Holmes Institute: HA3032 Auditing - Risk, Materiality & Procedures

This report provides an analysis of audit risk and materiality for Resource Mining Limited, a company listed on the Australian Stock Exchange. It assesses the company's audit risk using the audit risk model, considering inherent, control, and detection risks. Analytical procedures, including liquidity, efficiency, profitability, and solvency ratios, are applied to evaluate the company's financial performance over three years. The report quantifies planning materiality based on total expenses and identifies material account balances such as cash, trade receivables, and plant and equipment. Financial reporting assertions related to these balances, including completeness, existence, and valuation, are examined, and appropriate audit procedures are suggested to address potential risks. The document concludes with a summary of the findings and recommendations. Desklib provides access to similar solved assignments for students.

HA3032 Auditing
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Table of Contents
INTRODUCTION.................................................................................................................................3
DETAILS ABOUT THE COMPANY AND THE INDUSTRY...........................................................3
Nature of company................................................................................................................................3
AUDIT RISK MODE............................................................................................................................4
ANALYTICAL PROCEDURES...........................................................................................................5
QUANTIFYING THE PLANNING MATERIALITY..........................................................................8
MATERIAL ACCOUNT BALANCE LIST.........................................................................................9
FINANCIAL REPORTING ASSERTIONS RELATING TO ACCOUNT BALANCES THAT ARE
CONSIDERED MATERIAL..............................................................................................................10
USE OF SAMPLING TECHNIQUE...................................................................................................15
CONCLUSION...................................................................................................................................16
REFERENCES....................................................................................................................................17
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INTRODUCTION
The audit report of any organisation can be prepared by the auditor only when he is
able to gather sufficient and appropriate audit evidence. It is not possible to gather these
evidences without a proper audit planning. Proper audit plan envisages in it several kinds of
audit procedures. These range from simple trend analysis done with the help of analytical
procedures to complex financial assertion analysis that the management gives. All this
requires the auditor to define the scope of his work and get a clear understanding regarding
the operations of the entity. The report presented in the current phase deals with the same
issue of Resource Mining Limited (Byrnes, et. al 2018). A research has been made on the
company Resource Mining Corporation Limited. The basic concept relating to audit is
understood using the data and information available about the company from the annual
report published. The materiality for the audit purposes is established for the Resource
Mining Limited and the material account balances are identified. On the basis of this
identification further analysis is done for the assertions that the management has given
regarding those balances. The audit procedures required to remove any risk that lies in these
account balances are figured out with the relevant documentation purpose.
DETAILS ABOUT THE COMPANY AND THE INDUSTRY
The company Resource Mining Limited is listed on Australian Stock Exchange. The
industry in which the company is working is materials industry. The company is currently
listed with a market capitalisation of $2.96 million. It is an independently registered company
having operations related to mineral resources (Resource Mining Limited, (2017).
Nature of company
Resource Mining Limited is striving in the competition due to its innovative
marketing, technical and financial skills. The long term goal of the company lies on
construction of a strong business model lying on the development of minerals. The
sustainability of the company’ mission is in the use of the skills for creation of long lasting
wealth. Scientific innovation turns out to be the key strategy for the success of the company
(Resource Mining Limited, (2016).
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AUDIT RISK MODE
This audit risk model analysis the risk associated with the particular audit activities.
Due to the complex business nature of Resource Mining Limited, this company will have
high detention, audit and control risk in its business functioning. It is analysed that company
audit risk would be high due to the high detention and control risk. This Resource Mining
Limited has high risk due to the increased business compliance program and strict regulatory
listing requirements. The audit risk may arise due to the increased complexity of the
undertaken work. The detention risk arise due to misstatement and manipulation made by
company in its financial statement. The control risk arise due to the error and fraud made by
the accountant while managing the business process of organization (Noreen, Brewer, and
Garrison, 2014).
Practical implication of the audit risk model in Resource Mining Limited
The practical implication of the audit risk in the Resource Mining Limited could be
done by implementing the audit risk model. The increased business compliance program and
strict regulatory listing requirements has forced company to set high detention and control
risk which will also eventually result to increased audit risk in the audit assessment program.
This has shown that there would be chances that material recorded in the books of account
may be wrong and misleading (Resource Mining Limited, (2017).
This could be determined on the basis of the audit risk model undertaken in this research
The control risk is high as company does not have any internal control department
which could assess the discrepancies and issues in its audit reporting frameworks.
