Audit Planning and Internal Control: Arafura Resources Limited Report

This report provides a comprehensive audit analysis of Arafura Resources Limited, examining its financial statements, business transactions, and investment activities. It delves into the company's financial reporting practices, including compliance with AASB 101 and the use of analytical procedures over a three-year period. The report identifies material account balances, assesses relevant financial report assertions, and outlines audit work steps to mitigate risks. Furthermore, it includes a ratio analysis of liquidity, solvency, profitability, and efficiency, highlighting key financial trends and potential risks. The report also considers the company's investments in research and development, financing activities, and the role of internal controls in determining material account considerations. The audit focuses on evaluating the company's financial health and ensuring adherence to financial reporting standards and regulations. This report is contributed by a student and available on Desklib, a platform offering AI-powered study tools and resources for students, including past papers and solved assignments.

ARAFURA Resources Limited
Audit assurance and
practice
Audit Planning and Internal Control
Name of the Author

EXECUTIVE SUMMARY
With the changes in economic condition and increased complexity of the financial
reporting frameworks, every company needs to audit its financial statements with the
auditors. In this report, in order to conduct the audit and assurance, Arafura Resources
Limited has been taken into consideration. There are several financial tools and audit
assurance procedure have been taken which reflects that company has complied with all the
rules an regulation and established harmonization in domestic and international regulations.

Table of Contents
EXECUTIVE SUMMARY...........................................................................................................................1
Introduction...........................................................................................................................................3
Description of ARAFURA Resources Limited......................................................................................3
Understand the nature of the entity and its industry............................................................................3
Business Transactions of the company..............................................................................................3
Investments and investment activities..............................................................................................3
Financing and financing activities......................................................................................................3
Financial reporting practices..............................................................................................................4
Analytical procedures of the Statement of Financial Position and of Financial Performance over the
last three years......................................................................................................................................4
Consideration of the account balances are considered “material”.......................................................4
Ten different material account balances, five assets and five liabilities................................................6
List the relevant financial report assertions and explain why the selected assertions are applicable to
each account..........................................................................................................................................7
Comprehensive set of audit work steps for each material account balance.........................................8
Conclusion.............................................................................................................................................8
References.............................................................................................................................................9

Introduction
The substantive tests are the balances that are used to decrease the threats of the audit
risks. The internal control system helps to determine material consideration of account
balances. It is considered that Arafira Resources Limited has been taken into consideration to
evaluate whether company has been facing high loss in its business.
Description of ARAFURA Resources Limited
Arafira Resources Limited is the mineral extraction company which has been running
its business in Australia. This business has been planned to implement the rarest of the rare
minerals of earth. The main headquartered of company is in Perth, Western Australia. This
company is listed in the Australian Stock exchange (ARAFURA Resources Limited, 2017).
Understand the nature of the entity and its industry
Business Transactions of the company
It is evaluated that the auditors of the company are more worried about the over value
statement and less value in the books of statement. There are several test such as substantive
test, assertive test and audit program have been used to evaluate the business business
transaction of the company. The test balance is used to evaluate the balance of accounts
maintained in the business transactions.
With the business transactions of company is accompanied with the extraction of the rarest of
the rare minerals present on this earth. This company is the permanent supplier of
Neodymium and Praseodymium from the Noland which is the biggest project of company.
The busienss project of Company is situated in the northwest territory of Australia.
The mineral tenure project is secured by the three major extraction licenses which are applied
on four mineral leases (ARAFURA Resources Limited, 2017).
Investments and investment activities
In 2015, company had invested in the mineral production around $110,010. The payments for
extraction and evaluation amounted to $

