Audit Procedures For Identifying And Mitigating Risks In Financial Statements Of Adslot Limited

Tests of Controls, Substantive Tests of Transactions, and Substantive Tests of Balances

There are several business and financial complexity which may result to increased inherent risk in preparation of the financial statement of company. It is evaluated that if proper audit and assurance program is implemented then it will increase the overall outcomes and efficiency of the business at large. The financial Report in current study targets the audit practices and procedures that enable an auditor to obtain sufficient and appropriate audit evidence. Main focus is on the key assertions placed by management regarding account balances, being existence, completeness, rights & obligations and valuation. The risk that might exist even when the management have asserted about the account balances is stated with the substantive procedures to reduce the chance of risks being ignored. Various analytical procedures have been briefed regarding the details of company. Client chosen for the study is ADSLOT LIMITED, an ASX listed company. The initial part of report deals with the business of the client and its investing and financing activities. Later on, the above things are discussed in the report (Morgenstern, et al. 2017).

Being a listed company in Australian security exchange, Adslot has its operations set in New York, London, Shanghai, Munich, Sydney, Melbourne and Auckland. Company aims at revolutionising the next generation media. The main business operations are termed, Adslot media, Symphony and premium publishers. To focus on transparency, effective cost managed media solutions, strong control over media and a direct approach centred media, adslot media division is there. Symphony on the other hand aims at utilising the existing data to create more value and providing customised made solutions to overall agency requirements. In order to eliminate middlemen and provide automation of input output processes, premium publishers have come into picture. Overall efficiency is improved through this ((Arens, et al, 2016). 

The company’s investment in property, plant and equipment is comprised by computer equipment, plant & equipment and leasehold improvements. All these property, plant and equipment are depreciated on straight line basis. The investment in same has increased by an extent of around 200% in financial year 2016-17. The intangible property comprises of domain name, intellectual property, software, goodwill and research & development expenditure. The table below shows the statistical data regarding company’s investment activities (Arens, et al, 2016). This investment of the company in different units shows that company has objective to expand its business on international level.

AUD	2016-17 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2015-16	2014-15
Investments in property, plant, and equipment	(177,950)	(58,140)	(40,786)
Proceeds from sale of fixed assets	2,750
Purchases of intangibles	(4,524,194)	(2,911,523)	(3,638,707)
Receipt of R&D tax incentive relating to capitalised assets	1,583,175	1,716,792	1,741,136
Cash outflow from investing activities	(3,116,219)	(1,252,871)	(1,938,357)

After analysing the investment strategies of the company, it could be inferred that company has seen high amount of cash outflow. If Company do not curb this amount of investment then it will negatively impact the business liquidity in determined approach.  This high level of cash outflow from the business might impact the sustainability and liquidity position of company in long run (Morgenstern, et al. 2017). 

Substantive Procedures in Response to Specific Assessed Risks of Material Misstatement

Study of company’s financials and annual reports show that the company’s financing is done entirely through its own funds being reserves and retained earnings. There is no liability on company on account of long-term debt. Just short-term payables exist on account of day to day working of the entity. The table below shows the financing activities on account of share issue proceeds and for the payment of equity raising costs for financial year 2016-17, 2015-16 and 2014-15: These financial activities reflects that company has been gaining momentum throughout the time and increased its overall outcomes (Vasarhelyi, Alles, and Kogan,2018).

AUD	2016-17	2015-16	2014-15
Proceeds from issue of shares	18,054,640	4,600,000	6,523,200
Payments of equity raising cost	(1,219,342)	(237,135)	(370,441)
Net cash inflow from investing activities	16,835,298	4,362,865	6,152,759

(Morgenstern, et al, 2017).

As Adslot limited is publicly listed company in Australia, it’s bound to formulate its financial reports and statements as per the Australian Accounting Standards and frame the financials as per going concern concept. The same is being followed by it. The accounting has been framed by Australian Accounting Standards Board in line with International Financial Accounting Standards (IFRS). Being a corporate player, certain guidelines of Corporations Act 2001 are also followed. The major statements prepared by the company involve, statement of profit and loss & other comprehensive income, Statement of financial position, Statement of cash flows, Statement of changes in equity etc. All these have been prepared on a consolidated basis. Financial segments divided on the basis of geographical locations have also been presented. The financial reporting frameworks reflect that company has established harmonization its domestic and international reporting frameworks by complying with the IFRS rules and regulation (Morgenstern, et al. 2017). The financial activities of company reflect that company has been increasing its investment in financial activities which will eventually add value of its business. Company being international listed company has established harmonization in its domestic and international reporting in effective manner. Company has also complied with the international accounting policies and standards have been followed while valuation of employee benefits account. In addition to this, in context with the taxation rules and regulations, auditor should insist on the presentation of net deferred tax figure in balance sheet and ask questions about the dual representation of both deferred tax asset and liabilities (Morgenstern, et al. 2017).

