The present report is based on understanding the process of audit with the objective of determining the degree of materiality in the financial statement of the Santos Ltd to assess whether the financial statements are containing any material misstatements. The “International Auditing Standard 320” is related with the responsibilities of the auditor in implement the concept of materiality while planning and carrying out the audit of a financial statement (Hayes et al., 2014). According to the “ISA 450” explanations the materiality is implemented in assessing the impacts of the identified misstatement on the audit and any unrectified misstatement in the financial statements. The report would be assessing the aspects of materiality for Santos Ltd carrying out the business activities under ASX.
As stated under the “ISA 320” the financial reporting framework regularly discusses the materiality concept in context of the presentation and preparation of the financial statement (De Paula, 2016). Misstatement along with the omissions are treated as material given an individual or in aggregate could be reasonably anticipated to create an influence on the economic decision of the users undertaken based on the financial statements. Based on the quantitative materiality aspects the auditor is required to take into the account the percentage that is used in calculating the materiality in business. The computation of percentage is carried out during the planning stages of audit and materiality of planning. As a general rule qualitative materiality aspects for an item is considered that are of business significance and items involving complexities.
At the time of planning audit, it is necessary to calculate the materiality planning and materiality performance. While computing for the materiality planning, the auditor should take into the account a specific base that are present in the financial statement of an organization (Kumar & Sharma, 2015). A widespread practice has been adopted by most of the audit firms to take into the account the items of highest value to calculate the materiality planning for a company. Based on the materiality planning, materiality performance of the business is also calculated.
The yearly financial statement of the Santos Limited is considered in calculating the materiality planning. During the financial year ended 2017 the company reported a total asset of $13,706 and the same is taken into the consideration in determining the materiality planning of the business. Furthermore, while computing the materiality planning the auditor is required to take into the assumption a percentage based on which the values of the materiality planning is obtained (Zeff, 2016). The materiality planning is computed below;
Planning Materiality = Total Assets x Percentage Considered
$13,706 million x 5%
= $685.3 million.
The computed figures of planning materiality stand approximately $685.3 million that would be used by the auditor in recognizing the materiality performance that is ultimately used for determining any probability of material misstatement in the financial reports of a business.
The key events and performance of the company was specifically impacted by the following events and disclosed transactions that took place during the year;
The analytical review of financial statement is referred as the procedure of reviewing and analysing the financial statements of the company’s so that a better economic decision can be made (Ridley, 2017). These statement comprises of the income statement, balance sheet, statement of cash flows and statement of changes in the equity. The analytical review of the financial statement is regarded by the auditor as the medium of assessing the reasonableness of the accounting balances.
The auditor uses the analytical process to take into the account the vital financial ratios that are reflectors of the business (Appelbaum & Nehmer, 2017). The ratios that are computed for Santos to perform the analytical review of the financial statement includes liquidity ratios, profitability ratios, asset management ratios, leverage or solvency ratios and valuation ratios.
Liquid ratio can be defined as the ratio between the liquid assets and liabilities of the bank and other institutions (Warren & Jones, 2018). It is useful in determining the ability of the debtors in paying off the debt without raising any external capital. The current ratio for Santos Ltd stood all through the four-year span stood strong. The ratio during the year 2016 stood 1.90 while in 2017 it increased to 2.07. The quick ratio for the business stood impressive over the four-year span as it increased to stand 1.79 in 2017. This signifies that the business has sufficient amount of cash to meet its short term debt obligations.
The auditor is under the obligation of assessing whether the current ratio and the current liability of Santos is representing the true and fair view of the business. Similarly, the net working capital of the company represents a declining trend as the net working capital of Santos in 2016 stood 1,394 which subsequently declined to 1,021 in 2017. The auditor is required to evaluate the position of liquidity for Santos by taking into the account the financial report of Santos Ltd.
Table 1: Table representing Liquid Ratios
(Source: As Created by Author)
The profitability ratio can be defined as the ratio that is used to evaluate the ability of the business in generating the revenue with respect to the related expenditure (Zhu, 2018). The gross profit ratio for the company stood fluctuating over the period of four years. The net profit of the company in 2016 stood 17% while in the following year it significantly increased to 27%. The gross margin represents that the operational efficiency of the business has improved from the previous year. The net profit margin of Santos Ltd over the period of four years has stood negatively as the net profit margin in 2016 stood -40% however in 2017 the net profit margin stood negatively at -12%. This primarily due to the rise in the impairment of non-current assets and finance costs.
The auditor must assess the reason behind the significant increase in the non-current assets and finance costs. The return on assets of the company also stood negatively in 2016 and 2017 as the ratio stood -6.11 while in 2017 the ratio stood -2.49. Similarly, the return on equity for Santos represented a declining trend with the ratio falling to as low as 14.79 in 2016 however in 2016 it stood -5.03. The audit is under the obligation of implementing the appropriate audit process to understand the viability of the expenditure that is occurred by the business in the accounting year. This should be done to make sure that the losses that are reported by the business are not ambiguous. Furthermore, it is necessary for the auditor to gain a clear understanding of the impairment of the non-current assets and finance costs reported by the business (Hoskin et al., 2014). The auditor should implement vouching procedure in order to defend the amount of impairment cost and finance costs in the yearly reports of Santos Ltd.
