Deakin University MAA303 Audit and Assurance Case Study: Morris Ltd

This case study analyzes the audit and assurance aspects of Morris Ltd, a company dealing in herbal medicines experiencing financial losses. The report examines the company's efforts to expand, including bonus schemes and capital raising, and assesses its current performance. It applies auditing standards, particularly ASA 315, and discusses analytical procedures, professional skepticism, and materiality in the context of the audit. The case study evaluates key financial ratios, the going concern assumption, and potential risks like contingent liabilities and inadequate accounting records. The report concludes that while the company faces challenges, management is taking steps to improve its financial position. The analysis includes recommendations for the auditor regarding risk assessment, materiality levels, and evaluation of the company's ability to continue as a going concern. The report uses financial data and analytical procedures to assess the company's financial health and potential for future success.

Running head: AUDIT AND ASSURANCE
AUDIT AND ASSURANCE
Name of the Student
Name of the University
Author Note:

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Executive Summary
This report describes the performance of the client Morris Ltd, dealing in herbal medicines,
suffering continuous losses and seeking ways to expand its business to other countries as well.
The company is trying to expand by encouraging managers and employees through a bonus
scheme. The expansion planning has been supported by the board who has agreed to raise
additional capital to fund ongoing operations. The performance at present has been considered
and comments for the going concern has been made.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Conclusion.......................................................................................................................................8
Reference.........................................................................................................................................9

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Introduction
Auditing Standards ASA 315 Understanding the Entity and its Environment and
Assessing the Risk of Material misstatement deals with establishing requirements that are
mandatory and provides explanatory guidance on obtaining a complete understanding of the
business and its environment to the auditor. This auditing standard requires auditors to perform
procedures related to risk assessment to gain an understanding of the business and its
environment. In the present scenario, audit planning is done for client Morris Ltd, which has
been recently listed in the Australian Security Exchange (ASX).
Discussion
Answer to Question 1.
Analytical procedure means assessment of the financial information through an analysis
of the relationship among both financial and non-financial data (Utami et al., 2014). This
procedure includes comparison of financial information with prior periods, budgets or similar
industries. While risk assessment procedure is carried out to gain an understanding about the
company and its environment, including internal control of the company, to identify and assess
the risk of material misstatement in the financial statement which can be due to error or fraud.
Analytical procedure is used during the risk assessment process so that the auditor obtains a
better understanding of the entity and plan the nature, timing and extent (NTE) of audit
procedures accordingly.
Answer to Question 2.
Professional Skepticism requires an ability and attitude which includes questionable mind
and being alert to the condition that possibly indicates misstatement. It requires auditor on being

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alert to contradictory evidence, condition indicating possible frauds and conditions questioning
the reliability of the evidence gathered along with the critical assessment of that evidence.
Professional skepticism is essential while performing the role of auditor, and is a crucial aspect
of audit quality (Quadackers, Groot and Wright, 2014). While planning, auditors should perform
procedures and conduct test corresponding with the related risk, instead of making decisions on
the evidence that are easier to obtain. The main focus should be on evidence that is more reliable
and relevant. By maintaining professional skepticism, the overall risk is reduced to a low level.
Answer to Question 3.
Section AU 312, provide guidance when planning and performing an audit of financial
statement to auditors for considering audit risk and materiality following generally accepted
auditing standards (Baldauf, Steckel and Steller, 2015). Audit risk is a risk that the auditor may
express an unprofessional audit opinion when there is a material misstatement in the financial
statement (Griffiths, 2016). In the given case assumed planning materiality are:
a) Profit before Tax: Taking 8% as materiality amount, the variation in the loss of the
company seems immaterial. Therefore, small sample size is required. The change is
immaterial as compared to the company’s performance with the prior period and will not
change the decision of the investors.
b) Total Revenue: Taking 1%, when applied to the base, as material amount, the variation is
beyond 1%, and the increase in the revenue seems material and proper audit procedure is
required for it.
c) Total Asset: When the materiality is taken at 1% when applied to the base the variation in
total assets seems material and large sample size is required along with the receipt of the

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addition that is made to the total assets. This receipt needs to be cross verified with the
dealer through whom such assets have been acquired.
d) Equity: The materiality of Equity is taken at 1% and the variation in the equity seems
greater than it so the item of equity becomes material and it can change the decision of
the user. Therefore, the registrar needs to be checked in order to verify the addition in
members of the company
Answer to Question 4.
The net loss has shown significant variation by falling from 113% to 39% in the current
year. The reason for the change can be an increase in the selling units and earning more revenue
to cover fixed cost.

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Answer to Question 5.
Going concern assumption is the underlying assumption of accounting. It means that
business has neither the intent nor the need to diminish the scale of its operation. From the
analytical review, it can be analyzed that the company can maintain the current ratio greater than
1.3 as required in the loan covenant. Moreover, the goods worth AUD 200000 that has been
damaged should be excluded from the balance sheet under inventory side and needs to be shown
under income statement, and this will result in a decrease in the income, which has been
overstated.
Morris Ltd financial statement is showing a negative trend which includes increasing cost
and recurring losses with adverse financial ratios. It can be analysed that the system in
maintaining inadequate accounting records and excluding important transaction which results in
over-estimation of the income ((Svanberg and Öhman, 2014). Moreover, the company has a legal
proceeding that includes contingent liability related to an adverse reaction to a customer from the
product (Hennes, 2014). These are the areas which require further attention as it may hamper the
going concern of the company.
Morris Ltd has made key appointments with experienced marketing officer and general
manager of sales, as the company is expecting an increase in the demand for its product.
Additionally, the board has indicated its firm intention to raise additional capital to fund ongoing
operation which means that the company is ready to drive revenue with the new products in the
new market segment (Collier, 2015). As a part of our audit, we conclude that going concern basis
of accounting has been applied while preparing the financial statement and the responsibility for
assessing the company’s ability to continue it as a going concern is that of the management
(Sundgren and Svanström, 2014). Our reasoning is based on the information available at the date

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of an audit report, though future events or condition can be such that the entity ceases to be a
going concern.
Conclusion
From the above report it can be concluded that though the company is suffering severe
losses, efforts are still made by the management to increase the demand of the product which
will eventually minimize the losses and start generating profits. For expansion, the company has
decided to implement online sales through a new web-based system. Moreover, the company is
also investigating on the anxiety level through the use of different varieties of the same root for
future development, apart from selling fewer capsules per bottle product.

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Reference
Baldauf, J., Steckel, R. and Steller, M., 2015. The Influence of Audit Risk and Materiality
Guidelines on Auditor’s Planning Materiality Assessment. Accounting and Finance Research,
4(4), pp.97-114.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Griffiths, P., 2016. Risk-based auditing. Routledge.
Hennes, K.M., 2014. Disclosure of contingent legal liabilities. Journal of Accounting and Public
Policy, 33(1), pp.32-50.
Quadackers, L., Groot, T. and Wright, A., 2014. Auditors’ professional skepticism: Neutrality
versus presumptive doubt. Contemporary accounting research, 31(3), pp.639-657.
Sundgren, S. and Svanström, T., 2014. Auditor‐in‐charge characteristics and going‐concern
reporting. Contemporary Accounting Research, 31(2), pp.531-550.
Svanberg, J. and Öhman, P., 2014. Lost revenues associated with going concern modified
opinions in the Swedish audit market. Journal of Applied Accounting Research, 15(2), pp.197-
214.
Utami, I., Kusuma, I., Gudono, D. and Supriyadi, D., 2014. Halo effect in analytical procedure:
the impact of client profile and information scope. Global Journal of Business Research, 8(1),
pp.9-26.

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