Auditing Project: Comprehensive Financial Auditing of ZIP TEL Company

This auditing project report analyzes the financial position of ZIP TEL, a telecommunication company. It begins by identifying key business risks, including market, liquidity, and credit risks, and then assesses the company's financial performance through ratio and trend analysis over three years (2014-2016). The project calculates materiality for planning purposes and selects ten account balances to design comprehensive audit work steps, including assertions, audit procedures, and evidence. The report includes detailed analysis of profitability, liquidity, activity, and solvency ratios, along with a sampling plan for testing material account balances like cash at bank and trade receivables. The analysis reveals negative trends in profitability and concerning shifts in equity and debt levels, offering insights into the company's financial health and the effectiveness of its risk management strategies.

AUDITING PROJECT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Selecting ASX listed company ..........................................................................................1
2. Understanding of the nature of the entity in particular industry and identifying key business
risks.........................................................................................................................................1
3. Performing analytical procedures of financial statements of using ratio analysis and trend
analysis over the past three years...........................................................................................3
4. Explaining material account balances and calculated materiality for planning purposes and
justification.............................................................................................................................6
5., 6., 7. 8. Selecting ten account balances, listing assertions for items and designing
comprehensive set of audit work steps for material account balances with appropriate
evidence. Including sampling plan for testing each item of material account balances ........7
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................14

INTRODUCTION
Auditing means to analyse the financial position of an organisation through systematic
and independence examination of books of account of business. This is carried out to check the
authenticity and determination of any misrepresentation or misstatement of any transaction in
financial record of firm. In the present report auditing of listed telecommunication company ZIP
TEL is conducted. In this report key business risk related with the firm are anticipated and factor
effecting both inherent and control risk are discussed. For determination of financial
performance of business ratio analysis is carried out. Material information from the financial
record and accounts are found out and their relevancy with organisational performance is
presented.
1. Selecting ASX listed company
2. Understanding of the nature of the entity in particular industry and identifying key business
risks.
ZipTel Ltd is engaged in telecommunication sector which is the highest revenue
generating one for Australian economy leading to growth of overall nation in the best possible
manner. The nature of business entity is that it provides mobile SIM cards and internet data
services which help to attain profits. It can be interpreted from the financial reports that from last
three years ie 2014, 2015 and 2016, organisation is not able to earn profits and huge losses are
suffered. The key business risks are market risk, liquidity risk and credit risks. Risk management
program has been implemented in order to focus on unpredictability of financial markets and to
minimise these threats. However, derivatives are not being used by company.
Market risk is based on Foreign Exchange risk and cash flow and fair value interest rate
risks. ZipTel Ltd has short-term nature of cash and cash equivalents (CCE) bearing interest rates.
It can be analysed that due to its nature, interest rates are not vital at this time and risk is low.
Credit risk is termed as a type of risk where counter party will default on making its payments to
company and substantial loss will occur (Jespersen and Hasle, 2017). Liquidity risk on the part
of company are low as counterparties are banks having high credit risks and as such, risk is low.
3. Performing analytical procedures of financial statements of using ratio analysis and trend
analysis over the past three years
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Particulars Formula 2016 2015 2014
Profitability Ratios
Net margin Net profit / sales revenue -7.2 -8.73 -4.28
Gross margin Gross profit / sales revenue 0.39 0.04 0.56
Return on total Assets Net income / total assets -8.54 -0.86 -0.4514146241
Asset turnover
Sales revenue / Net assets
(Shareholders' Equity) 2.41 0.1 0.14
Liquidity Ratios
Current ratio
Current assets / Current
Liabilities 2.03 14.59 3.82
Quick ratio
Liquid assets / Current
liabilities 1.99 14.53 3.8
Activity Ratios
Inventory turnover ratio COGS / Average inventory -56.03 -27.69 -11.23
Debtors Turnover ratio
Sales / Average trade
receivables 80.96 0.00 107.43
Solvency Ratios
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Debt to equity Debt / Equity 0.13 0.01 0.01
Equity ratio
Total Shareholder's Equity /
Total Assets 0.49 0.92 0.74
Trend Analysis of ZipTel Ltd for last three years
Particulars 2015 2014 Inc/Dec
%
Change 2016 2015
Inc/
Dec % Change
Profitability ratios
Net margin -8.73 -4.29 -4.44 1.04 -7.21 -8.73 1.52 -0.17
Gross margin 0.04 0.56 -0.52 -0.92 0.39 0.04 0.35 8.06
Return on total Assets -0.86 -0.45 -0.41 0.91 -8.54 -0.86 -7.67 8.89
Asset turnover 0.11 0.14 -0.03 -0.24 2.41 0.11 2.31 21.46
Liquidity ratio 0.00 0.00
Current ratio 14.53 3.83 10.70 2.80 2.03 14.53 -12.50 -0.86
0.00 0.00
Quick ratio 14.53 3.81 10.72 2.82 1.99 14.53 -12.54 -0.86
0.00 0.00
Activity Ratios 0.00 0.00
Inventory turnover
ratio -27.69 -11.24 -16.46 1.46 -56.03 -27.69 -28.34 1.02
0.00 0.00
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Debtors Turnover
ratio 0.00 107.44 -107.44 -1 80.96 0.00 80.96 0
0.00 0.00
Solvency Ratios 0.00 0.00
Debt to equity 0.01 0.01 0.01 0.90 0.13 0.01 0.11 8.23
Equity ratio 0.92 0.75 0.18 0.24 0.49 0.92 -0.43 -0.47
Activity Ratios
Inventory turnover ratio-
Inventory turnover is another useful measure for assessing whether it is quickly using
stock for attaining desired production or not. It can be analysed that inventory ratio has been in
negative form over the years. Figure was -11.23 in 2014, increased to -27.69 in 2015, while
reaching to -56.03 in 2016.
Debtors Turnover ratio-
Credit sales are made by company and customers are required to pay after stipulated
time. This shows that amount needs to be gathered quickly from debtors. Lower the ratio, better
for the firm implying its efficiency in collecting outstanding amount. It can be interpreted from
the calculation and trend analysis that debtors turnover ratio was -107.44 in 2014 and was 0 in
next year. However, it reached to 80.96 in recent year showing firm's efficiency in recovering
amount.
Solvency Ratios
Debt to equity
Debt and equity both are used in order to maintain capital structure by utilisation of same
in a better way for meeting financial requirements. Debt equity ratio was 0.01 in 2014 which was
same in 2015 to 0.01. This shows that amount of debt was quite lower in capital structure.
However, figure reached to 0.13 in 2016 showing clearly that it is using more debt financing in
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its capital structure. Thus, it is required that 60 % should be of equity and remaining 40 % must
be debt so as to attain optimal capital mix.
Equity ratio-
It can be assessed that equity ratio was 0.75 in 2014 which increased to 0.92 in next year.
However, figure reached to 0.49 having -0.47 % of change as depicted by trend analysis. This
means that equity ratio was good in company in earlier years but it reduced to 0.49 which implies
that financial strength of company is gone down.
4. Explaining material account balances and calculated materiality for planning purposes and
justification
The users of financial information relies on financial reports which are made publicly
available so that it may attain benefits from it. Financials help to ascertain whether company is
earning profits or not in effective manner (Ferramosca, D'Onza and Allegrini, 2017). There are
material account having major impact on the company's position because omissions or errors
made in such information affects decision-making aspect for the firm up to a high extent and
fairness of financials are affected leading to false information to users and thus, it material
misstatements are to be analysed and true and fair view of financial statements must be presented
to them so that they may take appropriate decisions with ease by relying on fairness of
statements (Planning Materiality: Definition, Example, and Calculation. 2018).
Quantitative and qualitative factors are taken into consideration and thus, materiality is
identified. For planning purpose, 1.5 % of sales revenue has been taken in order to plan for
materiality. Hence, materiality is increasing which was 8554.21 in 2014, 977.105 in next year
and reached to 29148.15 in 2016 financial year. If more than or equal to misstatements are
found, then in that case, adjustment will be made.
Overall Materiality 2016 2015 2014
Sales Revenue 1943210 651407 570281
Profit/ (Loss) Before Tax 14009805 5687639 2444621
Profit/ (Loss) Before Tax (Adjusted) 14009805 5687639 2444621
Overall Materiality (1.5 % of sales 29148.15 9771.105 8554.21
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revenue)
5., 6., 7. 8. Selecting ten account balances, listing assertions for items and designing
comprehensive set of audit work steps for material account balances with appropriate
evidence. Including sampling plan for testing each item of material account balances
Account Balance Amount
Assertion
(s) Audit Procedures Audit Evidence
1. Cash at Bank
ZipTel.
$AUD
1353070
Existence,
Completenes
s, Accuracy,
Rights and
Obligations,
Valuation
and
Allocation
1. Requested and
examined bank
confirmations
2. Undertake tests
of bank
reconciliation,
follow-up
reconciling items.
Bank Confirmation certificate from
the Bank (Document).
Obtain copies of client’s bank
reconciliation (Document).
Enquiry and notes of reconciling
item (oral)
Assertion -
Existence
It determines that, all the proof of cash to ascertain various recorded receipts which
were have to be deposited in the bank account of ZipTel. Therefore, this dual
confirmation is quite necessary for organisation in making appropriate determination
of all operation (Shilts, 2017).
Assertion -
Completeness
It consists of cross checking data base with number of transactions and amount are
listed in each account. Thus, bank statement is examined with the BRS of ZipTel.
Outstanding amount had been overstated in the cash balance of organisation.
Assertion -
Accuracy
To analyse the accuracy or reliability of details on which bank account of a concern
has been considered to analysed the past records as well as matching the current
position with it. Along with this, it also ensures the preparation of Bank reconciliation
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at the end of the period which will is accurately based on company’s actual cash
position.
Assertion - Rights
& Obligations
It investigates all the transactions relevant with checks and cash to bearer which
determines disbursement propriety (Chou, 2017).
Assertion -
Valuation &
Allocation
To address issues which will be based on tracing the entries made in cash receipts,
Journals, ledgers, general ledger and various invoices. This helps in governing the
actual cash requirements in the business as well as proper allocation of all resources.
Account
Balance Amount Assertion (s) Audit Procedures Audit Evidence
2. Trade
and other
receivables
ZipTel.
$AUD
104,872
Existence,
Completeness
, Accuracy,
Rights and
Obligations,
Valuation and
Allocation
1. Tallying each
item and line in
accounts along with
its amount.
2. Undertake tests
of client’s accounts
and confirmation of
all transaction.
Statement of agreement
signed among client and
company (Document).
Copy of previous audits and
account information
(Document).
Enquiry and notes of
transactions with parties
(oral)
Assertion -
Existence
Consideration of the SAS 31 which states that, there will be proper occurrence
and deals of transactions which have been taken in consideration in terms of
recording the assets and liabilities. Moreover, considering the Equity interest
will be helpful in analyzing the data (Clikeman and Liu, 2017).
Assertion -
Completen
ess
The record of all transactions is needed to have proper disclosure in financial
statements which were considered.
Assertion - Allocation and valuation of data base needed to be based on proper
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Accuracy administration and making proper disclosure of data set.
Assertion -
Rights &
Obligation
s
Rights of firm ate associated with the assets while obligations are with the
liabilities.
Assertion -
Valuation
&
Allocation
It consists of proper disclosure of all data base which were relevant with proper
applicability and financial reporting based on proper framework.
Account
Balance Amount Assertion (s) Audit Procedures Audit Evidence
3.
Prepayments
ZipTel.
$AUD
6,868
Existence,
Completeness,
Accuracy, Rights
and Obligations,
Valuation and
Allocation
1. Analysing all
accounts as per
advance payments
2. Determining the
costs incurred in all
transactional
activities.
Past invoices of all
transactions
(Document).
Obtain copies of
expenses (Document).
Enquiry and notes of
transaction (oral)
Assertion -
Existence Future expenses have been represented on the current balance sheet date.
Assertion -
Completene
ss
Enquiring existence of such prepayments in the balance sheet with proper
amount and transactional process (Mccollum, 2017).
Assertion -
Accuracy
Proper classification of expenses along with its amount as well as proper
process of disclosure.
Assertion -
Rights &
Obligations
Responsibilities of client in analysing all risks which were being associated
with business.
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Assertion -
Valuation &
Allocation Required proper entries of each transactions with accurate allocation.
Account
Balance
Amoun
t Assertion(s) Audit Procedures Audit Evidence
4.
Inventories
ZipTel.
$AUD
6,868
Existence,
Completeness,
Accuracy,
Rights and
Obligations,
Valuation and
Allocation
1. Determining the
units produced by
organisation against
with sales of the
period
2. Analysing the
cost implicated in
this process
Inovices of all transactions
(Document).
Obtain copies of supplier’s
or distributor’s account
(Document).
Enquiry and notes demand
and supply made by
organisation (oral)
Assertion -
Existence
Tallying the transactions which are needed to be recorded in the financial
statement of firm such as income statement, trading account and balance sheet.
Assertion -
Completene
ss
Inventories along with its proper quantity and amount must have records in all
the financial statements.
Assertion -
Accuracy
It has been completely classified, recorded and listed in the books of accounts
with proper administration.
Assertion -
Rights &
Obligations
The ownership of the inventory will be awarded to the client which determines
their responsibilities for that product.
Assertion -
Valuation &
Allocation
There has been identification of all slow moving, obsoleted and damaged
goods along with their proper valuation and allotment in the transactional
activities (Ouenniche and et.al, 2017).
Account Amou Assertion Audit Audit Evidence
9

Balance nt (s) Procedures
2.
Receivables
ZipTel.
$AUD
24,001
Existence,
Completene
ss,
Accuracy,
Rights and
Obligations,
Valuation
and
Allocation
1. Request a
proper record of
all debtors in
organisation
2. Analysing the
debtors’
collection period
Account information regarding
number of debtors in each year
(Document).
Obtain copies of debtor’s invoices
(Document).
Enquiry and notes the amount
which will be receivable by the firm
in a upcoming period (oral)
Assertion -
Existence
Confirming the details listed in the balance sheet of the organization in each
year.
Assertion -
Completen
ess The complete transactions of all receivables in a proper manner in each account.
Assertion -
Accuracy
All categories of debtors were proper classified with the date, time and amount
of transactions. Along with this the accurate disclosure has been represented by
the accounting professionals of this organization
Assertion -
Rights &
Obligation
s
The rights and responsibilities of the balances are associated with the clients in
terms of making payment and obtaining the ownership of commodities from
company (Akeju, Butakov and Aghili, 2018).
Assertion -
Valuation
&
Allocation
Enquiring all accounts of business which has brought the clear determination
about valuation and allocation of funds.
Account Balance
Amou
nt
Assertion
(s)
Audit
Procedures Audit Evidence
1. Trade and other $AUD Existence, 1. Accessed Cash disbursements transactional
10