Comprehensive Auditing Report: Financial Review of SECOS Group Limited

This report presents an audit analysis of SECOS Group Limited, a manufacturer and distributor of packaging materials. It begins with an introduction to auditing and the chosen company. The report then details the company's business, including its market capitalization and ownership structure. It examines business risk, risk of material misstatement (inherent, control, and detection risks), and the audit risk model. Analytical procedures, including key ratio calculations (current ratio, inventory turnover, gross margin, and debt-to-equity ratio) are presented and interpreted. The report also covers materiality, outlining account balances and related audit procedures for cash and cash equivalents, and receivables. Finally, it includes audit work steps for cash and cash equivalents, and receivables. This report is contributed by a student to be published on the website Desklib.

AUDITING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................4
TASK 3............................................................................................................................................5
TASK 4............................................................................................................................................7
TASK 5............................................................................................................................................9
TASK 6..........................................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERECNES..............................................................................................................................15

INTRODUCTION
Audit is an inspection of various books of accounts of an entity with a view to ascertain a
fair and true picture of financial position. It is conducted by an auditor and he can be an external
party or an employee of the company. It helps in finding the material risk or error that could
affect the company to a great extent. The investors rely on the audited annual report for making
investment decisions (Chen and et. al., 2012). Therefore, it is important to conduct audit. Audit
can be compulsory or voluntary. There are two types of audit i.e. financial audit and management
audit. The chosen company in the project report is SECOS Group. The report covers, the
material account balances that may affect the company, audit work for addressing such balances
along with its respective assertions for gathering evidence to prove the materiality.
TASK 1
SECOS Group Limited is a manufacturer and distributor of packaging material across the
world. Its headquarters are situated at Mount Waverley, Australia. It was a result of merger of
Cardia Bioplastic and Stellar Films Group in April 2015. it produces and sells its high quality
cast films and provides renewable sustainable plastic materials for packaging and plastic
products industries. The company holds a robust patent portfolio and it is following a business
trend by going global through sustainable packaging. It has a Product Development Centre and
manufacturing plant of its own finished products and resins in China and the manufacturing unit
of cast films is located in Australia and Malaysia. Along with this, it has sales and distribution
channels in across the globe.

TASK 2
Business Risk- are non-financial risk, that assesses company's industry, its applicable
regulations and use of technology. An entity may have lower profits than the estimated profits
for the year. The factors included in this risk are input costs, competition, sales-volume, per unit
cost, climate affecting the economic stability and government regulations. Further, it includes an
internal review of company's survival in the future. The auditor will form an understanding
about the SECOS' business, the environment that is it operating in and its internal control.
SECOS Group Ltd. Is a small capital stock company that has a market capitalization of USD $8
Million. Since the company does not have huge market capitalization, there is a threat on its
survival because of its financial viability. The ownership structure of the company may affect its
short- term and long-term performance.
Risk of material misstatement- The risk that occurs due to the errors in financial
statements of an organization. Such situation arise when there is a difference between the figures
recorded and the estimated figures that will be included in financial statement to provide a fair
view of the company. It calculate the degree of material risk and is calculated at the assertion
level. It is subdivided into two categories viz. Inherent risk and control risk.
Inherent risk- refers to the possibility of incorrect or misleading data in accounting
records due to reasons other than failure of controls. It is the risk involved in the critical
transactions of the company. The inherent risk of SECOS Group limited is low, as the company
has been established in 2015 only, therefore it review and manages its internal control
effectively. Also, the auditors conduct the audit of the company, which reduces this risk as there
are low chances of errors in the transactions done during the year.
Control risk- occurs when there is material misstatement in the financial statements and
the reason for such misstatement is due to the failure of controls and practices used by the entity.
The factors affecting these risks range from industry practices, non-routine transactions, previous
audit results, audit decision regarding the recorded balances and transactions, related parties
transactions, misappropriation of assets etc.
Detection risk- It is the risk that assumes that auditor will not be able to assess or detect
a misstatement that subsist in an assertion of financial statements that could materially affect the
company. This means there are very high chances that the auditor will fail to find material

