Developing an Audit Program for Austal Limited (HA3032 Project)

This project focuses on developing a comprehensive audit program for Austal Limited, an Australian-based publicly listed company. The introduction provides an overview of audit plans and their importance, followed by a company overview including its nature, industry, and associated risks like market, credit, and liquidity risks. The main body delves into the selection of the company, financial performance analysis using ratio analysis (current, quick, and debt-equity), and the identification of material account balances. The project includes the selection of ten material account balances, relevant financial report assertions, and the design of a detailed set of audit work along with a sampling plan. The report also addresses the audit risk model, including inherent, control, and detection risks, and their impact on audit procedures. The analysis spans the company's financial performance over three years, concluding with a summary of the audit process and key findings.

“Developing an Audit Program for a
selected publically listed Company”

INTRODUCTION...........................................................................................................................2
MAIN BODY..................................................................................................................................2
1. Selection of the Australian listed company for the current ASX list and Gaining
understanding of nature of entity and its industry.......................................................................2
2. Performing analytical process of statement of financial performance....................................6
3. Discussion of account balances which are consider Material.................................................8
4. Selection of ten different material account balances...............................................................9
5. List of relevant financial report assertions.............................................................................10
6. Designing of comprehensive set of audit work.....................................................................11
7. Formulation of sampling plan................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15
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INTRODUCTION
The audit plan is a basic guideline that must be implemented when performing an audit. It
allows the auditor to collect adequate proof of the circumstances, works to keep audit fee at a fair
level and helps to prevent misinterpretations with client (Al‐Sukker and et.al., 2018). It is useful
for several stakeholders such as investors and shareholders because, only with aid of it, they will
evaluate whether or not the business in which they have put their money is using them
appropriately. For the better understanding of this audit concept, Austal industry limited that is
Australian based public listed company which founded in 1988. This project report covers
numerous topics including the essence of the company and the market, the analysis of specific
business risks, the analysis of the financial situation of the company with aid of the evaluation of
the ratio and the balance of accounts that can be considered to be content. In addition to this, ten
separate content accounts, financial statements for them, the development of a detailed collection
of auditing process and sampling plan are also covered in this paper.
MAIN BODY
1. Selection of the Australian listed company for the current ASX list and Gaining understanding
of nature of entity and its industry
Company Overview:
Austal Limited is an Australian based multinational ship constructing company founded in
1988 and a defence prime contractor specializing in the design, development and support
of defence and industrial vessels. Austal's range of products includes military boats, high-speed
ship and truck ferries and specialized service boats such as offshore wind farms and staff transfer
vessels. Since early 2017, Austal has designed and manufactured over 260 ships for
various defence and industrial fleet operators. Clients also include Australian Border Force, the
Royal Australian Navy, Condor Ferries, the Royal Oman Navy, Mols Linien of Denmark and the
United States Navy.
Nature of the entity:
Austal is international ship building organization that is related to the defence sector and
the total contribution of this Australian Company in the Australian GDP is approximately $3.2
billion (Ash and Watson, 2018). It is such a large organization which contributed enough in the
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country’s development through providing employment and offer several products which are used
by the different defence services.
In context of large organization such as Austal Limited, there are several risks which
organization currently faces while performing their operational activities. Some of the risks are
as follow:
Market risk: It is the risk that now the value of money could reduce depending on market
factors. Market risk is often referred to as "systematic risk" because it refers to variables such as
a depression that have an effect on the whole market. In relation to Austal Limited, market risk
affects the organization such as increase or decrease in interest rate, fluctuation in the foreign
currency rate etc.
Credit risk: It is the risk of monetary loss to the Company as a result of failure of
consumers or market participants to comply with their obligations. The Austal Limited Group is
subject to counterparty risk from commercial as well as other accounts receivable and financial
asset contracts which are pending at the end of the reporting period.
Liquidity risk: In this liquidity risk, the corporation will not be able to pay it back its debt
obligation or fulfil any working capital obligations if appropriate. This form of risk can arise
when a company fails to produce adequate financial resources to pay off all short-term debts. In
relation to Austal Limited, the Group's liquidity position is handled to ensure that adequate liquid
resources are invested to fulfil its financial obligations in a timely and cost effective way (Briem
and Wald, 2018). In case, management are not able to anticipate the financial needs of
the organization properly, as they can lead in insufficient income generation methods.
