Semester 3, 2019: BAO3306 Auditing Report on Reece Group Limited

This auditing report, prepared for the BAO3306 course, examines the audit of Reece Group Limited. The report begins with an executive summary outlining the auditor's responsibilities, including understanding the client's business, identifying high-risk accounts, determining planning materiality, and assessing audit risks. The report then provides a detailed understanding of Reece Group Limited, focusing on its control environment, risk assessment process, information system, control activities, and monitoring of controls. The report identifies and assesses five significant accounts: revenue and other income, cash and cash equivalents, receivables, inventory, and long-term borrowing, detailing the associated risks of material misstatements for each. The report discusses planning materiality, emphasizing its role in evaluating misstatements. Finally, it assesses potential risks associated with the identified accounts. The report concludes with a summary of findings, providing a comprehensive overview of the audit process and key considerations.

ASSIGNMENT
BAO3306 AUDITING
REPORT
Penalty
- Exceeding the 3000 words limit: TWO (2) marks deduction.
- Exceeding the 30% similarity index limit: FOUR (4) marks deduction.
- Late submission: TWO (2) marks deduction per day including weekends.
Plagiarism
Plagiarism is defined as presenting someone else’s work, including the
work of other students, as one’s own. Any ideas or materials taken from
another source for either written or oral use must be fully acknowledged, unless
the information is common knowledge. All students are strongly advised to do
the following:

- goto http://wcf.vu.edu.au/GovernancePolicy/PDF/POA040915000.PDF
- enter School of Accounting and Finance
- enter Student Resources
- read the PLAGIARISM POLICY.
Semester TRI_3 , 2019
Executive summary
The auditors have the responsibility to develop the audit plan by considering all related
aspects like understanding the client, identification of accounts with high risk of material
misstatements, setting planning materiality level and assessment of the audit risks. First part
of this report obtains understanding on the business of the client that is Reece Group Limited.
The second part identifies the five accounts which are prone to high material misstatements.
The third part of the report discuses about different aspects that need to be taken into
consideration for the determination of planning materiality level. The last part of the report
assesses what can go wrong with the identified accounts in relation to the assessment of audit
risks.

Table of Contents
Introduction................................................................................................................................3
Key information.........................................................................................................................4
Our understanding of the client..............................................................................................4
Our assessment of significant accounts..................................................................................5
Our planning materiality........................................................................................................6
Our assessment of what can go wrong...................................................................................6
Conclusion..................................................................................................................................8
Appendix....................................................................................................................................9
References................................................................................................................................11

Introduction
Audit and assurance is a major aspect for the investors and other stakeholders in order
to enhance the credibility of the disclosed financial information of the firms. In an assurance
engagement, the main aim of an auditor is to gain adequate evidence for expressing a
conclusion in order to improve the intended users’ level of confidence on the disclosed
financial information on different financial reports. ASA 200 indicates that the main
objective of the auditors in the audit of financial reports is expressing an opinion on whether
the client has prepared the financial statements in accordance with the required financial
reporting framework and whether there is any material misstatement in the financial
statements (auasb.gov.au 2020). It requires to be mentioned that the responsibility of the
auditors is to take into account all the required aspects while planning and carrying out the
audit of any client. In order to proceed with the audit of a client, an auditor must gain
adequate understating of the client as this is required for the determination of inherent risk of
audit. After that, the auditor needs to identify the key accounts that can be at the risk of
material misstatements. The next step is to determine the level of planning materiality in
order to ascertain whether there is material misstatement or not. Lastly, it is required for the
auditor to undertake risk assessment for assessing what can go wrong with the selected
accounts. The main aim of this report is to undertake all the above-mentioned steps for
undertaking the audit of Reece Group Limited.
Key information
Our understanding of the client
According to ASA 315 Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment, Para 3, an auditor’s objective is the
recognition of material misstatements risks by understanding the audit client and its
environment that consists of internal control (Fontaine, Letaifa & Herda 2013). This
particular standard is also applicable for the audit of Reece Group Limited where the external
auditor is required to gain understanding of different aspects of Reece Group Limited.
According to ASA 315, there are five specific components of the internal control of Reece
Group Limited that the external auditor needs to assess; they are control environment, risk
assessment process of the entity, information system, control activities and monitoring the
controls (auasb.gov.au 2020). The external auditor of Reece Group Limited is required to
assess these five components for gaining understating on the company.
Control Environment – Control environment consists of the culture, structure and discipline
of a company. Reece Group Limited has a clearly defined organizational structure where the
responsibilities of the management are clearly defined. The company has effectively
segregated the duties while delegating the limits of the authority. As mentioned in the
Corporate Governance statement of Reece Group Limited, the board of the company has put
key emphasis on the ethical aspects like honesty and integrity in all the business dealings.
The company has its own Code of Conduct and Code of Business Ethics for over viewing the
business activities (reecegroup.com.au 2020).
Risk Assessment Process –Reece Group Limited has an effective risk management
mechanism where the company does not only aim to eliminate the risks, but identify, monitor
and manage the material risk of business (reecegroup.com.au 2020). The Board of Directors
of the firm has developed a Risk and Compliance Committee in order to determine and
implement the risk management controls in the daily business conducts. This risk

