MAA705 Corporate Auditing Report: Deakin University, Trimester 1

This report provides a comprehensive analysis of corporate auditing in Australia, focusing on the application of the Australian Auditing Standards under the Corporations Act (2001). Part A examines the types of companies subject to audit, the advantages and disadvantages of a single set of auditing standards, and concludes with an overall assessment. The advantages include strengthening the audit profession and user-friendly audit reports. The disadvantages include concerns of standard manipulation and increased audit costs. Part B presents an audit planning memorandum, identifying major business risks such as high competition, natural calamities, increased feed costs, and reduction in property values. The report also includes an analysis of the results of analytical procedures, offering a detailed overview of the auditing process and its implications for various business scenarios.

Running head: CORPORATE AUDITING
Corporate Auditing
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Part A.........................................................................................................................................2
Introduction............................................................................................................................2
Types of Companies Subject to Audit under AAS and Corporations Act.............................2
Advantages of Company Audits Subject to One Set of Auditing Standards.........................3
Disadvantages of Company Audits Subject to One Set of Auditing Standards.....................5
Conclusion..............................................................................................................................6
Part B..........................................................................................................................................7
Audit Planning Memorandum................................................................................................7
References................................................................................................................................14
Appendix..................................................................................................................................17

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Part A
Introduction
It is required for the business organizations to prepare and present their audited
financial statements so that the users can assess the actual financial performance and position
of them. In this process, the auditors need to comply with the required auditing standards and
principles for auditing the financial statements of the companies. In the recent years, key
attempts have been taken for the development of a single set of auditing standards for all
types of companies (Ismail and Mustapha 2015). In Australia, the obligation on the
companies is to comply with the auditing standards of the Australian Auditing Standards
under Corporations Act (2001). There are three major parts of this report. The first part
discusses about the list of companies that are subject to audit under Australian Auditing
Standards under Corporations Act (2001). The next two parts discusses about the advantages
and disadvantages of having a single set of auditing standards for all the companies. Lastly, a
conclusion is provided based on the whole discussion.
Types of Companies Subject to Audit under AAS and Corporations Act
In Australia, different types of companies are subject to an audit in accordance with
the Australian Auditing Standards under the Corporations Act (2001). They are discussed
below:
 In case an entity is a disclosing entity or registered under the registration scheme of
the Corporations Act (2001), it is subject to an audit in accordance with the Australian
Auditing Standards under Corporations Act (2001).
 The public entities in Australia that are limited by guarantee are subject to an audit as
per the above-mentioned standards. Moreover, the Australian small companies that
are limited by guarantee are subject to audit in compliance with the Australian

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Auditing Standards under the Corporations Act (2001). Australian small companies
limited by guarantee are subject to audit as per the Australian Auditing Standards
under the Corporations Act (2001) in case the ASIC or members request them to
prepare and audit a financial report (deloitte.com 2020).
 The large proprietary companies in Australia that are also subject to an audit in
accordance with the same standards under the Corporations Act (2001) in case ASIC
has not granted them relief from the audit requirements of the Companies Act
(legislation.gov.au 2020).
 The small proprietary companies in Australia along with the foreign controlled small
proprietary companies in Australia that have not received granted relief from the audit
requirements of the Corporations Act are subject to an audit in line with the
Australian Auditing Standards under the Corporations Act (2001).
 The Australian small proprietary companies that are not controlled by foreign entities
need to consider the fact that whether the ASIC has requited them to prepare and audit
a financial statement. These types of small proprietary companies of Australian are
subject to an audit as per Australian Auditing Standards under the Corporations Act
(2001) in case the ASIC and their shareholders required their financial statements to
be audited (asic.gov.au 2020).
Therefore, it can be seen from the above that the business entities of Australia are
required to follow the rules and regulations of the Corporations Act (2001) under the ASIC in
order to be subject to an audit under Australian Auditing Standards.
Advantages of Company Audits Subject to One Set of Auditing Standards
Societies can get certain advantages of all the audit of all the companies are being
subject to a single set of Auditing Standards. Two of these advantages are discussed below:

