Auditing and Ethics: Materiality and Audit Procedures for SCG Report

This report examines the auditing and ethics of Scentre Group Stapled Securities (SCG), focusing on materiality, significant audit items, and analytical review procedures. Section 1 defines materiality, discusses its determination based on financial metrics, and calculates tolerable misstatement levels for SCG. It identifies and analyzes significant audit items, including contingent liabilities and the application of AASB 9 for impairment, detailing associated audit procedures. Section 2 employs preliminary analytical review procedures, particularly ratio analysis, to assess financial statement risks. It analyzes SCG's profitability, liquidity, and leverage ratios from 2015 to 2018, identifying key accounts like receivables and revenue for further audit procedures. The report provides audit procedures for key assertions such as existence, classification, accuracy, and cutoff, ensuring a comprehensive evaluation of SCG's financial statements. The report is based on the 2018 annual report of Scentre Group Stapled Securities.

Running head: AUDITING AND ETHICS
Auditing and ethics
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Table of Contents
Section 1..........................................................................................................................................2
Materiality....................................................................................................................................2
Significant items for audit...........................................................................................................3
Section 2..........................................................................................................................................5
Reference.........................................................................................................................................9

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Section 1
Materiality
Materiality is the threshold limit exceeding which the misstatement in the financial
statement is considered as material and is considered to have material impact on decision making
process of the financial statement users. As stated under AUS 202 the auditor’s main objective is
to express opinion regarding compliance of required framework and presentation of the financial
statement (Auasb.gov.au, 2019). Different factors are there those are also considered while
determining level of materiality like reliability of the information provided by internal sources,
environment of the entity’s business and other qualitative and quantitative factors. Planning
materiality is considered as estimate made by the auditor at planning state. It is the highest
amount that the auditor believes that the misstatement has taken place (Christensen et al., 2016).
Different bases used for determining the materiality level are as below –
Basis High level Low level
Net profit 5% 10%
Total revenue 0.5% 1%
Shareholder’s equity 2% 5%
Total assets 1% 2%
Based on the materiality level the tolerable misstatement level is set up. Generally, it
varies between 30% to 70% based on the entity’s nature of business and transaction carried out
by it. For SCG (Scentre Group Stapled Securities) based on its business nature it can be
established at 50% of materiality level (Scentregroup.com, 2019).
Rational for selecting the level

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Though the establishment of materiality level is based on experience and professional
judgments of the auditor as the items mentioned above in the table are of significant importance
these items are taken as the base (Byrnes et al., 2015).
Quantitative estimate
Considering all the factors mentioned above materiality level for SCG will be computed
as follows –
Basis Amount (million ) Materiality
Low level High Level
5% to 10% of the net profit $ 2,295.90 $ 114.80 $ 229.59
0.5% to 1% of the sales revenue $ 2,149.20 $ 10.75 $ 21.49
2% to 5% of the shareholder’s equity $ 23,865.80 $ 477.32 $ 1,193.29
1% to 2% of the total assets $ 40,875.00 $ 408.75 $ 817.50
Generally the highest mount is considered for establishing the level of tolerable
misstatement. Hence, for SCG the tolerable misstatement will be = $ 1193.29 * 50% = $ 596.65
or $ 600 approximately (Scentregroup.com, 2019).
Significant items for audit
Scrutinizing the financial statements of SCG, it is observed that some of the items shall
be regarded as important for the purpose of audit as these items require significant level of
judgement, estimates and assumptions to be made by the management. These items are –
Contingent liabilities –
SCG provided guarantees for certain joint venture operation of Westfield Corporation
Limited in UK. Under the implementation deed of merger and restructure, the organisations of
SCG as well as Westfield Corporation Limited have the cross indemnified to each other for

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claims, if any that estimated to be paid or for which payment is required to be made for such
guarantee (Scentregroup.com, 2019). Obligation of SCG with regard to performance guarantee
can be called on at anytime depending on the performance or non-performance for certain 3rd
parties. However, over the time in normal business course, the company is involved in the
lawsuit. Further, the directors are in the view that ultimate outcome of the pending litigation will
not have material impact on result of operation or on financial position of the entity. Total
amount of contingent liability for performance guarantee disclosed by the entity for the amount $
79.9 million (Scentregroup.com, 2019). Audit procedure for auditing contingencies are
mentioned below –
 The auditor shall evaluate the probability that the event will take place. While disclosing
the contingency the management must be able to estimate the amount for same or the fact
that the amount cannot be estimated shall be disclosed with contingencies. Further, the
level of probability varies like – remote level, probable level and reasonably probable
level. The auditor must assure that only the contingencies with probable level and
reasonably probable level have been disclosed (Lai, Melloni & Stacchezzini, 2017).
Application of AASB 9 for impairment –
In accordance with AASB 9 the entity fundamentally changed its accounting for the
impairment losses for the financial assets through replacing the AASB 139’s approach with
regard to forward looking expected credit loss approach. Further, it applied the simplified
approach and recorded the expected losses for lifetime on trade as well as other receivables. The
revised approach for computing impairment on account of trade as well as other receivables