Table 2: Table representing Profitability Ratios
(Source: As Created by Author)
Asset management ratio makes an attempt to assure that the firms obtains success in managing the assets to produce sales revenue (Barth & Landsman, 2018). The receivables turnover of the company stood strong over the period of four years as the ratio stood relatively similar in 2016 and 2017 at 7.07 and 7.06. The auditor should assess the inventories of Santos Ltd as they are held as the essential element of financial statement and highly vulnerable in material misstatement.
The net fixed asset turnover of the business represented a rising trend as in 2016 0.25 while in 2017 ratio stood 0.32. The auditors fall into the obligations of performing a check on the assets to make sure that assets are impartially represented. Furthermore, the auditor should perform the physical stock take of inventories to value the inventory balances. While the valuation of asset can be performed by obtaining the expert opinion.
Table 3: Table representing Asset Management Ratios
(Source: As Created by Author)
A leverage ratio is regarded as the financial ratio which help in indicating the extent of debt that is incurred by the business entity against numerous other accounts in balance sheet, income statement and cash flow statement (Flesher et al., 2018). Debt ratio for the company has been computed to understand the level of debt. In 2016 the debt ratio stood 0.54 while in 2017 the ratio stood marginally lower at 0.48. This represents that the degree of borrowings for the company has declined representing that the company has less reliance on the equity capital of the business. The debt to equity ratio for the company represented the identical trend as the ratio in 2016 stood 0.49 while it significantly declined to 0.38 in 2017. The auditor should assess the debt repayment schedule of Santos as whether the company has undertaken any added loan for business operative functions.
Table 4: Table representing Leverage Ratios
(Source: As Created by Author)
The valuation ratio is regarded as the financial process of ascertaining whether the company is worth for investment (Henderson et al., 2015). The price earnings ratio for the company stood negatively at -0.23 in 2017 while the price to book ratio also represented a declining trend over the years as it stood 0.93 in 2017. No dividend was paid by Santos in 2017 as it reported loss over the last four years. The auditor must check into the earnings per share of the company as this would enable the investors in taking the investment decision.
Table 5: Table representing Valuation Ratios
(Source: As Created by Author)
The cash flow is regarded as the financial statement that offers aggregate information regarding the inflow and outflow of cash that is received by the company from its operations and external investment sources (Macve, 2015). The cash flow statement of Santos represents the cash flow from operating activities, investment and financing activities. The cash flow from the operating activities represents a highest inflow of cash as receipts from customers accounted to $3,217. The cash flow from the operating activities represents the highest cash outflow as the payment to the suppliers that amounted to $1,611.
The cash flow from the investment activities stood $534 million. The company reported an expense of $483 million. The cash outflow is primarily the payments for the oil and gas. While the cash flow from the financing activities contained the highest cash outflow in the form of repayment of borrowings.
The concept of going concern is regarded as the fundamental principle of accounting. It assumes that in the present as well in future the company would complete its present plans by using its assets to meet the financial obligations (Carla & Accounting, 2017). The significant ratio of Santos Ltd represents an unfavourable situation as the business has reported a loss over the four-year span. The auditor should recognize the negative financial reflectors as they form an indicator that the going concern may be impacted.
Earnest and Young are the auditors of the company. The auditor’s opinion include that the company complies with the “Corporation Act 2001” that offers the true and fair view of the consolidated financial position and complies with the Australian Accounting Standard (Santos, 2018). The key audit matters included the issues in the estimation of oil and gas resources which can create a material impact on the financial report primarily in classification and capitalization of exploration expenditure. Another issue included the decommissioning and restoration provision that can result in material impact on the financial statement.
References:
Appelbaum, D., & Nehmer, R. (2017). Designing and Auditing Accounting Systems Based on Blockchain and Distributed Ledger Principles. Feliciano School of Business.
Barth, M. E., & Landsman, W. R. (2018). Using Fair Value Earnings to Assess Firm Value. Accounting Horizons.
Carla, Y., & Accounting, A. (2017). AUDIT STYLE AND FINANCIAL STATEMENT COMPARABILITY.
De Paula, F.R.M., (2016). The principles of auditing a practical manual for students and practitioners. Isaac Pitman & Sons, Ltd (1919).
Flesher, D. L., Flesher, T. K., & Previts, G. J. (2018). The Financial Accounting Standards Board: Profiles of seven leaders. Research in Accounting Regulation, 30(1), 38-48.
Hayes, R. S., Gortemaker, H., & Wallage, P. (2014). Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user perspective. Wiley Global Education.
Kumar, R. & Sharma, V., (2015). Auditing: Principles and practice. PHI Learning Pvt. Ltd..
Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Ridley, J. (2017). Creative and Innovative Auditing. Routledge.
Santos – Home. (2018). Retrieved from https://www.santos.com/
Santos – Investors. (2018). Retrieved from https://www.santos.com/investors/
Warren, C., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
Zeff, S.A., (2016). Forging accounting principles in five countries: A history and an analysis of trends. Routledge.
Zhu, Q. (2018). Impact of Enterprise Investment Efficiency Based on the Quality of Financial Accounting Data. JOURNAL OF ADVANCED OXIDATION TECHNOLOGIES, 21(2).
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