BAO3306 Auditing: Audit Planning, Risk & Materiality Assessment

This report provides an audit plan for Nanosonics Limited, focusing on understanding the company, assessing significant accounts, determining planning materiality, and evaluating potential risks. The audit plan identifies key areas of risk, including sales of goods and services, derivative financial instruments, trade and other receivables, impairment, and operating income before tax. Analytical procedures are used to identify accounts with a high risk of material misstatement. The report concludes by summarizing the key findings and recommendations for the audit, emphasizing the importance of a thorough risk assessment to ensure the financial statements present a true and fair view of the company's financial position. Desklib offers a range of solved assignments and study resources to support students in their academic endeavors.

ASSIGNMENT
BAO3306 AUDITING
REPORT

Semester 1, 2018
Contents
Executive summary....................................................................................................................2
Introduction................................................................................................................................3
Key information.........................................................................................................................4
Our understanding of the client..............................................................................................4
Our assessment of significant accounts..................................................................................4
Our planning materiality........................................................................................................7
Our assessment of what can go wrong...................................................................................8
Conclusion..................................................................................................................................9
Appendix..................................................................................................................................10
References................................................................................................................................12
Executive summary
Financial statements of the company represent the financial positions at the end of the
year and the financial performance for the reporting period. Through this financial
positions and the financial performance, the company’s health is verified and
considered and accordingly the necessary action takes place. Auditing of the same
financial statements is done on yearly basis so as to ensure that the financial
statements confirm the true and fair view of the state of affairs of the company. The
report has been prepared with the three major aims. First aim is to gain an
understanding of the company of whom the audit has been planned. Second major aim
is to assess and identify the risky accounts which the account which has been
materially misstated. Third major aim is to identify these risky accounts with the help
of the financial statements which are the part of annual report of the company. Last
and the major aim are to identify and assess the audit risk which is referred to as what
can go wrong if the material misstatements remain present or remains undetected.
With these four major aims in consideration, the report has been prepared with the
proper divisions and subdivisions if necessary.

Introduction
As the title of the report suggest, the whole report will be revolved around the audit.
Without the audit of the financial statements of the company no users, including the
stakeholders of the company and shareholders of the company will not rely upon the
financial working and the condition of the organisation. Therefore, audit is defined as
the backbone and supporting hand to the functioning of the organization. Audit
includes the independent function which involves the checking and verification of the
books of accounts. Before starting of an audit, the auditors shall develop the audit
plan. The audit plan includes the activities that are required to be performed and
majorly includes the heads of accounts which are required to be checked on an
independent basis. Heads of accounts are classified on the basis of the materiality of
the items present therein and in case any further decision is required then the same
shall be adopted and implemented frequently.
For the purpose of the report the company – Nanosonics have been selected. At first
the knowledge of the company is required to be done as to the name of company, its
origin, date of incorporation, purpose of the company. Thereafter, from the annual
report of this company, five significant accounts have been identified and obtained in
addition to the item, included in five able, the most significant accounts which are the
high risk level. Then the materiality level has been judged for each of the items so
identified level has been selected for the month of March 2018. After that what can
go wrong in each of the item has been discussed in detail with respects to the process
of the audit risk assessment. Then the report will end after the conclusion and
interpretation.

Key information
Our understanding of the client
The company selected for the purpose of the report is the Nanosonics Limited. It
has been head quartered in the area of Sydney, Australia. The company is the
listed company which is listed in the recognized stock exchange of Australia and
therefore all the provisions of the listing rules will be applicable. It has been
established in the year of two thousand and one and listed in the year of two
thousand and seven.
The company is engaged in business of providing the services in relation to
prevention of the infection present in the hospitals and is regarded as the
innovator. The company has developed the major product Trophon, which is
regarded as the solution which is universally applicable for reducing the way
where the cross introduction of the patients will not happen and also helps in
preventing the Healthcare Acquired Infections.
In the year of two thousand and nine, the company has introduced the new
technology namely Trophon. It is the unique and the updated technology for the
surface of ultrasound probes and for the intra cavity. Since the company has been
growing with high pace, in the year of two thousand and fifteen the company
name has been mentioned in the Australian Stock Exchange list of top three
hundred companies and mentioned as ASX 300 index. As of current date, the
company has the offices in North America, Canada, United Kingdom and Europe
with the employment of more than one and hundred sixty five.
The company prepares the annual report of the company and publishes on it
website on yearly basis. Along with the annual report the company also declares
the half yearly and quarterly results. The financial statement of the company has
been ended up with the 30th of June 2017 (Company Official Website, 2017).
Therefore, judging the financial analysis.
In the audit plan, the nature of the business of the company along with the history
so as to enable the team members to have the quick understanding of the business
of the client which will make them to audit the document at very ease (Ullah ,
2014). :
Our assessment of significant accounts
In this head, the annual report of the company will be discussed on
detail as to how the identified items of the financial statement are
more prone to the risks and that risk pertains to the material
misstatements. Material misstatements are referred to as the situation
whereby its presence nay leads to the ineffective and inefficient
making of decision. Therefore, these material misstatements shall be