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resulted into additional amount of allowance for loss for $ 4.7 million (Scentregroup.com, 2019).
Audit procedure for auditing changes in application of AASB are mentioned below –
 The auditor must verify that the changed method have been consistently applied for rest
of the concerned period after its adoption
 It shall be verified that the method has been changes for better presentation of financial
statement or it was not possible to treat the item as per previous standard
 Proper authorisation for changing the method shall be verified (Louwers et al., 2015).
Section 2
Preliminary analytical review procedure is executed for obtaining information that will
assist the auditor to assess the materials risk regarding financial statement of the client. It
involves comparison of various sets of operational as well as financial information for
establishing historical relationship with the current period’s information. Among different
methods ratio analysis is one such approach that can be used for carrying out analytical review
(William, Glover & Prawitt, 2016).
Ratio analysis for SCG for the period 2015 to 2018 –

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Profitability ratios assist the auditor in assessing the risk of material misstatement
involved in the income statement of the entity. Trend of profitability ratios of the entity is
revealing that the net profit margin of the entity is significantly high and for 2016 and 2017 it is
more than 100%. However, it is reduced to 87.13% in 2018 (Scentregroup.com, 2019). It is
signalling that high chances are there that the revenues of the entity are overstated. Liquidity
ratios of the company are significantly low and are indicating that the company is not able to
meet its short term obligations. It is signalling that high chances are there that the current assets
of the entity are understated. Leverage ratio that is the debt equity ratio is signalling that the

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major proportion of funding is raised through debt that will have unfavourable impact on its
sustainability (Eilifsen & Messier, 2014).
Considering the trend of the ratio and outcomes below mentioned accounts shall be
chosen for analytical review –
 Receivables – over the past 4 years it does not have any particular trend however it
significantly reduced over the years from 2015 to 2016.
Key assertion –
Existence – all the transactions related to credit sales have been fully reported at full amount
Classification – all the receivables are properly classified that is the amount due is not reported
as bad debts (Kharisova & Kozlova, 2014).
Audit procedure –
Existence – reported transaction and balance shall be matched with sales records
Classification – receivables and bad debts amount shall be reconciled with the amount of credit
sales (Knechel & Salterio, 2016).
 Revenue – revenue of the company has not been changed much over the last 4 years
Key assertion –
Accuracy – sales revenue have been recorded without any error
Cut –off – sales recorded in the income statement pertain to the current period only and other
periods sales has not been included in the current period (Kharisova & Kozlova, 2014).

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Audit procedure –
Accuracy – sales transaction and amount reported in the income statement shall be reconciled
with sales records
Cut – off – sales amount shall be matched with the receivables and cash for entire sales made
during the period (Knechel & Salterio, 2016).

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Reference
Auasb.gov.au. (2019). Retrieved 15 May 2019, from
https://www.auasb.gov.au/admin/file/content102/c3/AUS_202.pdf
Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. &
Vasarhelyi, M., (2015). Evolution of auditing: From the traditional approach to the future
audit. Audit Analytics, 71.
Christensen, B. E., Glover, S. M., Omer, T. C., & Shelley, M. K. (2016). Understanding audit
quality: Insights from audit professionals and investors. Contemporary Accounting
Research, 33(4), 1648-1684.
Eilifsen, A. & Messier Jr, W.F., (2014). Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Kharisova, F.I. & Kozlova, N.N., (2014). Applying the category of «Assertions (or
preconditions)» In audit of financial statement. Mediterranean Journal of Social
Sciences, 5(24), p.180.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Lai, A., Melloni, G., & Stacchezzini, R. (2017). What does materiality mean to integrated
reporting preparers? An empirical exploration. Meditari Accountancy Research, 25(4),
533-552.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. & Thibodeau, J.C., (2015). Auditing
& assurance services. McGraw-Hill Education.

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Scentregroup.com. (2019). Retrieved 16 May 2019, from
https://www.scentregroup.com/getmedia/d563d065-7c64-4632-a67b-5d30884237aa/
2018-Annual-Financial-Report_20-Feb-19.pdf
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic
approach. McGraw-Hill Education.