Detailed Audit Planning Memorandum for Cochlear Limited 2019

This audit planning memorandum focuses on the audit of Cochlear Limited for the financial year ending June 30, 2019. It begins with the terms of engagement, outlining the scope of the statutory audit under the Corporations Act 2001. The memorandum then provides a brief summary of Cochlear Limited, a major Australian company manufacturing hearing machines, and identifies key risks, including product innovation and competition, infringement litigation, misappropriation of know-how, medical device regulation, and reimbursement challenges. It details applicable laws and regulations, particularly the Intellectual Property Act, and addresses fraud risk, including asset misappropriation and fraudulent financial reporting. The assessment of the control environment highlights internal controls implemented by the board of directors and management. The memorandum defines materiality for consolidation, outlining bases and percentages used for calculations. Key audit risk areas are identified, including currency risk, credit risk, and operational risk, with associated assertions and substantive audit procedures. Finally, it presents detailed control planning, specifically for inventory, addressing accuracy, valuation, and allocation through analytical and testing procedures.

Running head: AUDIT PLANNING OF COCHLEAR LIMITED
Audit Planning of Cochlear Limited
Name of the Student
Name of the University
Author note

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AUDIT PLANNING OF COCHLEAR LIMITED
Audit planning memorandum Date
Client name: Cochlear Limited Prepared by: __________
Year end: 30 June 2019 Reviewed by: __________
1. Terms of engagement
A complete statutory audit of the parent entity (Cochlear Limited) and the
consolidated economic entity has been conceded out under the Corporations Act
2001. This audit plan concentrate on the economic entity (Cochlear Limited)
overall.
2. Brief summary of significant background information
2.1
Cochlear is a major company in Australia that is engaged in the manufacture
of hearing machines. The company from its inception has been able to
produce high quality of products that help its customers to live a comfortable
life through overcoming their hearing problem. Since the company is running
on a large scale it has to face several kinds of risks. The five major risk
factors that are identified from the annual report of the company are stated
below:
PRODUCT INNOVATION AND COMPETITION
One of the major challenge in this industry is the development of new
technology is happening very frequently and for that the companies has to
keep themselves up graded on regular basis. Cochlear faces the risk of in
ability to create innovative products for its clients.
The high rate of competition forces company to the risk of losing the position
in the market as it has to face continuous challenge from the other
participants in this industry. The organization is also uncovered to the risk of
medical biological and technological improvements by other market players
where substitutive products or treatment are established and prepared for
selling in the market that can make the products of cochlear obsolete and
would result into the loss of new market for the organization.
Infringement litigation

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AUDIT PLANNING OF COCHLEAR LIMITED
The industry of hearing aid has major intellectual property and patents and
design and trademark acts that protect the intellectual property. Cochlear is
uncovered to litigation risk for alleged infringement of the intellectual
property acts. This will consequence in cochlear reimbursing royalties to
continue to manufacture product, or paying damages or get injunction order
from the court which will prevent the company from selling any specific
product.
Misappropriation of knowhow and intellectual property
The company has to face risk that is associated with the misuse of its
knowhow and any intellectual property. This misuse can be done by any third
party or by any of its employees who very frequently used Cochlear’s
intellectual property. This will result in competitor by using this information
increase their competitiveness. This will become a major risky factor for
which the company may lose its market share.
Medical device regulation
The industry of medical devices is highly regulated by various laws and
regulations that are framed in order to ensure the safety of the human life.
The medical devices are the instruments that are essential for saving the life
of human beings so it is required to maintain all the steps that are esse3ntila
to make it sure that these devices are completely safe and that the use of such
devices does not cause any side effect in the health of the user. The products
of cochlear is sold in different countries of Asia, Europe, in USA and also on
Australia so all the se products has to qualify the standards that are set by the
regulatory body of that particular nation. The products of cochlear is
observed on regular interval by the different regulatory bodies and of these
regulatory bodies give any negative report about the products of cochlear
then in that case it will affect the cochlear ability to sell its products (Cohen
Krishnamoorthy and Wright 2017).
Reimbursement
Most of the cochlear customer depends on the level of reimbursement from
the insurers and the authorities of the government health care. The health care
budget in all over the world increased significantly over the years which
become the main reason of pressure on reimbursed price. The organization
also faced challenges relating to taxation issue imposed by various
government agencies which put negative affect on the ability of the clients to

