Assessment Of Materiality And Ratio Analysis For A Company

Part I a)

As per the “Para 9 of Australian Auditing Standard (ASA) 320”, the auditors of a company should take into consideration the materiality of the time and be able to determine the timing, extent and the nature of the audit procedure. It needs to take further into consideration the time of evaluating the time required to for effect of the misstatement. In addition to this as per “Para 12 of the ASA 320” has provided the auditor to conduct preliminary assessment of the materiality aspect. The Para 13 further provides the determination of the materiality as matter of the professional judgment taken by the auditor and its effect on the quantitative and the qualitative factors.

The calculation of the materiality has been given below as follows:

Statement for Planning Materiality
Particulars	Amount (31-12-2011) Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Percentage (%)	Planning Materiality
PBT	$        (3,315,804.00)	5%	$           (165,790.20)
Total Turnover	$        37,554,250.67	5%	$          1,877,712.53
Total Assets	$        24,100,296.00	0.50%	$             120,501.48
Equity	$          3,314,193.00	1%	$               33,141.93

Table 1: Assessment of the Materiality Planning

(Source: Created by Author)

The above interpretation shows that the varied level of the materiality, which can be selected by the auditors. Although it should be particularly kept in mind that as the company has incurred losses the maturity level cannot be determined based on PBT. The auditors further needs to determine materiality and the process which needs to be evaluated based on both quantitative and qualitative factors. There no is no availability of guidance for the determining the materiality and it is further seen to be dependent on the auditor’s judgment. In this particular case, the materiality level should be taken into consideration based on the revenue or the turnover. There are many reasons for selection of the revenue based on the materiality level. The turnover in general reflects the size of the company. It also depicts that the company has a high revenue based on the large size and the huge expenditure. Hence, it is seen to be important to determine the materiality aspect based on the revenue. This will be able to ensure that the organization and its size of the operations is reflected based on the level of the materiality selected. In the given case, the level of materiality is 5% of the turnover, which is computed as $1877712.53. This also shows that if the various types of the misstatements is below the materiality level then the auditor will be able to form an opinion to depict that financial statement of the organization can be used to represent true and fair value. On the contrary, in cased if any incident of misstatement being higher than the materiality level, then the auditor’s will be able to perform the audit procedure to ensure the fairness in the financial statement.

The various types of the analytical procedure is able to evaluate the financial information for the organization based on both non-financial and financial data. In this particular case, the financial position of the company has been seen to be risk associated in terms of the business and is seen to be based on the calculation of the financial ratios. The table depicting the financial ratio is shown below as follows:

Statement showing significant financial Ratios
Particulars	Formula	9/30/2011	12/31/2010
Liquidity Ratio
Current Ratio	Current Assets /Current Liability	2.02	1.38
Quick ratio	(Current Assets- Inventory- prepaid Expenses) /Current Liability	1.38	0.97
Solvency Ratio
Debt to Equity Ratio	Debt/Equity	2.72	1.68
Times Interest earned	Income before interest & expenses/interest earned	-1.77	2.91
Profitability Ratio
Net Profit Ratio	Net Profit/RevenueX100	-9%	3%
ROE	Net Profit/ Share holders Equity	-0.75	0.18

Table 2: Table depicting the financial Ratios

Part B a)

(Source: Created by Author)

The table highlights computation of the ratios, which are based on the various types of the financial statement of the organization. The three types of the ratios have been identified in terms of the liquidity ratio, solvency ratio and profitability ratio. The liquidity ratio measure has been identified to pay the current liability using the assets which can be converted to cash with ease. In this particular case, the liquidity of the company is measured in terms of the quick ratio and the current ratio. The current ratio measurement has proved the rationale for the company to  pay the short-terms liabilities by the use of the current assets. Hence, the table above also shows how the company is able to repay the various types of the increase in the liquid ratio and the current ratio. This also shows that the company is in a better position to repay the increase in the short-term liability.  

The table above further depicts that the various type of the computation based on the solvency ratio.  The solvency ratios are further seen to measure the ability of the company to determine the solvency situation. The debt equity ratio has further compared the equity and the total debt of the company.  Furthermore, the calculation also shows the various aspects of the increase in the debt and equity of the company. This also depicts that the company uses more debt capital structure. It needs to be understood that a reasonable level of the debt in the capital structure is able to increase the overall level of the profitability by reducing the overall cost of capital.  Despite of this, it should be considered that usage of a very high debt in the capital structure often increase the overall level of the risk. The interest ratio is further able to measure the ability of the company to pay the liability of the total interest payment. The table shown above further demonstrates that in 2010 the organization had the ability to make the payment of the interest. Although in 2011 the company has incurred losses, hence, it can be discerned that the company is not having sufficient profit in 2011 to make adjustment in the interest payment.