The control risk could be set to .20 and in order to have to 10% audit risk, company would set
its detention risk 10%. It reflects that company could only have 10% audit risk in its audit
reporting frameworks due to its high control and detention risk
Audit Risk = Inherent Risk x Control Risk x Detection Risk
10% = 20% x .5%
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20% = Detection Risk = .5%
.05%
The crux is that company could have 10% audit risk which company would have in audit risk
model (Srivenkataramana, 2018).
ANALYTICAL PROCEDURES
The analytical procedures help the auditors in understanding the scenario of
progression or digression that Resource Mining Limited is experiencing. These procedures
involve making comparisons of the financial and non-financial information that is available
for the company and the other companies in the same industry. The comparisons are sought
to be made within the company or outside the company. However, the data of the company
over the years is used to determine whether the company is progressing as per its past
performance and the data of the competing companies is used to determine the overall
standing of the Resource Mining Limited as compared to its competitors (Richstein, and
Farrenkopf, 2015).
Liquidity Ratio 2015 2016 2017
Current Ratio .28 .29 .30
Quick Ratio 0.13 0.07 0.22
A table is presented below that details the various ratios that are being calculated for the
company focusing on different areas like the efficiency, profitability, liquidity and solvency.
Data for the Resource Mining Limited is used for three consecutive years to look into the
level of performance.
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RATIO
CATEGORY
SELECTED RATIO AND
DESCRIPTION
2015 2016 2017
Liquidity Ratio:
these ratios help in
assessing the short
term
creditworthiness of
the Resource
Mining Limited
(Resource Mining
Limited, (2017).
CURRENT RATIO: this ratio is
helpful in identifying the number of
times Resource Mining Limited has
current assets as compared to its
current liabilities. The assessment of
the position to pay off the current
liabilities is assessed (Durrah,
Rahman, Jamil, and Ghafeer, 2016).
Formula: Current Assets
Current Liabilities
0.29 0.02 0.02
Activity/Efficiency
ratio: this ratio
helps to understand
the level of
effectiveness with
which the
company operates
(AICPA., 2017).
INVENTORY TURNOVER
RATIO: This ratio is used to
understand the number of times the
inventory of the organisation
shuffles. This is the best measure to
understand whether the company is
effective in selling its inventory or
not (Agha, 2014).
Formula: Cost of goods sold
Average Inventory
Profitability Ratio:
these ratios
RETURN ON ASSETS RATIO: this
ratio helps the user to get an
-8.69 -24.07 -293.61
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determine the
return the
Resource Mining
Limited generates
on different
parameters.
understanding of how well the
company is able to utilise the assets
to generate profits. In other words,
the profit generated as a proportion
of assets is calculated (Khan, and
Khokhar, 2015).
Formula: Net Income
Average Total Assets
Solvency Ratio:
this is the ratio that
helps in
understanding the
creditworthiness of
the company in the
longer run.
DEBT-EQUITY RATIO: the work
of this ratio is to determine the ratio
of the debts with the equity that
company holds. An idea of the
Resource Mining Limited’s
proportion of outside funds to owned
funds is gathered (Kajananthan, and
Velnampy, 2014).
Formula: Total Liabilities
Total Equity
0.13 0 0
Solvency ratio 2015 2016 2017
Financial Leverage .35 - -
Debt/Equity .12 - -
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The above table analysis shows that the Resource Mining Limited is not working well
in any of the aspects. The profitability of the Resource Mining Limited is declining as well as
the operating effectiveness is also very low (Appelbaum, Kogan, and Vasarhelyi, (2018).
Profitability 2015 2016 2017
EPS -30.4 -39 -27
Net profit ratio -37.58 % -34.45% -31.96 %
EBIT -28 % -27% -26%
Return on assets -12% -20% -18%
Further the long term and short term creditworthiness is far from average.
QUANTIFYING THE PLANNING MATERIALITY
Any entity for which an external auditor is hired and the audit function is required to
be carried out, requires the auditor to classify the transactions. The classification becomes
must because of some inseparable limitations that the audit function carries. The time frame
given to complete an audit function is limited. Further, the company has too many
transactions going on (Resource Mining Limited, (2017). It is practically impossible for the
auditor to check all the transactions and events that are taking place in the company. At some
point certain level of segregation is required to be done. This segregation is possible only
when the auditor gets an understanding of the areas that are highly material and have the
ability to influence the decision that the users shall take (Baldauf, Steller, and Steckel, 2015).