Analytical procedures help an auditor to identify the potential risk areas and understand the various reasons behind the same. This audit procedure does comparisons among the following (Zhao, et al. ., 2017).

• Entity’s financial information of the same financial years or different financial years
• Entity’ financial information with other company’s financial information in same industry
• Entity’s financial and non-financial information

These procedures highlight immediately the areas where drastic changes have taken place over a period of time. These critically evaluate the financial information and help to provide useful conclusions. The table below shows a few ratios performed over company’s financials (Davies, 2017).

RATIO	ANALYSIS
Solvency ratios	This ratio is most popular when it comes at analysing whether a company would be able to carry on its business in long run by paying off its liabilities. It comments on the creditworthiness of the company. Various ratios in this category are debt to equity, debt to asset and financial leverage ratio. As there is no interest-bearing debt, it’s not much useful to compute debt to equity and debt to asset ratio. Financial leverage ratio is computed by dividing average total assets by average total equity. This ratio had been 1.12, 1.14 and 1.09 in financial year 2014-15, 2015-16 and 2016-17. This ratio being low also depicts that the company is not using debt in its financing because a high leverage ratio shows more use of debt.
Profitability ratios	Profitability ratios show the income generating capabilities of a company in relation to its revenue, balance sheet assets, operating costs and shareholders equity. The net margin percentage had been -109.81%, -106.25% and -146.11% for financial year 2016-17, 2015-16 and 2014-15. This shows the net loss company has made. Along with net loss, the company is making operating losses too. . The operating margin stands to be -177.7% in financial year 2016-17, -162.4% in financial year 2015-16 and -159.8% in financial year 2014-15.
Liquidity ratios	Liquidity ratio comments on the sufficiency of company’s current assets to meet the current obligations when they fall due. Some people confuse working capital as a liquidity ratio, but it’s actually not. Main liquidity ratios include current ratio and quick ratio/ acid test ratio. Current ratio is obtained by dividing the current assets by current liabilities. Current ratio for financial year 2016-17, 2015-16 and 2014-15 had been 5.52, 2.28 and 2.19 in the respective years. This ratio, if too high shows the inefficient stocking of current assets and if too low represents inability to make payments for dues. Standard current ratio stands at minimum of 1 (Kangari, Farid, and Elgharib, 2012). Quick ratio, on the other hand is obtained by dividing all the current assets except stock and prepaid expenses by current liabilities. It tells the ability of a company to generate liquid cash when required. Quick ratio had been 5.44, 2.22 and 2.15 for financial year 2016-17, 2015-16 and 2014-15. Quick ratio does not vary much with the current ratio and hence shows quick liquidity at company’s end. Though the ratios seem fine, but as company is generating loss, the company must invest the idle cash in income generating investments to reduce the losses.
Efficiency ratio	Efficiency ratios comprise of receivable turnover, inventory turnover, fixed asset turnover, asset turnover etc. Receivables turnover show the number of times the company collects cash from the debtors and other receivable accounts. A very low receivables turnover shows company’s inefficiency to collect cash in time. The company’s receivable turnover had been 4.56, 3.67 and 3.16 in financial year 2016-17, 2015-16 and 2014-15. This is very low than it should be (Khwaja, Awasthi, and Loeprick, 2011.)

Assertions Related to Account Balances

This financial ratio analysis has reflected how well company has increased its financial performance throughout the time. However, company needs to lower down its financial leverage by redeeming its debt portion in its business. It has been observed that if company lower down its financial leverage then it will eventually impact the overall cost of capital and destruct return on capital employed of company (Kiviluoto, and Bergius, 2012). 

Account balances refer to the items of statement of financial position. Auditor has identified certain account balances belonging from both assets and liabilities side that are considered material. These balances are considered material because of the level of activity involved in them (Morgenstern, et al. 2017). They affect the balance sheet figures entirely and any misstatement in them, if comes in the knowledge of users can definitely affect the decisions taken by the users of financial information. These account balances will be assessed by using the proper accounting and auditing test which will assist in determining the material facts which company followed while recording the financial transactions in the books of account. However, by using the proper audit test, company could strengthen the transparency and reporting framework of organization (Laitinen, 2012).

The table below depicts the various account balances belonging to current assets and liabilities that are material:

Asset	Cash & cash equivalents
	Property, plant and equipment
	Deferred tax assets
	Trade receivables
	Intangible assets
Liability	Trade payables
	Deferred tax liabilities
	unearned revenue liability
	Current employee benefit provision
	Non- current employee benefit provision

These assets have been selected on the basis of its material use in the busienss, investment made in the business functioning and increased external factors on the changing value of these assets and liabilities. There is a chance that company might not have followed proper process and work system which may directly impact the value record system of these assets in the financial assets of company (Ooghe, & De Prijcker, 2008).