The payment for the extraction of mineral has being AUD $ 6,189,149 (ARAFURA
Resources Limited, 2017).
Company has invested $2,263,935 in its research and development department which
increase the long term benefit program of organization.
The net cash outflow from the investing activities of Arafura Resources Limited, $4,035,224
(ARAFURA Resources Limited, 2015).
In 2016, Arafura Resources Limited had invested capital of $523 in property, plant and
machinery. The current extraction of Arafura Resources Limited is to $4,072,639.
The expenses and investment of Arafura Resources Limited is $51,229 which eventually
increases the cash outflow of $1,608,469 (ARAFURA Resources Limited, 2016).
Arafura Resources Limited invested $55396 in 2017 in plants and machineries and deployed
more funds in its assets amounting to $3,364,107.
The current investment of Arafura Resources Limited in 2017 is $ 182500 as provision for
lease incentive in 2015 and $ 421,693 as lease investment (ARAFURA Resources Limited,
2017).
Financing and financing activities
In 2017, Company has increased its investment in research and development department
amounting to $6,764,740. On the other hand, the transaction cost is around $ $309,099 as
transaction costs of the shares
The total equity share of Arafura Resources Limited is $130,385,162 in 2015. The company
has increased its equity funding by $ 3.6 Million by using the investment of the institutional
investors (ARAFURA Resources Limited, 2017).
Financial reporting practices
Company has complied with the AASB 101 for the presentation of the financial
statement. It states that the company must ensure that its assets are accounted at their
recoverable amounts by using the assertion test and complied with the IAS 136. It implies
that the company has invested more capital in its current assets which will block high cost of

capital resulting in high cost of production. The company should deploy its funds from the
current assets to pay its current liabilities Arafura Resources Limited should increase the
overall turnover and transparency of its business if it wants to win over the market as
compared to other rivals by establishing harmonization in its domestic and international
reporting frameworks. Furthermore, financial assertions of the various material account
balances shall be executed. Lastly, the various steps of audit for each material account of the
company shall be designed. The accounts of company are audited by BDO audit (WA)
Private Limited (ARAFURA Resources Limited, 2017).
Analytical procedures of the Statement of Financial
Position and of Financial Performance over the last
three years
Ratio Analysis
Liquidity ratio
The liquidity ratio of company reflects that
company has maintained effective cash in its
business. The current ratio of company was
11.47 in 2015 which has increased to 12.70
in 2016. The quick ratio of company in 2015
is 12.70 which are already way too high and
company has also increased this ratio to
12.81 points in 2017.
Solvency ratio
The financial leverage of the company is
same in all the years viz. 2015, 2016 and
2017 i.e. 1.01 which is more than 0.5 which
is an ideal figure. The company has financed
more assets through its debt which are to be
repaid back. Larger debt loads makes the
company vulnerable during the economic
downturn. In case the company is not able to
make consistent interest payments, then the
investors are likely to lose confidence in it.

As a result, the share prices can go down
Profitability ratio
The profitability ratio shows company’s
ability to earn profit on the investment. Even
after new contracts have been entered, the
ratios have fallen; the reason may certainly
be the downfall in the prices due to high
competition and the severe downfall in the
mining industry. Even when the gold and
coal industries have seen a rise in the recent
year, but the iron industry remains at crash.
ARAFURA Resources Limited stands at the
risk to lose market share in the above
discussed industries due to heavy
competition or could lose the edge to bargain
for high lease income from the new potential
clients (Argenti, 2016).
Efficiency ratio
Anything that amounts to outflow or inflow
of cash is recorded. Income tax paid is an
item of cash flow statement and only
represents the amount of cash paid to the
income tax authorities for tax calls, be it for
current, previous or future periods. While,
the current tax expense relates to the tax
expense for current year itself (Arens, Elder,
and Mark, 2012).

Consideration of the account balances are considered
“material”
The account balance material consideration are done to make the presentation accrues to the
share of total comprehensive income formulated by the continuing operations
The internal control system helps to determine material consideration of account balances. It
refers to the technique that is used by the organizations to ensure that the risk flying over the
entity can be mitigated. There are various accounts are considered as material which are as
follows
Receivables
Lease undertaken
Hire purchase
Machines
Investment in mining business
Creditors
Lease payment
Lease
Bank loan
The consideration of accounts as material account is determined on the basis of the flow of
cash as per requirement and the risk for the same (Argenti, 2016).

