Audit and Assurance Report: Decasport, Risk, and Materiality Analysis

This report provides a comprehensive audit and assurance analysis of Decasport, an Australian luxury sports shoe manufacturer audited by C&B Partners. It examines competition and independence issues, assesses inherent and control risks like foreign exchange risk, customer base reduction, and employee turnover, and discusses materiality planning based on turnover. The report highlights potential risks such as overstatement of sales, valuation fluctuations, and the impact of international competition. It also analyzes control weaknesses in inventory management and customer returns. The report concludes with a summary of the audit process, emphasizing the importance of risk assessment and materiality in ensuring the accuracy and reliability of financial statements, and the legal requirements of the companies.

AUDIT AND ASSURANCE

EXECUTIVE SUMMARY
Audit is an independent examining of organisation's financial status and situation. Auditing of
the accounts of a company is usually a legal requirement and is done by the professionals. The
present report is about the audit and assurance of the Decasport , a luxurious sport shoes
manufacturing company based in Australia. The company is being audited by the C&B partner
for the last four years and the company shares very healthy relationship with the auditing firm.
The company is prone different types of risk such as foreign exchange risk, high employee
turnover, reduction in the customer base, competitive risks which detriments its profits. Thus,
company needs to strengthen its internal control mechanism for eliminating such risks like
offering high quality goods, using hedging and other instruments for coping up with foreign risk,
satisfying employees so that do not leave the organisation.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
..........................................................................................................................................................3
INTRODUCTION...........................................................................................................................4
MAIN BODY...................................................................................................................................4
Competition and Independence issues........................................................................................4
Risk assessment – Inherent risk..................................................................................................5
Risk assessment- Control risk.....................................................................................................6
Planning Materiality....................................................................................................................7
CONCLUSION................................................................................................................................8

INTRODUCTION
Auditing can be described as the activity of checking the books of accounts and other
financial related of and organisation. The work of audit and assurance involves undertaking the
risk analysis of company, developing the communication skill of the client organisation,
preparing financial statements and lastly identifying the internal weaknesses and recommending
the client company in controlling those weaknesses. The present report is about the Decasport
company situated in Australia which is engaged in manufacturing and selling luxurious sport
shoes around the country. The company is audited by C&B Partners for the last four years. The
report will highlight the risk assessment of company, competition and independence issues,
identifying internal control risk and controlling the risk. Lastly, report will cover materiality
planning.
MAIN BODY
Competition and Independence issues
The profession of Auditing and Assurance is highly prone to competition and
independence issues. The most common issues are; failure of gathering sufficient information,
lack of professional scepticism, due care, over reliance on inquiry, insufficiency in confirming
the account receivables etc. Audit firms are very competing and strives to provide the best
services to their clients. Auditor's reputation in the market plays great role when a client searches
for the external auditor because the report of auditor makes huge difference in organisation's
brand (Stringer, 2012).
Independence is considered to be the most required element in the profession of Audit
and assurance. An auditor's independence is the independence of external or internal auditor in
conducting the examination of company's financial records. This means that C&B partners is
independent from Decasport in undertaking auditing work, the report of auditor which could
harm the financial interest of client company. The independence is necessary because the report
of auditor is considered to be the base of investor's confidence in the financial reporting of
Decasport (Carey, Knechel & Tanewski, 2013).
The relationship of Decasport with its audit firm C&B Partners is very good and the
organisation allows full independence to the auditors in carrying out their work. This is the
reason why the audits of the company went very smooth for the last four years. Auditor is also

well known with the structure and routine operations of the company (Carson, Redmayne,N.B. &
Liao, 2014).
Risk assessment – Inherent risk
The work of auditor is to identify the different types of risks when it is working with
client organisation Decasport. One of the risk is inherent risk which can be understood as
omission or error in the financial record/ statements of company despite placing the control
measure to prevent them (How to assess inherent risk in an audit, 2019).
Assessment of inherent risk is more subjective in nature when compared to other
components of audit work. This is because the financial transactions that involves more
complexities are more likely or inherently to be misstated that the simple accounting transaction.
For example, if a company has wrongfully or improperly reported the figures of balance sheet in
the past might inherently more likely to again misstate the facts in the future. Such things are to
be assessed by the auditors for assessing the inherent risk (Knechel & Salterio, 2016).
Potential risk - description Account Assertions Level of inherent risk
Reduction in Customer
base
Sales and profit
and loss account
(REVENUE)
 Occurrence
 Accuracy
 cut-off
High ( because the
sales could be
overstated by the
company)
Foreign exchange rate risk Cash, accounts
receivable
account, P&L
account
 Valuation
 Allocation
 Existence
High( Because the
highly fluctuating
rates could
significantly affects
the figures of other
accounts such as
profit and loss
account)
Competition from
international corporations
Sales, profit,
cash, account
receivables etc.
 Completeness
 Accuracy
Medium(Because
mostly, the high
reputed companies do

not compromise on
the completeness and
accuracy of their
books of accounts and
uses the services of
professional account)