management process assesses, evaluates and mitigates risks such as strategic risk, reputation
risk, product and service quality risk, ethical conduct in business risks, financial risks and
others (Tepalagul and Lin 2015).
Information System – It is mentioned in the Corporate Governance Statement of Reece
Group Limited that one of the major responsibilities of the Board of Directors of the firms is
to provide the approval of the annual reports and disclosure in the market while overseeing
the processes of the company to make disclosure in timely and balanced manner of all the
material information on financial and non-financial aspects (reecegroup.com.au 2020). The
Board is also responsible to appoint, undertaken and properly check the material information
in the annual general meeting.
Control Activities –Reece Group Limited has its Audit Committee whose one crucial
responsibility is reviewing the risk management framework of Reece Group Limited along
with its internal control (reecegroup.com.au 2020). In addition, Reece Group Limited has
employed stable and reliable management reporting system along with appropriate
accounting control. In addition, the Board of Directors of Reece Group Limited is responsible
to set and monitor strategic plans as well as objectives that include measuring and monitoring
the performance of senior executives. Incompatible duties have been segregated properly
with the aim to eliminate the scope of frauds (Dao and Pham 2014).
Monitoring of Controls – The key responsibilities of the Board of Directors of Reece Group
Limited include monitoring the strategic plans as well as corporate objectives, monitoring the
functional and operational activities of the company, monitoring the business’s capital
expenditures, monitoring the compliance of the company with the regulatory and legal
necessities along with overall governance’s efficiency, monitoring compliance of Reece
Group Limited with its own business and ethical standards that includes codes of conduct and
values of the company and monitoring the senior executives’ performance. The Audit
Committee is responsible to monitor the development of accounting and financial reporting,
monitoring the external audit’s progress and monitoring the matters associated with Code of
Conducts and Whistleblower Policy (reecegroup.com.au 2020).
Our assessment of significant accounts
According to ASA 200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Australian Auditing Standards, audit risk can be
considered as a risk of expressing an unsuitable audit opinion in the presence of materially
misstated financial statements (auasb.gov.au 2020). It is needed for the auditor of Reece
Group Limited to undertake the risk assessment procedure for the identification of the areas
of risk of material misstatements. Appropriate analytical procedures need to be applied by the
auditors in this stage and simple comparison will be used for assessing the risks of Reece
Group Limited (Jans, Alles and Vasarhelyi 2014). Five accounts with the risk of material
misstatements of Reece Group Limited are discussed below:
Revenue and Other Income – It can be seen from the 2018 Annual Report of Reece Group
Limited that there is significant rise in the revenue and other income of the company in 2018
from 2017 that is from $2430958000 to $2691356000 (reecegroup.com.au 2020). Sales
revenue is considered as significant account and this large increase in this account casts
significant doubt on the fact that that can be material misstatement in this account. The
important assertions associated with this account are occurrence, accuracy, cut-off and
completeness. Therefore, this account is at the risks of material misstatement (Lobo and Zhao
2013).