misstatement even through substantive test and analysis. The audit report will provide that no
material errors are present in the data.
Audit risk- This risk is also known as residual risk. It means that an auditor will present
an unqualified report because of the failure to detect material misstatement due to fraud or error.
In this risk, the financial statements provided are free of any material misstatement. The
disclosure of the risk may have a impact on the decision making of the investors. The company
may calculate the overall risk by applying Audit Risk Model. The formula is :
AR = ƒ[IR*CR*DR]
Where, AR = Audit Risk
IR = Inherent Risk
CR= Control Risk
DR = Detection Risk
The inherent and control risk could affect the company as wrong opinion of auditor
formed on the basis of the recorded transaction will provide a negative image in the eyes of
investors. The judgement of the auditor is important at the time of disclosing the financial
position of the entity. The detection risk greatly depends on these two risks as the auditor should
find out the misleading information and the audit risk is the product of inherent, control and
detection risk.
TASK 3
Analytical procedures of SECOS by using various ratios:
Analytical procedures- The auditor use these procedures in the financial audit to assess
the potential risk exist in the business operations of the company. After identification of the
risks, they are required to be addressed by taking proper audit actions and plans. For applying the
actions, the auditor must understand the finances of the organization, the environment it is
operating in and history. The procedure starts from preliminary analytical review then
substantive analytical review and lastly, the final analytical review.
Key Ratios Calculation of SECOS Group Limited:
Ratios formula 2018 2017 2016
Current ratio Current Assets/ Current Liabilities 1.78 0.94 0.87

Inventory turnover
Cost of goods sold/ Average
inventory (WN1) 8.81 4.65 7.15
Gross Margin Gross profit*100/Net sales (WN2) 12.87 11.22 6.72
Debt to Equity Ratio
Total Liabilities/ Shareholder's
equity (WN3) 1.46 1.77 1.81
Interpretation of Current Ratio: The ratios are showing an increasing trend, which
means that the ability to pay off its short term obligations has improved in 2018 as compared to
2017 and 2016. Company should maintain this ratio in the coming years.
Interpretation of Inventory turnover: It shows the company's ability to generate sales
from the available inventories. A high ratio indicates either strong sales or insufficient inventory.
In this case, the companies sales has increased in the 2018 as compared to 2017 and 2016. the
company can increase this ratio by acquisition of inventories that are required by the company.
Interpretation of Gross Margin: It implies the gross margin as a percentage of sales.
The profits that a company makes after paying off the cost of goods sold. A higher profit margin
indicates the efficiency of an organization. The ratio in 2016 was 6.72 and 11.22 in 2017 show
that company did good in the year 2018 as the ratio increased to 12.87.
Interpretation of Debt to Equity Ratio: It shows the relevant proportion of
shareholder's equity and the funds/ debts utilized by the company's assets. It is also known as
leverage or gearing ratio. High ratio indicates the risk, in such a case the company should
maintain a balance between equity and debt. SECOS has been infusing the appropriate funds into
the company from the equity holder's funds for its operations. The ratio of 2018 is recorded the
least, which shows its efficiency.
Working Note (WN):
1. Calculation of Average inventory:
For 2018:
= Inventory at the beginning + inventory at the end
2
= 1,661,584 + 3,012,323
2

= 2,337,082
For 2017:
= 1661584+2606413/2 = 2133999
For 2016:
= 2606413+2940902/2 = 2773657.5
2. Revenue has been taken as Net sales.
3. Shareholder's equity has been calculated by deducting Total Liabilities from Total Assets.
For 2018:
= Total Assets – Total Liabilities
= 17,791,313 - 10,567,363
= 7,223,950
For 2017:
= 15684378-10030321
= 5654057
For 2016:
= 13570997-8747256
= 4823741
TASK 4
Materiality implies the impact of an omission or misstatement of an information in an
entity's financial statements. It affects the decision of investors. The material balances includes
those assets and liabilities, which if increased or decreased will impact the data stated in financial
statements. The account balance is the amount recorded in the financial statement. The
materiality in such balances mean the error or omission in the figures at the time preparing the
financial statements of a company. No company shall take such materiality easy. The auditor
should find the error while preparing the statements as the decision of investors will be based on
that report. For this purpose, the auditor shall plan the complete procedure as per the requirement
of the organization and also the transaction done by it in the year. The planning also depends on
the future proposals of the company. Usually, the chances of materiality is high in big companies
as huge number of transactions are being carried by the company during the year, hence a proper

plan will help the auditor to conduct the audit and provide a report which will depict true
financial position of the company.
Account Balance Amount
(AUD$)
Assertion(s) Audit Procedures Audit Evidence
Cash and cash
equivalents
1937866 Existence,
Completeness,
Cut off , detail
tie- in and
Accuracy
1. Banks
confirmation
will be
obtained.
2. Bank
Reconciliation
will be
examined.
3. Correct
classification of
cash needs to
be tested.
Bank
reconciliation
copies.
Notes of
reconciling
items.
Bank
confirmation
certificate.
Assertion- Existence The cash and cash equivalents given in the balance sheet subsist as on
balance data.
Assertion-
Completeness
All the cash items have been recorded in the balance sheet at the year end
date.
Assertion- Cut off The amounts of cash have been recorded within the specified period.
Assertion- Detail
tie-in
The cash items as mentioned in the notes is recorded correctly and align
with the general ledger.
Assertion- Accuracy The cash items have been recorded by classifying properly and reconciled
accurately.
Receivables 4029259 Completeness,
Occurrence,
Valuation,
Existence and
1. Undertake an
inspection of
invoices of the
account
Copies of
invoices.
Confirmation of
accounts

