherent Risks..............................................................................................3
AGL Energy Ltd....................................................................................................................3
Qantas Ltd..............................................................................................................................4
3. Audit Procedures for the Identified Inherent Risks................................................................5
References..................................................................................................................................7

2AUDITING THEORY AND PRACTICE
1. Executive Summary
The main purpose of this report is to undertake the audit planning for two Australian
companies while considering the needed audit planning strategies; they are AGL Energy Ltd
and Qantas Ltd. This report involves in assessing the inherent risks of these companies,
designing the audit procedures for the identified inherent risks, analytical review, substantive
audit procedures and audit report. Inherent risk analysis shows that these companies faces
inherent risk mainly because of intense competition in the market, presence of complex
accounting judgments and assumptions, dependence on government and fluctuation in fuel
and exchange rate. The auditors will be required to undertake the process to check and verify
the opening balances and analytical tests for obtaining more relevant and appropriate
information.

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2. Identification of Inherent Risks
As per ASA 315, Paragraph 25, it is needed for the auditors to assess the risks of
material misstatements in the clients’ financial statements. ASA 200, Paragraph A39 states
that the auditors are needed to consider both Inherent risk and Control risks (auasb.gov.au,
2020). The following discussion shows three inherent risks of AGL Energy Ltd and Qantas
Ltd each:
AGL Energy Ltd
1. As mentioned by the company, it has to face major competition from its competitions
in the retail market along with a consistent high level of customer movement
(agl.com.au, 2020). This is associated with the loss of business by AGL Energy Ltd as
both the sales and profitability can get affected. For example, revenue of the company
has increased from $12,816 million in 2018 to $13,146 million in 2019; and sales may
be overstated due to competitive pressure (agl.com.au, 2020). As mentioned in ASA
200, Paragraph A40, this can be considered as an external circumstance leads to
business risk and can increase inherent risk (auasb.gov.au, 2020).
2. As AGL Energy Ltd operates in the industry of energy utilities, its business operations
are largely dependent on complying with the regulations and policies of the Australian
government (agl.com.au, 2020). AGL Energy Ltd’s dependence on the government
can lead to the risk of going concern in case there is change in government as the new
government may put restriction on some of the operations of the company having
negative impact on the environment. For example, profit for the year has decreased
from $1,582 million in 2018 to $905 million in 2019; and intervention of the
government may be a reason for the same (agl.com.au, 2020).
3. Large use of complex calculations, estimates and judgments can be seen in the
financial reporting of AGL Energy Ltd in the areas of assets, liabilities and expenses

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(agl.com.au, 2020). All these aspects are grounded on past information and different
former facets. As mentioned in ASA 200, Paragraph A40, these estimations and
judgments that are full of uncertainties increase inherent risk of AGL Energy Ltd
(auasb.gov.au, 2020). For example, critical accounting estimates and assumptions are
used by the company for recognizing revenue through including variable
consideration in the transaction price as estimated as the inception of contract. This
consideration consists of constrains that may affect the process of revenue recognition
(agl.com.au, 2020).
Qantas Ltd
 Qantas Ltd has to face major competitive intensity because of market capacity growth
ahead of underlying demand and this negatively affects the airline’s profitability. The
domestic aviation market of Australia is highly competitive and Australia’s liberal
aviation policy has attracted offshore competitors (investor.qantas.com, 2020). As
competition is a major external force that increases business risk as per ASA 200,
Paragraph A40, this increase the inherent risk (auasb.gov.au, 2020). For instance,
revenue and other income of Qantas Ltd has increased from $17,128 million to
$17,966 million that includes which includes net passenger revenue, net freight
revenue and other revenue and income; and there is a potential that revenue might be
overstated in the company (investor.qantas.com, 2020).
 Volatility in fuel and foreign exchange is an inherent business risk of Qantas Ltd
which affects its sales, cash flows and profits (investor.qantas.com, 2020). This risk
may leads to the misstatements of some of the key items in financial statement and
thus, increases the inherent risk. As mentioned by the company, there has been an
increase in fuel cost by $614 million as compared to the prior year; and this might