Cash and Cash Equivalents – As per the 2018 Annual Report of Reece Group Limited,
there has been a major increase in the cash and cash equivalent that is from $101,805,000 in
2018 to $539,891,000 in 2018 (reecegroup.com.au 2020). Increase in cash and cash
equivalent improve the short-term liquidity position of the companies and this can be a major
aim of the management of Reece Group Limited to overstate cash and cash equivalent for
improving the liquidity position. Therefore, this particular account is largely at the risks of
material misstatements because of overstatement (Kochetova-Kozloski, Kozloski and
Messier Jr 2013).
Receivables – 2018 Annual Report of Reece Group Limited shows that there is a major
increase in the debtors of Reece Group Limited from 2017 to 2018 that is from $360,912,000
in 2017 to $410,212,000 in 2018 (reecegroup.com.au 2020). There are three important
transactions that create major impact on the receivable balances; they are sales, cash receipts
and sales return and allowance. Since sales and cash and cash equivalents are of significant
risk of material misstatements, their effects can be on the balance of receivable. For this
reason, the account of receivable is required to be considered at the high risk of material
misstatements (Czerney, Schmidt and Thompson 2014).
Inventory – It can be seen from the 2018 Annual Report of Reece Group Limited that
inventories of the company has largely increased from $457,063,000 in 2017 to $540,564,000
in 2018 (reecegroup.com.au 2020). Increase in inventory improved the short-term liquidity
position of the companies and the same is also applicable for Reece Group Limited which
provides the management of the company the reason to overstate this account. Moreover,
there are three crucial transactions that affect the balance of inventory which are purchase,
cash payments and inventory possess. For these reasons, the account of inventory is also at
the high risk of material misstatements (Bhattacharjee, Maletta and Moreno 2015).
Long-term Borrowing – It can be seen from the 2018 Annual Report of Reece Group
Limited that the long-term borrowing of the company worth $100,000,000 in 2017 has been
fully repaid by the company in 2018 (reecegroup.com.au 2020). Since the main risk
associated with this account is understatement, this account is at the most risk of material
misstatements. On the other hand, two significant types of processes create impact on the
balance of this account that are cash payments and purchase. In the presence of these reason,
this accounts needs to be considered at the risk of material misstatement (Czerney, Schmidt
and Thompson 2014).
Our planning materiality
Materiality is considered as a crucial concept in auditing that includes the
misstatements creating major influence on the decision making process of the users of the
financial reports of the clients. As a foundation of the opinions of the auditors, it is required
by the auditors to acquire rational guarantee on there is material misstatement in the financial
reports of the clients or not. This makes increases the significance of the concept of
materiality in auditing. Auditors apply this as audit planning stage along with performing
audit and evaluating the impacts of material misstatements on the overall audit.
The use of materiality in auditing can be seen in order to test and asses the legitimacy
of information in the financial statements and associated notes. The presence of all
materiality related rules and regulations can be seen under ASA 320 Materiality in Planning
and Performing an Audit (auasb.gov.au 2020). It is needed for the auditor of Reece Group
Limited to utilize his/her professional judgment and understanding of the client at the time to
set panning materiality level and the auditor also needs to be alert of the primary users of the
financial statements. The auditor of Reece Group Limited has the option to select the