The possibility of material mis-statement is a form of mistake that may be made
voluntarily or unintentionally by professional accountants while preparing financial statements of
the company for the particular period. This may lead in an unsuccessful composition of the final
accounts. There are some reports in which there could be material misstatement in annual report
of Austal Limited Company. These are all including assets, like current, fixed non-current,
liabilities like current, long-term, short-term etc. In all these aspects of the financial reporting,
there could be a chance of misstatement of material.
Inherent risk: This risk could be attributable to the vulnerability of a statistic to
misstatement because to the complexity of the risk. Estimates of the future are known to be
elements that might trigger this form of danger because they demand evaluation. There are many
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variables that can have an effect on Austal Limited due to the size of the deal generated by the
firm, the number of transactions, the liquidity performance or position, the current accounting
rules and arbitrary assumptions. The ranking of such a risk to the company is high because there
is a high likelihood of adjustments to all the variables that will affect it.
Control Risk: This can be described as the possibility of materially incorrectly structured
financial reports caused by the failure in the method used to detect prevention and manage them.
The factors influencing the control risk of Austal Limited and the atmosphere of the organization
wherein the business operates, the nature and efficacy of control systems and controlling
procedures. The rating of such risk for Austal Limited is medium, as the potential for changes in
the market climate and other factors is moderate.
Audit Risk Model:
This model has been developed to help companies recognize concerns that can arise in
audits (Day and et.al., 2018). There are several top accounting controversies that show the
significance of such audits. The audit risk model is divides the risks to be handled in the audit
through three basic sections. The three major components of this audit risk model are Control
Risk, Detection Risk and Inherent Risk.
Formula:
AR = f(IR, CR, DR)
IR = Inherent Risk
CR = Control Risk
DR = Detection Risk
In order to evaluate all forms of errors, the audit risk model may be evaluated as follows:
In relation to Austal Limited, this audit risk model used mostly by accounting staff to define the
various components of the audit that are as follows:
Elements IR CR Amount of evidence
required
Inventory Medium High Medium
Trade and other receivables Medium Medium Medium
Cash and cash equivalents High Low Medium
Trade and other payables Medium Low Medium
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Prepayments Low Very low Low
Property, plant and equipment Very low Low Low
Derivatives Low High Medium
Restricted cash Low Very low Low
Financial liabilities High Medium High
Provision for rehabilitation Very low Low Low
Employee entitlement provision High Medium Medium
Equities Very high High Very high
Progress and prepaid sales Low Low Low
Liabilities in relation of acquisition Medium High Medium
From the analysis of above table, it is required to evaluate that how it will affect the
assessment of detection and audit risk. These are discussed below:
Detection risk: This is the risk where auditor fails to recognize the misstatements in the
entity's financial reports (Dumay, La Torre and Farneti, 2019). These all errors may be produced
in the accounting records of Austal Limited on the basis of a number of reasons, including such
error or mistakes. On the basis of above table, there are some risk identified related to cash and
cash equivalents, trade receivables, production and investment funds, stock, trade payables,
employee entitlements and transaction liabilities.
Audit risk: This risk can be opposed as a danger that can significantly contribute to the in-
correctness of the financial reports and the audit assurance that all reports or individual
accounts are error-free. In order to minimize this risk, accounting experts of Austal Limited
perform audits on an annual basis. The above table notes that certain audit risk factors are
other current assets, financial obligations, equities etc.
The evaluation or assessment of the audit and detection risk could be influenced by a
higher or lower inherent and control risk rating. If there is a high probability, the auditor will be
able to identify and report inaccurate statements. According to the above analysis, this has been
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determined that 10 risks that perhaps the company needs to concentrate on are cash inflows,
trade receivables, development and appraisal properties, inventory, employee compensation
provision. In addition, acquisition obligations, other existing assets, capital liabilities, equities,
etc.
2. Performing analytical process of statement of financial performance
In order to evaluate their annual performance on the basis of financial performance of the
company, organization needs to implement ratio analysis. It helps in identifying financial
position as well as performance of last three years in relation to Austal Limited. By using ratio
analysis, organization able to evaluate overall performance and these are as follow:
Ratio Analysis: It is a method used to evaluate the several items of the entity's financial
reports. There are certain basic ratios that are determined by the accountants of Austal Limited to
assess the financial position of the firm (Engelbrecht, Yasseen and Omarjee, 2018). All estimates
are as follows which based on the identified risks of the company:
Current ratio: In the most corporate organisations, this ratio is determined for the aim of
analysing the liquidity of the company. With the help of Austal Limited, accounting
professionals will be able to analyse whether or not the company would be able to cover its short
term obligations within one year with the support of its current assets.
