AUDITING: Report on Auditing Theory and Practice for Cochlear Limited

This report provides an overview of the audit procedures applied to Cochlear Limited, focusing on the planning phase. It begins with an overview of the company's operations, including its key business risks such as competition, regulatory compliance, and litigation. The report then applies ratio analysis to the company's 2018 financial statements, identifying cash and inventories as key account balances at risk of material misstatement. For each key account balance, the report identifies the relevant key assertions. Finally, the report outlines the specific audit procedures that would be used to gather sufficient and appropriate audit evidence to address the identified risks and assertions, including bank reconciliations, inventory counts, and testing of inventory valuation methods.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the student
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Table of Contents
Introduction......................................................................................................................................2
1. Overview of the Cochlear Limited’s operation........................................................................2
2. Ratio analysis and risk of material misstatement.....................................................................4
3. Kay assertions...........................................................................................................................5
4. Procedure to gather appropriate and sufficient audit procedure...............................................6
Conclusion.......................................................................................................................................6
Reference.........................................................................................................................................7

2AUDITING THEORY AND PRACTICE
Introduction
Planning for the audit includes establishment of overall strategies for audit for developing
and engaging the audit plan that particularly includes assessment procedures for planed risks and
planned responses for the risk of the material misstatement. Audit planning is not the discrete
phase of the audit however the iterative and continual procedure that may start just after
completion of previous audit and may continue till completion of current audit (Yoon, Hoogduin
and Zhang 2015).
1. Overview of the Cochlear Limited’s operation
Cochlear Limited is the Australian public entity ranked at 335 out of 2000 entities. It
generates majority of the income through surgical and medical equipment manufacturing under
Australian industry. It is engaged in providing the solutions for implantable hearing. Implant
system of the company includes the implant that is inserted at the time of surgery and external
sound processor. It operates through 3 segments – Asia Pacific, Africa and EMEA (Europe,
Middle East and Africa) (Cochlear.com 2019)
Key business risks of the company are as follows –
 Competition and product innovation – the entity is exposed to risk associated with failing
to produce and develop innovative products for the customers. Further, the increased
level of competition increases the risk of losing the market share and reduction of average
selling price under the industry. Apart from that the company is also exposed to risk of
technological, biological and medical owing to the advancements by 3rd parties where
alternative treatments or products are developed (Cochlear.com 2019)

3AUDITING THEORY AND PRACTICE
 Regulations related to medical device – the entity operates under highly regulated
industry and the medical devices are subject to the strict regulations including the data
securities of the regulatory bodies in Europe, US, Australia and Asia. If the company or
any of its 3rd party suppliers fails in satisfying the regulatory requirements or there is any
change or modifications in the regulations it can led to imposition of the sanction or the
product of the company may subjected to reputational harm or loss of the sales if the
changes are not complied with (Cochlear.com 2019)
 Infringement litigation – the entity operates under the industry where it has substantial
intellectual property and designs, patents and trademark protecting that is the intellectual
property. It is exposed to litigation risk for the alleged infringements. It may result into
payment of royalties by the entity to be able to continue product manufacturing or paying
the damages or receiving injunctions that prevents the company to sell the products that
has been developed by it (Cochlear.com 2019).

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2. Ratio analysis and risk of material misstatement
From the above ratio analysis of the company following have been found –
 Current ratio – current ratio has been improved as compared to previous year and reached
to 2.03 in 2018 from 1.69n in 2017. Main reason behind the same is increase in the cash
and increase in the trade receivables (Cochlear.com 2019)
 Inventor turnover – inventory turnover is reduced from 2.28 to 2.21 as compared to
previous year that signifies that the company’s ability in selling the inventories has been
reduced (Cochlear.com 2019)
 Debt equity ratio – though the debt equity ratio has been improved and reached to 0.89 as
compared to 1.09 for the previous year, it is observed that the company repaid its short
term borrowing however, raised long term borrowing in that place. It is signifying the
company’s liquidity issues (Cochlear.com 2019)

