Cimic Group Limited 2017 Audit: Ethics, Analysis & Procedures

This report provides a comprehensive analysis of Cimic Group Limited's 2017 financial statements, focusing on key aspects such as materiality, ethical considerations, and audit procedures. It examines the level of materiality used for the group accounts, offering a preliminary analytical review of the company's financial information. The report addresses key balance sheet and profit and loss ratios from 2014 to 2017, reviews the cash flow statement, and discusses primary cash receipts and payments. It also assesses the various draft notes and disclosures accompanying the annual report, identifies key risk areas for the audit, and outlines relevant assertions and audit procedures. This detailed analysis aims to provide a thorough understanding of the financial health and audit considerations for Cimic Group Limited in 2017. Desklib provides a platform to access similar solved assignments and study resources.

Running head: AUDITING AND ETHICS 1
Auditing and Ethics
Name
Professor
Institution
Date

AUDITING AND ETHICS 2
Introduction
The purpose of this paper is to examine the 2017 annual report for Cimic Group
Limited Company and determine the level of materiality that should be used for the group
accounts for the fiscal year ending 2017. This report also represents a preliminary analytical
review on the information that is provided by the company. Key balance sheet and profit and
loss ratios over the period 2014 to 2017 have been addressed. In addition to this, the report
gives a review of the cash flow statement of the company and discusses its primary cash
receipts and cash payments during the year ending 2017.
Section 1: The Level of Materiality to Be Used For the Audit
a. Nature of Materiality
According to the framework of IASB, material information is that whose
misstatement or omission would possibly influence how financial statement users make their
economic decisions based on such financial reports. Therefore, materiality refers to how
significant transactions, errors and balances contained in a company’s financial statements
are. This is a cutoff or threshold which determines whether or not financial information is
relevant for use by users in meeting their decision making needs. Companies must therefore
ensure that information presented on their financial statements is complete and relevant at all
times, and is presented on a fair and true basis that represents the entity affairs. Materiality
highly relates to the size of an individual company, as well as its particular circumstances
(Cim, 2014).

AUDITING AND ETHICS 3
b. What Materiality Represents In Terms of the Audit of a Set of Financial
Statements
In financial statements audit, materiality represents errors or misstatements.
Misstatements or errors in financial statements are often considered as misstatements that
have not been recorded or corrected. In normal audits of financial statements, auditors
identify and report the dollar amount of such errors and misstatements on a schedule in
which normally he lists two categories of errors in financial statements. For instance, he
reports amounts in financial statements which have been recorded incorrectly. These are
transactions which were generally not recorded correctly since they were posted in incorrect
amounts or in wrong accounts (Cim, 2014).
Additionally, the auditor must also report amounts that ought to have been recorded
in financial statements but were not. The auditor is responsible for calculating to an exact
dollar amount the misstatements that have been unrecorded or uncorrected in financial
statements. For errors that are based on an estimated adjustment, they are considered to result
from weaknesses or deficiencies in internal controls. The auditor must therefore consider
reviewing each item against the determined level of materiality with a view to determining
whether or not to make adjustments to financial statements (Media, 2012).
c. Different Bases and Considerations Employed in Arriving at Materiality
In determination of materiality levels, the auditor must consider a number of factors.
For instance, the level of materiality should be in relation to intended uses and purposes of
the financial statements audit. The auditor must clearly understand the financial information
which is considered important and valuable for use by decision makers. For instance, in

