Holmes Institute: Audit and Assurance Report - Laserbond Ltd Analysis

This report provides a comprehensive audit and assurance analysis of Laserbond Ltd, a specialist surface engineering company. It begins with an introduction to the company and its industry, followed by an examination of the audit risk model, including inherent, control, and detection risks. The report details a financial analysis of Laserbond, covering key ratios such as current, quick, and profitability ratios. Analytical procedures are then discussed, highlighting the use of various financial ratios. The report then delves into materiality, the selection of material account balances, and audit assertions. Selected account balances are presented with their respective audit assertions, procedures, and audit work steps. The report concludes with a sampling plan and overall conclusions based on the audit findings. The report is based on the assignment brief provided by Holmes Institute for the HA3032 Auditing course.

Audit and Assurance
Audit

Table of Contents
INTRODUCTION......................................................................................................................1
Background Information Company and industry.......................................................................1
AUDIT RISK MODEL..............................................................................................................2
Financial analysis of the Laserbond Company..........................................................................3
ANALYTICAL PROCEDURES...............................................................................................4
MATERIALITY AND SELECTION OF MATERIAL, ACCOUNT BALANCES in the
LASERBOND LTD...................................................................................................................4
SELECTED ACCOUNT BALANCES WITH AUDIT ASSERTION, PROCEDURES AND
AUDIT WORK STEPS..............................................................................................................6
SAMPLING PLAN..................................................................................................................10
CONCLUSION........................................................................................................................10
REFERENCES.........................................................................................................................11

INTRODUCTION
As the world moves towards the globalization and privatization, the people have come across
a variety of opportunities in which they can invest their money. Depending upon the
performance of financial statements of a company, investors decide whether to or not invest
money in that particular organization. However, due to the non-effective transparency of the
organization to provide true and transparent information, auditors of the company determine
the audit risk model and assertion test. These auditors after carefully examining the financial
statements, account books and other related information, carefully draws conclusion where to
invest money. Many accounting and auditing procedures are in place and needs to be
followed to make opinions regarding financials and performance of the company by auditors
(Chan & Vasarhelyi, 2011)
The study has been done on Laserbond Ltd the company which is a public entity. The
company has been using different audit procedures and by studying it we would be able to
look practically how the to audit system works.
Background Information Company and industry
Laserbond Ltd is a specialist surface engineering company which was founded in 1992? The
company has its presence in South Australia and New South Wales. Laser bond Ltd. Deals in
development and application of materials, methodologies, and technologies in the capital –
intensive machinery components so that there would be an increase in there operating
performance and wear life. Due to the effect of abrasion, cavitation, heat, corrosion, erosion
and their combination, almost all components fail on the surface. This wear of surface causes
the loss of productivity, efficiency and total cost of ownership of heavy types of machinery
across all industries. Laser bond Ltd provides them with tailored surface metallurgy which in
turn extends the life of machinery many folds and increases and enhances their performances.
Laserbond Ltd has its applications across many industries and sectors like agriculture,
defense, resources and energy, advanced manufacturing and infrastructure construction.
Laserbond is a globally famous company and mainly based in Australia.

AUDIT RISK MODEL
There are many kinds of risks involved with the audit procedure in an organization namely
detention risk, control risk, and inherent risk. In order to identify these risks, Audit risk model
is designed. However, even with the implementation of the assertion test throughout the audit
procedure, auditors of the organization are not able to manage several different risks (Arens,
Elder, & Mark, 2012).
Audit risk of an organization can be computed by multiplying the control, detention and
inherent risk which are associated with the company’s financial statements. It is found that
Laserbond Ltd also faces many several kinds of risks within its financial statements and
discussed here in this report (Bradbury, 2008).
Laserbond’s financial statements contain major complexities within them and therefore they
have increased numbers of misstatements and thus causes the high chances of inherent risk
within company’s financial statements (Chan, & Vasarhelyi, 2011).
Mostly the control risk of any organization is determined by the issues that are being faced by
the company in identifying its accounting and reporting frameworks. It is found that the
framework for accounting and reporting of other companies are very well established and
some companies are in the process of setting framework up. Since Laserbond Ltd. Is filing
the financial statements of the company domestically and internationally, its accounting and
reporting framework is getting complex and thus increasing the risk and results in high
control risk factor (Chippendale, et al. 2018).
Since the accountants and other finance people employed by the company are well educated
with many years of experience in their field, the company faces almost no issues in preparing
their financial statements. Due to this kind of experience, the chances of errors, frauds, and
omission on part of accountants are very less thus the detention risk of Laserbond is very
moderate (Clarkson, Overell, & Chapple, 2011).
In order to evaluate the transparency and clear picture of all the assets and liabilities the
company is having, there are several audit procedures are implemented in the company.
These audit procedures provide the transparent and clear picture of financial statements of the
company to shareholders, users, and top management as well. To identify the audit risk
within these audit procedures, the Audit Risk Model is used (Curtis, et al. 2019).

