ACCT20075 CQUniversity: Materiality, Audit Procedures & Ethics Report

This report provides a comprehensive analysis of auditing and ethics, focusing on materiality considerations, analytical procedures, and cash flow statement analysis. It assesses the financial statements of Cornwell Group, computing planning materiality and analyzing disclosures related to deferred tax, derivative contracts, and reserves. Key financial ratios, including liquidity, profitability, asset management, leverage, and valuation ratios, are calculated and interpreted to evaluate the company's financial health and identify potential risks. The report also examines the cash flow statement, categorizing activities into operating, investing, and financing, and concludes with a review of the auditor's report, ensuring compliance with auditing standards and ethical considerations. Desklib is a platform which provides all the necessary AI based study tools for students.

Running head: AUDITING AND ETHICS
Auditing and Ethics
Name of the Student:
Name of the University:
Author’s Note

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AUDITING AND ETHICS
Table of Contents
Section 1..........................................................................................................................................2
Materiality Consideration in Audit..............................................................................................2
Analysis of Disclosures and Notes..............................................................................................3
Section 2..........................................................................................................................................5
Analytical Procedures in Auditing...............................................................................................5
Section 3..........................................................................................................................................8
Cash Flow Statement Analysis....................................................................................................8
Review of the Auditor’s Report.................................................................................................10
Reference.......................................................................................................................................11

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Section 1
Materiality Consideration in Audit
The concept of materiality is covered in ISA 320 which is an auditing standard which
covers the significance of materiality while conducting an audit of a business. The materiality
aspect of an item which is shown in the financial statements of a company is based on the
judgement on the auditor which is generally done on the basis of complexity of the item or
relevance of the item in relation to the financial statement of the business. In an audit process,
the materiality of an item plays an important role as the auditor generally concentrates and
applies more audit procedures on items which are considered to be material in nature in respect
to the business of the client (Cox, Dayanandan & Donker, 2014). The assessment will be
considering the financial statements of Cornwell Group which is engaged in the business of real
estate management for clients (Cromwellpropertygroup.com, 2018). The purpose of the
assessment is to analyze the financial statements of the company to comment whether the same
is showing true and fair view or not. The assessment will also be computing planning materiality
for the business.
The materiality concept in audit has a much wider scope and covers both qualitative
material items and quantitative material items. Qualitative material items refer to those
significant items of a financial statement which are generally relevant and most likely to have
material misstatements. On the other hand, quantitative material items refer to which are of
significant value and are shown in the financial statements of the company. The presence of
material items in the financial statements determines the audit procedures which the auditor is
going to apply and also the timing and extent of the audit is also determined similarly

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(Christensen et al., 2016). The auditor generally plans as to which item is to be considered as
material and which is not during the preparation of the audit program and plan.
In order to effectively deal with the materiality aspect, the auditor first computes planning
materiality which is base used by the auditor for considering tolerable errors and omission and
also determining performance materiality for different items. The planning materiality estimate is
computed by assuming a base which is then multiplies with a predetermined percentage to get
the estimate for planning materiality of the business (Todea, Joldos & Cioca, 2013). The base
which is considered for computing the planning materiality of the business are generally of
significant value such as net profit before tax, total assets, total sales revenue generated by the
business. In the case of Cornwell Group ltd, the base which is considered for the computation of
planning materiality of the business is total assets figure which is shown to be $ 3410.9 million
and the percentage which is estimated for computing planning materiality of the business is
considered to be 2%. The computation of planning materiality is shown below in equity form:
Planning Materiality=Total Assets × Predetermined Percentage
¿ $ 3410.9 million ×2 %
¿ $ 68.218 million
The planning materiality of the business refers to the materiality level which is used for
the purpose of deciding whether an item which is shown in the financial statements are material
enough for the purpose of estimating if there are any misstatements in the annual reports of the
company (Johnstone, Gramling & Rittenberg, 2013).

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Analysis of Disclosures and Notes
The notes to accounts are considered to be an important aspect of the financial statements
and contain information regarding the treatments and methods which are used by the
management in the preparation of the financial statements of the business (Hahn & Lülfs, 2014).
The significant items which are covered in the disclosures and notes to account section are
discussed below:
 Deferred Tax Assets and Liabilities: The annual reports of the business show that the
same consist of deferred tax assets and liabilities which are shown in the notes to account
section of the annual report. The deferred tax assets and liabilities of the business arises
due to temporary difference and carried forward losses of the business (Laux, 2013). The
deferred tax assets and liabilities of the business contains complex treatments and
therefore the auditor needs to review the same.
 Interest and Cross Currency Derivative Contracts: As per the notes to accounts
section of the annual reports, interest and cross currency contracts information are present
which can affect the decision of the auditor. The business in engaged in derivate contracts
and therefore the auditor needs to put emphasis on the valuation for the same in order to
understand that the same is showing true and fair view or not.
 Reserves: The reserves which are shown by the business in the annual reports of the
company. The reserves amount which is shown in the annual reports of the company is
considered to be important figure as the same can affect the financial statements of the
business. The auditor needs to analyze the same and ensure that the financial statements
are showing a clear view of the reserves and also the sources which are used for creating
the reserves.

