PACC6002 Auditing: REA Group Financial Statement Risk Assessment

This assignment identifies and assesses audit risks within REA Group's financial statements, focusing on key asset and expense accounts. It examines cash and cash equivalents, plant and equipment, and impairment expenses, explaining the potential risks associated with each. The analysis includes identifying relevant assertions based on ASA 315, such as existence and completeness for assets and cut-off and occurrence for expenses. Substantive tests of detail are described to gather sufficient appropriate audit evidence. For example, verifying bank statements for cash receipts and payments and matching totals with the general ledger and verifying supporting documents for plant and equipment acquisition. The assignment highlights the importance of assessing impairment expenses due to the assumptions involved and the potential for misstatement. This assignment showcases the application of auditing standards in evaluating financial statement risks and designing audit procedures.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and assurance services
Name of the student
Name of the university
Student ID
Author note

1AUDITING AND ASSURANCE SERVICES
Table of Contents
Answer 1 and 2...........................................................................................................................2
Answer 3....................................................................................................................................3
Reference....................................................................................................................................4

2AUDITING AND ASSURANCE SERVICES
Answer 1 and 2
1. Asset
Account
2(a). Explanation 2(b). Assertion 2(c). Substantive test of
detail
Cash and
cash
equivalents
(increased
from $
126,834,000
to $
358,500,000
over the
period from
2016 to
2017)
Audit of cash is
regarded as important
part of audit as the
business transactions
are eventually settled
through the cash
balances and audit of
the cash account helps
in verifying other
liabilities, assets,
expenses and revenues.
Further, cash is highly
liquid and hence
considered as highly
risky as it is highly
susceptible to
misappropriation and
misstatements.
As per ASA 315 cash is
exposed to existence
assertion. It is related to
the assurance that the
amount of cash recorded
in balance sheet is
actually in existence and
it belongs to the entity
on the given date
(Auasb.gov.au, 2018).
 Samples shall be selected
from cash receipts and
cash payments and
verifying the bank
statements, pay-in-slips
and remittance advices
associated with those
 Matching the cash
receipts total with general
ledger
 Verifying all the unusual
items such as cancelled
cheques, items under
stopped payments
and contra items (Mock
& Fukukawa, 2015).

3AUDITING AND ASSURANCE SERVICES
Plant and
equipment
(increased
from $
16,165,000 to
$ 19,767,000
over the
period from
2016 to
2017)
Plant and equipment
being major item under
non-current asset are
susceptible to potential
misstatements like
 Purchasing the asset
from related party at
inflated price
 Capitalising the
expenses that are not
actually attributable
to plant and
equipment cost
 Writing off the asset
wrongly as donated,
destroyed,
obsolescence and
scrap (Ismail, Islam
& Mouratidis, 2015).
As per ASA 315 plant
and equipment is
exposed to completeness
assertion. It states that
the expenses those
required to be
recognised under plant
and equipment were not
recognized. It includes
capitalisation of finance
costs, failure in regard to
accounting the assets
held under hire purchase
or lease agreements.
 Acquisition of new asset
and improvements of the
existing asset shall be
verified with the
supporting documents
like invoices, order copy,
deeds and tax related
papers
 Auditor shall assure that
cost of plant and
equipment is recognised
under asset when costs of
the asset have been
measured reliably and it
has been assured that the
economic benefit of the
asset will inflow to the
entity (De Kleijn, R., &
Van Leeuwen, 2018)..
Answer 3
Expense account Explanation why a risk Assertion
Impairment (in the
year 2016 the
company did not
account any amount
under impairment,
however, in 2017
they charged $
182,837,000 as
impairment expenses)
As impairment is an
important aspect while
recognising the non-
current assets in the
balance sheet, it is
exposed to potential
misstatement. Further,
charging of impairment
requires assumptions
regarding the indication
from the market that the
value of the asset will be
declined (Knechel &
Salterio, 2016).
Various assertions involved with the
impairment expenses are as follows –
 Cut – off that states that the amount of
impairment has been recognised under
appropriate reporting period
 Occurrence that states that impairment has
been charged only after there is proper
indication of impairment and testing the
asset for impairment (Saha & Roy, 2017).

4AUDITING AND ASSURANCE SERVICES
Reference
Auasb.gov.au. (2018). [online] Retrieved 23 October 2018, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
De Kleijn, R., & Van Leeuwen, A. (2018). Reflections and Review on the Audit Procedure:
Guidelines for More Transparency. International Journal of Qualitative
Methods, 17(1), 1609406918763214.
Ismail, U. M., Islam, S., & Mouratidis, H. (2015, September). A framework for cloud
security audit. In International Conference on Global Security, Safety, and
Sustainability (pp. 296-309). Springer, Cham.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Mock, T. J., & Fukukawa, H. (2015). Auditors' risk assessments: The effects of elicitation
approach and assertion framing. Behavioral Research in Accounting, 28(2), 75-84.
Saha, S. S., & Roy, M. N. (2017). Quality Control Procedure for Statutory Financial Audit:
An Empirical Study. Emerald Publishing Limited.