AUDIT AND ASSURANCE REPORT: High Tech Ltd Financial Assessment

This report presents an audit and assurance analysis of High Tech Ltd, an electronic component producer facing financial challenges due to supplier issues and a major debtor's financial downturn. The report identifies two key account balances at risk of material misstatement: long-term debt and shareholders' equity, detailing the associated key assertions at risk (existence, rights and obligations, completeness, and valuation). It provides a rationale for these risks and outlines substantive tests to address them. Furthermore, the report examines two key going concern factors at risk and suggests substantive tests to mitigate these risks. It also identifies a related party transaction factor that could increase the risk of material misstatement and concludes with an overview of the findings, referencing relevant accounting standards and principles. The report highlights the importance of assessing financial health, managing risks, and ensuring accurate financial reporting.

Running head: AUDIT AND ASSURANCE
Audit and Assurance
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Table of Contents
Introduction......................................................................................................................................2
Identification of two key account balances at risk of material misstatement..............................2
Key assertion at risk.....................................................................................................................3
Rationale for being the account balance and assertion are at risk...............................................5
Substantive test for each account to address the assertion and risk identified............................5
Two key going concern factors assumption at risk in relation to High Tech Ltd’s financial
report............................................................................................................................................7
Substantive test to address the going concern risk......................................................................8
Identification and explanation of one key related party transaction factor that would increase
the risk of material misstatement.................................................................................................9
Conclusion.......................................................................................................................................9
References......................................................................................................................................11

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Introduction
The case study is associated to an electronic component producer based in Sydney. The
given situation relates to various types of accounting issues as a result of bankruptcy of High-
Tech Ltd.’s major suppliers. This has led to serious disruption pertaining to shortages of
products. Despite of the assistance provided by Peter James by overcoming the shortages and
providing the goods at a competitive price, there was no formal agreement made with High Tech
Ltd.
The important discourse of the report relates to the concerns about electronic components
which are supplied by Peter James as they were found to be of inferior quality. It has been
further informed by the board that High Tech Ltd has to go through cash flow issues as a major
debtor of Creative Ltd was experiencing financial downturn. This has led to significant fall in the
sales of the High-Tech Ltd. As a result of this High Tech Ltd had to increase its reliance on its
sources of credit which had caused temporary breach of debt equity ratio relating to its loan with
Big Bank Ltd.
The discussions of the report have highlighted account balances for concerns associated
to material misstatement. That account balances for the key assertions at risk have been also
discussed. Some of the other sections of the report has included the test of detail for addressing
that assertions and risk identified. In addition to this, the study has also recognised going concern
factors at risk in relation to the financial statement published by the company in year ended 30
June 2013. Lastly, they would have also explained and a key party associated transaction factor
which may increase the risk associated to material misstatement (Louwers et al., 2015).

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Identification of two key account balances at risk of material misstatement
As per the given situation High Tech Ltd had to increase its dependency for taking credit
to overcome the adverse impact of financial difficulties faced by Creative Ltd. The main concern
faced by the company due to this is related to temporary violation of debt equity ratio pertaining
to loan covenant with Big Bank Ltd. This will result in a significant increase in the chances of
risk for two accounts mentioned below as follows:
 Long-term debt- Cash flow from financing activities and Balance sheet
 Shareholders’ Equity- Balance sheet
The identification of business risk associated to financial reporting for long-term debt can be
seen with material misstatement by lowering of debt equity ratio in the short term. As the risk of
debt equity is seen to be short-term in nature and auditors may decide to reduce the actual
account balances for long-term debt and equity and reverse the same in future which will show a
stabilized debt equity ratio as the company overcomes the challenges pertaining to its suppliers
(Zamboni & Litschig, 2018).
Key assertion at risk
Some of the key assertions associated to the risk of long-term debt and shareholders’
equity are listed below as follows:
 Existence - Firstly, the existence of clearing the debt obligations for the individual
account balances of liabilities may be doubtful in nature. This may include nonexistence
of paperwork for the sources of funds and commitment to specific debt obligations
(Contessotto & Moroney, 2014). It needs to be further discerned that a firm keeps a
record of equity interest associated to each of the investors in its balance sheet. There
may be certain records which are needed to be filled by Securities and Exchange

