Auditing QEM Limited: Business Risks, Analytical Procedures, and Audit

This report provides a comprehensive analysis of the auditing process for QEM Limited, an ASX-listed company in the energy sector. It begins with an introduction to auditing, emphasizing risk assessment and analytical procedures. The report then delves into the nature of QEM Limited, its business risks (operational, financial reporting, and compliance), and the application of the audit risk model to determine detection risk. Analytical procedures, including ratio analysis (ROCE, Current Ratio, Accounts Receivable Turnover, and ROE), are examined to identify potential material misstatements. The report also covers the determination of materiality, the selection of appropriate bases and percentages, and the calculation of materiality. Finally, it presents an analysis of account balances, audit assertions, audit works, and sampling plans for various accounts, including revenue, expenses, income tax, cash, receivables, payables, borrowings, reserves, prepaid expenses, and equity. The conclusion highlights the importance of understanding the audit client, applying audit risk models, and utilizing audit assertions and sampling processes to obtain sufficient audit evidence. The report references various auditing research papers to support its analysis.

AUDITING
QEM LIMITED

INTRODUCTION
Auditing refers to the process to inspect and examine the financial records and statements of the audit
clients for assessing whether there is any material misstatements in them and whether they have been
prepared in accordance with the required accounting rules, regulations and principles (William Jr, Glover
and Prawitt 2016). Analysis of audit risk is one of the major responsibilities of the auditors whether it is
needed to determine the level of inherent risk, control risk and detection risk. After the process of risk
assessment, it is required for the auditors to adopt the suitable audit procedures for reducing the risk to an
acceptable level. Analytical procedures in auditing involve analysis of ratios that helps in showing the areas
with potential risk of material misstatements (Knechel and Salterio 2016). In addition, the auditors are
needed to assess the audit assertions while developing appropriate substantive audit procedures and sample
plans for them. The main aim of the report is the analysis of different aspects of auditing for QEM Limited.

NATURE OF THE ENTITY, BUSINESS RISKS
AND RISK ASSESSMENT
Nature of Entity – QEM Limited is an ASX listed company involves in the exploration and
development of its flagship Julia Creek Project that covers 249.6 Km2 in the area of Julia
Creek of North Western Queensland. QEM Limited’s shale project is considered as a world
class unique resource that has the potential of delivering innovative energy solutions by
producing energy fuels and vanadium pentoxide. It indicates that QEM Limited operates in
the energy sector and it is involves in complex business operations (qldem.comau 2019).
Business Risks – It can be seen from the Corporate Governance Plan of QEM Limited that
there are three types of business risks to which the business operations of QEM Limited are
exposed to (qldem.com.au 2019). These risks are
1. Operational risk,
2. Financial reporting risks and
3. Compliance risk.

NATURE OF THE ENTITY, BUSINESS RISKS
AND RISK ASSESSMENT
 QEM Limited is involved in highly complex business environment that can lead to material misstatements. After that,
competition in the industry in which QEM Limited operate is highly competitive that can lead to material mistsement.
Therefore, this risk is high for QEM Limited
 the company has implemented effective internal control for the business that includes effective structure of board, monitoring,
risk and compliance management, delegation of authority and others. All these show that this risk is medium in QEM Limited
 It is assumed that the policy of the audit firm of QEM Limited is to keep the overall risk below 10%. The inherent risk is
assumed to be 70% and control risk is assumed to be 40%. The following discussion shows the application of audit risk model
to get the detection risk level.
AR = IR × CR × DR
0.10 = 0.70 × 0.40 × DR
0.10 / (0.70 × 0.40) = DR
DR = 0.3571 or 35.71%
 It implies that the detection risk has to be 35.71% in order to maintain the overall risk level 10%. It needs to be mentioned that
the detection risk is of medium level which required the application of substantive audit procedures to acquire the required
audit evidences (Chou 2015).

ANALYTICAL PROCEDURES

ANALYTICAL PROCEDURES
Ratios Explanation
ROCE Unnatural fluctuation in this ratio is there in QEM Limited since this largely increases
from 2016 to 2017 and then massively decreases in 2018. This indicates towards the
poor ability of the company to generate profit. This is a crucial area that needs to be
considered in the audit of QEM Limited for assessing any kind of manipulation in this
(Jans, Alles and Vasarhelyi 2014).
Current ratio This ratio has largely decreases in 2017 and then increases in 2018. This indicates
towards the potential of the occurrence of any kind of manipulation with the current
account balances for increasing the liquidity of QEM Limited in manipulative manner.
For this reason, this ratio needs to be considered in the final audit of the company
(Titera 2013).
Accounts Receivable
Turnover
This particular ratio has a decreasing trend since it has decreased from 2016 to 2018.
This indicates towards the decreased ability of QEM Limited to collect its average
accounts receivable. This is a crucial aspect in the final audit of the company which
indicates towards the presence of material misstatements in the financial statements
(Jans, Alles and Vasarhelyi 2014).