AUDITING AND ETHICS 4
regard to solvency or regulatory issues, the level of materiality is highly related to industry
benchmarks in solvency ratios (CIM Group et al., 2015). Additionally, for purposes of
appraisal, the level of materiality is specifically related to net income or net worth of a
company, or its earnings per share (EPS). For general purposes relating to financial
statements, the level of materiality is associated with both the net surplus or the net capital
and the net income (Cimic Group Ltd, 2017).
The level of materiality also varies in accordance with other features or
characteristics of the company, such as its size, access to capital, the stage of organizational
life cycle, its net retention and type of business conducted (whether commercial lines,
personal lines or single line versus multi-line). The financial strength of the company is also
considered since it influences the materiality level. It is generally postulated that as an
organization approaches a given threshold for materiality, the materiality standard for work
in relation to that threshold becomes increasingly rigorous (CIM Group et al., 2015).
d. The Rationale behind Your Choice of a Certain Level of Materiality
Determination of dollar amounts that are considered material to financial statement
users is a matter of professional judgement. A certain percentage is often applied by the
auditor to a chosen benchmark as a preliminary step in determination of the level of
materiality adopted by financial statements in entirety. These benchmarks may either be firm
oriented or industry oriented. For instance, the benchmarks could be based on items such as
gross profit and total revenues (Cimic Group Ltd, 2017).
However, in determining the level of materiality in unrecorded and uncorrected
misstatements in financial statements, the auditor uses several methods based on various

AUDITING AND ETHICS 5
rationales. For instance, the 5% rule is very key in determining the materiality level in
financial statement misstatements, and the value of misstated dollar amounts is derived in
consideration to this percentage limit of materiality. This limit is acceptable since any
unrecorded and/or uncorrected misstatements that approach this percentage are considered
material misstatements in the financial statements of the company. There is therefore a need
to take appropriate audit tests and measures for ascertaining whether or not the actual
misstatements happened. In the audit of Cimic Group Limited Company, the maximum limit
of acceptable level of materiality is therefore 5%. Any misstatement that exceeds this value
is thus considered material in the financial statements of Cimic Group Limited Company
(Liu, 2015).
e. Review the Various Draft Notes and Disclosures
Upon reviewing the various draft notes and disclosures accompanying the draft
annual report of CIM Company, there are several notes and disclosures that were found to be
significant in the audit. For instance, according to the notes on recognition of revenue, the
company recognizes revenue using the percentage complete method where stage of
completion is determined with reference to the total costs that have been incurred and
calculated as a percentage of the total estimated costs for every contract (Aicpa, 2017). This
note is very significant in the audit of Cimic Group Limited Company since where the result
of the project can be estimated reliably, the revenue and expense of the contract are
recognized as earned and incurred in the profit and loss statement of the company. However,
if the results cannot be measured reliably, the profits are then deferred and the variance
between the amount of consideration received and the expenses incurred is carried forward to

AUDITING AND ETHICS 6
the next operating periods as either payables or receivables of the contract
(Verschoor, 2008). In regard to this disclosure, the auditor must perform audit procedures to
ascertain whether the results of the various projects or contracts of the firm during the year
ending 2017 were estimated reliably. This can be achieved by examining the various
expenses and profits incurred and realized from each contract, and then establishing whether
they are in accordance with the budgeted amounts for the same (Key, Riddle & Institute of
Internal Auditors, 2012).
Additionally, the company discloses in its notes to financial statements that the
finance costs are recognized as expenses in the period in which they were incurred, with an
exception to cases where the amounts are included in the respective costs of qualifying
assets. The rate of capitalization used in determining the amount of finance costs to be
capitalized is the weighted average interest rate that is applied to the borrowings of the
company during the financial year. This is significant to the audit since the auditor needs to
ascertain if such costs were accurately recognized as expenses in the year ending 2017. In
doing this, the auditor must consider reviewing the each qualifying asset to determine
whether the finance costs have been included in the cost of the assets or not (Jubb, 2010).
Section 2: A Preliminary Analytical Review on the Information Provided
a. Key Balance Sheet and Profit & Loss Ratios
Net profit margin 2017 2016
Net profit $ 690.60 $ 552.40
Total revenue $ 13,429.50 $ 10,853.60
Net Profit margin 5.14% 5.09%
Gross profit margin 2017 2016