Formula:
Current ratio = Current assets / Current liability
Particulars 2017 ($‘000) 2018 ($‘000) 2019 ($‘000)
Current assets 422,404 519,570 681,088
Current liabilities 238,908 388,923 474,663
Current ratio 1.76 times 1.33 times 1.43 times
Above calculated ratio of Austal Limited shows the fluctuated results which means
organization is not stable regarding their financial performance. Overall performance is not good
because idea ratio should 1:1 which they need to maintain for fulfilling their short term
obligation which required to pay within a year.
Quick ratio: This ratio is determined to evaluate the relationship among the various
current assets and the firm's short-term obligations (Gillin and et.al., 2019). With the aid of its
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administrators, it will evaluate whether or not Austal Limited will be capable of paying all its
current liabilities within one year.
Formula:
Quick Ratio = Quick assets / Current liabilities
Particulars 2017 ($‘000) 2018 ($‘000) 2019 ($‘000)
Quick assets 241619 259373 500933
Current liabilities 238,908 388,923 474,663
Quick ratio 1.01 times 0.66 times 1.05 times
It has been analysed that quick ratio of Austal Limited is fluctuated from last three years.
This ratio indicates the liquidity position of the organization as well as financial performance to
meet its short term liabilities which required fulfilling immediately.
Working Notes:
Particulars 2017 ($‘000) 2018 ($‘000) 2019 ($‘000)
Cash and cash equivalents 150,471 162,024 275,665
Trade and other receivables 91,148 97,349 225,268
Quick Assets 241619 259373 500933
Debt equity ratio: It is measured for the aim of evaluating the financial leverage of the
company (Groomer and Murthy, 2018). It is primarily used in investment banking to determine
the extent to which the company uses finance to conduct all its operations by equity and debt. In
Austal Limited, administrators use it to demonstrate the suitability of an entity's internal
obligations to meet all debts.
Formula:
Debt equity ratio = Debts / Equities
Particulars 2017 ($‘000) 2018 ($‘000) 2019 ($‘000)
Debts 187560 118818 130095
Equities 456,914 548,960 630,783
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Debt equity ratio 0.41 0.21 0.20
Above calculated ratio indicate that, company is under performing but management try to
maintain to improve their performance and get the sustainability in their financial performance.
Total assets to equity ratio: It is primarily used in order to calculate the proportion of
assets held by the shareholder's equity. In Austal Limited, this ratio is being used by managers as
a measure to define the leverage of the organisation used to fund the company.
Formula:
Total assets to equity ratio = Total assets / Equities
Particulars 2017 ($‘000) 2018 ($‘000) 2019 ($‘000)
Total assets 960001 1144183 1327301
Equities 456914 548960 630783
Total assets to equity ratio 2.10 2.08 2.10
From the above calculation of total assets to equity ratios show good and stable financial
performance which is beneficial for the organization to attract more potential investors. overall
financial performance of Austal Limited is stable which shows the consistency in their overall
performance and provide stable profit as well.
3. Discussion of account balances which are consider Material
Materiality of accounts can be characterized as the condition in which the financial report
is deemed to be material leading to mistakes in the details reported therein (Jackson, 2018).
There are different accounts that should be listed as material due to errors in their balances
documented in the corporation's final accounts and defined in the table of audit risk model. In
context of Austal Limited, some of the particular accounts that may be reported as material such
as cash and cash equivalents, other current assets, trade receivables, derivatives, prepayments,
inventories, etc. In addition to these, most of the other liabilities that may be reported as
materialism are trade and other obligations, financial liabilities, Equity, employee entitlement
clause etc.
The purpose of materiality for planning is determined by reviewing all the components of
the financial reports to ensure that the amounts that are reported are true and reliable or not.
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When measuring it, the following considerations are regarded and the higher percentage value
is selected for making plans:
 2 to 5% of internal liabilities
 1 to 2% of total assets
 5 to 1% of revenues
 5 to 10 % of net profit and
 1 to 2% of gross profits
When any investor thinking about investing in any organization such as Austal limited, so
initially they analyse the every component of company’s final accounts (LITTLE and Lehkamp,
2018). After analysing financial position of the organization, if they found it profitable for their
investment then they will invest it or they can refuse to make any kind of investment in this
organization because of poor performance in profitability aspects.