MATERIALITY FOR PLANNING
1. It is needed to select the appropriate base or benchmark in order for the determination of materiality
and certain aspects like nature of the business entity and nature of the industry are needed to be
considered for this. The commonly used bases are profit before tax, total assets, revenue and others. In
case of QEM Limited, total assets ($2,196,283) is selected as the base (Eilifsen and Messier Jr 2014).
2. Selection of appropriate percentage is required that will be charged on the selected base. Professional
judgments of the auditors plays a crucial role in this selection. As per AASB 1031 Materiality, this
percentage can be either greater than or equal to 10% of less than or equal to 5%. Based on the
judgement of the auditors, 5% is considered as the appropriate percentage that needs to be charged on
the selected base (Vîlsănoiu and Buzenche 2014).
 Based on the above-selected base and percentage, the calculation of the materiality of QEM Limited is
done. The calculation is shown below:
Materiality = Total Assets × 5%
= $2,196,283 × 5%
= $109,814 (approximately)

ANALYSIS OF ACCOUNTS BALANCES,
ASSERTIONS, AUDIT WORKS AND SAMPLING
PLAN
Material
Account
Balances
Assertions Comprehensive Set of Audit Works Sampling
Plan
Revenue Relevance Summaries of all the major revenue accounts while comparing the date of
the present year with the data of the past years, check the invoices and to
verify completeness of revenue, accuracy of financial data, recognition of
revenue and others.
Random
sampling
Expenses Completen
ess and cut
off
scanning of the check register, the expenses are required to be sorted,
check register in order to obtain information , enquire about the
payments made to the same vendor
Random
sampling
Income Tax Accuracy Check the tax calculation mechanism, checking the tax related present
data with the historical data with the aim to analyse the trend in tax
payments
Personal
judgment
sampling
Cash and
Cash
Equivalent
Existence,
accuracy
and cut off
Obtain confirmation of the cash balances, vouching reconciling items to
the subsequent month’s statement of bank, ask question on the inclusion
of bank accounts on the general ledger, inspection of deposits as well as
disbursements or proper cut off
Random
sampling
Trade and
Other
Receivable
Existence
and
occurrence,
valuation,
Confirmation on the large accounts receivable balances, vouch
consequent period collections, review of the allowance computation
Personal
judgment
sampling

ANALYSIS OF ACCOUNTS BALANCES,
ASSERTIONS, AUDIT WORKS AND SAMPLING
PLAN
Material
Account
Balances
Assertions Comprehensive Set of Audit Works Sampling Plan
Trade and
Other
Payable
Completen
ess and cut
off
Vouch subsequent payments to the invoices , enquiries regarding the
payments made to the vendors
Personal
judgment
sampling
Borrowings Completen
ess and
classificati
on
Summarization and testing of the debt agreements, review new leases,
confirmation of all major debts , review of the classification of all debts
appropriately, review the accruals for major amount of interests
Personal
judgment
sampling
Reserves Completen
ess and
accuracy
Review and check the suitability of methodology for calculating
reserves, assess whether the company has applied the adopted
methodology for reserve throughout the year on consistent basis, assess
the reliability of the used assumptions and judgments in reserves
calculation
Personal
judgment
sampling
Prepaid
Expenses
Completen
ess and cut
off
Obtaining confirmation on the written approval on the prepayment,
verifying the item to be coded as a prepaid expenses in greater than or
equal to the minimum capitalization limit, obtain and check the copy of
documents
Personal
judgment
sampling

ANALYSIS OF ACCOUNTS BALANCES,
ASSERTIONS, AUDIT WORKS AND SAMPLING
PLAN
Material
Account
Balances
Assertions Comprehensive Set of Audit Works Sampling
Plan
Equity Existence
and
occurrence;
rights and
obligations;
and
classification
summarization and review of the all equity related
transactions, review all equity related account for
proper classification, agreement needs to confirm
between commencing of all period balances with the
previous year ending balances, review all equity
disclosures in order to comply with the reporting
framework requirements
Random
sampling

CONCLUSION
It can be seen from the above discussion that obtaining knowledge about the audit client is
necessary for determining the business risk of the same entity so that audit risk model can be
applied in order to determine which substantive audit procedures should be adopted. This
report also states that the adoption of preliminary analysis helps the auditors in showing the
areas with suspicious tractions and events. It can also be seen from the above discussion that
the calculation of materiality is a crucial aspect which need to be done in certain steps like
determination of base, determination of percentage and calculation of materiality. One crucial
aspect that can be seen from the above discussion that audit assertions play a crucial role in
the adoption of the appropriate audit steps with the aim to obtain the required audit evidence.
At the same time, the auditors are needed to adopt the appropriate sampling process.

REFERENCES
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