Audit Program For Resonance Health Ltd: Key Risks, Analytical Procedures, And Audit Risk Model

Key risks in the business of Resonance Health Ltd.

The report is developed with an aim for understanding the concepts of auditing in regard to Resonance Health Ltd. In this report different steps for auditing are performed and a risk-based program for audit is also designed in context of Resonance Health Ltd which is health care Australian company specializes in developing and delivering software and services related to medical invasive imaging. In order to fulfill the purpose of the report, a substantial approach is used so that the balances of liabilities and assets of the company are substantially tested. The report further provides discussion on the key risks associated with the business of Resonance Health Ltd and item’s materiality is also identified. In addition to this, analytical procedures are performed for evaluating the financial performance and position of the company for the recent three years. In this concern, ratios and metrics are used. Moreover, a sampling plan is included in the report which provides information on how sampling will be used for each material account balance.

The factors which hinder the company in achieving its goals are considered as business risks. The success and failure of business are dependent upon these factors. If these factors are not managed timely and taken care of, then it may lead to failure of the business. Since Resonance Heath care is engaged in the business of digital health care there are different risks associated with the company. Companies like Resonance Health Ltd operating in invasive health care are revolutionized in health care which is consumer centric. Therefore, in order to promise better outcomes for patients and breakthrough innovation a systematic approach for management and risk identification shall be realized (Kerzner and Kerzner, 2017). In order to reshape the industry, Resonance Health Ltd is with its venture, legal, IT, and HR partners shall realize the risk to utilize the opportunities fully. There are four major risks whose frequency is observed to be increasing and are as follows:

Patient Injury

It represents significant risks in relation to reputation and financial area for Resonance Health ltd. Technological failure, human error or hack may result in injuries for patient. The support and delivery of health care is powered by technology, therefore claims can be made through number of ways.

Highest privacy and security level is required for managing the personalized data in the digital health care. Due to increasing number of ransomware, breaches in data, and DDoS attack it is important for Resonance Health Ltd to use extreme in the management of non-medical or medical data (Padmanabhan, 2017).

Importance of evaluating business risks for the purpose of auditing

The organization can be exposed to increased expense and risks because it is important to comply with the local, state, and federal regulators each having different priorities and mandates.

There is always a danger of failure in system. With new updates in the technology, there is an increased possibility of malfunction due to which the delivery of care could be negatively affected (Berezina, Cobanoglu, Miller, and Kwansa, 2012). In such case, Resonance Health Ltd will be held liable for the related expenses and damages.

It is significantly important for the auditors to gain knowledge related to the business of the organization and the environment in which it operates so that the misstatement with the financial statements can be evaluated.

The audit risk is associated with the material incorrectness in the financial statements even though it is stated by the auditor that there are no material misstatement in the financial report (Gul, Wu, and Yang, 2013). Such statement from the auditor could also be due to flaws in the organization’s internal control.

In this regard, the risk audit model is required to be applied while performing audit in Resonance health Ltd. Control risk (CR), internal risk (IR), and detection risk (DR) are the three different aspects of audit risk model. The IR shows vulnerability in multiple transactions or balance of account to the misstatement in the absence of related controls. CR represents risks that cannot be identified through the process of internal control. DR shows risks related to the inability of the auditor to identify accounting errors which internal controls are not able to capture (Blankely, Hurtt, and MacGregor, 2012). The equation for calculating audit risk in Resonance Health Ltd is:

Audit risk (AR) = RMM×DR

AR = (CR×IR) × DR

DR =AR/CRxIR

The planned risk for audit in context of accounts receivables for Resonance Health Ltd is 0.04. The inherent is assessed at 0.70 and control risk is assessed at 0.50. Therefore DR can be evaluated by using the above formula:

DR =0.04/0.50×070

DR =0.04/0.35

DR = 0.11

Findings: The equation of model for audit risk depicts that the detection risk is evaluated at 0.11. This implies that internal risk is greater than the detection risk while the control risk is relatively moderate for Resonance Health Ltd. Due to higher value of inherent risk it can be concluded that transactions in Resonance Health Ltd are in the exposure of external environment aspects in addition to organization’s internal environment like economic, legal, and political factors. Since the internal control of the organization is weak there may be different areas where it is expected that deception may occur. The areas can be cash, fraud in the payroll, fraud from third party, valuable assets, and transactions related to banking.