ACCOUNT BALANCE	KEY ASSERTION	AUDIT RISK (RELEVANCY OF KEY ASSERTION)	STEPS TO OBTAIN SUFFICIENT AND APPROPRIATE AUDIT EVIDENCE
Cash & cash equivalents	Existence: Cash reported in the books of accounts do exist in possession of the company and in the company’s bank accounts	There are chances that the cash reported in the books is not the true figure. Some level of absconding and theft might have taken place leading to reduction in cash after the books are made.	Arbitrary changes in duties: Auditor should change the duties of staff relating to cash collection, cash handling and cash deposition. Employees shouldn’t be informed before their duties are about to be changed. This helps in keeping a check on one employee’s work by another. This way any absconding or theft could be brought in the light of the management and auditor could also gain evidence regarding same.
Property, plant & equipment	Existence : The assets recorded in the balance sheet with their descriptions exist in a form similar to the mentioned in company’s premises	Risk of assets entries made in books without any physical property being present exists. (i.e. asset is not held by the entity or the asset is either sold, but still shown as under company’s property.(Askary, Goodwin, and Lanis, 2012.).	Physical verification: A checklist of all the assets should be made in accordance with the entries made in the books of account and physical inspection of the property lying in the company’s premises should be made. The checklist shall serve as a guide in verifying the property present and recorded and vice-versa (Perry, 2011).
Deferred tax assets	Completeness: The amount mentioned as deferred tax asset is the net result of the figure brought forwarded from previous years and shown after being adjusted with all the temporary differences that occurred or reversed this financial year (Morgenstern, et al. 2017).	In order to evade taxes, the deferred tax figure could be altered to misrepresent the tax amount (Morgenstern, et al. 2017).	Auditor should insist on the presentation of net deferred tax figure in balance sheet and ask questions about the dual representation of both deferred tax asset and liabilities (Morgenstern, et al. 2017).
Intangible assets	Rights & obligation: Intangible assets shown in the books are in the ownership of Adslot limited.	The intangible property may not be under the company’s ownership.	Inspection: The contracts regarding the purchase of intangible property and the financials showing business acquisition that generated goodwill must be read by the auditor.
Account receivables	Rights & obligations: The receivables represent the right of entity to obtain money as and when due.	Risk lies when the money received from some debtor is not reduced from his account and absconded.	External confirmation: receivables accounts must be selected randomly, and written confirmations should be requested from them regarding their account balances.
Account payables	Completeness: All the creditors have been recorded.	Expenses might have shown as account payables to abscond the money already received to make payment for them.	External confirmation: Payables accounts must be selected randomly, and written confirmations should be requested from them regarding their account balances.
Unearned revenue	Existence: Unearned revenue is actually accrued on the balance sheet date.	The unearned revenue may not even exist.	Company’s policy regarding unearned revenue and the contract made with the client should be read.
Deferred tax liability	Completeness: The amount mentioned as deferred tax liability is the net result of the figure brought forwarded from previous years and shown after being adjusted with all the temporary differences that occurred or reversed this financial year.	In order to evade taxes, the deferred tax figure could be altered to misrepresent the tax amount.	Auditor should insist on the presentation of net deferred tax figure in balance sheet and ask questions about the dual representation of both deferred tax asset and liabilities.
Employee benefit (short-term & long-term)	Valuation: Accounting policies and standards have been followed while valuation of employee benefits account.	There is a risk of human error as well as fraud leading to wrong valuation.	Re-computation: Auditor should seek for a professional and re-compute the value of ESOP accounts.

The above given assertion test reflects that Adslot Limited has high audit risk in its receivables and cash recorded transactions. It is determined that if popper audit program and assertion test is implemented in proper manner then it might increase the overall value of the business at large. This reflects that company needs to follow proper recording framework and effective program which may increase the overall outcomes and efficiency of the business. These all five assertion tests are followed to increase the overall reporting frameworks and identifying the material issues which company might have faced while recording its assets and liabilities in the books of accounts (Dow, Kevin Weidenmier, Marcia, and Shea, Vincent 2013). Company has followed accounting policies and standards have been followed while valuation of employee benefits account which will strengthen the employee benefits recording process.

Selection of Efficient and Effective Combination of Audit Procedures

Conclusion

After analysing all the assets and liabilities of Adslot Limited, it could be assessed that company has been facing high audit risk in its receivables and investment in its plant and machineries. The proper recording system and effective receivable turnover list may result to mitigation of these associated risks. However, complying with the proper accounting frameworks and increased business outcomes may negatively impact audit risk of company. The auditors of the Adslot Limited have used all these five assertion test to identify the true and faire view of assets and evaluate that whether company has been showing the true and fair view of its assets and liabilities in it financial statement. These audit rules and accounting standards are followed to strengthen the transparency of the business and win the trust of the stakeholders on sustainable basis.  The main thing which should be noticed by auditors is Auditor should insist on the presentation of net deferred tax figure in balance sheet and ask questions about the dual representation of both deferred tax asset and liabilities. Now in the, it could be inferred that if proper auditing test and assertion procedure is followed then it will strengthen the transparency of the business at large.

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