Comprehensive Audit Report: Cloud 9 Inc. Financial Statement Review

This report provides a detailed analysis of the financial statements of Cloud 9 Inc., focusing on key aspects of the auditing process. It begins with the computation of planning materiality, outlining how auditors determine the acceptable level of misstatement in financial statements. The report t...Read More

Running head: AUDITING
Auditing
Name of the Student:
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Author’s Note

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Table of Contents
Part 1................................................................................................................................................2
Computation of Planning Materiality..........................................................................................2
Part 2................................................................................................................................................4
Analytical Procedure...................................................................................................................4
Special Area of Consideration.....................................................................................................7
Compensation Disclosures...............................................................................................................8
Introduction..................................................................................................................................8
Payment Mode of Executives......................................................................................................8
Highest PayScale of Executives................................................................................................10
Linking Remuneration with Profit/Share price of the Business................................................10
Conclusion.................................................................................................................................10
Reference.......................................................................................................................................12

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Part 1
Computation of Planning Materiality
Planning Materiality can be determined as the estimates which are considered by the
auditor of the business for determining the misstatement level in the financial statements of the
business. The planning materiality of the business is computed at the initial planning stage of
audit. The planning materiality of the business are computed and on the basis of the same,
different performance materiality of different items are computed and assessed for identifying
material misstatement of the business (Eilifsen and Messier Jr 2014). It is to be recognized that
materiality forms an important consideration for an auditor while formulating an opinion whether
the financial statement of the business is showing true and fair view or not.
In this case, the company which is considered in the assessment is cloud 9 Inc which is
engaged in the business of manufacturing of basketball shoes. The parent company has its
operations in many countries and therefore, it can be said that the scale of operations of the
business is large scale. The auditor needs to check the materiality of each item before
formulating a audit plan for the business. In this process, the auditor needs to determine the
planning materiality of the business so that misstatement which are present in the financial
statement of the business can be appropriately assessed by the auditor. The planning materiality
is the basis on which performance materiality of the business is computed. The planning
materiality of the business of Cloud 9 Inc is computed and the same is shown in the table below:
Computation of Planning Materiality
Particulars Amt $
Cash- operating Accounting 364182
Cash- Savings Account 136319
Petty cash 3188
Cash-Store Locations 709

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Trade receivables- stores 314914
Trade receivables- Wholesales 16453793
less: Allowance for Doubtful debts 930949 15522844
Sundry Debtors 72136
Employee Receivables 67395
Inventory 5330930
Less: Provision 453320 4877610
Goods in transit 544745
Derivative Financial Assets 966938
Amount Receivable from Parent 417545
Prepaid Rent 183273
Prepaid Insurance 361530
Other Prepaid Expenses 31817
Deferred Tax Assets 240290
Plant and Machinery 5507106
Furniture and Equipment 5684896
Less: Accumulated Depreciation 1348861 4336035
Leasehold Improvement 4257747
Less: Accumulated Depreciation 378914 3878833
Total Assets 37827409
Planning Materiality 189137
Figure 1: (Table Showing Planning Materiality of Cloud 9 Inc)
Source: (Created by Author)
The above figure shows the computation of planning materiality of Cloud 9 Inc for the
year 2016. The same is computed considering the figure of total assets of the business. The total
asset figure is considered as the same is shown to be of significant amount and therefore the
same is considered to be material in nature (Elder et al. 2013). The total assets of the business
comprise more of current assets such as inventory, debtors, cash balance which needs to be
considered by the auditor as they are most susceptible to material misstatement. The figure of
total assets is considered for computation of planning materiality as the operations of business is
rapidly changing and the scale of operations of the business is large (Edmonds et al. 2013). The
management of Cloud 9 Inc depends on the assets of the business for generating revenue and as
the business has operations in different countries therefore, the figure of total assets is

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appropriate for computing the planning materiality for the purpose of audit (Glover, Prawitt and
Drake 2014). In addition to this, the auditor needs to consider the figure which is important and
the total assets is a very significant figure shown in the financial statements.
Part 2
Analytical Procedure
The analysis of the financial statement of Cloud 9 Inc would be assessed with the help of
analytical procedure which involves computation of key financial ratios of the business. The key
financial ratios of the business are computed considering the financial results which are covered
in the annual reports of the business (Delen, Kuzey and Uyar 2013). The key ratios are also
useful in identification of business risks which are faced by the management of the business and
also assess whether the same are critical in nature. The key ratios which are computed in the
tables below covers area of solvency, liquidity, profitability and efficiency.
The profitability ratios of the business are represented by gross profit margin and net
profit margin of the business. The gross profit margin of the business is shown to have slightly
fallen in 2016 which suggest a slight fall in the profits of the business. The main reason for the
fall in gross profits of the business is due to the fall in sales of the business. The net profit margin
of the business is shown to have increased significantly during the year and the same is

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computed to be 5.06%. This is mainly due to the reduction in costs of the business (Xu et al.
2014). The auditor needs to ensure that the costs of the business are appropriately presented in
the annual reports as they can directly affect the revenues of the business.
The liquidity ratios of the business are computed considering the current assets and
current liabilities of the business. The current ratio and quick ratio of the business is shown to
have significantly improved during the period which suggest that the management of the
company is focusing on liquidity of the business. The liquidity ratios of the business are
considered to be important financial indicators of the business and therefore the auditor needs to
provide special emphasis on such while considering the material misstatement of the business.
The efficiency ratio of the business is covered with the help of inventory and debtor’s
policy of the business. The inventory turnover ratio of the business is shown to have decreased
significantly and the same is also shown for receivables turnover ratio of the business. The