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Section 2
Analytical Procedures in Auditing
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Current Assets 125,236 193,140 134,100 551,100
Current Liabilities 178,590 186,805 254,600 495,500
Current Ratio 0.70 1.03 0.53 1.11
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Total Current Assets 125,236 193,140 134,100 551,100
Quick Assets 125,236 193,140 134,100 551,100
Current Liabilities 178,590 186,805 254,600 495,500
Quick Ratios 0.70 1.03 0.53 1.11
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Current Assets 125,236 193,140 134,100 551,100
Less: Current Liabilities 178,590 186,805 254,600 495,500
Net Working Capital -53,354 6,335 -120,500 55,600
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Gross Profit 183,443 148,724 333,100 278,700
Sales 333,055 309,917 325,600 320,800
Gross Profit Margins 55.08 47.99 102.30 86.88
Net Profit 182,471 148,763 329,600 277,200
Sales 333,055 309,917 325,600 320,800
Net Profit Margin 54.79 48.00 101.23 86.41
Net Income 182,471 148,763 329,600 277,200
Average Assets 2,469,940 2529517 4172847 3144600
Return on Assets 7.39 5.88 7.90 8.82
Net Income 182,471 148,763 329,600 277,200
Shareholders Equity 1,263,998 1,294,211 1,500,200 1,639,900
Return on Equity 14.44 11.49 21.97 16.90
Cromwelll Group ltd
Liquidity Ratios
Profitability Ratios

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Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Sales 333,055 309,917 325,600 320,800
Average Net Fixed Assets 1700 2650 3350 3300
Fixed Asset Turnover 195.91 116.95 97.19 97.21
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Sales 333,055 309,917 325,600 320,800
Average Total Assets 2469940 2529517 2733697 3144600
Total Asset Turnover 0.13 0.12 0.12 0.10
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Total Debt 1,011,214 1,093,467 1,118,200 1,274,200
Total Assets 2,469,940 2,589,094 2,878,300 3,410,900
Debt Ratio 0.41 0.42 0.39 0.37
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Long Term Debt 1,011,214 1,093,467 1,118,200 1,274,200
Total Equity 1,263,998 1,294,211 1,500,200 1,639,900
Debt – Equity Ratio 0.80 0.84 0.75 0.78
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Net Debt 1,011,214 1,093,467 1,118,200 1,274,200
Total Equity 1,263,998 1,294,211 1,500,200 1,639,900
Total Capital 2,275,212 2,387,678 2,618,400 2,914,100
Gearing Ratio 44% 46% 43% 44%
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Market Price per share 1.02 1.115 1.105 0.92
Earnings per Share 0.11 0.09 0.19 0.16
Price / Earnings ratio 9.27 12.39 5.82 5.75
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Market Price per share 1.02 1.115 1.105 0.92
Book Value per Shares 0.71 0.74 0.82 0.9
Price / Book Value Ratio (P/BV) 1.44 1.51 1.35 1.02
Particulars 2014($-000) 2015($-000) 2016($-000) 2017($-000)
Dividend per Share 0.08 0.08 0.08 0.08
Market Price per share 1.02 1.115 1.105 0.92
Dividend Yield 7.84 7.17 7.24 8.70
Valuation Ratios
Asset Management Ratios
Leverage Ratios

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Analytical Procedure refers to calculations of key financial ratios which are used by the
auditor to assess the risks which are involved in a business. As per the analysis of the financial
statements of Cornwell Group and also the key financial ratios which are computed in above
chart, significant ratios of a business are effectively computed.
The liquidity ratio of the business comprises of current assets and quick assets of the
business. The current ratio and quick ratio of the business are shown to be favorable for the year
2017 as the estimates are shown to be 1.11. The liquidity ratio of the business is considered to be
important for the purpose of estimating the cash position of the business (Jans, Alles &
Vasarhelyi, 2014). The auditor needs to take into consideration the liquidity risks of the business.
The profitability ratio of the business comprises of gross profit ratio, net profit ratio,
return on assets and return of equity of the business. The gross profit ratio of the business is
shown to have tremendously improved from previous year performance of profitability. This
shows that the business has an efficient operational structure and is also performing better in
terms of previous year. The net profit ratio of the business also shows improvement from
estimates of previous year which suggest that company is maintain the costs of the business
(Yoon, Hoogduin & Zhang, 2015). The auditor needs to ensure that the balance which are shown
in the financial statements are showing true view and no item which should be present in the
income statement is missing. The return on assets and return on equity of the business is shown
to be favorable which is also a positive sign for the business. Both these estimates are considered
to be financial indicators for the success of the business.
The asset management ratio comprises of asset turnover ratio which shows the ability of
the business to generate revenue from the use of assets of the business. The asset turnover ratio is