4. Selection of ten different material account balances
There is a list of different martial account balance of last three accounting period of Austal
limited, It is mentioned below:
Assets
Account name 2017 ($‘000) 2018 ($‘000) 2019 ($‘000)
Cash and cash
equivalents 150,471 162,024 275,665
Trade and other
receivables 91,148 97,349 225,268
Derivatives 1,051 1,608 1,932
Prepayments 6,077 7,557 9,480
Inventory 170,422 246,509 167,042
Liabilities
Trade and other
payables
141,465 177,848 202,308
Borrowings 186,487 112,520 122,543
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Equities 456,914 548,960 630,783
Provisions 2,864 1,546 1,707
Derivatives 1,073 6,298 7,552
5. List of relevant financial report assertions
Below mentioned list provide the financial report assertions for every material account and
these are as follow:
Assets Assertion Application of selected assertion
Cash and cash equivalents Accuracy This is not practically possible for entities to predict
real cash receipts that may differ due to poor or
questionable debts.
Trade and other
receivables
Existence Most of the time, the sum of such receipts is earned
after a lengthy time due to bad debts, so that it can be
materialistic due to the incidence of the receivable.
Provisions Classificat
ion
It is the estimated amount of future expenses and
secures that amount as per the future requirement
(Oussii and Taktak, 2018). So organization can make
several numbers of provisions as per their connivance.
Derivatives Uncertain It is a short term contract between two parties and the
price of derivation can be fluctuated according to the
value of assets. in the balance sheet, there is no
specification regarding the each small investment.
Inventory Existence This assertion is applied on the organization, where
organization required adequate amount of inventory to
produce products and further converted them into cash..
Trade and other payables Understan
dability
Since all the accounts payable are reported in one
single account, the problem will be raised for
participants to analyse the financial reports and to
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establish materiality.
Borrowings Rights and
obligations
All obligations are reported in two balance sheet
sections that are current and non-current liabilities. This
is not in compliance with financial reporting
responsibilities so that it may contribute to materiality.
Equities Understan
dability
This account can result in materiality having the ability
to recognize, since there are different figures that are
reported under this heading (Sellar and Gulson, 2018).
Derivatives Completen
ess
Organizations can generate many derivatives which can
create error. This is a short term agreement between
two participants and the value of the derivative can
differ depending on the price of the properties.
Provisions Valuation Estimation of provision can also generate error for the
organization. This is the expected sum of potential
spending and guarantees the sum when needed in the
future.
6. Designing of comprehensive set of audit work
Assets Audit Work Steps Explained
Cash and cash equivalents  Initially, all the account balances under the heading cash
& cash equivalents shall be checked, including
transactions related to foreign currencies.
 Receiving evidence, such as written records, of all
activities reported on the financial reports.
 At the end of the day, so all records are assessed to ensure
that they fit the evidence.
Trade and other receivables  Perform an audit to determine the sum reported in this
account (Smith and et.al., 2018).
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 Comparing balances with ledgers, evaluate balances.
 Analysing whether or not the poor and questionable debts
deduction are sufficient.
Provisions  Reviewing all the data documented in the main heading.
 Verifying if all of them seem to be genuine or fake.
 Ask management continue providing evidence, such as
reports, of every non- current asset’s items.
Derivatives  Check every small investment which comes under this
heading and create balance for non- current assets.
 Also review that, recorded amount should be right and
there is no alteration with figures.
Inventory  Check the balance of the final account.
 Analysing all documents of particular account, such
as invoices, inventory reports, etc.
Liabilities
Trade and other payables  Perform an overview of all the information published in
this report in order to confirm their appropriateness (van
Staden and Haslam McKenzie, 2019).
 Analysing whether or not the number is accurate with the
aid of key audited financial statements such as journals,
booklets, etc.
Borrowing  Separating the accounts reported under this heading in
order to verify their truth.
 Measure that the sums reported are sufficient with the aid
of primary accounts, including such ledger accounts.
Equities  Reviewing the financial statements for accurate details on
all shares.
 Overview of information obtained from various sources,
including financial reports.
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 The company's analysis followed all the legislation to
report the sums of equities.
Provision  Reviewing the closing balances of every account in the
past year's annual report.
 Analysing that all of the account balance will be made in
accordance with the statute.
 Ensure that the exact sum is reported in them.
