Analysis Of Materiality And Audit Assertions In Auditing: A Case Study Of JB Hi-Fi

Quantitative estimate of materiality

As per ASA 320, materiality is one of the most crucial part of auditing and the main role of the auditor is to analyze the key elements of the financial statements of the company and make relevant assertion on any given materiality level for the company. Any kind of misstatement, error or omission can lead to material risk for the company as that might affect the financial statement of the company and have negative impact on its financial position. It is very subjective in nature and differs from company to company from individual to individual. Some areas might be more material to some company in comparison to others (Choy, 2018).

Thus, proper professional judgement on part of the company and the professionals who are conducting the audit is important. Materiality can be both quantitative and qualitative in nature. There are certain levels of materiality that has been stated by the ASA 320 and IASB which ranges from 0.5% to 1% of sales revenue, 2-5% of the shareholders equity, 5-10% of net profit of the company, 1-2% of the total assets of the company or the gross profit being made by the company. The overall materiality element of the company has been analyzed calculated and analyzed below. The annual report of the company has been downloaded and key data from the same has been taken for the relevant analysis.

Quantitative estimate of materiality
Criterion Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Base	Amount	Materiality level/range
0.5% to 1% of gross revenue	Gross Revenue	5,628.00	28.14 to 56.28
1% to 2% of the total assets	Total Assets	2,452.00	12.26 to 24.52
1% to 2% of the gross profit	Gross Profit	1,230.00	6.15 to 12.3
2% – 5% of the shareholders’ equity	Equity	853.00	4.27 to 8.53
5% to 10% of the net profit	Net profit	172.00	0.86 to 1.72

The company that has been selected over here for relevant analysis is JB Hi-Fi. The company is listed on the Australian Stock Exchange. The company is an Australian retail company that deals in electronic consumer goods that includes video games, Ultra HD Blu-rays, DVDs, CDs etc. The company was established in 1974 and from the above calculation the materiality levels of the company are studied and analyzed (Arnott, Lizama, & Song, 2017). The overall quantitative materiality level of the company has been derived from the above parameters.

The auditors have stated that the financial statements of the company are free from any kind of material misstatement, however there are certain areas in which they have exercised their assertion which includes calculation of the carrying value of the forward contracts. The overall financial risk management and liquidity analysis has also been done. Material risk has been stated well in the report of the auditor and they have provided their relevant conclusion on the same in their audit report (Alexander, 2016).

The notes to the financial statements includes disclosures with respect to any changes that the management of the company has made with respect to accounting standards and policies, key matters that the auditors feels important has been highlighted, also the going concern assumption of the company has been stated in brief.

Preliminary analytical review of the company

Section 2: Preliminary analytical review of the company

The second part of the assignment will include application of relevant audit procedures to analyze the overall growth of the company with in comparison to the prior years and also with comparison to the industry in which the company is functioning. The audit procedures will include two types of procedures which are substantive test and analytical procedure. Substantive test will include vouching and verification that deals with analyzing the key elements in the financial statements like the income and expenses and then comparing the same with the overall supporting documents (Erik & Jan, 2017).

Verification helps in checking the appropriateness, valuation, completeness of the various assets and liabilities. In case the auditor does not perform substantive process, it can aim for analytical procedures which includes trend analysis, ratio analysis. It also deals with proper audit planning to understand the overall nature and timing of the audit procedures of the company (Farmer, 2018). In the case of the given company, the preliminary testing would be done based on basic ratios of that would be calculated from the balance sheet and PL of the company. The ratios have been calculated below:

Ratio Analysis
Particulars	2014	2015	2016	2017
Current Ratio	164%	162%	157%	132%
Quick Ratio	183%	181%	175%	35%
Debt Equity Ratio	60%	24%	26%	50%

The given ratios show the overall growth of the company from 2014-2017. Since 2014, the overall current ratio of the company has reduced considerably and that shows that the overall liquidity position of the company is not stable as the company is not having optimum resources to pay off its liabilities. The debt equity ratio shows the overall debt that the company is having in comparison to its liabilities and previously the proportion of borrowing was less and equity was more, but since 2016 to 2017,

this balance has changed a lot and the company is having less of equity and more of borrowings and that might affect its financial position and the overall returns that the company would be paying of to its shareholders would also decrease due to this arrangement (Goldmann, 2016). Ratios are a great way to analyze how the company is performing and what are the areas in which the company needs to put more efforts to make sure that the discrepancies are removed. The below table shows the comparison of the company with the industry in which it is operating.