5AUDITING THEORY AND PRACTICE
lead to understatement of fuel cost for increasing profitability (investor.qantas.com,
2020).
 The accounting operation of Qantas Ltd is subject to critical accounting estimates and
judgments that are full of uncertainties (investor.qantas.com, 2020). In accordance
with ASA 200, Paragraph A40, the presence of complex calculations derived from the
use of accounting estimates and judgments full of uncertainty can lead to the increase
in inherent risk; and the same is also applicable for Qantas Ltd (auasb.gov.au, 2020).
As mentioned by Qantas Ltd, critical accounting estimates and judgments create
major impact on the accounts of provisions, superannuation and revenue; and this can
lead to material misstatements in the financial statements of the company
(investor.qantas.com, 2020).
3. Audit Procedures for the Identified Inherent Risks
After identifying the audit the inherent audit risks, the auditors of AGL Energy Ltd
and Qantas Ltd are needed to undertake certain audit procedures in accordance with ASA 510
(auasb.gov.au, 2020). As per ASA 510, Paragraph 6, the auditors will be required to obtain
adequate appropriate evidence about whether there is misstatement in the opening balance
that affect the present period’s financial statement (auasb.gov.au, 2020). As per ASA 510,
Paragraph 6 (a), the auditors need to determine whether the closing balances of the related
accounts of prior period such as sales, inventory, expenses, receivables and others have been
correctly brought forward to the current period or have been correctly restated. As per
Paragraph (b), they are also needed to determine whether appropriate accounting policies
were followed for preparing the opening balances of these accounts. In compliance with
Paragraph (c), the auditors of the current year need to determine whether the financial reports
of the prior year were audited in order to obtain evidence regarding the associated accounts
balances (auasb.gov.au, 2020).

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Apart from the above procedures, the auditors of AGL Energy Ltd and Qantas Ltd are
required to undertake certain analytical procedures against the identified inherent risks for
obtaining relevant and reliable audit evidence on whether there is material misstatement in
the financial statements or not (auasb.gov.au, 2020). As per ASA 520, Paragraph 6, the
auditors are required to design and perform analytical procedures at the time to form overall
conclusion as to whether the financial statement is consistent with the understanding of the
companies (auasb.gov.au, 2020). For the identified inherent risks in AGL Energy Ltd and
Qantas Ltd, the auditors will be needed to perform the analytical procedures of simple
comparisons, ratio analysis, common-size statements and trend analysis.
Simple Comparison – Auditors of these companies will involve in the comparison of current
balances of financial statements such as sales, expenses, inventory, receivable and others with
the balances of previous periods and budgeted amounts.
Ratio Analysis – Auditors will involve in the computation of ratios and percentage
relationships for comparison with previous budgets, years and industry average. Four types of
ratios need to be considered by the auditors; they are short-term liquidity, activity,
profitability and solvency.
Common-size Statements – This technique will require the auditors of these companies to
express the components of income statement as a percentage of total sales and the
components of balance sheet as a percentage of total assets. This will help in identifying the
significant variations from expectations which indicates the need for investigation.
Trend Analysis – This technique involves in expressing each item of income statement and
balance sheet as a percentage of its own level of base year; and this allows in focusing on the
trend of changes rather than absolute magnitude of dollar change.

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References
Agl.com.au. (2020). 2019 Annual Report. Retrieved 18 April 2020, from
https://www.agl.com.au/-/media/aglmedia/documents/about-agl/investors/annual-
reports/agl_annual_report_090819.pdf?
la=en&hash=2890C67A39531E9197467BBC1F87B463
Auasb.gov.au. (2020). Auditing Standard ASA 300 Planning an Audit of a Financial Report.
Retrieved 21 April 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_300_Compiled_2015.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 510 Initial Audit Engagements-Opening
Balances. Retrieved 21 April 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_510_Compiled_2015.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 520 Analytical Procedures. Retrieved 21
April 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_300_Compiled_2015.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 200 Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance with Australian Auditing
Standards. Retrieved 18 April 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_Compiled_2019-
FRL.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 315 Identifying and Assessing the Risks of
Material Misstatement through Understanding the Entity and Its Environment.
Retrieved 18 April 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf

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Auasb.gov.au. (2020). Auditing Standard ASA 330 The Auditor's Responses to Assessed
Risks. Retrieved 18 April 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_330_Compiled_2015.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 520 Analytical Procedures. Retrieved 18 April
2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_520_Compiled_2019-
FRL.pdf
Investor.qantas.com. (2020). Qantas Annual Report 2019. Retrieved 18 April 2020, from
https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1t
pgyw/file/annual-reports/2019-Annual-Report-ASX.pdf
Pwc.com. (2020). The audit process. Retrieved 18 April 2020, from
https://www.pwc.com/mt/en/StudentMaterial/SummerMaterial/The%20audit
%20process.pdf