Audit Planning Report: Near Map Limited - Financial Audit 2016

This report focuses on the audit planning process for Near Map Limited, covering key steps to ensure an effective audit. The executive summary highlights the report's objective: to guide the auditor through the audit process, considering the client's business and industry. The report details initial audit planning, including client investigation and engagement letter preparation. It emphasizes understanding the client's business operations, industry risks, and governance structure. Furthermore, it assesses client business risks, especially those related to the IT sector and intangible assets. Preliminary analytical procedures involve ratio analysis to assess liquidity, profitability, and solvency, identifying potential areas of concern. The report recommends suitable audit tests, including tests of controls and substantive tests, to gather sufficient audit evidence. The conclusion stresses the importance of a comprehensive audit plan and provides recommendations based on the risk assessment and financial analysis.

1

EXECUTIVE SUMMARY
The title of the report is New Client – Audit Planning. As the title states, the report has been
prepared for planning of the audit of new client. The main aim of this report is to identify what
are the steps that the auditor shall take into consideration while planning the audit so that the
audit can be conducted effectively. The major steps that have been considered are performing
initial audit planning, understanding the clients business, assessing the risk being faced by the
business and performing analytical procedures. The second major aim is to plan the audit with
respect to the industry and the nature of business in which the client functions. With these two
major aims the report has been prepared with sufficient headings.
2

Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................4
PLANNING THE AUDIT.................................................................................................................................4
INITIAL AUDIT PLANNING........................................................................................................................5
UNDERSTANDING CLIENT’S BUISNESS AND INDUSTRY............................................................................5
ASSESSMENT OF CLIENT BUSINESS RISK..................................................................................................6
PRELIMINARY ANALYTICAL PROCEDURES................................................................................................6
SUITABLE AUDIT TESTS................................................................................................................................8
CONCLUSION AND RECOMMENDATION.....................................................................................................8
REFERENCES................................................................................................................................................9
3

INTRODUCTION
Auditing plays a very important role in the finance function and is considered as important
activity on which every person including the government and the related agencies relies and
functions. Auditing gives an insight of the business of various companies and provides the
disclosures whether the company is performing as per the governing rules and regulations. Audit
planning is considered as the major step in the process of audit as it forms the basis as to how the
audit shall be started. In this report the company – Near Map Limited has been chosen for the
study. The financial report for the financial year ending 30th of June 2016 has been considered.
The planning process has been detailed in four major headings – initial audit planning, clients
business, assessment of risk and preliminary analytical procedures. Each of the four steps has
been detailed with reference to the Near Map Limited. After performing the planning process,
the number of suitable that will be performed in order to collect the audit evidence has been
described. In the last the study has been ended up with the conclusion summarizing the report
and the recommendation as to what is the better for the auditor and the client.
PLANNING THE AUDIT
For executing any kind of work, it is necessary to develop the plan as to how the work shall be
conducted and in what manner the way will lead to early and efficient completion of the work.
The similar fact applies to the audit process. If the plan for audit has not been prepared then the
auditor will end up with nothing at the end and the work done will all be futile. Therefore,
Planning of an audit plays the very important role in the whole audit process. As per the Auditing
Standard of Australia 300, an auditor shall plan his audit for the following purpose:
- Avoiding any type of misunderstanding with the client
- Avoid the high cost of audit and keep it at reasonable margin and
- Providing the auditor or the audit team guide to obtain the sufficient and reliable audit
evidence (AASB, 2006; Ullah, 2014).
In this report, the audit planning has been detailed with the four major steps. These steps have
been detailed below.
4

INITIAL AUDIT PLANNING
The first step in the audit planning is to accept the new company as the client and performing the
initial audit planning. In this step following four functions are performed:
- Before accepting the client engagement, the client is investigated as to at what position
the company have the standing in the market, how far stable is the client in the financial
terms and the nature of the relations that the client has with the earlier accounting firm.
- Next function is to determine as to why the company gets its books of accounts audited
by our firm. The same has been finalized with the discussion of the management.
- Then the understanding with the client is obtained after obtaining the engagement letter.
The engagement letter is in documented form which contains the objectives of the audit,
roles and responsibilities of the auditor and the client, detail of the services to be
provided, scope of the engagement including the limitations if any and the understanding
of fees.
- After having the agreement, if the auditor requires the opinion from the outside
consultants, then it shall also be the part of the initial audit planning.
In the given case, audit firm KPMG, Sydney is the auditor of the company for the year ending
30th of June 2016 which has authenticated the financial statements through its audit partner Trent
Duvall (Company official Website, 2016). The client investigation is to be conducted and
engagement letter is required to be obtained.
UNDERSTANDING CLIENT’S BUISNESS AND INDUSTRY
As per the paragraph number 11 of the Auditing Standard of Australia number 315, the auditor
shall obtain two types of information. One is related to obtaining the understanding of client’s
nature of business and the industry within which the company is operating. Along with that the
company’s nature with regard to the governance and the structure is detailed (AASB, 2013).
Following functions have been performed:
- Nature of the business operation of the company. The company under study – Near Map
Limited is the company registered in Australia and listed on the Australian Stock
Exchange. The company – Near Map Limited is engaged in the operations of the web
5