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acquire the products of cochlear. The reimbursement cost become a major
rissk for the company as it directly effects the revenue earning sources (Tarek
et al 2017).
2.2 Laws and regulations applicable to Cochlear Limited
The main law and regulation that is applicable for the company is the
intellectual property act that directly effects the operation of cochlear limited.
The intellectual property act is a major challenge for the medical device
industry. As there are several innovations are made on regular basis so the
provisions and regulation of patent act, are required to be followed by this
company. Cochlear has to face several litigations for the breach of the patent act
in 2018 the US district act awarded damages of USD 268 million against the
company for the dispute that has been made against Alfred E Mann foundation
for scientific research and advanced bionics. So, the patent act is the main law
that is applicable for the cochlear limited in addition to this the taxation laws
and the corporation act is also applicable for this company (Boersma 2017).
2.3 Risk of Fraud

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AUDIT PLANNING OF COCHLEAR LIMITED
the cochlear limited has taken all the provisions to detect and prevent fraudulent
activities. The company used to follow all the principles and provisions of the
AASB which are applicable to give a fair and true view of the financial
statements and to ensure that the risk of fraud can be mitigated to the maximum
level.
2.3.1 Misappropriation of assets
All the assets of the cochlear limited are recorded as per the guidelines that are
applicable as per the relevant accounting standard. The company is largely
dependent ion the assets as they are used in various scientific research and for
the development of the products of the company. In respect to that the company
maintain a proper tracking system and a valuation method in order to avoid the
risk of misappropriation of the assets. Further the company also maintain a
internal audit procedure to monitor that all the assets are recorded appropriately
in there books of accounts (Kenway et al 2016).
2.3.2 Fraudulent financial reporting
The financial reports are prepared as per the guidelines of the AASB in order to
give a true and fair view of all the financial transactions. The board of directors
have the following responsibilities for the financial reports:
That the financial reports are organized in accord to the guidelines given by the
AASB and the corporation act 2001.
That the board has implemented a internal control system to make sure that the
financial statements are prepared to give a true and fair view are clear from any
material misstatement as a result of any fraudulent or erroneous activity.
Whether the company is appropriately using the going concern approach of
accounting. The going concern method includes the disclosure of all the material
facts that are related with the operation of the business.
The responsibilities of the auditor
The auditors of the company have some responsibilities in the grounding of the

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financial report these are
To attain sensible guarantee regarding the issue that the financial report is
transparent from any material misstatement for any fraudulent activity.
To issue a report that contains the opinion of the auditor
3. Assessment of control environment
The control environment ids the base on which the the effective process of
internal control is created and the functioned in an orgaanissation that strives to
Attain its strtategic objective
Provide reliable finacila reprting to internal and externla stake hiolders.
Functions its bussiness successfully and competently.
Conform with all the relevant laws and regulations
Precaution of its assets
The board of directors and the management of the cochlear has made up
internal control ssystem by compiling the organisational structure , process,
policies and standards that are used to maintain control all over the
organisation .the company has major priciples o control environment these are
Demonstrate a pledge to honesty and ethical values.
The indepence of the board of directors from the mngement and their
misunderstanding of the company’s interior control are maintained.

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The company establish a organisational structure, reporting lines authority, and
reponsibiities to purue buiness objective.
The company demonstrate a promise to catch the attention and maiantian
experienced people.
The company llso maintain a strong ccountaability for the execution of the
responsibilities of the internal control process (Yu et al 2016).

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AUDIT PLANNING OF COCHLEAR LIMITED
Audit planning memorandum Date
Client name: Cochlear Limited Prepared by: __________
Year end: 30 June 2019 Reviewed by: __________
4. Scheduling materiality for consolidation of economic entity
concise explanation of the financial report materiality base $ amount chosen and
percentage (%) applied
Base chosen and why
The following bases are chosen to identify the misstatement sum fixed by the
auditors at the scheduling phase of an audit founded on the materiality to
financial statements:
Sales revenue
Total assets
Gross profit
Shareholders equity
Net profit
Percentage applied to the base above and why

