CQUniversity: ACCT20075 Auditing and Ethical Practices Report

This report provides a comprehensive analysis of auditing and ethical practices, focusing on the application of these principles to a specific company's financial statements. The report begins by defining materiality and its significance in the audit process, followed by an assessment of the firm's cash and cash equivalents, receivables, and assets. It calculates and analyzes financial ratios, including profitability, liquidity, and stability ratios, to evaluate the company's financial performance and position. Additionally, the report scrutinizes the statement of cash flow and reviews the audit report, providing an overall assessment of the company's financial health and the auditor's opinion. The report covers important aspects of the audit process, including the analysis of financial statements, application of materiality, and evaluation of financial ratios.

Running head: AUDITING AND ETHICAL PRACTICES
Auditing and Ethical Practices
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Solution to Part 1........................................................................................................................2
Materiality..............................................................................................................................2
Enumeration of materiality....................................................................................................2
Materiality in audit.................................................................................................................3
Assessment of firm’s Cash and cash equivalents –................................................................3
Assessment of firm’s Receivables –......................................................................................3
Assessment of firm’s Assets –...............................................................................................3
Quantitative approximation of materiality of the firm Charter Hall Group...........................4
Analysis of Firm’s Draft notes together with disclosures......................................................4
Solution to Part 2:.......................................................................................................................6
Important financial ratios.......................................................................................................6
Profitability ratio-...................................................................................................................7
Liquidity ratio of the firm Charter Hall Group......................................................................8
Solution to part 3........................................................................................................................9
Analysis of the statement of stream of flow of cash..............................................................9
Going concern risk.................................................................................................................9
Audit report..........................................................................................................................10
References................................................................................................................................10

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Solution to Part 1
Materiality
Materiality can be considered to be one of most important notions for auditors.
Particularly, misstatements that entail omissions can be considered to be material when in
collectively or separately they can exert influence decisions of users of financial statements
(Knechel & Salterio, 2016). In itself, materiality in audit comprises of both qualitative as well
as quantitative facets. As such, materiality in the process of performing as well as planning
the audit lays stress on the below mentioned factors–
 opinion on the subject of materiality are mainly based on varied situations and
circumstances that comprise of characteristics along with size of misstatements
 Misstatements can be regarded to be material in case if it can exert impact on
decisions of users concerning the financial assertion (Junior, Best & Cotter 2014).
 Opinions designed are based on common requirements of users as a group
Enumeration of materiality
According to qualitative research approach, materiality is approximated to be 5% of
firm’s net earnings before tax for the particular year under deliberation. Nevertheless, the
materiality is a subject of specialized professional opinions. As a result, in case if the firm’s
net earnings is observed to be volatile then there are other scales and points of references that
might be taken into account, such as firm’s revenue or else gross profit (Simnett, Carson &
Vanstraelen, 2016). Nevertheless, for majority of the profit earning firms, the most fitting
benchmark is the firm’s net income before tax. Profit gained before tax for the year ended
30th June 2017 of Charter Hall Group is registered to be $ 281 million. Thus, misstatement

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can be regarded to be material in case if the same amounts to be ($ 281 *5%) = $ 14.05
million or else over and above that.
Materiality in audit
Assessment of firm’s Cash and cash equivalents –
Cash as well as cash equivalent can be considered to be material in its nature. Seeing
that cash is for all time exposed to misappropriation, thievery and misuse, firm’s total cash
can be assessed and the balance can be matched with the statement of bank. Moreover, the
assessor can test out all the transaction of cash associated receipts, coupons, vouchers and
approval to assure that there are no misstatements (Jelinek, 2015). Analysis of the annual
report of the firm Charter Hall Group helps in identifying the fact that the cash and cash
equivalents of the firm has increased from $145 million in 2016 to $174 million in 2017. In
this case, the receipts of the payments in cash and statements of banks can be examined
appropriately.
Assessment of firm’s Receivables –
Receivables can be considered to be a material item as receivables are those items that
turn into bad debts when remain due for a long period of time. Thus, in a bid to verify the
status of firm’s receivables, the assessor has the need to undertake debtor’s aging analysis
and present queries concerning the ones that are due for over and above the period of credit
allowance (Taylor‐Alexander, 2017). In this case, receivables registered to be $65 million
during 2017 can be said to be material in terms of size.
Assessment of firm’s Assets –
Audit procedures such as classification testing can be undertaken to examine whether
purchase records for different fixed assets were appropriately categorised within the correct
account for fixed assets. The total assets of the firm are observed to have increased from