page which delivers the details of the addresses of banks, houses and etc along with their
latitude and longitude figures. It contains the technology which provides the better
presentation of the addresses with the photos in high quality definition. The company’s
major source of revenue is the Subscription revenue which is accounted for in the books
of accounts as per the life of the contract (Company official Website, 2016).
- Assessment of the risk which is common to the industry. As the company – Near Map
Limited is linked with the Information Technology sector, there is always be the risk of
having the outdated technologies as compared to the competitor.
- The company’s governance system shall be assessed along with the ethical climate of the
business so as to place the reliance on the level of the financial reporting.
ASSESSMENT OF CLIENT BUSINESS RISK
In this step, the auditor is majorly concerned with the material misstatements that may be
contained in the financial statements of the company due to the risk present in the client
business. Second concern of the auditor is the non compliance with the rules and regulations in
case of having the business risk. These risks are primarily explained by the management of the
company.
In the given case, as the company is engaged in the Information technology sector, the chances
of having the impairment of intangible assets is higher and hence the auditor is required to check
the impairment indication at reporting date along with the proper calculation (Company official
Website, 2016).
PRELIMINARY ANALYTICAL PROCEDURES
This is the fourth major step in the audit planning process. These procedures are performed to
have the clear understanding of the operations of the company and the clear assessment of the
risk. The procedure details the assessment of the financial ratios and comparing the same with
the previous years so as to analyze the major changes and plan the audit accordingly.
Following ratios have been calculated and analysed:
6

STATEMENT SHOWING THE RATIO ANALYSIS
($'000)
S. No. PARTICULARS 2016 2015
1 Liquidity Ratios
a Current Assets 18236 25025
Less Current Liabilities 23106 20194
Working Capital (4870) 4831
b Current Ratio 0.79 1.24
2 Profitability Ratios
a PBT (4693) 627
Revenue 30882 23702
Net Profit Magrin (15) 2.65
b Assets 44267 45369
Average Assets 44818 45369
Revenue 30882 23702
Asset Turnover Ratio 68.91 52.24
c EBIT (4693) 627
Average Assets 44818 45369
ROA (10) 1.38
d PAT (7135) (789)
Equity 18493 22580
Average Equity 20537 12443
ROE (35) (6)
3 Long Term Solvency Ratios
a Debt 25774 22789
Equity 18493 22580
Debt to Equity 139.37 100.93
5 Market Strength Ratios
7

a Earnings Per Share (2.01) (0.24)
From the above ratios, it is clear that the company is not functioning very well and is under the
higher risk of liquidity due to the negative working capital and low current ratio and similar other
ratios like decreased earnings per share, negative net profit margin (Company official Website,
2016).
SUITABLE AUDIT TESTS
Apart from performing the analytical procedures, two tests are required to be done. One is the
test of controls and the other one is the substantive tests.
- Test of controls – In this test, different types of audit evidence are required to be
obtained. At first the personnel of the company is enquired about the procedures of the
authentication and the approvals and after that the sample sales or purchase invoices are
checked whether the procedures are followed. Similarly the roles and responsibilities of
the personnel are checked with reference to the practicality of the business.
- Substantive Tests – There are three types – test of transactions, analytical procedures and
test of balances. First test check the misstatement that can affect the correctness of the
accounts. Second test includes the comparisons and relationships and third test emphasize
on checking of the balances of ledger accounts appearing in the financial statements of
the company.
CONCLUSION AND RECOMMENDATION
To conclude, the nature of the company business is required to be understood and the reasons as
to why the company wants to change the auditor and the analysis of the risk shall be taken
seriously.
It is recommended to prepare the exhaustive audit plan first before proceeding with the audit as
the analysis have shown very areas where there are high chances of having the material
misstatements.
8

REFERENCES
AASB, (2006), “ASA 300 – Planning and Audit of a Financial Report” available at
http://www.auasb.gov.au/admin/file/content102/c3/ASA_300_28-04-06.pdf
accessed on 13/09/2017.
AASB, (2013), “ASA 315 – Identifying and Assessing the Material Misstatements through
understanding the entity and its Environment” available at
http://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standar
d_ASA_315.pdfaccessed on 13/09/2017.
Company official Website, (2016), available on http://www.nearmap.com.au/about accessed on
13/09/2017
Ullah A, (2014), “Planning and Audit of Financial Statements” available on
http://leaccountant.com/2014/12/08/asa-300-summary-planning-an-audit-of-
financial -statements/ accessed on 13/09/2017
9