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AUDIT PLANNING OF COCHLEAR LIMITED
The following percentages are applied on the various bases
0.5% to1% of sales revenue
1% to 2% of total assets
1% to 2% of gross profit
2% to 5% of shareholders equity
5% to 10% of net profit.
During the calculation of the planning material, the auditor used to take the
maximum amount from the above factor. For instance, greater sales revenue
or total assets. Though the auditor also has to comprehend the qualitative
aspect of materiality in the financial statement of the company previous to
draw conclusion regarding the size of the scheduling materiality of financial
statements( Lakis and Masiulevičius 2017).
5. Key audit risk areas
Based on the research, analytical procedures and business risk analysis
undertaken, the three (3) accounts at significant risk for the Cochlear audit are
mentioned below
5.1 Account 1: currency risk
Outline why account is as significant risk
Cochlear is uncovered to currency risk on sale and purchase which are subject to
a currency which is different from the particular practical currencies of the
lawful units.
Key assertion at risk
Valuation of the currency rates
applicable realistic substantive audit procedure which would point out the
precise risk and allegation recognized

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AUDIT PLANNING OF COCHLEAR LIMITED
Currency risk is adjusted in accord with the board permitted treasury risk
management system (Escobar and Demeritt 2017).
5.2 Account 2: credit risk
Outline why account is as significant risk
The company is exposed to credit risk as it is predisposed by the environmental
position and the uniqueness of the individual customers. Cochlear do not
concentrate on the credit risk with a particular customer.
Key assertion at risk
Credit management
applicable realistic substantive audit procedure which would point out the
precise risk and allegation recognized
At the regional level, the organisation’s policy and measures for credit
management and the supervision of the receivables, are done. This helps in
proper monitoring of the customer credit risk and the preparation of the ageing
profile of total debtors accurately (Eilifsenet al 2017).
5.3 Account 3: operational risk
Outline why account is as significant risk
Operational risk is the risk that is directly associated with the loss that the
company has to incur from a large number of causes that are related with the
company’s process personnel, technology , infrastructure and the corporate
behaviour of the entity.
Key assertion at risk
Loss of sales and damage of the reputation

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AUDIT PLANNING OF COCHLEAR LIMITED
applicable realistic substantive audit procedure which would point out the
precise risk and allegation recognized
audit procedure to address such risk are stated below
division of duties to the appropriate departments as per the specialization of
that department.
Documentation of the procedure of internal control.
Arrangement of internal and external audit programs.
Development of the contingencies plan.
6. Detailed Control Planning (Mitigating controls)
6.1 Account at risk: Inventory
Key assertion: Accuracy, Valuation & Allocation
recognize two controls that will deal with the key allegation
The two controls that will address the following assertions are the analytical
procedure and the testing procedure.
The analytical process includes the following steps
Comparison the value off inventory of the current year with the previous year
Comparison of the inventory turnover ratio off the previous year.
A comparison of the cost of per unit of inventory with the past financial years.
Testing procedure includes
The practice of monitoring the inventory by the auditor.
The report of the auditor to be thoroughly monitored.
The auditor should point out the details of all the items of inventory and the

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valuation method used by the company.
6.2 Account at risk: Warranty provision.
Key assertion: completeness
recognize two controls that will deal with the key allegation
The key audit matters that are considered for mitigating the risk related
with the warranty provisions are.
The approximation ambiguity related with the key assertions’ pragmatic by the
consolidated entity to determine the warranty provisions.
The combined entity’s developing product portfolio, concluded by the overview
of the new generation, where each product’s strategy and eminence features can
influence the key assertions.
The amplified utilization of the global repair center proposed to decrease
estimate the repair cost.
The intrinsic impulsiveness of forthcoming disaster consequential in
entitlements under warranty and
The calculation is largely manually developed and therefore is at greater risk of
error.
The key assertions used in the consolidated entity for the determination of the
warranty provision are
The prediction of the claim rates of the multiple products in the portfolio
The ratio of repairing to replacing failed products
The two control that are adopted by the auditors of the company to address
the assertions are stated below
Procurement of a considerable growing merchandise portfolio of each product
warrantable period and past details of claim rates.
Checking the sensitivity of the warranty provisions by changeable major
predictions contained by a rationally feasible variety to concentrate on additional
actions. The completeness assertion for the warranty provisions are addressed by
comparing previous estimates to the actual outcomes.
The control system also assesses the veracity of the theory for the warranty
provision. this comprised the inspection of the exactness of the methods used in