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$1421 million in 2016 to $1873 million in 2017. Real estate properties of the firm have also
increased from $15 million in 2016 to $19 million in the year 2017. The basic audit that can
be carried out in this regard is the investigation and thereby establishment of the fact that the
asset of the firm subsists.
Quantitative approximation of materiality of the firm Charter Hall Group
A wide range of approximately 50% to roughly 75% of planning materiality can be
regarded as acceptable misstatement for Charter Hall Group as level of risk concerning
financial statement is sensible. Again, the tolerable misstatement is founded to ascertain low
level for particular items that are separately important under specific financial items, for
example, firm’s cash, accounts receivables as well as inventories (Helin, & Babri, 2015).
Analysis of Firm’s Draft notes together with disclosures
Different items from the firm’s disclosure that are significant for the process of audit
are hereby discussed in detail below: –
Asset Impairment – For the purpose of undertaking audit on asset impairment, the assessor
might consider verifying all the supposition utilized for enumerating the value that is in use
and assessing the fair value that is reduced by the specific cost of selling. However, for the
purpose of auditing of impairment of asset, the carrying amount of specific assets can be
verified with asset register and other related documents (Moroney, 2015). Essentially, the
auditor of the firm might also consider testing out and checking depreciation techniques
together with market value of assets of the firm matched with firm’s assets to ensure that the
appropriate process has been implemented.
Contingent liabilities – this is the credible requirement of the firm that may perhaps add to
the firm’s payables founded on diverse forthcoming contingent event. However, if the firm’s
contingent liability becomes material otherwise if whole amount cannot be anticipated, the

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evaluator shall estimate probability and likelihood of happening of events. Fundamentally,
likelihood can be probable, sensibly possible otherwise remote. In a bid to review likelihood,
the assessor can apply specialised professional opinion (Gaynor et al., 2015). Nevertheless,
for plausible class of contingent liabilities the assessor can apply unique accounting
treatment. Additionally, the liability can be presented in the notes segment of the disclosure
section.

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Solution to Part 2:
Important financial ratios
Ratio Analysis
Current Ratio 2014-06 2015-06 2016-06 2017-06
Current Assets 1,28,759 2,01,078 1,94,045 2,40,621
Current Liabilities 62,240 71,808 88,574 1,29,307
Ratio 2.06875 2.800217 2.190767 1.860851
Gearing Ratio
Long term debt and liabilities 6,724 6,160 15,920 21,459
Equity 9,17,088 12,00,461 13,11,084 17,22,271
0.007332 0.005131 0.012143 0.01246
Profitability Analysis
Gross Profit Margin Ratio
Gross Profit 1,15,600 1,52,677 2,57,604 3,27,887
Net Sales 82,116 1,17,885 2,15,240 2,57,561
Ratio 140.7765 129.5135 119.6822 127.3046
Operating Profit Margin Ratio
EBIT 88,781 1,22,871 2,23,718 2,93,347
Net Sales 82,116 1,17,885 2,15,240 2,57,561
Ratio 108.1166 104.2295 103.9389 113.8942
Return On Assets Ratio
Net Income 82,116 1,17,885 2,15,240 2,57,561
Average Total Assets 9,86,052 12,78,429 14,15,578 18,73,037
Ratio 8.327756 9.221083 15.2051 13.75098
Return on Capital Employed
EBIT 88,781 1,22,871 2,23,718 2,93,347
Total Assets 9,86,052 12,78,429 14,15,578 18,73,037
Ratio 9.003683 9.611093 15.804 15.66157
Return on Equity
Net Income 82,116 1,17,885 2,15,240 2,57,561
Shareholder's Equity 9,17,088 12,00,461 13,11,084 17,22,271
Ratio 8.953994 9.819977 16.41695 14.95473
Charter Hall Group

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Profitability ratio-
Profitability ratios are primarily utilized to evaluate the company’s potency to acquire
profit in comparison to expenses of the firm. Essentially, net profit margin of the Charter Hall
Group reflects the profit retained with the firm after making disbursement for different
operational, financial as well as taxation expends of the firm. However, based on analysis of
key ratio it can be hereby stated that the operating profit ratio of the firm has increased from
103.93 % in 2016 to 113.89% in 2017 reflecting an upward moving trajectory and a desirable
financial situation. Again, gross profit margin shows a fluctuating trend throughout the period
2014-2017. This ratio initially dipped during the period 2015 in comparison to the year 2014.
Thereafter, it further declined in the year 2016. However, later on during the period 2017, this
ratio improved considerably, reflecting a favourable financial condition (SURYANTO,
2017). Again, return on firm’s asset represents profitability of the firm in comparison its
assets (Davies & Aston, 2017). Essentially, it reflects the level of efficiency of firm’s
management in utilizing its assets for generation of earnings.
There are different types of assertion that may possibly be associated to profitability
ratio is level of accurateness. It might be that different items of expends as well as incomes
might not have been properly registered in full amounts. Therefore, audit process for this
assertion shall be to test out that firm’s records for expends and earnings (Louwers et al.,
2015). This is mainly to examine whether accurate amount has been registered and to ensure
that there is no overstatement or understatement.
Stability ratio of the firm Charter Hall Group – The important financial ratio on stability
analyses the overall debt amount that can be supported by the business entity. Essentially, this
ratio is also implemented to determine financial leverage of the firm Charter Hall Group.
Again, Debt equity ratio enumerates overall proportion of firm’s assets that are funded by