appropriate base of materiality either from income statement items or from balance sheet
item. The main items of income statement are revenue, gross profit or profit before tax; and
the key items of balance sheet are total equity or total assets. Professional judgment of the
auditor needs to be used while selecting the appropriate base (Eilifsen and Messier Jr 2014).
It can be seen from the annual report of Reece Group Limited that the company has been bale
in registering large amount of revenues over the years; and therefore, revenue is the
appropriate base for the planning materiality level of Reece Group Limited. According to
ASA 320 Materiality in Planning and Performing an Audit, Para A8, professional
judgements need to be applied by the auditor to determine the percentage; and it needs to be
taken into consideration that there is a relationship between the chosen benchmark and
percentage. Therefore, in case of Reece Group Limited, 0.025% is considered as the
appropriate percentage that is to be charged on total revenue. The level of materiality of
Reece Group Limited is calculated below:
Planning Materiality Level = Revenue × 0.025%
= $ 2,691,356,000 × 0.00025
= $672839
Our assessment of what can go wrong
After obtaining the required understanding on the client and identifying the significant
accounts, it is needed for the auditors to assess what can go wrong in these accounts or the
presence of material misstatements in these accounts. This helps in providing the basis to
design and perform additional audit procedures. One crucial part of this is the prioritisation of
the identified risks as this helps in determining what audit procedures need to be undertaken.
The following discussion shows discusses about what can go wrong with these five selected
accounts:
Revenue and Other Income – It is discussed in the above that the sales revenue of Reece
Group Limited has majorly increased in 2018 and this indicates towards the presence of fraud
risk. It is mentioned in the annual report of Reece Group Limited that the company faces
major competition and interruption from unlikely sources. It means Reece Group Limited
operates in a highly competitive industry where the pressure is on its management to achieve
high sales targets. This particular aspect creates the risk of overstating the sales figure in
manipulative and fraudulent manner. This risk cannot be reduced with the company’s internal
control which implies that the inherent risk in this aspect is high for Reece Group Limited
(McKee 2014).
Cash and Cash Equivalents – Earlier discussion indicates that there is significant increase
in the cash and cash equivalent of Reece Group Limited in 2018 and this is also an indicator
that there may be overstatement of cash and cash equivalent by the management to enhance
its short-term liquidity position. It can be the outcome of the competitive pressure on the
company. In addition, Reece Group Limited might have running low of cash which can raise
significant doubt on its ability to continue as a going concern since the core operation of it
were not able to fetch adequate cash. It implies that Reece Group Limited has a high inherent
risk (Boritz, Kochetova-Kozloski and Robinson 2014).
Receivables – It can also be seen that receivables of Reece Group Limited have also
increased in 2018 and two fraudulent activities can be involved in this. First, the management
of Reece Group Limited may have realized the dues from the debtors but did not report it in
the period when it was collected and this will show increased receivables amount. Second,
the management may have used incorrect provision associated with the collection of
receivables. However, the intention behind both of these actions is to enhance the short-term

liquidity position of the company. This risk could be mitigated through internal control and
therefore, the control risk is risk in this case (Fortvingler 2016).
Inventory – Inventories of Reece Group Limited has significantly increased in the year of
2018 which indicates towards the overstatement of inventory by the management for
enhancing the short-term liquidity position. It needs to be mentioned that cash received
majorly connected with inventories where cash is generated from the sale of inventories.
However, increase in cash as well as inventories in Reece Group Limited indicate towards the
presence of fraud around inventories. This risk could be mitigated with effective internal
control and therefore, control risk is high in this case (Fukukawa, Mock and Srivastava
2014).
Long-term Borrowing – It can be seen from the above that the long-term borrowings of
Reece Group Limited has been fully repaid in 2018 and it indicates towards the presence of
understatement of long-term borrowings in 2018 by its management. The main intention of
the management of the company behind this understatement may be the plan to raise further
debt or renegotiate a loan. Presence of huge debt would affect the company’s long-term
liquidity and solvency position to take more loans. Therefore, the management of Reece
Group Limited may have understated the long-term debts or may have classified the long-
term debts incorrectly. In this context, it needs to be mentioned that this increases the
inherent risks of audit of Reece Group Limited associated with long-term debts (Favere-
Marchesi 2013).
Conclusion
The above analysis undertakes the analysis of different steps in the audit planning of
Reece Group Limited. It can be seen from the above that Reece Group Limited operates in a
highly competitive industry where in likely forces disrupt its business operations. The
company has become able in establishing an effective internal control by taking into
consideration all the necessary aspects such as the implementation of an effective risk
management framework, effective distribution and segregation of the duties of senior
executives, control on financial reporting and others. The report also shows that there are five
accounts that are at the high risk of material misstatements; they are sales revenue account,
cash and cash equivalent account, receivables account, inventories account and long-term
borrowings account. The balances of these accounts have fluctuated in 2018 unexpectedly
which raises the doubt of the presence of material misstatements in them. This report
discusses about the necessary aspects associated with the determination of planning
materiality of the audit of Reece Group Limited by discussing the consideration of necessary
aspects in materiality determination such as appropriate base and selection of percentage. The
planning materiality level of Reece Group Limited is obtained by charging 2.5% on total
sales. The last parts show that presence of frauds in the mentioned five accounts with the aim
to achieve certain objectives of the management of Reece Group Limited. The increase in
sales revenue can be the outcome of competitive pressure on the management to post higher
amount of sales. The increase in cash and cash equivalent, receivables and inventories can be
the reason to enhance short-term liquidity position and to mitigate the going concern risk.
The decrease in long-term borrowings can be the reason to improve long-term liquidity
position for raising more loans.

Appendix
Consolidated Statement of Profit or Loss and Other Comprehensive Income

Consolidated Statement of Financial Position

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