Auditing Project: Financial Statement Analysis of Zicom Group Limited

This auditing project report provides a comprehensive analysis of Zicom Group Limited's financial statements. It begins with an introduction to audit programs and procedures, including risk assessment and materiality. The report then delves into business risks, including inherent, control, and detection risks, as well as the audit risk model. Analytical procedures are performed using financial ratios, including profitability, liquidity, and gearing ratios, to assess the company's financial performance over a three-year period. The concept of materiality and its impact on audit sampling are discussed, followed by a listing of material account balances and relevant financial report assertions. The project explores financial statements, business risks, financial ratios, and audit procedures. The report also includes recommendations for improving financial performance. This report is a great resource for students looking to understand auditing and financial statement analysis. Desklib provides past papers and solved assignments.

AUDITING PROJECT

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................1
TASK 3............................................................................................................................................2
TASK 4............................................................................................................................................6
TASK 5............................................................................................................................................7
TASK 6............................................................................................................................................7
TASK 7 ..........................................................................................................................................9
TASK 8..........................................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERECNES..............................................................................................................................14

INTRODUCTION
An audit program means a plan of audit that is documented and according to which
procedures of the auditor depends. Before starting audit procedure an auditor will make a audit
program on the basis of previous year(s) working papers, size of entity, materiality of risk
associated with the relevant industry and accordingly decide the audit duration, number of audit
staff and audit procedures that have to be followed while doing audit. Audit procedures are
depends upon the inherent risk, detection risk and control risk and accordingly materiality and
sampling are done. Analysis of financial statements is done with the help of profit and loss
account, balance sheet and ratio analysis and conclusion is framed about the financial position of
the company. Generally audit procedures are based upon materiality of transactions and
sampling is done according to audit risks.
TASK 1
In this project, Zicom Group Limited which is dealing in leading specialist equipment
manufacturing and niche engineering service proving with core expertise. In this project, we
discuss about various risk, material account balances and sampling procedures applied by the
auditor while performing its audit procedures.
TASK 2
Business risk refers to the possibility that an organisation will have lower profits than
anticipated profits or experience a loss rather than taking a profits. There are various factors
which are associated with it such as : volume of sale, per unit price, competition, input cost and
legal compliances. Zicom Group Ltd is a leading manufacturer of marine deck machinery, fluid
regulating and material stations, precision engineered & automation equipment etc. It belongs to
the manufacturing industry(Bodnar and Hopwood., 2012). There are various types of business
risks which are described as below :
Risk of material misstatement : Material misstatement risk can be arise due to the
errors in financial statements of a company. It can be occurs due to difference between the
reported figures and what is anticipated to be reported in order for the financial statements to be
fairly presented.
1

Audit risk : Audit risk arises when auditor of an organisation express inappropriate audit
option on financial statements that contain material misstatement. Auditor of Zicom Group Ltd
properly follow audit procedure so this risk does not much high in the organisation.
Formula of Audit risk model : AR = ƒ[IR * CR * DR]
Inherent risk : In financial auditing inherent risk arises, especially while dealing with
complex transactions. This risk can be posed by an omission in a financial statement due to a risk
factor other than failure of control. In Zicom Group Ltd this risk is low because auditors of
organisation prepare its financial statements effectively which minimize the chances of errors in
financial transactions.
Control risk : Control risk refers to that risk of inefficiency of organisation controls to
analyse material misstatements in financial statements of company. Management and auditors of
Zicom Group Ltd able to identify and control risk in material misstatements so this risk is low in
organisation.
Detection risk : Detection risk is that risk which is arises when auditors fails to detect a
material misstatements in the financial statements. Auditors of Zicom Group Ltd always try to
follow audit procedures so that material misstatements can be deducted in financial statements.
So this risk does not much affect the assessment.
TASK 3
Analytical procedures using ratios:
Analytical procedures are one of many financial audit processes which help an auditor
understand the client's business and changes in the business, and to identify potential risk areas to
plan other audit procedures.
Income Statements of Zicom Group Ltd for the year ended 30.06.2017 and 30.06.2018
(AU $ in million)
2015-16 2016-17 2017-18
Revenue 111 85 76
Cost of revenue 68 43 40
Gross Profit 43 42 36
2