Ten different material account balances, five assets and five
liabilities
Investment in the research and development department
Numbers Current assets
Current Assets Receivables
Lease undertaken
Hire purchase
Machines
Investment in mining business
Current libiliteis Creditors
Lease payment
Lease
Bank loan
Credit charges on the Assets

List the relevant financial report assertions and explain
why the selected assertions are applicable to each
account
To ascertain the risk attached with the significant accounts related to any client, the auditor is
required to check up the various assertions by the management pertaining to the liabilities,
assets and equity balances on the basis of existence, fairness, completeness, obligations and
valuation, and concerning to the transactions on the basis of the accuracy & occurrence,
classification and cut-off. These assumptions are the representations for the management
which they believe to be fair and in good faith. They streamline the way of audit risk
(Boynton, and Johnson, 2016).
ACCOUNT ANALYSIS AUDIT RISK AUDIT STEPS TO
REDUCE RISK
Plant and equipment The demand for
already owned
machines has rapidly
decreased and the
purchase of new
computer controlled
equipment has been
done due to the
changes in market
scenario and
customer’s demand
(Dow, et al.2013).
Existence: It’s
concerned to the
portrayal given by
the management
related to the
physical availability
of already existed
assets and the assets
that are purchased.
There is a chance that
no actual purchase
being done and fake
purchase documents
has been presented to
abscond cash.
Completeness: There
To avoid the risk and
chance of fraud
related to the actual
existence and
disclosure
completeness of
assets, a checklist
should be made of
the assets which are
shown in the balance
sheet and physical
check or verification
should be
undertaken.
The valuation experts
in the concerned field
can be included in

is also a chance that
all the equipment
required to be
disclosing in the
balance sheet aren’t
done in real.
the valuation process
to get the correct
valuations. They may
help to ascertain the
correctness of
valuation in
ARAFURA
Resources Limited’s
context (Dow, et al…
2013).
Investment in mines
It leads to the result,
that many used and
huge mining
machines are lying
idle and motionless
in ARAFURA
Resources Limited’s
yard.
Valuation: Although
it may be possible
that the management
have represent the
correctly valued
assets and liabilities
but there may be
chances that the
improper valuation
has been adopted and
expressions have
been done for the
window dressing of
the figures of balance
sheet.
Any Discrepancy in
the existence or
disclosure of the
existence of the
assets is there, then it
shall be highlighted
automatically by a
cross verification of
the list with the
physical equipment
property.
Machine Finance
Liabilities
The liability which
becomes obligatory
for the management
for the purchase of
Completeness: There
a risk may be arises
that the liability on
the management to
To avoid the risk, the
documents related to
the purchase of both
old and new

the new machinery is
known as machine
finance liability.
As per the
evaluation, the
obsolescence of the
old machinery leads
to the purchase of
new computer
controlled
equipment, which
results into increase
in the borrowings.
Conclusively the debt
has increased, which
provides progress to
the debt equity ratio
that is not observed.
purchase the new
machinery has not
been mentioned in
the financial
statement as a
liability.
machinery are
required to be
obtained.
The machinery
which is backed with
finance must have a
check regarding the
debt. The amount
repaid till the date
should be deducted
from the debt
amount. It will show
the exact figure of
machine liability.
Accounts Receivable From the above
discussion, it is
evident that
ARAFURA Resource
Limited was under an
agreement to provide
certain machinery on
lease at a fixed price,
which must have
affect positively the
figures of the
receivables. It means
the amount of current
assets has increased.
Completeness: In this
situation the most
potential risk is that
the assets purchased
by the creation of
new accounts
receivables have not
been admit table in
the balance sheet.
By assessing the
agreement between
ARAFURA
Resource Limited
and its debtors, the
external confirmation
form the debtors
related to their
account balances can
be solicit.