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1. Strengthening the Audit Profession – The presence of one single set of auditing
standards play a crucial role in strengthening the audit profession as this one single set of
auditing standards largely contribute to the development of strong national and international
economies. It is possible to uplift the overall quality as well as consistency of the auditing
practices in the presence of a single set of auditing standards due to the follow of same
auditing standards by the auditors of all companies irrespective of size and industry (Nicoll
2016). This helps in addressing the complex audit issues in the most uniform manner so that
users of the audited financial statements of all companies can comprehend them easily. All
these aspects increase the trust of the common people on the audited financial statements that
eventually increases trust on the audit profession. In this manner, a single set of auditing
standards help to strengthen the audit profession for all the companies (Bryce, Ali and Mather
2015).
2. User-friendly Audit Reports – Users of the financial statements and regulators alike now
want more information as well as insight on the audited companies and its financial
statements. When there is major value of audit, many also believe that the reports of the
auditors need to communicate more information and insight on the financial performance and
position of the companies (Bryce, Ali and Mather 2015). This is not an open issue as this
indicates towards the question that whether the key risks of an entity need to be
communicated by the auditors. This leads to the need for change in the reports of the auditors
for catering to the needs of the users and regulators. In the presence of this issue, a single set
of audit standards put the same obligation on the auditors of all the companies to report on
the audit issue and key risks areas. This makes the audit reports user-friendly from where the
users can easily access the required information (Boolaky and Cooper 2015).

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Disadvantages of Company Audits Subject to One Set of Auditing Standards
Along with the advantages, there are certain disadvantages of the presence of a single
set of auditing standards for all the companies; and they are as below:
1. Concern of Standard Manipulation – One single standard of auditing for all the
companies provides the auditors with flexibility, but this has also a disadvantage. The
auditors can choose only the audit procedures they wish to incorporate in the auditing of the
companies and this allow them to provide favourable results to the audit clients (Simunic, Ye
and Zhang 2015). Therefore, the audited financial statements fail to demonstrate the actual
financial position and performance of the clients in the mort error-free manner. This situation
makes it easier for both the managements and auditors in incorporating revenue or profit
manipulation in the audit findings so that it become easier to hide the financial issues that
may exist. All these aspects together lead to fraudulent activities in the financial statements of
the companies; such as change the inventory valuation method for showing more income and
others (Fu, Carson and Simnett 2015).
2. Increased Cost of Audit – Before the introduction of a single set of auditing standards,
small companies were not required to prepare and audit their financial statements; but the
introduction of a single set of auditing standards has changed the scenario as now the small
companies are also required to prepare and audit the financial statements (Ferguson, Pinnuck
and Skinner 2016). It is easy for the large business organizations to absorb the cost of audit
like audit fees and others due to their huge income source, only the small business
organizations would feel the burden of these standards as they would be forced to prepare and
audit their financial statements that would cost them huge audit fees. This would create
negative impact on the financial resources of these small companies which would affect their
ability to generate sales and profit for long-term sustainability (Ferguson, Pinnuck and
Skinner 2016).

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Conclusion
It can be seen from the above discussion that developing a single set of auditing
standards for all the companies has both the advantages and disadvantages to the society.
When considering from the overall basis, harmonization in general leads to the reduction of
costs as it makes easier to comply with the laws and regulations. At the same time, it
becomes easier in checking the compliance and enforcing the laws in the audit engagement.
In the presence of a single set of auditing standards for all the companies, the public is
entitled to have a confidence that irrespective of the occurrence of the business activities, the
same auditing standards will be applied for all the companies by the auditors. It is widely
recognized that the users of the audited financial statements such as investors and others will
be more enthusiastic for the diversification of their investments in all types of companies in
case they become able in relying on the financial information gathered as well as audited on a
same set of auditing standards. The corporate governance mechanism of all the companies are
required to be effective as demanded by the application of a single set of accounting
standards; and strengthening the corporate governance meashniam is necessary for avoiding
the occurrence of financial frauds and manipulations by the managements of the companies
or by the auditors. On the overall basis, it can be said that the application of a single set of
auditing standards for all the companies is beneficial for the companies, auditors and users of
the audited financial statements.