Derivatives  Verifying the amount relevant to the non -current
liability is acceptable or not with the final accounts of the
company.
 Verification of the classification of each and every
product, such as the business contract.
7. Formulation of sampling plan
Assets Sample Size
Cash and cash equivalents Invoice, deposit slips, bank statements and payments of a regular
and substantive nature, including contra products, cancelled
checks and discontinued payments. These are the items or
activities where errors can be identified which affect the entire
account balance.
Trade and other receivables Credit memos, deductions or clauses for uncertain accounts, bank
deposits, invoices for large and regularly traded groups.
Derivatives Balances of small securities which come under current assets
balance.
Provisions Some fixed proportion which is going too transferred into
particular provision account.
Inventory 100 per cent of the properties whether they are from other groups
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and represent different objectives.
Liabilities
Trade and other payables Borrower account balances, bank account statements and
transaction details of a regular and significant nature.
Borrowings Accounts related to all future obligations and clauses, reports of
meetings, articles of association, overall accounts and balance
sheets.
Equities 100% of Equity Accounts with large stakes in Austal limited.
Derivatives Total 100 per cent of derivatives account balance.
Provisions 10% secured in this provision account to meet unexpected
expenses which can occur anytime.
CONCLUSION
On the basis of above discussion, it has been concluded that the audit program is a type of
strategy which developed by the auditor to ensure that the statistics reported in the firm's final
reports are accurate or not. There are different types of risks that may influence the performance
as well as accuracy of resulting accounts. They are essential in audit, identification and control.
In order to minimize them, it is important for the accountancy profession of the businesses to
identify certain factors which can affect them. There are the business conditions, exchange rates,
liquidity, new accounting standards and so on. Materiality has become one of the big threats that
the company's accountants need to concentrate on. There are numerous statements of
comprehensibility, valuation, category, etc. that are applied to each account that has materiality.
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REFERENCES
Books & Journals
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Ash, A. and Watson, I., 2018. Developing the north: learning from the past to guide future plans
and policies. The Rangeland Journal, 40(4), pp.301-314.
Briem, C. R. and Wald, A., 2018. Implementing third-party assurance in integrated
reporting. Accounting, Auditing & Accountability Journal.
Day, A. and et.al., 2018. Standards of practice in domestic and family violence behaviour change
programs in Australia and New Zealand. Australian and New Zealand Journal of Family
Therapy, 39(4), pp.501-513.
Dumay, J., La Torre, M. and Farneti, F., 2019. Developing trust through stewardship. Journal of
Intellectual Capital.
Engelbrecht, L., Yasseen, Y. and Omarjee, I., 2018. The role of the internal audit function in
integrated reporting: a developing economy perspective. Meditari Accountancy Research.
Gillin, L.M. and et.al., 2019. Teaching companies how to be entrepreneurial: cultural change at
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Groomer, S. M. and Murthy, U. S., 2018. Continuous Auditing of Database Applications: An
Embedded Audit Module Approach1. In Continuous auditing. Emerald Publishing
Limited.
Jackson, D., 2018. Developing graduate career readiness in Australia: shifting from extra-
curricular internships to work-integrated learning. International Journal of Work-
Integrated Learning, 19(1), pp.23-35.
LITTLE, H. T. and Lehkamp, J. M., 2018. The Development of Audit Quality
Indicators. Archives of Business Research, 6(1), pp.8-25.
Oussii, A. A. and Taktak, N. B., 2018. The impact of internal audit function characteristics on
internal control quality. Managerial Auditing Journal.
Sellar, S. and Gulson, K.N., 2018. Dispositions and situations of education governance: The
example of data infrastructure in Australian schooling. Education Governance and Social
Theory: Interdisciplinary Approaches to Research, pp.63-79.
Smith and et.al., 2018. Developing open employment outcomes for people with an intellectual
disability utilising a Social Enterprise Framework. Journal of Vocational
Rehabilitation, 48(1), pp.59-77.
van Staden, J. W. and Haslam McKenzie, F., 2019. Western Australia's Royalties for Regions
program: a policy response to growth, regional neglect, and perceived
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Online
Annual report of Austal limited. 2018. [Online]. Available through:
<https://investor.austal.com/static-files/6aa9d4f2-2a67-4416-a56c-dbf792a15f09>
Annual report of Austal limited. 2019. [Online]. Available through:
<https://investor.austal.com/static-files/135a4c3a-10f5-407e-8631-db3573410bbe>
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