5AUDITING THEORY AND PRACTICE
 Net profit margin – it has been improved as compared to the previous year and increased
to 18.02% in 2018 against 17.83% in 2017. It is signifying that the profitability position
of the entity has been improved (Cochlear.com 2019)
2 key account balances at the risk of material misstatement are as follows –
 Cash – cash is considered as the material item by its nature as cash is always subjected to
theft, embezzlement and misstatements. Further, the theft of cash can be covered up by
fake confirmation and fake bank statement. Cash of Cochlear Limited has been reduced
from $ 89.5 million to $ 61.5 million over the period from 2017 to 2018. Likelihood is
there that the cash has been misstated (Vîlsănoiu and Buzenche 2014)
 Inventories – inventory is considered as the material item as it is exposed to theft and
misstatements and misappropriations. Further, inventories of Cochlear Limited have been
increased from $ 160 million to $ 167.4 million over the period from 2017 to 2018.
Likelihood is there that obsolete inventories are still being included in the inventories or
the company could not sell the inventories as it was manufactured without considering
the demand (Gleason, Greiner and Kannan 2017)
3. Kay assertions
Key assertions involved with the above mentioned accounts are as follows –
 Cash – major assertion involved with cash balance is accuracy that is the amount
recorded for cash balance is accurate and has taken into consideration all the transaction
while recorded the amount for cash. Another assertion associated with cash is cut-off that
is the cash balance recorded is for the period only that is taken into consideration
(Bendovschi and Ionescu 2015).

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 Inventories – major assertion involved with cash balance is existence that is the amount
recorded for inventories is actually in existence. Another assertion associated with
inventories is completeness that is all the inventories has been taken into consideration
while recorded the same for balance sheet (Kharisova and Kozlova 2014).
4. Procedure to gather appropriate and sufficient audit procedure
 Cash – the auditor shall obtain the bank reconciliation and reconcile the cash balance
with bank. Further, the cash book shall be verified with the cash receipts and cash
payments books.
 Inventories – the auditor shall check the methods used by the company for the inventory
that is FIFO or LIFO and shall confirm that the company is following the same. Further,
the auditor shall test the high-value items, inventories in transit, error probe items and
carry out physical inventory count (Edgley, Jones and Atkins 2015).
Conclusion
It is concluded from the above that business of Cochlear limited is exposed to various
risks like competition and product innovation, regulations related to medical device and
infringement litigation. Some of the accounts those are considered as material are cash and
inventories.

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Reference
Bendovschi, A.C. And Ionescu, B.Ş., 2015. The Gap between Cloud Computing Technology and
the Audit and Information Security. Audit Financiar, 13(125).
Cochlear.com. 2019. [online] Available at: https://www.cochlear.com/43d56bcc-d510-4a20-
ab70-6208fa5af77e/en_annualreport2018_cochlear2018annualreport_5.69mb.pdf?
MOD=AJPERES&CONVERT_TO=url&CACHEID=ROOTWORKSPACE-
43d56bcc-d510-4a20-ab70-6208fa5af77e-mkRS5RK [Accessed 9 Aug. 2019].
Cochlear.com. 2019. The World's Leading Hearing Implant | Cochlear Hearing Implants.
[online] Available at: https://www.cochlear.com/intl/home [Accessed 9 Aug. 2019].
Edgley, C., Jones, M.J. and Atkins, J., 2015. The adoption of the materiality concept in social
and environmental reporting assurance: A field study approach. The British Accounting
Review, 47(1), pp.1-18.
Gleason, K.C., Greiner, A.J. and Kannan, Y.H., 2017. Auditor pricing of excess cash
holdings. Journal of Accounting, Auditing & Finance, 32(3), pp.423-443.
Kharisova, F.I. and Kozlova, N.N., 2014. Applying the category of «Assertions (or
preconditions)» In audit of financial statement. Mediterranean journal of social sciences, 5(24),
p.180.
Vîlsănoiu, D. and Buzenche, S., 2014. Determining Audit Materiality in the Banking Industry–a
Knowledge Based Approach. Procedia Economics and Finance, 15, pp.935-942.

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Yoon, K., Hoogduin, L. and Zhang, L., 2015. Big Data as complementary audit
evidence. Accounting Horizons, 29(2), pp.431-438.