Laserbond Ltd is also using this Audit risk model to evaluate the audit risks within its
auditing procedures (Horne, Venter, & Lochner, 2018).
The Laserbond has been facing high audit risk due to strict legal compliance. However, the
audit risk model has been set to the10% as it has 36% detention risk, 27.8% inherent risk and
10% control risk (Keune, & Johnstone, 2012).
Computation of the audit risk model has been given below.
Audit Risk = Inherent Risk x Control Risk x Detection Risk
0.10 = 0.60 x 0.60 x Detection Risk
0.10 = Detection Risk = 0.278 = 27.8%
0.36

Financial analysis of the Laserbond Company
The current ratio of Laserbond Company has increased to 1.3 points which reflects that the
company has increased its overall investment in its current assets by 20% since last three
year. The quick ratio of the company has increased to 1.25 points in 2018 which is 30%
higher for last three years. This shows that Laserbond Company has been increasing its
overall investment in its liquidity. Nonetheless, the profitability of the company has been
increased to 18% in 2018 which is 3% higher since last three years. This shows that the
company has made a good amount of increment in its business process and increased its
overall outcomes. The return on capital employed has decreased by 12% since last three year
due to the increased operating expenses in its business process. It is analyzed that return on
equity capital of the company has also increased with the increase in its overall revenue
(Ling, & Roberts, 2017)). In terms of financial leverage, Laserbond Company has kept
higher debt funding in its business process. It reflects that the company needs to lower down
its debt funding if it wants to lower down it wants to keep its business sustainable in the long
run. The time interest coverage ratio is also way too high which reflects that the company
might face issue in paying off its interest payment if its profit goes down. The business
efficiency of the company is strong as it is keeping the low inventory turnover. The inventory
turnover is 22 days which is way too less as compared to other rivals in the market. The
debtor’s turnover of the company is also 28 days which is 3 days lower since last three days.
It shows that the company has been keeping its business effectively and having chances to
strengthen its business process in the long run (Mangala, & Kumari, 2016).

ANALYTICAL PROCEDURES
To get a better understanding of financial and non-financials of Laserbond Company, it is
must to have analytical procedures. The analytical procedure uses the various ratios to find
out the financial aspects of the company and the computation of these ratios give a clear and
transparent picture of the company's financials. Calculation of different figures whether
financial and non-financial are done by these ratios. The main types of ratios used in this
analytical procedure are profitability ratio, liquidity ratio, solvency ratio, and activity ratios.
The computation and values of these ratios determine where the company is going, what
ongoing trends are and what decisions to be taken for the better future of an organization
(Morris, & Nichols, 018).
MATERIALITY AND SELECTION OF MATERIAL, ACCOUNT BALANCES in the
LASERBOND LTD.
As is the case with most companies, Laserbond too has a very complex and diverse
accounting system with many account balances. While doing the audit of financial
statements, it’s not possible for an auditor to go through all the accounts and check each and
every transaction (Nigrini, 2018). That would be time and money consuming process. Audit
is mostly done in a specified time period and limited resources, so auditor has to take certain
decisions regarding which account balances and transactions need to be checked in detail. It
is analyzed that auditor indulged in randomly choose any account and financial statement. It
would be dangerous to approach for the organization as well as auditor to assess the financial
books of account. So in order to select the account balances which needs to be checked in
detail, an audit assertion test and tool is used known as materiality level (Whittington &
Panny, 2010)
The computing of materiality involves the number of steps, first among them is the selection
of least volatile stable base. It can be anything between net profit, net assets, expenses or
revenues. In the case of Laserbond, the company is using revenue as a stable base. After the
selection of the base account, the percentage of that base account is computed. The figure
shown in the revenue base is 2% (Houston, Peters, & Pratt, 2019).After computation of 2%
revenue and studying ongoing trends in the company's business, the resultant amount is
adjusted. This will give the final figure termed as the materiality of the company. It should be
noted that in case of Laserbond we have taken revenue as a stable base and not the net