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means of borrowings. In particular, it can be seen that on an average roughly 34% to around
38% of firm’s assets are funded by using borrowed funds (Ferrell & Fraedrich, 2015).Again,
debt equity ratio also enumerates the overall debt and equity proportion of the firm to fund
assets. In this case, it can be recognized that equity proportion of the firm has considerably
increased during the period so as the debt. Also, the debt to equity ratio has also increased
although insignificantly during the period 2017 in comparison to the year ago period.
Varied categories of assertion that might perhaps be associated to the ratio on stability
is essentially accuracy. It might be the fact that different debt items, assets along with equities
of the firm might not be properly registered in the financial assertions of the firm. Therefore,
in that case, audit procedures might possibly involve the processs of verification of all the
associated documents on purchase of assets, data on borrowings, examination of register for
sales and catalog share issue (Carson, Fargher & Zhang, 2016).
Liquidity ratio of the firm Charter Hall Group – liquidity ratios are primarily utilized for
the purpose of measuring overall liquidity condition of the firm. The current ratio is
calculated for testing out whether the firm’s current assets of Charter Hall Group are adequate
enough to repay their current obligations. Based on the enumerated financial ratio it can be
said that current ratio has decreased 2.06 in 2014 to 1.86 in 2017. Thus, the liquidity
condition of the firm can be said to have deteriorated throughout the specified period.
A kind of assertion that may perhaps be attached to stability ratio is essentially
accuracy in addition to classification. In this case, it might be the fact that different current
assets as well as current liabilities items might perhaps not have been registered in full
amounts (Cohen & Simnett, 2014). Also, it might however so happen that firm’s current
assets as well as liabilities might not have been appropriately categorised. This means that
non-current assets/liabilities might have been categorised and identified as current. In this

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case, audit processes for this specific assertion would involve examination and verification of
different pertinent documents and register for firm’s current assets as well as current
liabilities.
Solution to part 3
Analysis of the statement of stream of flow of cash
Figure 1: Depicting the cash flow statement 2017 and 2016

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Figure 2: Depicting the cash flow statement 2015 and 2016

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Figure 3: Depicting the cash flow statement 2014 and 2015
Based on analysis of the statement of flow of cash for the year ended 30th June of the
year 2017, it can hereby be stated that majority of cash inflows pare mainly from the
operating categories during the year 2017. The positive flows of cash in the operating
segment mainly stem from alterations in liabilities and negative flows in the section are
mainly due to alterations in accounts receivables. The total inflow of cash particularly from
operating activities has increased considerably throughout the period 2014 to 2017. It can be
observed from the statement of flow of cash that the total outflow of cash for investing
activities of the firm has enhanced considerably during the period 2014 to 2017 except a fall

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in the year 2016. The primary area of outflow of cash in this segment is “Investment”. Again,
cash inflow from the financing actions of the firm has also sharply increased throughout the
above mentioned period except for the year 2016. The main inflow of cash in this segment
has been from sale purchase of particularly stocks. Thorough analysis of stream of cash from
financing activities reveals that the dividend disbursements of the company has also increased
during the current period of 2017 in comparison to the year ago period. In the annual report
the there has been no non financial identified in the cash flow statement. However the
investing activities consist of various investment related payments and loans. The auditor of
the firm utilizes the risk that has been assessed of material misstatement for determining the
suitable risk detection level for asserting the financial statement. The greater the risk of
material misstatement, the less is the level of risk of detection needed for reduction of audit
risk to a level that is appropriately low.
Going concern risk
Founded on the performance of the firm, it can be hereby observed that profitability
situation; stability arrangement and efficiency position of the corporation has enhanced
throughout the period 4 years. In addition to this, According to the auditor’s report there is
no risk attached to the organisations going concern. However, there is a chance for the
company to improve its liquidity position by paying off the obligations that is short-term.
Hence, no risk with the organisation’s going concern that could be identified (Andrikopoulos
et al., 2016).

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Audit report
Figure 2: Depicting the auditor’s report for 2017
The auditor produced the unqualified report to specifically Charter Hall Group for the
year ended 30th June 2017. According to their feedback the financial report of the company
and the businesses controlled by it is complied with the Corporation Act 2001. It addition to
that involves the following –
 The Financial statements represents a true and fair view of the financial position of
the company as on 30th June 2018 and the financial performance for the year end

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 It is complied with Corporation Regulations 2001 and the Australian Accounting
Standards.

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