Operating expenses:
Sales, general and administration expenses 25 27 32
Other operating expenses 20 26 17
Total Operating expense 48 53 49
Operating Income -5 -10 -13
Interest expense 0 0 0
Other income (expense) 4 5 2
Income before tax -2 -5 -11
Provision for income tax 1 -1 0
Other income 0 0 0
Net income from continuing operations -3 -4 -11
other 0 0 0
Net Income -2 -4 -11
Net Income available for common shareholders -2 -4 -11
Balance Sheet of Seek Limited as at 30.06.2017 and 30.06.2018
(AU $ in million)
2015-16 2016-17 2017-18
Assets:
Current Assets:
Cash:
Cash and cash equivalent 21 18 10
Short term investment
Total Cash 21 18 10
3

Receivable 13 15 19
Inventories 22 22 28
Prepaid expenses 1 3 0
Other current assets 14 4 7
Total Current Assets 71 61 64
Non Current Assets:
Property, plant and equipment:
Gross property, plant and equipment 57 55 57
Accumulated Depreciation -32 -33 -36
Net property, plant and equipment 25 22 21
Equity and other long term investments 7 9 9
Goodwill 0 7 7
Intangible assets 15 7 7
Deferred income taxes 2 3 3
Other long term assets 0 1 1
Total Non Current Assets 48 48 49
Total Assets 119 109 112
Liabilities And Stockholder's Equity
Current Liabilities:
Short term debt 7 9 18
Capital leases 1 0 0
Accounts Payable 18 15 18
Deferred income taxes 1 0 0
Other current liabilities 4 6 5
4

Total Current Liabilities 30 31 41
Non Current Liabilities:
Long term debt 2 1 1
Deferred tax liabilities 2 1 1
Total Non Current Liabilities 5 2 2
Total Liabilities 35 33 43
Stockholder's Equity:
Common stock 38 36 38
Other equity 0 0 -2
Retained earning 49 41 32
Accumulated other comprehensive income -3 -2 0
Total Stockholder's Equity 85 76 69
Total Liabilities And Stockholder's Equity 119 109 112
For doing analytical procedures of above financial statements of Zicom Group Ltd, it is
necessary to calculate and analyse various ratios like profitability ratios, investment ratios and
liquidity ratios, which are as follows:
 Profitability Ratio:
Particulars 2015-16 2016-17 2017-18
Gross Profit ratio (%) 38.84 49.55 47.54
Operating profit ratio
(%)
-4.49 -12.14 -17.57
Net Profit ratio (%) -1.53 -6.37 -14.92
Note: Gross profit ratio = Gross profit/sales*100
Net profit ratio = Net profit/sales*100
5

Operating profit ratio = Operating profit/sales*100
Comments: In profitability ratios, which are calculated above for three years. By analysis of
these, the gross profit ratios are positive but all other are negative. Zicom Group Ltd.
Should decrease its operating expenses to improve its ratios. There is also decreasing
trend year to year, it should be corrected(Mkoba and Marnewick., 2016).
 Liquidity Ratio:
Particulars 2015-16 2016-17 2017-18
Current Ratio 2.39 1.99 1.55
Quick Ratio 1.21 1.09 0.76
Note: Current ratio = current assets/current liabilities
Quick ratio = quick assets/current liabilities
Comments: In these ratios, there are decreasing trend. Company should either increase its short
term assets or decrease its short term liabilities for doing better state of company in
liquidity position(Meredith and Mantel Jr., 2011).
 Gearing Ratio:
Particulars 2015-16 2016-17 2017-18
Gearing ratio 0.3 0.01 0.01
Note: Gearing ratio = total debt/total shareholder's equity
Comments: In this ratio which is calculated above, it can be analysed that, in year 2017-18 and
2016-17 business is more depending on equity as compared to debt than previous year 2015-16.
It is very good for Zicom Group Ltd to have less debt, it decreases the financial risk.
 Investor Potential Ratio:
Particulars 2015-16 2016-17 2017-18
Return on assets(%) -1.68 -3.82 -9.77
Return on equity(%) -2.44 -5.43 -14.93
6