Ratios	Company	Industry
Quick Ratio	0.35	0.4
Current Ratio	1.32	1.17
LT Debt to Equity	49.54%	7.81%
Total Debt to Equity	49.54%	13.40%

On comparing the industry with the company, the quick ratio is same as per the standards of the industry and thus it reflects that the company’s liquidity position is stable. The current ratio is more in comparison to the industry which means that the company has enough current assets to pay off its liabilities in comparison to the industry it operates in.

Ratio Analysis

There is a huge difference between the long-term debt to equity ratio between the company and the industry (Grenier, 2017). It shows that the company is having more equity and less borrowings in comparison to the borrowings and this might make the overall capital structure of the company less stable and also given the fact that the company is having chances to take more investment from the market in the form of long term and short term borrowings and expand more. Overall on the basis of the ratio analysis it can be said that the company is playing safe and there are very few areas in which the company needs to make changes (Jefferson, 2017).

Audit assertions are very important from the view point of auditing and taking appropriate decisions with regards to audit planning and procedures. Assertions helps in making claims regarding certain elements of the financial statements of the company to decide whether they are showing true and fair view of the companies position (Kim, Schmidgall, & Damitio, 2017). There can be certain risks also that the auditors might face while conducting audit and that includes – Inherent risk, detection risk and control risk. With respect to the given company certain key areas have been analysed and highlighted below:

Sl No.	Key risk areas	Relevant assertion	Audit procedure
1	The key area includes acquisition of 100% stakes of a company based in New Zealand. It was a big accqusition and the company has invested a lot funds in that (Das, 2017).	The aim of the company and the auditor is to check that the accqusition has taken place on fair grounds and proper judgement was involved in accounting for the transaction of the company. There are high chances that the mamagement can default in this area.	The key audit procedures would include: Reviewing the sale agreement, performing test on the fair value of the assets and liabilities, check whether relevant disclosures are relevant or not. Undertaking third party valuation would also be an important step.
2	The other key area would include analysing the carrying value of the cash generating units that are established in New Zealand by the company (Sithole, Chandler, Abeysekera, & Paas, 2017).	The main area of assertion would be to analyse the overall financial performance of the company and also check the relevant cash flows and other key assumptions made by the company (Werner, 2017).	The key audit procedures would include : Understanding the management decision on using the value-in-use model. Taking help from valuation specialist to check the several aspect that are related to such cash generating units (Trieu, 2017).

Section 3: Review of the cash flow statement of the company

The third part will include analysis of the cash flow statement of the company that helps in tracking the movement of the cash between the opening and the closing balance of cash for the company. The cash flow statement has been extracted from the annual report of the company and has been presented below:

From the given cash flow statement it can be seen that the major source of cash inflow is receipts from customers of $6205, and the major payments is done to the supplier $5908. The company does not invest too much in financing and investing activities, and this is clear from the above statement. In the given year the company has paid for business combination and also for plant and equipment (Jefferson, 2017). This shows that the company is trying to expand its operations. It can also be seen that the company has issued some shares and also repayed some borrowings which means that the overall capital structure of the company is becoming more big , with more investment and better result (Belton, 2017).

Overall on the basis of the analysis above it can be said that the company is functioning very well and there are very few areas in which the company needs to make changes given the industry standards.

References

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Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, 145. 

Das, P. (2017). Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), 10-17.

Erik, H., & Jan, B. (2017). Supply chain management and activity-based costing: Current status and directions for the future. International Journal of Physical Distribution & Logistics Management, 47(8), 712-735.

Farmer, Y. (2018). Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, 1-12.

Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4, 103-112.

Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), 241-256.

Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland . Technological Forecasting and Social Change, 353-354.

Kim, M., Schmidgall, R., & Damitio, J. (2017). Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), 23-40.

Sithole, S., Chandler, P., Abeysekera, I., & Paas, F. (2017). Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), 220. Retrieved from 

Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93, 111-124.

Werner, M. (2017). Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, 25, 57-80.