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also shown to be favorable. However, the auditor needs to check whether the fixed assets of the
business are valued in a proper way for which the auditor can use the help of an expert for
valuation of the assets of the business. The auditor also needs to check the condition of the assets
and also the depreciation which is charged on the assets which affect the valuation of the assets
of the business.
The leverage ratio of the business is associated with capital structure which is used by the
business during the year. The debt ratio of the business measures the debt of the business and the
calculation which is shown in the financial statements and the same shows that the debt of the
business has reduced significantly as per the policies of the business. The debt to equity ratio of
the business shows the mixture of debt and equity which is used by the business for financing the
activities of the business. The auditor needs to verify whether the balance which are shown for
the borrowings and equity are appropriately shown in the annual reports of the business.
The dividend which is shown in the financial statements of the business shows the current
performance of the business. The dividend yield ratio of the business shows the dividend of the
business has increased significantly during the financial period. The auditor needs to check
whether the financial statements effectively shows the value of dividend paid by the business
during the year.
Section 3
Cash Flow Statement Analysis
The cash flow statement of the business is shown in the financial statement of the company and
shows different activities which are undertaken by the business which includes operating
activities, investing activities and financing activities.

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The cash from operating activities of the business generates maximum amount of cash
flows for the business as the same is shown to be $ 154.3 million. The cash from investing
activities as shown in the cash flow statement of the business shows the maximum amount of
cash outflows for the business. The cash from investing activities is shown to be $ 187.7 million.
The primary cash receipts as identified from the cash flow statement of the business for the year
2017 is shown to be receipt from customers for the operational activities of the business and the
figure for the same is shown to be $ 342 million. The primary cash payment which is made by
the business as identified in the cash flow statement is the payments which is made to the
suppliers of the business during the year. The cash flow statement shows the two major cash
receipts and cash payments are covered in cash from operating activities of the business.
The main cash from investing activities can be identified as the payments which the
business made for the acquisition of disposal group. The main cash from financing activities of
the business is the receipts which the business gets from taking a loan for the business.
The going concern principle of the business is considered to be an important principle
which all accounting professionals are required to follow while preparing the financial
statements of the business. As per the analysis of the financial statements, the net profits of the
business are shown to be favorable and also the liquidity position of the business is also shown to
be appropriate (Krishnan & Wang, 2014). The business also has positive cash from operations as
per the estimates which are shown in the cash flow statement of the business. Therefore, it can be
assessed from the financial statements of the business that the going concern of the business is
not affected in any way (Feldmann & Read, 2013). However, the audit in order to satisfy the
skeptical attitude needs to apply audit procedures in order to confirm or deny whether the going
concern principle of the business are appropriate or not.

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Review of the Auditor’s Report
As per the auditor’s report of the business, the financial statements of the company is
shown to be showing true and fair view and all relevant accounting standards are followed in the
preparation of the financial statements of the business and also all relevant regulations of
accounting are also followed accordingly as per Corporation Act 2001. The auditor of the
company is Pitcher partners and as per their judgement they have issued an unqualified audit
report (Louwers et al., 2015).
The valuation of investment property which is done by the management is a bit complex
in nature and therefore the auditor needs to apply relevant accounting standards for the purpose
of valuation of investment properties. The auditor needs apply verification process for ensuring
that the value of properties are effectively represented. The valuation of intangible assets of the
business are also covered in the key audit matters of the company and the auditor needs to
estimate whether the same are showing true and fair view.

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Reference
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Cox, R. A., Dayanandan, A., & Donker, H. (2014). Materiality disclosure and litigation risks: A
Canadian perspective. International Journal of Disclosure and Governance, 11(3), 284-
298.
Cromwellpropertygroup.com (2018). Retrieved 1 September 2018, from
https://www.cromwellpropertygroup.com/__data/assets/pdf_file/0015/22920/CMW-
2017-Annual-Report-final-web.pdf
Feldmann, D., & Read, W. J. (2013). Going-concern audit opinions for bankrupt companies–
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1773.
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conducting a quality audit. Cengage learning.