CQUniversity Auditing and Ethics Report: Sonic Healthcare Analysis

This report provides a comprehensive analysis of auditing and ethics principles, specifically in the context of Sonic Healthcare Limited. It begins by determining the materiality level, a crucial step in the audit process, considering factors like profit before tax and selecting an appropriate percentage. The report then reviews draft notes, highlighting significant areas such as contingent liabilities and the adoption of new accounting policies, and outlines the necessary audit procedures. A preliminary analytical review is conducted, examining key ratios like diluted EPS, dividend payout ratio, and return on equity, to identify potential audit risks. The report further analyzes the statement of cash flow, assessing cash inflows and outflows, and evaluating the going concern risk. Finally, it reviews the audit report, including the unqualified opinion and key audit matters, such as the estimated recoverable amount of goodwill and income tax provisions, providing a complete overview of the audit process and its key considerations.

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

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Table of Contents
Introduction................................................................................................................................2
Section 1: Materiality.................................................................................................................2
Determination of Level of Materiality...................................................................................2
Review of the Draft Notes......................................................................................................4
Section 2: Preliminary Analytical Review.................................................................................4
Section 3: Review of Statement of Cash Flow and Audit Report..............................................7
Cash Flow Statement Review................................................................................................7
Audit Report Review..............................................................................................................8
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
Auditing is the process of methodical and independent examination of the financial
statements of the companies in order to examine the fact that whether there is any material
misstatements in those financial statements which can affect the financial outcome (William
Jr, Glover & Prawitt, 2016). There are certain aspects that the auditors are needed to
considered while providing the professional services. The auditors must ensure to determine
the level of materiality for the identification of material misstatements in the financial
statements. After that, the auditors must apply the appropriate analytical procedures for the
testing of the financial statements in order to find the risk areas that need attention (Knechel
& Salterio, 2016). Moreover, the auditors are needed to ascertain the going concern status of
the companies in order to provide the appropriate audit opinion. There are three sections in
this report. Section 1 involves the determination of materiality for the audit of Sonic
Healthcare Limited. Section 2 involves in the application of analytical procedure in the form
of ratio analysis. Section 3 analyses the cash flows of the firm for the determination of going
concern status of the company.
Section 1: Materiality
Determination of Level of Materiality
Materiality is considered as a crucial aspect for the auditors and the concept of
materiality is considered as fundamental to the audit. Materiality is applied by the auditors at
the audit planning stage and when audit is performed and at the time of the evaluation of the
effects of identified misstatements on the audit (Mio, 2013). Determination of the level of
materiality is considered as a crucial process for the companies and there is not any exception
of this fact in case of Sonic Healthcare Limited.

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While there is not any mandatory approach for the determination of materiality, it is
needed follow three specific steps in the process. They are:
i. Selection of the appropriate benchmark;
ii. Determination of a level that is a percentage of this benchmark; and,
iii. Provide justification of the choice (icaew.com, 2019).
At the planning stage of the audit of Sonic Healthcare Limited, it is needed to follow
these three steps for the determination of materiality. It is shown below:
Step 1 –Certain factors are required to be considered while selecting the benchmark which
includes the nature of the entity and the nature of the industry in which it operates. Some of
the commonly used benchmarks are profit before tax, total income or total expenses, gross
profit, net assets and others. Profit before Income Tax is selected in case of Sonic
Healthcare Limited because this is commonly used to measure the performance of the
companies under this industry (Eilifsen & Messier Jr, 2014).
Step 2 – The selection of this percentage largely depends on the professional judgment of the
auditors. Generally, the use of 1% to 5% of threshold can be seen because of the large
acceptability of this range. In case of Sonic Healthcare Limited, 5% is considered as the
percentage of this benchmark (Legoria, Melendrez & Reynolds, 2013).
Determination of Materiality Level – On the basis of the above discussion, the materiality
of Sonic Healthcare Limited is shown below:
Profit before Income Tax × 5% = Overall Materiality
$616,981,000 × 5% = $30,849,050 that is $30 million approximately.