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The quantification of materiality involves certain steps. These steps are listed in the
table below. Along with the steps taken in the given company are mentioned (Aprisilya, and
Mawardi, 2016).
STEPS TAKEN FOR QUANTIFYING
MATERIALITY
IN THE CASE OF RESOURCE MINING
CORPORATION LIMITED
Step 1: choosing a stable base among net
profits, revenues, total expenses or total
equity. The amount that is to be taken as a
base needs to be the one that has been the
least volatile over years (Resource Mining
Limited, (2017).
The base amount chosen for this company is
total expenses. The amount reported for the
expenses is $748,022 (Resource Mining
Limited, (2017).
Step2: selecting a percentage from a window
of 1-10%. The percentage is selected on the
basis of risks that are expected to prevail in
the company (Resource Mining Limited,
(2017).
For the Resource Mining Corporation
Limited, the percentage chosen is 1%.
Hence, the value comes to be $7,480.
Step 3: making adjustments in the amount
calculated to arrive at the figure of planning
materiality (Krahel, and Titera, 2015).
Looking at the weak position of the company
and the negative returns that the company is
showing, the materiality level has to be
brought down much lower than the
calculated. Hence, the materiality in
quantified terms comes down to be $7,000
(Resource Mining Limited, (2017).
MATERIAL ACCOUNT BALANCE LIST
ASSETS LIABILITIES
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Cash and cash equivalents Trade and other payables
Trade and other current assets Provisions
Plant and equipment Interest bearing liabilities
Non-interest bearing liabilities
FINANCIAL REPORTING ASSERTIONS RELATING TO ACCOUNT BALANCES
THAT ARE CONSIDERED MATERIAL
ACCOUNT
BALANCE
AMOUNT ASSERTION AUDIT
PROCEDURE
AUDIT
EVIDENCE
1. Cash and cash
equivalent
$ 51,460 Completeness,
Rights and
Obligations,
Existence
1. The cash totals must be
made to check whether
they tally with those
mentioned.
2. The confirmations of
the bank balance must
be made from the
banks (Resource
Mining Limited,
(2017).
3. .
4. Management must be
asked and enquiries
should be made from
The management
enquiry
questionnaire.
The cash and bank
passbook copies.
The statement that
reconciled the cash
and bank balance.
The confirmation
balanced received in
written form from
the bankers.
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them regarding the
major transactions
done in cash (Resource
Mining Limited,
(2016).
Goodwill 54254 Completeness,
Rights and
Obligations,
Existence
5. A statement must be
made which tallies and
reconciles the
revaluation of the
assets
Use of impairment
test.
Rights and obligations The entity is completely authorised and able to deploy the cash and bank
balance they have for the purpose of carrying on the entity’s business.
Completeness Any amount of cash or bank balance has not been missed. All the entries
have been counted and the final balance is provided.
Existence The cash that has been reported by the Resource Mining Limited is present
with it either in physical cash form or in the form of bank balance.
2. Trade and other
current assets
$ 21,145 Completeness,
existence,
valuation
1. The component of the
trade receivables of the
entity must be
confirmed by
requesting them to
make confirmations in
written form.
2. The details of the other
current assets must be
checked to identify the
nature of the assets and
The list of all the
assets that fall in this
account balance.
The confirmations
that the receivables
have provided.
The valuation
calculations made
by the management.
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the amount of
transactions happened
that involved them.
3. The value that has been
provided to the assets
under this balance
should be checked.
Existence The assets that have been mentioned are existent and available at the time of
balance sheet date.
Completeness All the other current assets and the receivables that should have been entered
in this list have been entered.
Valuation The valuation done for the elements of these account balances is reliable
(Resource Mining Limited, (2017).
3. Plants $ 142,283 Completeness,
existence,
valuation
1. There must be physical
inspection of the assets
that the entity has
listed.
2. The condition in which
the assets lay in the
company must be
checked to see whether
the valuation done has
been correct or not.
3.
.the report of
valuation provided
by the valuation
expert.
The commentary on
the physical
condition of the
assets.
4. equipment $52124 Completeness,
existence,
valuation
4. Help of experts of
valuation of tangible
assets must be taken to
The asset list of the
Resource Mining
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