income, (which is the case with many companies) because net income is showing a lot of
volatility and negative figures from last two financial years. (Keune & Johnstone, 2012)
The materiality amount is:
Revenues: AUD 2,896,395
2% of revenue: 57,928
After assessing the financial details of the company, it is found that The Laserbond is having
high business risk in its business process due to the high financial leverage and less
profitability which resulted to the materiality test to AUD 50,000. By using the materiality
test, all the account balance are rechecked to assess the changes in the value of the financial
statement. However, below given accounts are shown to implement the assertion test in the
books of account of the company (O'Donnell, Arnold, & Sutton, 2010).
Assets Liabilities
Account receivable Creditors
Debtors Deferred revenues
Prepaid expenses Current liabilities
Plants and property
Intangible assets set in IAS 138.
SELECTED ACCOUNT BALANCES WITH AUDIT ASSERTION, PROCEDURES
AND AUDIT WORK STEPS
Given account Value Audit Audi steps and procedure Audit evidence

balance determine
d
assertion test
1. Cash & cash
equivalent
AUD
1,379.062
Completeness,
and existence
1. The cash in the company's
bank and lockers must be
cross-checked with balance
sheet figures.
2. To find accuracy, cash
accounts must be cross-
checked with cash sales
invoices
3. The debt crises rate is
checked to assess the debt
credit rating of the company.
4. The updating of the cash
book should be analyzed and
cash transaction of this year
should be compared with
previous ones.
Cash book
Sales book
Purchase book
Other books.
Existence The combination of hard cash and bank balance should match the cash figure in the
balance sheet
Completeness It was found that bank balance and hard cash of the company has been taken into
account and matches with the cash and cash equivalent figures of balance sheet.
2. Receivables
$ 3,484.611
Rights &
obligations,
existence
1. The due amount and due
tenure of the debtor should be
confirmed directly by
approaching debtors
2. For computing balance of
major debtors, sales invoices
Debtors approached
to confirm their
balance and due
tenure has provided
Confirmation Letter

of credit sales should be
matched with debtor accounts
Invoice of the sales
Account receivable
books
Existence The amount of credit sales company is entitled is shown in debtor balance column of
balance sheet
Rights and
obligations
The company is legally entitled to the money owed to debtors in the balance sheet
and can sue them in case of nonrecovery.
3. Prepaid
expenses
AUD
3,484.611
Existence,
valuation
1. Prepared expense entries
would be checked to assess
the business cash
transactions.
2. All the cash account and
other cash flow statement
would be checked to
determine whether the cash
outflow and inflow have been
made to assess the payment
made by the company.
Prepared cashbook
Cash flow statement
Invoices
Payment receipt book
And income and
expenditure books
Existence All the prepaid expenses will be recorded in the assets side of the company under the
miscellaneous heading.
Valuation All the advance money paid will be recorded as advance payment in the assets side of
the company.
3. Intangible
assets
AUD
23.387
Valuation,
existence
1. The existence valuation
report is prepared to assess
the value of the assets. IAS
137 is followed to assess the
Valuation and
existence test is used
to recheck the value