Note: Return on assets = Net profit/Total assets
Return on equity = Profit after tax/Net worth
Comments: In these ratio after calculating three year ratios as shown above, it can be easily
analysed that return is less in current year than year 2017-18 in both ratios as compared to
previous years. This mean, Zicom Group Ltd is not using assets & funds effectively and
efficiently which is invested by shareholders in the company. It can demotivate the investors to
not investing in this company due to low rate of return. Company should take corrective major
to enhance the income so that new investors can come and invest fund.
TASK 4
Materiality means those assets and liabilities whose increase or decrease can impact the
decision regarding financial statements for the users of financial statements and accordingly the
audit sample is made. In material, account balance refers to the size of recorded account balance
in the financial statement and it focuses towards physical aspects of things. Materiality refers to
the errors contained in balances and transactions while preparing the financial statements of
organisation. It is helpful for the planning purpose. For example , If auditor of Zicom Group Ltd
has shown wrongly $1000 as fixed assets where it has to be shown as current liability because it
amount of interest payable. So it is important for an auditor to find the errors while preparing the
financial statements as a result planning can be done effectively. If organisation has planned to
expand its business in different market and it is possible when financial statements provides
relevant information such as profits available in current year for company. For expansion, money
is needed and if corporation has sufficient profits as per the information available in financial
statement than it can plan for business expansion(Feng and Hudson., 2011). So it is helpful in
planning as well as decision making as a result management of company can take important
decision regarding expansion of its business (Turner., 2016).
TASK 5
Ten different material account balances are as follows:
Particulars Amount
Assets:
7

Turner, R., 2016 Property,plant and equipment 21301
Intangibles assets 14602
Deferred tax assets 3054
Inventories 28007
Cash and bank balances 9739
Liabilities:
Interest bearing liabilities 664
Long term provisions 414
Deferred tax liabilities 983
Trade and other payables 19122
Gross amount due to customers for contract work 1844
TASK 6
For listing relevant financial report assertions for selected material account balances
firstly, understand the meaning of this, which is as follows:
Financial Report Assertions: It is also referred to as management assertions, which are explicit
or implicit statements made by a company regarding financial statements(Hill., 2013). It can be
viewed as company's official statements. When a Zicom Group Ltd's financial statements are
audited, the principal part an auditor reviews is the reliability of the financial statement
assertions. Relevant financial report assertions for selected material account balances are as
follows:
Particulars Relevant Financial Assertions
Assets:
Property,plant and equipment  All property, plant and equipment are properly
recorded and authorised.
8

 Expenditure for repair & maintenance are
segregated from purchase value of these assets
which are capitalised.
 Freight Turner, R., 2016given on purchase of
these assets are included in the cost of fixed
asstes and accordingly capitalised.
Intangibles assets  Goodwill acquired is properly valued.
 Cost of intangible assets which are acquired in
exchange transactions are properly capitalised.
 Intangibles assets which are integral part of
other tangible assets are recorded as per
principal nature of these assets(Iliescu., 2010).
Deferred tax assets  It is recorded if these are realisable.
Inventories  Inventory recognized in the balance sheet
exists at the period at year end.
 Any inventories which is held by the third
party or in transit, are recorded and included in
balance sheet.
Cash and bank balances  All cash and bank balances are recorded in the
balance sheet.
 These are properly classified, described and
disclosed in the financial statements.
Liabilities:
Interest bearing liabilities  Interest bearing liabilities are included those
on which fixed rate interest is payable at every
year end.
Long term provisions  Provisions are recorded after taking
appropriate & reasonable assumptions based
on authentic sources of information.
9

Deferred tax liabilities  Deferred tax liabilities includes those which
are virtually certain and calculated as per
applicable international accounting standards
(IAS).
Trade and other payables  All trade and other payables are included in
the financial statements.
Gross amount due to customers for
contract work
 Contact for this work is in written form and
contains all necessary information regarding
payment to customers relating to work done by
them.
TASK 7
Particulars Audit work steps
Property,plant and equipment  An auditor should verify opening balances
by checking previous financial statements
and audit report.
 An auditor should inspect the title deed to
the property.
 Check all the financial assertions made by
management regarding fixed assets.
Intangibles assets  An auditor should check the the accounting
relating to receipts and creation of intangible
assets.
 Checking the registration of the contract of
sale of intangible assets.
Deferred tax assets  An auditor should Obtain a deferred tax
working schedule from the client along-with
related disclosures for current and prior
periods. Match and cross-refer with the
10