disclosure. receivables.
2. Test the
reconciliation
of receivable
with general
ledger.
3. Contact the
customers to
confirm the
accounts
receivables.
4. Asses the bad
debts written
off during the
period.
receivables.
Receivables
report.
Cash receipts.
Assertion-
Completeness
The receivables amount shown in the balance sheet is the
TASK 5
Particulars Audit Work Steps
Cash and Cash equivalents  Internal control system must be
reviewed that are related to cash
balances of the company.
 Whether the cash transactions have
been done with proper authorization or
not shall be checked.

 It is to be checked that the company has
matched the amount of cash from the
ledger and other documents at fixed
interval.
 Whether SECOS has safe custody of
cash, cheque books, other documents
that can be produced for inspection.
Receivables  Auditor must check the invoices of the
receivables of the company.
 The cash receipts must be reviewed.
 Confirmation of all the receivables
during the year must be assessed.
 The auditor must go through the
receivable report.
Property, plant and equipment  Auditor should ascertain and asses that
company holds proper and legal
documentation related to the title of the
property (title deed).
 The opening balances should be
checked from the financial statements
of past year and the opinion given in
the previous year's audit report.
 It should be checked that company has
stated the correct financial assertions
relating to fixed assets.
Inventories  The documents of inventories that are
held by the company must be checked,
also whether its possession is with any
third party or not.
 Confirmation from the external parties

should be taken.
 The internal control system that the
entity uses for recording the inventory
must be checked.
 Whether the company utilise its
inventories according to the
requirement and policies should be
checked.
Intangible Assets  The auditor must check the registration
of various intangible assets.
 If company has sold any such assets,
the documents of such sales must be
checked.
 The receipts and creation of such assets
must be checked.
Borrowings  The documents of the borrowing must
be checked.
 The sources and whether its utilization
has been made according to the
objectives.
 Check the loan amount has been
recorded accurately.
 Check the balance sheet depicts the
correct value as mentions in the
primary books.
Trade payables  The auditor must check the controls
that has been implemented while
recording the payables in the
appropriate time duration.
 Whether the purchase order is matched

with the receiving document and
relevant receipts and invoices or not.
Short – term provisions  The documents relating to such
provision should be checked.
 Whether such amount is matched with
the appropriate expense account or not
must be checked.
Long – term provisions  Whether the company has recorded the
amount as per law or not.
 Also, the differences in the amount as
per the company's policies must be
assessed.
Issued Capital  The share registers must be checked.
 The documents related to the account of
the amount so utilized must be
assessed.
TASK 6
Sampling: It is a method, in which units from a population are selected to determine the
results in a fair manner about the overall population.
Audit Sampling- It is the process of applying various audit procedures on various items
of accounts in an organization in such a way that every individual unit chosen might have an
equal chance of being selected.
Factors responsible for audit sampling to test account balances:
1. Identify the test objectives: In this step, the auditor assess the reasonableness of the
account balances so that he can provide an assurance of finding material misstatement
and ways to control them.
2. Define the characteristics of chosen sample: The auditor check the accuracy of the
recorded transactions and whether they have been classified correctly. In the last, auditor
makes an opinion in respect of a particular account balance is materially correct or not.

3. Determine sample size: The auditor must select the sample by considering the factors like
confidence level, expected error, risk of incorrect acceptance and the chosen sample will
give accurate report.
4. Selection of sample units: the items must be selected on the basis of experience and
knowledge of the auditor performing the audit.
5. Perform audit procedures: The auditor of SECOS will perform the audit by applying the
procedures for obtaining sufficient evidence to provide fair and true opinion of the
financial statement.
6. Audit conclusion: The auditor will give an opinion on whether the account balance is
materially correct or not. Also, the misstatement will be mentioned in the report, if any.
CONCLUSION
From the above report, it has been concluded that audit is important to know the financial
position of the company. The auditor should make his audit plan before proceeding so that
evidence can be gathered for providing the opinion. Along with this, assertions are vital to the
organization for assessing and reporting the materiality in the financial statements. Along with
this, audit sample plan will help the company to determine the potential risks and find conclusion
and remedies to reduce those risks. Along with this, audit at periodic intervals prevents the risk
to get more riskier which makes the company a financial sound company.

REFERECNES
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Online:
Annual report of SECOS Group Limited. 2018. [Online]. Available through:
<http://www.secosgroup.com.au/site_files/977/upload_files/FY2018AnnualReport.pdf?
dl=1>