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Part B
Audit Planning Memorandum
Date 07.04.2020
To Audit Partner
Prepared By Audit Team
a. Four Major Business Risks
Business risks are the factors that that create hindrances for the business organizations in
achieving their goals and objectives. The following discussion shows four major business
risks of Contessotto Agriculture Limited:
1. High Competition – Contessotto Agriculture Limited has to face major competition in the
international market due to the presence of other companies from the countries like U.S. as
these companies offer lower price as compared to Australia due to government subsidies.
This affects the sale of Contessotto Agriculture Limited as it has not been able in registering
as much as the U.S. companies due to higher price than them. Profitability of the company is
also affected which creates negative influence on the company’s ability to achieve the
organizational goal (Knechel and Salterio 2016).
2. Risk of Natural Calamity – The operation of Contessotto Agriculture Limited has been
majorly affected due to the occurrence of severe drought across both the properties that
majorly affected its ability in the production of adequate feed for its cattle. This has required
the company for purchasing water for stock use which is increasing the cost of the company.
Reduction of sales for increased competition along with the increased costs for purchasing
water has affected Contessotto Agriculture Limited’s ability to register increased revenue and
profitability (Kot and Dragon 2015).

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3. Increase in Cost of Feed –Due to the occurrence of fraught in Australia, Contessotto
Agriculture Limited has witnessed a significant increase in the cost of feed on a continuous
basis. This needs to be considered as a key business risk for the company as this increased
cost of feed affects the profitability of the company by reducing the margin of profitability.
As the company has chosen the strategy of reducing the head of cattle, it had to retrench a
number of its employees. This is a negative aspect for achieving overall goal of the company.
4. Reduction in the Value of Properties – There has been a major decrease in the value of
the properties of Contessotto Agriculture Limited due to the occurrence of drought in
Australia. Reduction in the value of properties has negative impact on the overall financial
position of the organization and this is also a negative aspect for the business of the company.
For this reason, this needs to be considered as a crucial business risk of Contessotto
Agriculture Limited (Kot and Dragon 2015).
b. Analysis of the Results of Analytical Procedures
As a part of the analytical procedures in auditing, three techniques have been used for the
identification of the areas of Contessotto Agriculture Limited’s financial statements that
require additional audit investigation; they are Horizontal analysis of financial statements,
Vertical analysis of financial statements and financial ratios. The results of the analytical
procedures are discussed below:
Statement of Comprehensive Income Analysis – Both the horizontal and vertical analysis of
this statement show that revenues and costs of goods sold have been fluctuated over the three
years. The fluctuation in costs of goods sold is on line with the fluctuation in revenue. This
requires additional audit consideration for analyzing the relation. There is a continuous
decrease in the gross profit and the reasons may be high price from the suppliers, ineffective
inventory management, change in the nature of business such as increase in competition,