taken as serious and with proper care otherwise the financial
statements will not serve the purpose of the users of the financial
statements rather will remain only the formality. The significant
account has been analysed through the analytical procedures.
Analytical procedures is first step towards the audit planning as it will
help the auditors to have an understanding of the business of the client
and the changes that the company has made from the previous year.
This has further helped the company to have the areas listed where
there are the chances of having potential risks. The significant
accounts are as follows:
- Sale of Goods and Services – In the consolidated statement of
profit and loss and other comprehensive income, the sale of goods
and services have been considerable increased from 42796
thousand dollars from the financial year ending 30th of June 2016 to
67507 thousand dollars in the financial year ending 30th of June
2017. There has been 57.77 percentage increases in the sale figure
from 2016 to 2017. The increase is considered as the drastic
increase. As pee the note number 2.1 of the annual report of the
company, the revenue of the company has been increased because
of the increase in the business located at North America. In this the
revenue has been increased from 39029 thousand dollars from the
financial year ending 30th of June 2016 to 62305 thousand dollars
in the financial year ending 30th of June 2017. No other explanation
has been given by the company nor has any note been disclosed in
the annual report of the company due to which from the point of
view of the auditor the same shall be treated as the one having the
risk of material misstatement. It is because of the sure assumption
that any form of manipulation might have been to generate the
higher revenue either due to some debt covenant or because of any
other means (ACCA, 2016).
This shall be considered as one of the high risky accounts as only
because of this inflation only many businesses have been collapsed
during the year.
- Derivative Financial Instruments – In the consolidated statement
of financial position and other comprehensive income, the amount
of the derivative financial instruments have been considerable
increased from 35 thousand dollars from the financial year ending
30th of June 2016 to 338 thousand dollars in the financial year
ending 30th of June 2017. There has been a manifold percentage
increase in the sale figure from 2016 to 2017.

It has been mentioned in the annual report that the company uses
the derivative financial instruments in order to hedge the currency
exposure. Derivatives are defined as the asset which defines the
value of the asset on its own. It includes forwards, options, futures,
forward contracts, etc. The foreign exposure has hedged to the
great extent. The forward exchange of contracts shall be of lesser
amount and with the change and shall not be of higher amount. The
hedge shall be diversified. As keeping all the money at one place
will only be at risk always. It is because if the place where all the
currency have been kept and in case of any uncertain event the
company will be in higher loss.
Therefore, in this way the company’s exposure to foreign currency
is at risk.
- Trade and Other receivables- The next account which can have
the material misstatements is the trade receivables. It is because of
the fact that the trade receivable in proportion to the increase in
sale of goods or services is very less. It is because of the fact that
most of sales that are made have been received in cash or cash
equivalents. The major risk is that the company is not able to
collect the amount from customers due to which there always be
the liquidity risk and there will be the risk of having the debtors as
time barred and after that the company will have the right to not to
make payment and will therefore write off the trade and other
receivables amount. Secondly the company is not able to collect
cash from customers which are pending for so long. New sales
have been made and cash has been received from them. It means
that the company’s cash collection policy is very liberal and will in
this way lead to big fraud (Anastasia, 2015).
- Impairment- As per the note to the financial statements of the
company, the company has not charged any impairment during the
year. It means that all the assets of the company meet the criteria of
impairment and there has been no need of charging the impairment.
It is because of the fact that recoverable amount will be less than
the cost of property plant and equipment. Impairment is calculated
after deducting the carrying amount and the recoverable amount. In
case the recoverable amount is lower than the carrying amount then
the carrying amount shall be reduced till it achieves the minimum
level of recoverable amount. No mention has been given for the
calculation of the recoverable amount and impairment thereon.
For the calculation of the impairment of assets the cash generating
units are identified, the present value of cash inflows will be