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Review of the Draft Notes
Following are the areas of draft notes that are significant for the audit of Sonic
Healthcare Limited:
Contingent Liabilities – As per Note 30 Contingent Liabilities, Sonic Healthcare Limited
has provided guarantees regarding the workers compensation insurance of $10,442,000 in the
year of 2018 and for the performance of certain contracts by the subsidiary companies.
Although this amount does not surpasses the materiality threshold, it can affect the audit
planning if becomes due (investors.sonichealthcare.com, 2019). The required audit
procedures for this are the verification of this liability’s existence through obtaining the letter
of representation from the management of Sonic Healthcare Limited that includes the states
that the management has knowledge about this undisclosed liability and reviewing the
agreement regarding this liability (Byrnes et al., 2018).
Adoption of New Accounting Policies – As per Note 1 (ad) New Accounting Standards and
Interpretation, the company has adopted certain new accounting standards in the year 2018
such as AASB 9 Financial Instruments, AASB 15 Revenue from Contract with Customers
and AASB 16 Leases (investors.sonichealthcare.com, 2019). It needs to be mentioned that the
adoption of these standards can have major impact on the financial outcome of the company
in the year which can affect the audit process. The appropriate audit procedure in this case
will be to assess the impact of these new standards on the financial outcome of the company
(Byrnes et al., 2018).
Section 2: Preliminary Analytical Review
Preliminary analytical procedures are crucial for the auditors to identify the areas of
audit risk which needs to be addressed in the audit procedures. The following discussion

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shows the changes in the key ratios of Sonic Healthcare Limited as a part of analytical
procedures.
Table 1: Key Ratios of Sonic Healthcare Limited
(Source: investors.sonichealthcare.com, 2019)
Diluted EPS – The above table shows fluctuation in the diluted EPS of Sonic Healthcare
Limited since it increases from 2015 to 2016, then decreased in 2017 and again increases in
2018. This is because of the fluctuation in the net income of the firm. This is a key area that
needs to be addressed in the audit (Griffiths, 2016).

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Dividend Pay-out Ratio – As per the above table, there is a fluctuation in the dividend pay-
out ratio of Sonic Healthcare Limited from 2015 to 2018 which is the outcome of the
fluctuation in the net income of the firm. This can lead to the risk of material misstatements
rewarding net income of the firm which needs to be addressed in the audit process (Brown-
Liburd, Issa & Lombardi, 2015).
Gearing Ratio – The above table shows that this ratio increases from 2015 to 2017 and then
decreases in the year 2018. This is due to the reduction in debt level that can be done to
improve the financial position and this is an audit risk which needs to be addressed (Griffiths,
2016).
Interest Cover – Interest cover of Sonic Healthcare Limited increases from 2015 to 2016 and
then decreases from 2016 to 2018. Decrease in EBITDA can be considered as a reason for
this fluctuation which can create material misstatements in the company’s profitability
position. This is a crucial risk area that needs to be addressed in the audit (Brown-Liburd, Issa
& Lombardi, 2015).
Debt Cover – The above able shows that debt cover ratio of Sonic Healthcare Limited
decreases from 2015 to 2016, increases from 2016 2017 and then again decreases in the year
2018. Fluctuation in the EBTDA of the company can be considered as the main reason for
this which can lead to material misstatement and needs to be addressed in the audit process
(Griffiths, 2016).
Return on Invested Capital – As per the above table, this ratio increases from 2015 to 2016,
then decreases in 2017 and then again increases in 2018. This questions the performance of
the management of Sonic Healthcare Limited in efficiently using the invested capital for
generating return and this is an audit risk area since it can lead to material misstatements
(Brown-Liburd, Issa & Lombardi, 2015).