Application of model of audit risk

In the process of carrying out the program for audit in Resonance Health Ltd it is significant for the auditor to review the potential risks and apply procedures so that the inherent risks can be addressed effectively (Alali and Yeh, 2012). Moreover, the auditor shall use relevant approach for conducting audit as the success of audit is dependent on the selection of right approach for conducting audit. The selected approach is then used for calculating the impact on financial statement due to the existence of errors and frauds.  In addition to this, the errors and faults can be rectified timely with the use of effective auditing.   

Under International Accounting Standards, analytical procedures shall be performed by the auditor. Metrics and ratios are used for performing the analytical procedures for three years in context of Resonance Health Ltd. The details are provided below:

Ratios	Year 2015 (AUS$)	Year 2016 (AUS$)	Year 2017 (AUS$)
Net profit ratio Net profit/net sales×100	463234/2443476×100 = 18.9%	(384366)/2547685×100 = 15%	304217/2485332×100 = 12.2%
Operating ratio Operating expenses/net sales×100	371733/2443476×100 = 15.21%	781540/2547685×100 =30.67%	269529/2485332×100 =10.8%
ROCE Income before interest & tax/(Total assets – Current liabilities) ×100	248633/(5192448-787160) ×100 =5.64%	483926/(4926819-892897)×100 =11.9%	618722/(4618915-884210)×100 =16.5%
Asset turnover ratio Sales/total assets	2443476/5192448 =47%	2547685/4926819 = 51.7%	2485332/4618915 =53.8%
Current ratio Current assets/current liabilities	3501684/787160 =4.44	3042229/892897 =3.40	2325048/884210 =2.62
Quick ratio Cash and equivalent + Short term investment + Current receivables/Current liabilities	2797203+662177/787160 = 4.39	2512441+458331/892897 =3.32	1685375+577393/884210 =2.55

Only in the year 2015, the company gained profit but in 2016 and 2017 the company has to bear loss. The net profit ratio for the year 2015 was 18.9% but in 2016 and 2017 it was 15% and 12.2% that to in terms of loss. Therefore company is required to focus on increase sales and reduce operating expenses in order to recover itself from losses.

The company underwent heavy losses in the year 2016 and 2017. Moreover, the operating expenses were too much in the year 2016. There was not much increment in the sales in 2016 rather it was again dropped in 2017. The reason for decreasing sales and increasing losses shall be addressed by the auditor to improve the financial status of the company in significant way.

Instead of profit, the company underwent losses in 2016 and 2017. Moreover, the return on capital employed ratio has increased in 2016 and 2017 but as there was no profit received by the company in 2016 and 2017 the return on capital employed is taken in a negative sense. This shows that the losses have increased in 2016 and 2017 may be because the share price of the company has lowered and are no more purchased by the people. However, the assertions can be properly checked to verify if any financial misstatement exists in the financial statement of the company (Piskorksi, Seru, and Witkin, 2015).

It depicts that the company is not able to generate enough sales with the use of its assets. The ratio is high which shows that the company has to put strong focus in improving its sales through the use of assets. The auditor shall check whether the assets are understated or the sales are overstated in the balance sheet.

Analytical procedures

The current ratio depicts whether the assets have been used effectively by the company to set off its debts or not (Gitman, Juchau, and Flanagan, 2015). If the ratio is below 1 then it shows that the assets of the company are not enough to discharge its debts. In case of Resonance Health Ltd, the ratio is above 1 which shows that company as enough asset against its liabilities. However the ratio is decreasing, therefore the auditor shall give a proper check to the assertions to draw true conclusions.

In order to determine the position of liquidity with reduction in inventory for an entity quick ratio is used (Owolabi and Obida, 2012). The current liabilities can be discharged mainly through cash and receivables. Quick ratio of Resonance Health Ltd shows a decreasing trend which means that soon company will lose all of its cash and there will no amount left to pay off the current liabilities.