true value of the assets.
2. Acquisition contract and
agreement is checked to
assess the value of the
recorded assets.
3. The proper depreciation chart
is checked to assess the value
of the assets.
of the assets.
Depreciation charts of
the entity.
The carrying value of
the company is
determined the value
of the recorded
assets...
Existence All the intangible assets of the company are recorded and proper charge annexure is
prepared to value the recorded assets.
Valuation The amortization method is followed to assess the value of the assets recorded in the
books of account (Sharma, & Panigrahi, 2013).
4. Plant &
equipment
AUD
3,086.473
Existence test
and right and
obligation
1. All the assets recorded in the
book of account will be
rechecked by using the
physical existence test
(Sickles, 2012).
2.
3. The valuation of the assets
would be done on a
periodical basis to assess the
value of the assets recorded.
4. Assets purchased contract
and assets valuation methods
would be used.
Assets lease
agreement
Assets checkbook
Hire purchase
agreement
Charge annexure
Will be used to assess
the true value of the
recorded assets.
Existence The existence test is followed to evaluate the
Rights & All the assets and resources purchased or owned by the company will be fully used

obligations by the organization in its business.
Valuation IAS 137 is used by the company to assess the true and fair value of the recorded
assets.
1. Accounts
payables
$
1,036.909
Rights &
obligations,
existence
1. All the creditors are booked
in the liabilities side of the
company and the same will
be paid at the time of the
provisional due.
2. The purchased invoice of the
creditors is checked with the
creditor's balance.
Confirmation letter
from the creditors is
used to assess the
changes in the credit
value.
Existence The balance of creditors and other payables is represented the actual figure that
existed.
Completeness All the creditors are assessed by checking the purchasing books of accounts.
2. Deferred
revenue
215 Completeness
and valuation
method
1. The amount delivered to the
client is analyzed to evaluate
the accuracy of the value.
Contract with the
client is rechecked on
continues basis.
Valuation The number of intangible assets will be valued every year by using IAS 137
accounting method (Vendrzyk, & Bagranoff, 2013).
Completeness Deferred tax and other amount pending will be determined to set up the dues of the
company.
2. Other current
liabilities
AUD Considered
right and
1. The proper check and
valuation methods should be
used to assess the changes in
Proper management
check will be set up
in the process.

43.386 obligation. the current liabilities
Valuation The amount shown in the non-current liabilities of the balance sheet is overstated.
Rights &
obligations
Laser bond Company will make the payment to its creditors and other outstanding
dues in the given time manner (Whittington, & Pany, 2010).
SAMPLING PLAN
In order to select the items and arrange them to make a sample base, an audit sampling named
ASA 530 is used. These are the sample base on which then audit procedure would be done.
There are many inherent limitations present in the audit function because of which ASA is
considered important in Laserbond audit. As discussed earlier, due to time and cost factor all
the account balances cannot be audited, a reasonable sample base is thus created and
required. The auditor on basis of his judgment and different tools select this sample base,
provide the assurances regarding the financial statements and therefore provide his overall
opinion on the financial conditions of the company (Williams, et al. 2009). Sampling is a tool
to determine that sample base. Earlier we have established, materiality is important to
evaluate the sample base. Along with sampling plan and materiality, a strong sample base can
be created on whose basis the whole auditing is designed. One can choose various sampling
forms but the scientific and systematic techniques are always considered the best (Houston,
Peters & Pratt, 2019)
In Laserbond, whenever they are doing scientific sampling, certain criterions are kept in mind
to choose the sample. It is not possible to choose any random sample and then done an audit
on it. In Laserbond they use materiality level as the scientific base, the sample size is
determined by the items of the materiality level. The number of the items in sample size is
generally not predetermined. It can be any number of items i.e. it can be a small sample size
or large. The sample size is normally decided by the auditor during audit depending on the
risks identified in an organization. The smaller sample size is normally enough if the auditor

feels that the risks in the financial statements in the organization are not too prevalent.
Whereas if the risks are too prevalent and auditor feels the need for in-depth audit large
sample size is required to represent a large number of accounts (Houghton, Jubb & Kend,
2011)
CONCLUSION
In order to have a transparent audit system which can be relied upon, its necessary to
have it in a professional manner. If the audit done is not reliable, no shareholders can make
good decisions. It is important that the auditor is independent and do not have any conflict of
interest with the organization. Whatever the results and pieces of evidence came across the
audit must be documented properly and stored as per the professional requirement for future
use. But it’s not always true that the financial statements and accounts which are audited
would be free from all misstatements and faults. That's why small provision for reasonable
assurance is taken into account. It is found out in the report that the risk is inherent and
detention are high in Laserbond but still the company ids doing good financially from last
decade and investors can look upon it for investment purposes.

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