It has been further seen that the profitability ratio further determine the ability of the company to generate higher amount of profit from the operations. The consideration of the net profit ratio has been further bale to depict that the company has been able to make profit in terms of the earnings per dollar of the sales. The calculation shown that in 2010 the company has been able to earn a significant amount of the positive net profit ratio, while in 2011, the company has incurred loss. The measure showing the return on equity has further bale to show the business has able to earn a considerable amount of profit from the investment made by the shareholders.

The calculation for ROE is shown with a decrease from 2010 to 2011. 

b)

Common Size Balance sheet
Particulars	2010	Percentage	2011	Percentage
Current Assets
Cash	$   1,753,765.00	7%	$      245,965.00	1%
Trade Rceivables	$ 10,701,064.00	44%	$ 10,552,109.00	44%
Inventory	$   6,263,242.00	25%	$   5,924,156.00	25%
Financial Assets	$   4,075,205.00	17%	$   4,469,759.00	19%
Prepayment and other assets	$      666,054.00	3%	$   1,112,028.00	5%
Total Current Assets	$ 23,459,330.00	95%	$ 22,304,017.00	93%
Non Current Assets				0%
PPE	$      852,965.00	3%	$   1,449,330.00	6%
Deffered Tax Assets	$      277,559.00	1%	$      346,949.00	1%
Total Non current Assets	$   1,130,524.00	5%	$   1,796,279.00	7%
Total Assets	$ 24,589,854.00	100%	$ 24,100,296.00	100%
Current Liabilities
Payables	$   8,413,818.00	45%	$ 10,323,185.00	50%
Interest Bearing liability	$   8,240,091.00	44%	$      149,354.00	1%
Current tax liability	$      207,893.00	1%	$      159,866.00	1%
Provisions	$      189,015.00	1%	$      401,658.00	2%
Total Current Liability	$ 17,050,818.00	91%	$ 11,034,063.00	53%
Non Current Liability
Deferred tax Liabilities	$      170,284.00	1%	$      198,647.00	1%
Interest bearing liabilities	$   1,500,000.00	8%	$   8,872,482.00	43%
Provisions	$        79,556.00	0%	$      680,911.00	3%
Total Non Current liability	$   1,749,850.00	9%	$   9,752,040.00	47%
Total Liabilities	$ 18,800,668.00	100%	$ 20,786,103.00	100%
Net Assets	$   5,789,186.00		$   3,314,193.00
Equity	$   5,448,026.00	94%	$   5,448,026.00	164%
Reserves	$    (259,498.00)	-4%	$    (247,638.00)	-7%
Accumulated Profit/ loss	$      600,658.00	10%	$ (1,886,195.00)	-57%
Total Equity	$   5,789,186.00	100%	$   3,314,193.00	100%

Table 3: Table showing Common Size Statement

(Source: Created by Author)

The shows the common size balance sheet of the company. This statement is responsible for the measurement of all the items in terms of the percentage and is often considered as an important tool for the comparison of the balance sheet items. It has been further seen that the common size balance sheet is able to depict the total value of the noncurrent assets, which shows a decrease of 2% from 2010 to 2011. The various types of the analysis of the common size of the balance is able to depict the noncurrent asset of the company will be able to depict the total decrease in the total current liability in 2010 to 2011. It has been further seen that the proportion of the total noncurrent liability of the company has increased in 2011 and decreased in 2010.  The above analysis will be further bale to show the auditor  should be able to concentrate on the areas shown in the table above. 

The memorandum is able to highlight on the material misstatement, which exists in the financial statement and the various types of the evaluations of the financial statement of the company. Although, it can be further seen that despite of revenue increase the overall profit has decreased. Based on the analysis, it can be observed that the rationale for the decline in the profit has played a significant role in the increase in the other expense and the borrowing cost. The other expenses has been seen with various types of the ordinary activity increase by 42% and 23%. Hence, it can be said that the audit procedure will be able to give special attention to the expense areas. It has been further seen that the auditor will be able to apply the analytical process for the determination of the significant increase in the promotion expenses, insurance and advertisement.

The preliminary level of the materiality was able to decide that the auditor should be able to follow consistently the misstatement, which is identified above the materiality level. The overall evaluation of the income statement is further able to state that there should be special attention given to depict the reason behind increasing expenditure.

Statement for Profit/Loss
Particulars	Amount	Amount	Amount	Change %
12/31/2010	9/30/2011	12/31/2011
Revenue	$    34,300,042.00	$ 28,165,688.00	$   37,554,250.67	9%
Cost of Borrowings	$         748,106.00	$      798,611.00	$     1,064,814.67	42%
Expenses from ordinary activity	$    32,122,122.00	$ 29,575,856.00	$   39,434,474.67	23%
PBIT	$      1,429,814.00	$ (2,208,779.00)	$    (2,945,038.67)	-306%
IT Expenses	$         378,074.00	$      278,074.00	$        370,765.33	-2%
Profit available to the members of the company	$      1,051,740.00	$ (2,486,853.00)	$    (3,315,804.00)	-415%

Table 4: Income Statement

(Source: Created by Author)

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