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Commission. As a result of material misstatement in equity, it may be difficult to track
the performance of the company by the Australian securities exchange (Griffiths, 2016).
 Rights and obligations- In general it is the duty of the company to make sure that
liability belongs to the interest of business. As per the given scenario High-Tech Ltd may
face several legal consequences for non-obligation of paperwork to test the existence of
the money that the business owns. In addition to this, the covering of liability may not be
approved with the proper process (Graham, Bedard & Dutta, 2018). Shareholders and
managers are considered to be having specific rights and obligations for equity of form.
An entity may be purchased to cover all the liabilities it has undertaken. The management
of a company is responsible for assertions of auditor in compliance for the generally
accepted accounting standards. The misrepresentation of equity will violate the
transaction obligation pertinent to an entity’s equity (Ackermann & Marx, 2016).
 Completeness- In several situation the liabilities held by the business are not included in
the financial statement during the end of assessment period. This may involve several
changes made in the outgoing cash from the business in the financial year when the
company was facing the debt equity ratio crisis (Elsayed, 2017). The traceability of the
accounts for the relevant liability may be at risk due to such measures. The auditors may
decide to put forth incomplete and inaccurate information for the firm’s equity interests.
Therefore, the liabilities may not be recorded as per Australian accounting standards
which will lead to several in incompleteness in the cash transactions (Hsieh, Lin, &
Chang, 2018). Valuation- The valuation of the long-term liability accounts may be at significant risk
with its recognition as per “Australian Accounting Standards Board (AASB)” and

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“Corporations Act 2001”. Managers of the company are obliged to record any value of
equity as and when they have occurred. High Tech Ltd. may decide to value an equity
before they have been recorded. This may be done by issuing pre-dated additional
common stock. This can include significant volume of shares issued to the public and
recording the purchases before they have been actually sold. The percentage changes in
the shareholders equity will lead to significant anomaly in recording of actual income of
the company (Borkowski & Gaffney, 2018).
Rationale for being the account balance and assertion are at risk
As per the given scenario it can be noted that increased dependency for taking credit to
overcome the adverse impact of financial difficulties faced by Creative Ltd. has led to temporary
violation of debt equity ratio for High Tech Ltd. Therefore, there is a high chance that the
company has lowered the account balances of long-term debt for keeping the interest of
stakeholders (Cohen, Krishnamoorthy & Wright, 2017). In addition to this, increasing the equity
will also lead to a favourable situation in lowering the debt equity ratio. However, any instance
of material misstatement pertaining to long-term debts will lead to significant inaccuracies in
actual performance of the company for a particular financial year. Similarly, auditors may decide
to put forth incomplete and inaccurate information for the firm’s interests for equity in order to
portray a better picture towards the stakeholders of the firm (Rakhmanova, Nagumanova &
Naumova, 2016).
Substantive test for each account to address the assertion and risk identified
The substance of tests suggested for the individual accounts are listed as follows:
 Long-term debt- One primary substantive test to address the issue of long-term debt
needs to be considered with completeness. The auditors need to regularly review and

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check to ensure that there is appropriate existence of the liability. The auditors need to
also ensure that the obligation for parties associated liabilities exist. Secondly, it needs to
be also ensured that liability belongs to the business. This needs to be done by using
appropriate paperwork for testing the existence of the liabilities which are owned by the
business. An entity irrespective of group investor or individual is entitled for covering all
the liabilities which it has undertaken (Smetanko, 2014). The auditors of the company
need to check that the assets and liabilities have been recorded as per the relevant values
defined under “Australian Accounting Standards Board (AASB)”. The assumption
should be further review with appropriate documentation associated to the underlining
transactions. The auditors need to also trace the transactions which are associated to
relevant liability accounts. In this way, the auditors can ensure that transactions at the end
of accounting period are included in the balance sheet (Sakr et al., 2017).
 Shareholders’ Equity- - One primary substantive test to address the issue of
shareholders equity debt needs to be addressed with ensuring integrity. The firm needs to
record the equity of each interest of its investors which should be reflected in the balance
sheet. The management of the company is accountable for compliance with representing
the equities as per “AASB 132 Financial Instruments: Presentation”. In addition to this,
the auditors need to approve the transactions pertaining to the creditors. The management
needs to disclose the transactions associated with a particular equity. It should also ensure
that the evidence of meeting their obligations are supported by relevant accounting
standards. It is the responsibility of the auditors record and disclose equity interest
pertaining to each disclosure and ensure they are factually accurate and complete. The
liabilities and equity interests need to be reflected accurately in the balance sheet as per