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decrease in the inventory turnover ratio and debtor’s turnover ratio suggest that there has been a
change in the debtor and inventory policies of the business.
The solvency ratios are computed to show the application of debt capital in the business
of Cloud 9 Inc. The analysis of the ratios from above shows that there has been an increase in the
debt capital of the business. The increase in the financial leverage of the business suggest that the
business. The level of debts of the business has increased which the auditor needs to consider
whether the same are genuine in nature.
Special Area of Consideration
The auditor needs to consider area of total revenue which is generated from store and
wholesale which has significantly fallen during the current year. The auditor needs to apply
vouching procedure in order to assess whether the same are not overstated. This is to be done as
the revenue figure has direct impact on net profits of the business. The auditor also needs to put
special emphasis on inventory and debtors figure as the same can adversely affect the financial
position of the business.
The auditor also needs to check the debt figures and ensure that the same is appropriately
presented in the financial statements. The auditor needs to check whether the increase in the
debts during the year is genuine.

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Compensation Disclosures
Introduction
The companies which are considered for this part are BHP Billiton Ltd, Boral Ltd and
Ausdrill Ltd which all belongs to mining industry. The annual reports of the business are
considered for identifying the remuneration policies of the companies and also the remunerations
report which is formulated by the business.
Payment Mode of Executives
The remuneration of executive directors and non-executive directors of BHP Billiton ltd
comprises of basic fees, benefits, STI and LTI and early retirement payment (Bhp.com. 2019).
The remuneration policies of the business are set in order to enhance the performance of the
directors of the business and motivate them towards sustainable practices in a business
Figure 1: (Extract from annual report of BHP Billiton ltd)

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In the case of Ausdrill ltd, the remuneration is directly linked with the performance of the
business and from the annual report of the business for the year 2018, the remuneration
comprises of cash salaries, non-cash benefits, long service leave, post-employment benefits, STI
and service bonuses and options (Ausdrill.com.au. 2019).
Figure 2: (Extract from annual report of Ausdrill ltd)
In the case of Boral Ltd, the remuneration composition which is offered to the executives
and CEO of the business are directly associated with the performance and is quite similar to
Ausdrill and BHP Billiton ltd remuneration policy having monetary and non-monetary benefits
along with bonuses (Boral.com. 2019).

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Figure 3: (Extract from annual report of Boral ltd)
Highest PayScale of Executives
In the case of BHP Billiton ltd, the CEO of the business Andrew Mackenzie gets the
highest remuneration which totals to 8,106. In the case of Ausdrill Ltd, the highest remuneration
is given to R.G. Sayers who is the CEO and one of the executive directors of the business and the
total of is remuneration is 803,681 as per the remuneration report of the business. The annual
report of Boral Ltd shows that the maximum remuneration is offered to Mike Kane which is $
4913 who is the CEO and Managing Director of the business.
Linking Remuneration with Profit/Share price of the Business
The annual reports of all the three companies which are considered clearly shows that the
performance of the business is closely related to remunerations of the executives. The salaries of
the CEO and managing directors of all three companies are shown to be high which suggest that
they play a vital role in managing the business and taking major decisions for the business.
Conclusion
The annual report of all three companies shows remuneration policies which are followed
by businesses appropriately. The remuneration reports which are prepared by the management of
BHP Billiton ltd, Ausdrill Ltd and Boral ltd are consistent with the requirements which is set by
ASX and therefore comply with the regulations which is applicable to an Australian company

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which is listed. The remuneration of the executive directors and non-executive directors are
appropriately presented in the financial statements of the business.

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Reference
Ausdrill.com.au. (2019). [online] Available at:
http://www.ausdrill.com.au/files/2018_Ausdrill_Annual_Report.pdf [Accessed 28 Jan. 2019].
Bhp.com. (2019). [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf [Accessed 28 Jan. 2019].
Boral.com. (2019). [online] Available at:
https://www.boral.com/sites/corporate/files/media/field_document/Boral-Annual-Report-
2018.pdf [Accessed 28 Jan. 2019].
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A
decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Edmonds, T.P., McNair, F.M., Olds, P.R. and Milam, E.E., 2013. Fundamental financial
accounting concepts. New York, NY: McGraw-Hill Irwin.
Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public accounting
firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Elder, R.J., Akresh, A.D., Glover, S.M., Higgs, J.L. and Liljegren, J., 2013. Audit sampling
research: A synthesis and implications for future research. Auditing: A Journal of Practice &
Theory, 32(sp1), pp.99-129.
Glover, S.M., Prawitt, D.F. and Drake, M.S., 2014. Between a rock and a hard place: A path
forward for using substantive analytical procedures in auditing large P&L accounts:
Commentary and analysis. Auditing: A Journal of Practice & Theory, 34(3), pp.161-179.
Xu, W., Xiao, Z., Dang, X., Yang, D. and Yang, X., 2014. Financial ratio selection for business
failure prediction using soft set theory. Knowledge-Based Systems, 63, pp.59-67.