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Return on Equity – This ratio increases from 2015 to 2016, then decreases in 2017 and then
again increases in 2018. This fluctuation in this ratio can be due to fluctuation in net income
of the company and thus, needs to be considered in the audit process (Griffiths, 2016).
As per the above discussion, the relevant assertions are Accuracy for net income,
Existence and Valuation for debts and Accuracy for EBITDA. In case of accuracy for net
income, it is needed to assess the calculation mechanism of net income in Sonic Healthcare
Limited can address the issue. Same like this; it is also needed to test the calculation process
adopted by the company for EBITDA. Lastly, in case of net debt, it is needed to assess the
fact that whether the recorded debts actually exist and whether they have been measured and
recognized in the correct manner (Titera, 2013).
Section 3: Review of Statement of Cash Flow and Audit Report
Cash Flow Statement Review
It can be seen from the 2018 Annual Report of Sonic Healthcare Limited that the cash
flows from operating activities of the company has provided the majority of cash inflows
which is $767,920,000 and $736,365,000 in 2018 and 2017 respectively. At the same time,
cash flows from investing activities had the greatest outflow which is $464,436,000 and
673,492,000 in 2018 and 2017 respectively (investors.sonichealthcare.com, 2019).
The primary cash receipts of Sonic Healthcare Limited during the year is from cash
receipts from customers inclusive of goods and service taws which is $5,641,609,000 and the
primary cash payment is the payments to suppliers and employees include of goods and
service taxes which is $4,713,563,000(investors.sonichealthcare.com, 2019).
There was the occurrence of non-cash financing and investing activity in Sonic
Healthcare Limited when the company acquired plant and equipment with an aggregate fair
value of $108,000 by means of finance lease (investors.sonichealthcare.com, 2019).

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It can be seen from the above discussion that Sonic Healthcare Limited has generated
healthy cash inflows from operating activities; but concern can be seen in the areas of cash
flows from operating activities and financing activities since there is major outflow of cash in
both the categories of cash flows. It indicates that that the company has to pay more than its
earnings. This creates the going concern risk which can affect the company’s ability continue
as a going concern (Feldmann & Read, 2013).
At the planning stage, it is needed to consider whether there are conditions that may
raise major doubt about the going concern assumption of Sonic Healthcare Limited. It is
needed to discuss with the management about their going concern assessment in order to
know that whether they have considered any event or condition and how they have planned to
minimize it. It is needed to look for certain events that can lead to going concern risk like net
liability or net current liability position, withdrawal of financial support, negative operating
cash flows, adverse key financial ratios and others (accaglobal.com, 2019).
Audit Report Review
As per the audit report of Sonic Healthcare Limited, the auditors have
provided the company with unqualified audit opinion because the financial reports of the
company have provided true and fair view of their financial position as well as performance
and they have complied with the Australian Accounting Standards and the Corporations
Regulations 2001 (investors.sonichealthcare.com, 2019).
Apart from the audit opinion, the presence of the section named “Key Audit Matters”
can be seen in the auditor’s report where the auditors have raised two issues that were of
major significance in the audit of Sonic Healthcare Limited. They are discussed below.
Key Audit Matter 1 – The auditors have considered the estimated recoverable amount of
goodwill and other indefinite life intangible assets as significant because these are significant

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assets in the balance sheet and the management of the company has applied complex
judgments for the assessment of impairment regarding these assets
(investors.sonichealthcare.com, 2019).
Key Audit Matter 2 – The auditors have considered the income tax provision as significant
matter because of the fact that Sonic Healthcare Limited is subject to taxation in different
jurisdiction and thus, the presence of uncertainty can be seen in tax calculation in many cases
(investors.sonichealthcare.com, 2019).
Conclusion
As per the above discussion, it is needed to follow certain steps for the determination
of materiality for auditing such as selection of benchmark, determination of the percentage of
the selected benchmark and others. After that, the above discussion shows that ratio analysis
can be considered as a crucial tool for the preliminary analytical review of the financial
statements for the identification of the risky areas which need to be treated with special
emphasis. Lastly, it can be observed that the analysis of cash flows helps in determining the
going concern risk of the companies. In Sonic Healthcare Limited, the presence of two key
audit matters can be seen in a separate section apart from the audit opinion.

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References
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impact on audit judgment and decision making and future research
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Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., &
Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the
Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297).
Emerald Publishing Limited.
Eilifsen, A., & Messier Jr, W. F. (2014). Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), 3-26.
Feldmann, D., & Read, W. J. (2013). Going-concern audit opinions for bankrupt companies–
impact of credit rating. Managerial Auditing Journal, 28(4), 345-363.
Griffiths, P. (2016). Risk-based auditing. Routledge.
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going-concern15.html
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audit-of-financial-statements.ashx
Investors.sonichealthcare.com. (2019). Annual Report – 30 June 2018. Retrieved 14 May
2019, from https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/

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