AUDITING AND ETHICS 7
Gross profit $ 1,002.40 $ 758.40
Total revenue $ 13,429.50 $ 10,853.60
Gross profit margin 7.46% 6.99%
Return on Assets (ROA) 2017 2016
Net Profit $ 690.60 $ 552.40
Total Assets $ 9,571.50 $ 10,060.10
Return on Assets (ROA) 7.22% 5.49%
Current Ratio 2017 2016
Current assets $ 5,302.10 $ 5,074.80
Current Liabilities $ 5,355.20 $ 5,859.20
Current Ratio 0.99 0.87
Quick Ratio 2017 2016
Current assets $ 5,302.10 $ 5,074.80
Less: Inventory $ 210.80 $ 213.00
$ 5,091.30 $ 4,861.80
Current Liabilities $ 5,355.20 $ 5,859.20
Quick Ratio 0.95 0.83
Based on the results obtained above and the nature of Cimic Group Limited
Company’s business and its markets, there are apparent trends and changes its key ratios. For
instance, the gross margin of the company increased from 6.99% to 7.46% during the year
2016 and 2017 respectively. The net profit margin also increased by 0.05% in the years 2016
and 2017. Additionally, there was an increase of 1.73% in Return on Assets (ROA) during
the year 2016 and 2017. Also, the current ratio and quick ratio increased by 0.12 in both
2016 and 2017 (Cimic Group Ltd, 2017).
b. Key Risk Areas for the Audit

AUDITING AND ETHICS 8
There are various risks associated with the audit. For instance, risk of misstatement is
very significant. Every stakeholder in the corporate chain of this company makes key
decisions based upon the information presented on the financial statement of the company.
For this purpose, material misstatements or non-disclosures in the financial statements may
lead to significant audit risks that should be examined. There is also a risk that the auditor
may not be able to detect fraud caused by weaknesses in the internal controls of the Cimic
Group Limited Company. The auditor therefore needs to address these key risks in his audit
plan (Aicpa, 2017).
c. Relevant Assertions and Audit Procedures
The auditor should make the following assertions in regard to classes of transactions
as well as related disclosures for the financial year ending 2017.
i. Occurrence
He should certify that the recorded events and transactions have actually occurred and
they are in pertinence to the company. This can be done by examining and inspecting the
original books of accounts such as purchase vouchers (Hayes, Gortemaker & Wallage,
2014).
ii. Completeness
The auditor must ensure that the all events and transactions that took place in the year
ending 2017 have been recorded in the financial reports. He can achieve this by critically
examining the financial records against the original documents (Cim, 2014).
iii. Accuracy

AUDITING AND ETHICS 9
Additionally, accuracy of the amounts entered in the account books need to be
ascertained by the auditor. He can do this by critically examining the account books to
verify that the transactional amounts have been recorded appropriately and necessary
disclosures made (Fiedler & Fiedler, 2010).
Section 3: Review the Statement of Cash Flows
Upon reviewing the cash flow statement of Cimic Group Limited Company in the
year ended 2017, it has been established that the majority of the company’s cash inflows
were generated by the cash flows from operating activities, which totaled to $14,090. The
company generated net cash flows amounting to $1,362.40 from its operating activities in the
year ending 2017. The company’s largest cash outflows were also reported from its operating
activities, which totaled to $12,754 (12,566.5+106.2+80.8). During the year ending 2017,
Cimic Group Limited Company recognized primary cash receipts of $15,798. The company
also reported primary cash payments amounting to $15,472 (Arens, Elder & Beasley, 2016).
The Main Non-Cash Financial and Investing Activities
According to the cash flow statement of Cimic Group Limited Company, the entity
has several non-cash financial and investing activities. For instance, the firm receives
significant amounts from sale of its property, plant and equipment amounting to $118. The
company also makes payments in relation to these items totaling to $424. Additionally, the
company makes a payment of $29.3 for acquisition of non-controlling interests
(Nobes, 2014).
Evaluation of the Going Concern Risk of This Company and Recommended Audit
Procedures