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the guidelines of AASB (Chen et al., 2015). Furthermore, an auditor needs to also pay an
augmented focus while recording the cash transactions which can be often overlooked in
such a violation of debt equity ratio. Lastly, the equity interests of the firm need to be
recorded in an accurate manner in the financial statements. In order to do so the managers
of the company must record the valuations and allocations of the equity as and when they
are incurred. In case the form is defected to issue additional shares of common stock, the
same needs to be reflected as a percentage of shareholder equity along with noting down
the changes in the financial statement of the firm (Yoon, Hoogduin & Zhang, 2015).
Two key going concern factors assumption at risk in relation to High Tech Ltd’s financial
report
As per the principle of going concern, the accountant of the company formulates several
assumptions which will ensure that the entity will remain in business in future. This will also
consider the fact that entity will not be compelled to stop its operations and liquidate its assets.
The aforementioned assumptions are considered to be justifying the recognition of particular
expenses incurred at a later period (Contessotto & Moroney, 2014). The end it is our further
assumed to be in the risk of going concern due to absence of any significant information. The
two going concern factors in relation to the financial report published by the company are listed
as follows:
 Adverse key financial ratios- Based on the given assertions High Tech Ltd had to
increase its reliance on its sources of credit which had caused temporary breach of debt
equity ratio relating to its loan with Big Bank Ltd.
 Cash flow difficulties- As evidenced in the case study there has been major concerns
about electronic components which are supplied by Peter James, as they were found to be

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of inferior quality. High Tech Ltd has to go through cash flow issues as a major debtor of
Creative Ltd was experiencing financial downturn. Creative Ltd took more than 120 days
for paying of the outstanding debt amount despite of 30 days limit of trading as per the
terms of agreement between the companies. In addition to this, Creative Ltd was
responsible for more than 40% of sales for the company. Therefore, financial difficulties
suffered by Creative Ltd had a detrimental impact on High Tech Ltd’s cash flows
pertaining to sales (Chan & Vasarhelyi, 2018).
Substantive test to address the going concern risk
The substantive steps to improve the debt to capital ratio needs to be focused with
restructuring of the debt of the company, better management of inventory and increasing
profitability. However, the main emphasis of the test to address the risk of going concern in this
case is seen with focusing on increasing profitability. It is logical for the company in sourcing for
other partners of trade through which it can aim at increasing its sales revenue which will lead to
increased profits. In addition to sourcing of other supplier, High Tech Ltd may decide to raise its
prices for reducing costs and increasing sales. The extra cash generated by the company will be
conducive in paying off debt covenant with Big Bank Ltd (Knechel & Salterio, 2016).
In order to address the issues concerning the cash flow High Tech Ltd should send the
invoices promptly which will help in choosing the overdue bills. It will be also beneficial for the
company in clearing the payment terms pertaining to the suppliers from the beginning of 30 days
terms of credit. This procedure will also allow the company knowing the customer payment
dates thereby reducing the scope of delays and irregularities. The knowledge of payment due for
a product or service will help the company in monitoring its cash flow activities (Guénin-
Paracini, Malsch & Paillé, 2014).

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Identification and explanation of one key related party transaction factor that would
increase the risk of material misstatement
In case there is any transaction such as credit sales with Creative Ltd then it may have
serious repercussions on increasing the risk of material misstatement for High Tech Ltd. Any
transaction as per credit sale will allow Creative Ltd to make payments in future. However,
creative Ltd is not only suffering from financial difficulties but also inconsistent to pay its
outstanding amounts for more than 120 days. Therefore, any further transactions from Creative
Ltd as credit sales may lead to bad debt for the company in future. It may be a case that Creative
Ltd is not able to overcome its situation of financial downturn and get bankrupt. This will also
lead to serious going concern issues for High Tech Ltd. The net impact of entries pertaining to
credit sales will have negative repercussions on both cash flow and debt equity ratio of the
company (Pizzini, Lin & Ziegenfuss, 2014).
Conclusion
The various assertions made from the study have shown that the Identification of two key
account balances at risk of material misstatement are seen with Long-term debt under Cash flow
from financing activities and Balance sheet and Shareholders’ Equity under Balance sheet.
Moreover, the business risk associated to financial reporting for long-term debt can be seen with
material misstatement by lowering of debt equity ratio in the short term. As the risk of debt
equity is seen to be short-term in nature and auditors may decide to reduce the actual account
balances for long-term debt and equity and reverse the same in future which will show a
stabilized debt equity ratio as the company overcomes the challenges pertaining to its suppliers.
The main reason for account balances to be held at risk is seen with increasing probability of the
company to lower the account balances of long-term debt for keeping the interest of

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stakeholders. In addition to this, increasing the equity will also lead to a favourable situation in
lowering the debt equity ratio. However, any instance of material misstatement pertaining to
long-term debts will lead to significant inaccuracies in actual performance of the company for a
particular financial year. Some of the tests to overcome this situation is also stated with adhering
to the aspects of completeness and integrity in the financial statement. The management of the
company should also ensure that the evidence of meeting their obligations are supported by
relevant accounting standards. It is the responsibility of the auditors record and disclose equity
interest pertaining to each disclosure and ensure they are factually accurate and complete.

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