defined and then the carrying amount will referred and compared.
In case any impairment is identified then the necessary adjustment
shall be made.
Thus, the impairment is the very important factor and it delivers
the exact value of each item of the property plant and equipment.
The risk will be present in terms of the value of the property plant
and equipment. .
- Operating Income before Tax - Last item which has been
considered for the study from the annual report of the company for
the risky head is the operating income before income tax. In the
given case, the company has achieved the operating income before
tax as dollar 13852 thousands in the year ending 2017 whereas in
the year ending 2016 the company achieved the amount of dollar
136 thousand. With the corresponding increase in the sales
income, the profit income has been increased due to which it
depicts that the expenses have not been increased considerably. It
exhibits that there has been some risk associated with the figure of
the profit before tax and the same is required to be looked after.
Our planning materiality
As analytical procedures helps in making the comparison intercompany as well as
Intra Company through the figures stated in the financial statements. Through
these figures the materiality can be judged so as to plant the audit.
The term materiality is concerned with the importance of the item present in the
financial statement of the company and its effect on its presentation of the
financial statements. If the item is material then it will be disclosed separately in
the financial statements so that the users of the financial statements of the
company can have the better idea as to how the same has been dealt with it. While
planning the audit, the materiality concept shall be considered in full and no
deviation shall be there as without following the materiality concept the plan
could not be made and cannot be streamlined. Thus, the materiality levels shall be
defined and presented in the concise manner so as to enable the users to have the
idea as to how to perform the further functions of audit. The level of materiality is
set by the Audit manager of the firm and then it shall be informed to each and
every member of the audit firm. For each of the following heads of the financial
statements of the company, the following material level has been created and
mentioned below:
- Revenue from Sale of Goods or Services – the materiality level shall be kept
as high because of the reason that the revenue has increased manifold and
accordingly the net profit has been increased and secondly with the increase in
the revenue of goods and services the chances of manipulation is high and
hence it has been treated as high material items (PCAOB, 2017).

- Derivative financial instruments – In the changing market conditions specially
the currency market, it is very dangerous to have the currency exposure at
such high levels and secondly if there is the reasonable doubt of believing that
it might be at risk then the materiality level shall be kept at high and not low
or medium.
- Trade receivable and others – The movement of the debtors and the
receivables shows that there has been irregular flow of transaction. The
company is receiving the cash from current sales and the debtors which are
pending from years is not being properly managed due to which the level of
debtors are high in comparison with the earlier years. Therefore, in this case
the materiality level shall be kept as medium as there will not be the major
effect in the financial statements.
- Impairment - The Company has not done the impairment testing and
calculation. The impairment shall be done on a yearly basis. There will always
be something in market known as the impairment indicators, which help the
company to judge whether the particular asset shall be impaired or not.
Whether there are indicators or not, the company shall make the calculations
as the impairment will reduce the cost of the assets. Thus, impairment shall be
kept at high level because of the fact that it has the impact of reducing the
value of the assets.
- Operating Income before tax – The materiality level shall be high. It is
because; the operating income has been increased manifold and has led the
company into the profit making company by 13716 dollars thousand from the
sales increase of 17989 dollars thousand. Thus, in this manner the operating
income before tax is material for the purpose of the audit planning.
Our assessment of what can go wrong
Following things can go wrong out of the five accounts selected for
checking of the most risky accounts.
- The balances of debtors may be found as accurate. It is because of
the fact that the debtors which is showing as outstanding as on 30-
06-2017 may contain the debtors from the current sales and the
balance pending from earlier debtors might have been received in
the current year as the cash collection from customers. If this is the
case then the materiality level be low and it will not have any
serious impact on the auditing treatment of the company.
- The sales figure as shown by the financial statements of the
company may be found correct. It is because of the factor of
increase in demand. If this is the case then there will be less
chances of manipulation and therefore the materiality level which
earlier was recognised as the high will now get converted into low
level.
- The third instance which can go wrong is the impairment. If at the
end of the reporting period it is observed that the property plant

and equipment is not liable to be impaired due to the fact that no
indicator is present for the assets. As and when the impairment
clause is corrected the high level of materiality will get transferred
to the low materiality level.
- The fourth instance which can wrong is of the derivatives of
financial instruments. As there will always be the risk of having the
foreign currency and for hedging that risk everyone enters into the
derivatives through which their foreign currency exposure gets safe
and there will not be any loss depending upon the market
conditions. As per the given market scenario, the foreign currency
can have the material effect but in case the market goes in favour
of the company then there will be the chances that it may be
removed from the high materiality items to the low material items.
In this manner, if something go wrong, these will be the results and
appropriate changes in the materiality level of the audit plan.
Conclusion
The annual report of the company contains the financial statements of the company
along with the director’s report and the auditor’s report. The financial statement
consists of the balance sheet, statement of profit and loss and cash flow statement.
The company – Nasonics Limited though is the listed company in Australia but still
there are accounts which are prone to the material misstatements and these accounts
are required to be checked at time of the audit as to whether these areas and material
misstatements are present or not and accordingly the plan has been developed. In
order to conclude the report, it has been exhaustive one and have detailed the similar
observations.
Therefore, it is recommended to have the audit done in accordance with the Auditing and
Assurance standard.

Appendix
NANOSONICS LIMITED
(Amount in
thousand dollar)
S. No. Particulars 2017 2016 Increase / (Decrease)
1 Statement of Financial Position
Trade and Other Receivables 8923 7734 1189
Derivative Financial Instrument 338 35 303
2 Statement of Profit and Loss
Sales 67507 42796 24711
Impairment 0 0 0
3 Statement of cash Inflows
Receipts from Customers 67816 41243 26573
1.