AUDITING AND ETHICS 10
According to question 2 and 4, Cimic Group Limited Company is experiencing some
key risks concerning its going concern. For instance, the firm is highly dependent on cash
inflows from its operating activities since its investing and financing activities reported a
negative net cash flow during the year ended 2017. In addition to this, the greatest cash
outflows of the company were reported from its operating activities. This means that the
company may not has huge payments which may lead to significant stoppage of its
operations in future should the cash outflows exceed the inflows. This highly contravenes the
going concern of Cimic Group Limited Company (Arens, Elder & Beasley, 2016).
Recommendations for Addressing the Risks
There are various audit procedures that are highly recommended for addressing this
risk. For instance, the management should consider diversifying the operations of the firm in
order to ensure that operating activities are not the only main sources of its cash inflows. It
should also be ensured that the huge costs and expenses are cut or reduced materially. This
would ensure that the company recognizes an increased amount of free cash flow that can be
used for its future expansions, thus guaranteeing it’s going concern and eliminating the
associated risks (Dennis, 2015).
Review of the 2017 Financial Report for the Company
Upon reviewing the Company’s financial for the year ended 2017, it has been
established that the independent auditor issued an unqualified opinion regarding the financial
statements of the company. In their opinion, the auditor certifies that the financial report of
the Cimic Group Limited Company is prepared in accordance with the Corporations Act of
2001. The financial statements present a true and fair view of the financial position of the

AUDITING AND ETHICS 11
group as at 31st December 2017 and of its financial performance for the year ended 2017
(Crain, Hopwood, Pacini, & Young, 2018).
Conclusion
As discussed in the above sections, the financial statements of Cimic Group Limited
Company have been prepared in accordance with the Generally Accepted Accounting
Principles (GAAPs), and they give a true and fair view of its financial position as at 31st
December 2017 as well as its financial performance for the financial year then ended
(Wells, 2014).

AUDITING AND ETHICS 12
References
Aicpa. (2017). Auditing Standards 2017: Codification of Statements on Standards for Auditing
Standards. John Wiley & Sons Inc.
Arens, Al, A, Elder, R., & Beasley, M. (2016). Auditing, Assurance Services & Ethics in
Australia. Sydney: P. Ed Australia.
CIM Group, Domus Development LLC, McLarand, Vasquez, Emsiek & Partners, & Sonoma
Marin Area Rail Transit District. (2015). Railroad Square: Qualifications presented to
the Sonoma-Marin Area Rail Transit District. San Rafael, Calif.: Sonoma Marin Area
Rail Transit District.
Cim, A. (2014). Le diner des gens de lettres. Australia: Book On Demand Ltd.
Cimic Group Ltd - AnnualReports.com. (2017). Retrieved from
http://www.annualreports.com/Company/Cimic-Groupltd
Crain, M. A., Hopwood, W. S., Pacini, C., & Young, G. R. (2018). Essentials of Forensic
Accounting. Somerset: John Wiley & Sons, Incorporated.
Dennis, I. (2015). Auditing Theory. New York, NY: Routledge.
Fiedler, B., & Fiedler, B. (2010). Student guide to accompany Essentials of auditing, assurance
services and ethics in Australia: An integrated approach [1st ed.]. Frenchs Forest,
NSW: Pearson Australia.
Hayes, R., Gortemaker, H., & Wallage, P. (2014). Principles of auditing: An introduction to
international standards on auditing. Harlow: Pearson Education Limited.

AUDITING AND ETHICS 13
Jubb, C. (2010). Assurance & auditing: Concepts for a changing environment. s.l.: Thomson
Learning.
Key, J., Riddle, C., & Institute of Internal Auditors. (2012). Sawyer's: Guide for internal
auditors. Altamonte Springs, FL: Institute of Internal Auditors Research Foundation.
Liu, J. (2015). Study on the Auditing Theory of Socialism with Chinese Characteristics, Revised
Edition. Hoboken: Wiley.
Media, B. P. (2012). ACCA F4 - Corp and Business Law (Eng) - Study Text 2013: Study Text.
London: BPP Learning Media.
Nobes, C. (2014). 4. Financial reports of listed companies. Very Short Introductions.
doi:10.1093/actrade/9780199684311.003.0004
Verschoor, C. C. (2008). Audit committee essentials. Hoboken, NJ: John Wiley & Sons, Inc.
Wells, J. T. (2014). Principles of fraud examination. (Online version ---> Principles of fraud
examination.) Hoboken, NJ: Wiley & Sons, Inc.