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pricing policies and others; thus, further audit investigation is needed (Appelbaum, Kogan
and Vasarhelyi 2018).
Alike gross profit, EBIT has continuously decreased over the years and the reason may be the
increase in the operating expesneses of Contessotto Agriculture Limited. This needs to be
further investigated for acquiring evidence against it. Finance costs have continuously
increased over the year when there has been continuous decrease in the borrowings of the
company for the same period; therefore, this area requires further audit consideration. Net
profit has decreased continuously over these three years that requires further audit
investigation.
Statement of Financial Position Analysis – There is a large increase in cash and cash
equivalents in 2020 and the reason for this need to be investigated. There is also a large
increase in trade and other receivables when major fall in sales can be seen. Increase in
revenue in the presence of fall in sales is unusual which needs further audit investigation.
There is a major decrease in inventory in 2020 even in the presence of major fall in sales.
Since inventories increase due to low sales, inventories of Contessotto Agriculture Limited
require further audit investigation. There is a major decrease in trade and other payables; and
it is large as compared to the cash and cash equivalents and trade and other receivables. The
reason of this needs to be further investigated. Non-current borrowings of Contessotto
Agriculture Limited have continuously decreased over the years, but interest expenses have
increased at the same time. This is unusual and requires further investigation (Glover, Prawitt
and Drake 2015).
Ratio Analysis – Gross profit margin has decreased over the last three years and the reasons
can be ineffective management of inventory, higher price from the suppliers and accounting
errors. This requires further investigation in audit. Net profit margin has a decreasing trend

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over these three years where operating expenses ratio has increased continuously; it means
increase in operating expenses has affected the net profit. Therefore, reason for increase in
the operating expenses needs to be investigated in audit (Moolman 2017).
Inventory turnover ratio of Contessotto Agriculture Limited has continuously increased when
there is continuous fall in gross profit margin that shows ineffective management of
inventory. This mismatch needs to be investigated. Debtor turnover ratio has decreased over
the last three years and the reasons may be deficiencies in credit and collection policies,
possible uncollectability of some accounts, possible fictitious sales, cut off errors and others.
This area need to be further investigated.
The presence of very high current and quick ratio can be seen in Contessotto Agriculture
Limited in 2020 and the reasons may be the build-up of trade debtors because of ineffective
collection procedures and build-up of inventory because of difficulties to sell products.
Therefore, this ratio needs to be further investigated through considering both inventory
turnover and debtors turnover ratios. Debt to equity ratio has a decreasing trend over the last
three years which demonstrates decrease in non-current liabilities, but the interest coverage
ratio of Contessotto Agriculture Limited has also decreased in the present year even in the
decrease in non-current borrowings (Yoon, Hoogduin and Zhang 2015). This needs to be
further investigated in audit.
c. Identification and Explanation of Four Inherent Risks
Based on the analysis of business risks and analytical procedures, four inherent risks of the
business of Contessotto Agriculture Limited are shown below:
1. Contessotto Agriculture Limited is facing a business risk in the form of major
increase in competition; and this business risk leads to inherent risk of decrease in
sales as the competitors from U.S. are offering lower prices to the customers as

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compared to the Australian companies. It affects the level of inventory of the
company as decrease in sales increase the level of inventory within the organization.
This risk cannot be controlled by the internal control of the company (Botez 2015).
2. The financial year of 2020 was a challenging year for the business of Contessotto
Agriculture Limited as the occurrence of draught affected its ability of sufficient feed
for the cattle. Since the company had to purchase large amount of water due to dry up
of the dams, the inherent risk is the increase in the expenses of the company as it had
to purchase large amount of water. This risk cannot be controlled by the internal
control of the company (Heltzer and Shelton 2015).
3. It can be seen from the business risk analysis that the value of the properties of
Contessotto Agriculture Limited fell due to the occurrence of draught and it leads to
the inherent risk of the impairment of values of the properties. This inherent risk can
be considered as the risk where the values of the properties of Contessotto Agriculture
Limited decrease as compared to the current market value of those same properties.
This inherent risk cannot be reduced with the help of internal control (Chen et al.
2017).
4. It can be seen from the ratio analysis that the inventory turnover ratio of Contessotto
Agriculture Limited has continuously increased over the last three years even when
the sales was continuously decreasing. This indicates towards the presence of inherent
risk that the company has failed in collecting the dues from the customers which
contributes towards increasing the amount of trade receivables. This is a crucial
inherent risk that cannot be controlled with the help of the company’s internal control.
d. Identification of Key Accounts and Key Related Assertions
Each above-identified inherent risk of Contessotto Agriculture Limited involves one accounts
and assertion that is at the risk of material misstatements; and these are discussed below: