Semester 2 BAO5524 Auditing Report: Probiotec Limited Audit Analysis

This report analyzes the auditing procedures applied to Probiotec Limited, an Australian pharmaceutical company. It examines the nature of the company, its audit program, and the concept of materiality in financial statements, including planning materiality. The report identifies potential material misstatements in accounts like cash, receivables, and intangible assets, along with the associated risks. It also outlines the audit procedures used to assess these risks, considering inherent and control risks. The analysis covers substantive procedures and the auditor's approach to forming an opinion on the financial statements, offering a comprehensive overview of the audit process and its application to a specific company.

Running head: AUDITING
AUDITING
Name of the Student
Name of the University
Author Note

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Executive Summary
The report shows the auditing procedure that is carried by the auditor upon different entity
report. It deals with a company name Probiotec which an Australian based company. It shows
the different account that can have material misstatement and also show the planning
materiality which is being calculated by the auditor in the initial stage of audit process.
Lastly, it states the risk that has been associated with different account and the procedure
which is carried upon the account and based on which auditor gives its opinion upon the
same.

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Table of Contents
Introduction................................................................................................................................3
Nature of the Company..............................................................................................................3
Audit Program............................................................................................................................4
Materiality in financial statement...............................................................................................5
Planning Materiality...................................................................................................................6
Risk Associated in Above mentioned Accounts........................................................................7
Conclusion................................................................................................................................11
Reference..................................................................................................................................12

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Introduction
An audit is the evaluation of the entity report as whether the entity has followed all
the norms that are laid in accounting standard while preparing their books of accounts (Chen
et al., 2015). This process can be carried by both external and internal ways as if the internal
employee carries the audit process than it termed as internal auditing and if the external
auditor carries the audit than it termed as statutory audit. It has to check the financial report
by carrying different procedure in the entity operation. Each organisation must have proper
internal control system as this system helps them to reduce the risk associated in their
business activities (De Simone, Ege and Stomberg 2014). As if the entity is having lack of
proper internal control in their business activity than it increase risk associated in the
business, auditor has to figure out the risk which is being associated in internal control and on
the evidence gather by the auditor it has to form a proper opinion upon the report of the
entity. The report shows the entity Probiotec Limited and states the amount of risk that is
present in entity business. It also shows the materiality in entity business and how the auditor
able to plan its audit procedure upon the planning materiality. It describes the material
misstatement that is present in a different account of the entity and how the auditor can carry
substantive procedure to know the risk of material misstatement in entity books of accounts.
Nature of the Entity
The report shows the company Probiotec Limited that is an Australian based
Pharmaceuticals organisation which carries its activities in Australia. It has many business
operations as its market, manufacture and distributes its product in the country. The company
was founded in 1997 and has it headquartered in Laverton North, VIC. It has a proper range
of health product and able to carry its business in a very cost-saving manner. Company has
proper research team, and also it has invested a considerable sum upon the advancement of its

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technologies in their business activities (Auasb.gov.au 2019). Auditor has to apply many
auditing standards upon the company financial information to understand the business as well
as to know the amount of materiality in the entity books of accounts. It has to set the
guidelines and scope of the audit it has to comply with ASA 201 “Terms of Audit
Engagements” which shows all the norms that should be followed by the auditor while
ascertaining the scope of the audit (Auasb.gov.au 2019). ASA 250 “Consideration of Law
and Regulations in an Audit” state the law and regulation which is to be followed by the
auditor in its audit process and help it to increase the overall audit quality.
Audit Program
It is the strategy which the auditor makes upon the plan and procedure which it will
carry in the entity different activities (DeFond and Zhang 2014). These help the auditor to
know whether the entity has followed all the framework while carrying their business
activities in its respective industry. These strategies and plans are programs that are made by
auditor in the initial stage of the audit. As per ASA 300 in Para 7 it states that the auditor
should plan its strategy at the beginning of the audit, which assists the auditor to get an
overview how the things while being carried on in later stage of the business. The audit
strategy shows all the stages that will be followed by the auditor in carrying the audit process
upon the company financial information (Auasb.gov.au 2019) as it shows the process which
auditor plans to calculate the planning materiality as well the analysis of material
misstatement in different account of the entity. These also focuses upon the sampling and
other substantive methods that are used by the auditor to understand the risk of material
misstatement in the organisation (Auasb.gov.au 2019). It also states the steps that are carried
by auditor in regards of entity internal control system is working and how the organization
can manage the business risk with the risk assessment procedure in their business activities.
ASA 300 “Documentation” is also used by the auditor to know which are the vital document

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that should be asked from the management and how the analysis of each document should do
by the auditor (DeFond and Lennox 2017). All these steps help the auditor to get an overview
of all the procedure which it should carry upon the financial report and also help to minimise
the audit risk, which is there in their activities.
Materiality in financial statement
It refers to the error or omission which happen in entity accounting books, and it
directly affects the financial information of the organisation. Financial user has an effect on
their decision making process if the entity is having materiality in their business. Auditor has
to check the management risk assessment procedure and how effective it is in its business
activities. As per the ASA 315 “Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment” in its para 5 states that auditor should
carry many risk assessment procedures upon the entity accounts to know whether it contains
materiality or not (Eilifsen and Messier Jr 2014). The materiality in company financial
accounts has shown below:
Cash and Cash Equivalent - The financial report of the entity for the year 2018 shows an
increase in the figure of cash, which signifies that there is specific materiality involves in the
account balance. In 2017 it was $321624, but in 2018 it is $1816089, so the difference
between the two figure is enormous due to which the auditor has ascertained that the account
is having certain misstatement and the auditor has to carry its risk assessment procedure to
know the amount of risk involved in the account.
Trade and other Receivables - The next account which is considered to have some
materiality is trade and other receivables. As it has also had a significant increase in current
due to which the auditor has consider it to having some misstatement done by the
management in the account. In 2017 it was 10822143, but in 2018 it becomes 16472056

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which show a significant amount of difference so it should perform many tests of control to
know the real value of this account in the entity books of accounts
Intangible Asset – This asset shows the goodwill and brand value of the entity, increase in
the asset signifies that it able to gain more amount of popularity in their industry. As there is
an increase in the account balance, it may happen to portrait a good picture Infront of
investors and other user company has done overvaluation of the account. The auditor should
carry proper substantive procedure upon the books of account to know the real figure of the
intangible asset of the entity.
Long-term Interest-Bearing Liabilities - Auditor has also considered this account to have
certain amount of materiality as there is increase in the account which signifies that the entity
has manipulated the account to get benefit in the industry. The auditor should gather proper
audit evidence about the materiality which is involved in entity account and should state all
the matters correctly in its auditor report
Long-term Provisions – The financial report shows a rise in the level of provision in current
year which can termed as very risky for the company. If the company is increasing the
provision that denotes it having less amount of customer in the business. It should check the
reason for increase in company provisions as well whether the amount has been increased as
per the proper accounting standard or not.
Planning Materiality
Auditor has to carry many procedures in an entity book of account to ascertain
whether it has followed all the norms which preparing their financial reports. Materiality is
one of the most critical factors which the auditor has to ascertain in its audit process
(Furnham and Gunter 2015). The omission of transaction that is made by an individual and
judgement taken by them is termed as materiality. As if the entity financial books have

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materiality that signifies that the entity books not made as per different accounting
frameworks and guidelines.
Auditor plans the amount of materiality at the starting stage of audit process as this
helps it to know the audit process which is being carried upon the entity accounting books
(Griffiths 2016). Planning materiality assists the auditor to understand the materiality involve
in their business activities, and with the help of which the auditor plans the amount of audit
procedure it requires to perform upon the entity activities. These also assist the auditor in
having an idea about the timing and scope of audit that is to be performed by the auditor upon
the entity operations (Groomer and Murthy 2018). The auditor can know where it has to give
more emphasis and how easily it able to gather more audit evidence in regards to fraud and
other error done by the company in that accounting year.
The ascertain which the auditor make at the begging of its audit process is solely
based upon the planning materiality (Hall 2015). The calculation of planning materiality is
done by considering any one of the three factors which are Total Assets, Sales and Equity. It
generally considers the highest amount factor which helps it to get a proper amount of
materiality in regards to entity operations (He, Zeadally and Wu 2015). As per the company
is consider auditor has taken the total asset value in consideration for the calculation of
planning materiality and the percentage is imposed is 5%. Calculation of planning materiality
is listed below:
Planning Materiality=Total Asset∗5 %
¿ $ 93657465∗5 %
¿ $ 4682873.25
The calculation shows the materiality of the entity and with the help of which the auditor can
plan its audit strategy that it will carry upon the company financial report. The auditor can

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know how much time it has to give in regards of each aspect of the business activity and how
it will able to collect audit evidence with the help of test of control and different substantive
procedure in entity operations.
Risk Associated in Above mentioned Accounts
The risk that has associated in above mention account has adequately been analysis by
the auditor as the auditor has carry substantive procedure in the entity financial information
which assists it about the amount of risk involved in each type of account. The risk which can
found in a company statement is control and inherent risk.
Inherent risk is those risk which cannot be controlled by the internal control of the
entity. There is a risk which cannot be minimised by the entity while carrying their business
activities. Control risk is those type of risk which can be easily controlled by the
management. These are the error or omission which occurs in entity business, and that can
quickly be minimised if the entity has sound internal control system in their activities. The
risk and the substantive procedure that is carried by the auditor shown below:
Account
Affected
Risk of Material
Misstatement
Assertions Audit Procedure
Cash and
Cash
Equivalents
The risk of material
misstatement is very
high in this account as
this is a liquid account
so the company can
easily manipulate the
account (Knechel, and
Salterio 2016). As the
Completeness – Auditor
has to check that the
entity has recorded each
transaction properly in
their financial statement
as if there is any
misstatement than it will
show an adverse effect in
Auditor has tom
verify the cash
register of the entity
to ascertain that the
entity can record each
transaction in their
financial books. The
auditor should also

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financial report shows
a very high increase in
cash so this signifies
that it can be due to
some manipulation that
is done by
management in regards
to this account.
entity financial reports (Li
et al., 2015).
carry bank
confirmation that will
help it to match the
value which is there
in company accounts
(Newton et al., 2015).
Trade and
other
receivables
As per the annual
report of the company
it can be seen that there
is an increase on
company trade
receivables which can
show that entity may
have shown wrong
amount in their
account (Pizzini, Lin
and Ziegenfuss 2014).
As this account shows
the liquidity position of
the business, this is the
reason why the
company will
manipulate this
Relevance – Auditor has
to check whether the
company is carrying
proper transaction in this
account or not
(Probiotec.com.au 2019).
It has to verify whether
only the relevance
information company has
incorporated in its
financial information or
not.
Auditor has to carry
external confirmation
that will help it to
know the real value
of the company
account and able to
judge the amount of
materiality in entity
financial reports
(Power and Gendron
2015). Proper
verification of
invoice should also
take place as these
will give the auditor a
proper picture of the
entity.

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account in their books
of account
Intangible
Asset
These are the asset
which is made by the
company or acquires
by them, so the level of
misstatement also
increased in the asset
(Rydin 2014). As it
shows the brand value
of the company so to
create the right image
in the industry
company may come up
with the manipulation
in these accounts.
Accuracy – Company has
to calculate the value of
the intangible asset as per
the accounting standard
and which should be
accurate (Sandvig et al.,
2014). As if the proper
valuation method has not
been used by the
management that will lead
to increase the amount of
materiality in their
business activities.
Auditor has to check
whether they acquire
intangible asset
recorded by the
company or not. As
all the information
which are there in
company financial
statement should duly
verified by the
auditor (Schramm
2016). It has to check
the disclosure which
the entity has given in
regards to intangible
asset in their notes on
accounts
Long-term
interest-
bearing
liabilities
The financial
information of the
entity shows that there
is an increase in the
amount of interest-
bearing liabilities
Completeness – The
company should record
the transaction correctly
in their financial
statement which will help
them to give the proper
Auditor has to check
the contract upon
which the entity is
paying the interest. It
should ask questions
from the management

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which signify the risk
of misstatement in the
account (Shen et al.,
2017). The entity to
show their financial
health strong may
manipulate these
account figure; as a
result, the materiality
will occur in the
company books of
accounts
amount of information to
the users. As if the entity
is not able to record the
transition correctly than
the risk of misstatement
will increase in the
business.
related to the changes
in the figure in an
accounting year.
Proper verification of
the disclosure should
also be done by the
auditor to get a
picture of how the
entity is dealing with
the account in their
business activities.
Long Term
Provisions
As there is an increase
in the amount provided
in compare to last year,
which denotes that
there can be risk of
materiality in the
business. The company
has increased the
provision which will
also give an impact
upon the overall
financial health of the
entity.
Relevance – Company
should only take relevant
information in the
financial information. It
should make provision as
per the accounting
standard, and the entity
should carry no irrelevant
information in their books
of accounts.
The auditor should
match the provision
with the accounting
standard to verify that
the entity has
followed the said
accounting standard
in their books of
account. Industry-
standard should be
analysed by the
auditor to ascertain
the level of