From the financial statements of the company, it can be said the profitability has suffered
due to the high number of product returns by the customers. Poor quality has dissatisfied the
customers and has generated negative feedbacks for itself. Also, the sensitive international
exchange rate risk has affected the earnings of the company. Thus, these risks are very high and
should be considered by the Decasport for maintaining its profitability. Hence, the overall
inherent risk is quite high.
Risk assessment- Control risk
Control risk can be defined as the probability of misstatement in the financial statement
produced by the management of company due to the failure of internal control mechanism. For
example, the information contained in the financial statements could be misstated when duties of
the employees are segregated and things gets messy. Like misplacing of vouchers, purchase
orders leads to mismanagement in the documentation which in turn leads to improper accounting
of the transaction. This eventually results in control risk (Griffiths, 2016).
Control weakness Potential misstatements Assertions Transaction level internal
control
Inventory
management
Under or overstatement
of inventory valuation
Valuation
and
allocation
Avoiding dead stock by
faster movement of
inventory. Using FIFO
method.
Handling customer
returns
Misstatement in the
account receivables and
sales accounts
Completen
ess and
valuation&
allocation
Offering the best and
superior quality products to
the customers for reducing
product returns.
Theft stores Misstatements in the
inventory valuation
Valuation
and
allocation
Regular monitoring of the
items in the store

Planning Materiality
As needed by international accounting standard, an auditor is required to assess the
materiality of financial statement of a company at the planning stage which is done by applying
quantitative and qualitative method. Planning materiality can be defined as the misstatement
amount which is set by the auditors at the planning or initial stage of an audit on examining the
materiality of the financial statements of the company (Ahmed Haji & Anifowose, 2016).
Auditors of C&B Partners plans the materiality figure that will be used for the financial
statements of Decasport as whole. There can be different bases for assessing the materiality such
as Profit before tax, total assets, turnover, gross profit etc.
The auditor of C&B Partner has taken the turnover as base for planning materiality
because of following reasons:
 Firstly, because the profit before tax of Decasport is volatile therefore, turnover is more
appropriate base.
 Second is that the company operates in very high risk industry for which more
conservative approach has to be applied by the auditor.
Calculating planning materiality:
Turnover's threshold limit is 0.5
The materiality for the year 2018 is calculated below:
0.5*annual turnover = materiality amount
0.5%* 41,202,000 = 20601
Thus, the auditor would take the amount 20,601 as the materiality figure for the whole financial
statements.
Now, if the auditor founds out that the company has stated the revenue which is less than
the amount stated above, then it will consider such mistreatment as immaterial and if the

misstatement is greater than the 0.5%, then it will be considered as material misstatement of
figures in the financial statements of the Decasport.
Year 2018 has been taken because the data for the fiancial year 2019 is estimated one.
Therefore, the planning materiality has been calculated for the year 2018 on actual fianancial
data.
Another scenario would be, if the auditor of C&B Partners found out that the amount
misstated is greater than the materiality figure due to the fraud or involvement of senior
management team member, then the auditor will deem that the overstated amount is material as
the member of management was engaged ion it and it was a potential criminal action.
CONCLUSION
From the above project report, it can be summarised that audit is one of the legal
requirements for the companies. Audit and assurance is the assessment of company's financial
statement to examine whether the information stated by the organisation is true or not. This has
been made necessary because the interests of the different stakeholders lies in the financial
records of the entity. Like auditor's report acts as a foundation for the investor to invest in a firm
or not. Further, it was seen in report that auditor calculates a materiality amount which it uses for
the financial statements as whole for determining what figures are misstated and which should be
considered as material and which immaterial.

REFERENCES
Books and Journals
Ahmed Haji, A., & Anifowose, M. (2016). Audit committee and integrated reporting practice:
does internal assurance matter?. Managerial Auditing Journal, 31(8/9), 915-948.\
Carey, P., Knechel, W. R. & Tanewski, G., (2013), “Costs and Benefits of Mandatory Auditing
of For-profit Private and Not-for-profit Companies in Australia”, Australian Accounting
Review, Vol 23 Issue 1 No 64, pp. 43–53.
Carson,E., Redmayne,N.B. & Liao,L.,(2014) “Audit Market Structure and Competition in
Australia”, Australian Accounting Review, Vol 24 Issue 4 No. 71, pp 296-311
Griffiths, P. (2016). Risk-based auditing. Routledge.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Stringer, A., (2012), “Future Directions in Auditing”, Charter, May, p48.
Online
How to assess inherent risk in an audit.2019. [Online]. Available through
<https://www.dummies.com/business/accounting/auditing/how-to-assess-inherent-risk-in-
an-audit/>