Substantive approach in auditing signifies that the data collected through the audit work has completeness, validity and accuracy in relation to the organization’s financial statement. The financial records are audited by the auditor using substantive approach so that the material misstatement can be distinguished. The substantive approach includes testing of account balances, disclosures, and transactions (Johnstone, Gramling, and Rittenberg, 2013). The auditor examines the journal entries as well as the entries related to adjustments. The approach is applicable in the activities associated with internal as well as external audit of Resonance Health Ltd. Vouching and verification of documents is done in most activities of the audit. Therefore, this approach is known as vouching approach. The approach is beneficial in cased where the organization has weak internal control management. The audit work performed using substantive approach aids in improving the reliability of data collected during the procedure of the audit (Gale, Heath, Cameron, Rashid, and Redwood, 2013). The steps included while performing the audit for resonance Health Ltd are as follows:

Steps taken	Description
Planning	It is the initial step and forms the base for obtaining the required outcomes in the out of a specified activity. The audit is commenced by understanding the activities of the organization, exploring risk factors, and setting audit objectives (Knechel and Salterio, 2016). The scope of the audit is updated to the management firstly. Information related to different departments is obtained by the auditor. Risk is assessed in setting the audit objectives. Further, a plan for audit is prepared for processing audit steps. The management of Resonance Health Ltd is involved with the auditor for conducting audit effectively. The information related to the organization’s financial statement is provided to auditor by the management.
Meeting	This step involves communication between the individuals from different departments related to organizational concerns. The functional area in which the audit will be conducted is discussed between the audit team and management. The audit’s scope determined through assessment of the risk is conversed with the participants of Resonance Health Ltd. The department’s concern is discussed with for successful conduct of the audit. The procedure for audit and its reporting is analyzed by the participants who attended the meeting. Information related to the issues faced by the organization in term of finance is provided in the meeting (Theaker, 2017).
Fieldwork	This step involves review of the internal control by testing and evaluating them effectively. The structure of the internal control is understood by communicating effectively with the staff members of Resonance Health Ltd. In addition to this, tests of audit are imposed to find out whether the financial records are misstated or not (Christensen, Glover, and Wood, 2012). The purpose of doing this is to identify the weaknesses in the operations and procedures of the business effectively. The data is then collected and the report is summarized and after that it is communicated to management for addressing concerns of the organization.
Drafting report	In this step, a review of the audit documents is done and a report is drafted so that the scope, objectives, and termination of the audit are communicated.
Exiting the meeting	The audit report is discussed with the management and audit team to form conclusions. The draft report is evaluated and possible changes are argued between the participants who attended the meeting. The due date is determined for the feedback on the audit.
Management response	The recommendations from the management is responded in writing which includes the actions required to perform for correcting and improving the financial statement’s accuracy in order to increase the business productivity. The timeframe for the execution of the corrective actions are told to management for future development. The response is reviewed and management’s response is added by the audit team in the draft report (Blackburn, 2012).
Follow up	This step includes the preparation and distribution of the final report to the management and audit officer. Moreover, the suggestions related to audit for implementation are communicated to management.

Account name	Amount	Assertions	Procedure for audit
Cash and equivalent	1685375	Valuation, Existence, allocation, completeness, accuracy, obligations and rights	1. Bank verification analysis. 2. Testing rank reconciliation and taking follow up on reconciled items.
Trade and other receivables	577393	Occurrence, subsistence, classification, accuracy, and recording	1. Examining journal ledger. 2. Calculation and reconcilement of balalnces
Inventory	50000	Valuation, existence, disclosure, completeness	1. Observation of stock. 2. Reviewing the cost of every item.
Accounts payable	487040	Existence, correctness, presenting, and disclosing	1. Analyzing the cheque register 2. Reconcilement of related invoices
Bank loan	200000	Note down, valuation, obligations and rights, presenting and disclosing	1. Reviewing documents of loan 2. Conducting the process of test reconciliation.
Creditors	170000	Existence, completeness, evaluation and disclosing	1. Verification of balances 2. Checking ledger accounts
Outstanding commission	150000	Recording, obligations and rights, valuation, disclosure and presentation	1. Taking confirmation from designated officer 2. Investigation of nominal accounts

Sampling is the application of the procedure of an audit for all the items under different transactions or balances in the accounts so that their basic characteristics can be analyzed. The following steps shall be taken by Resonance Health Ltd in forming a sampling plan

The maintenance and repair is an account which is considered as a risky expense in context of an audit. It becomes significant for the auditor to analyze the level of accuracy and assertions categorizations for the maintenance and repair account. In order to verify the accuracy of the account correctly the recorded transactions shall be properly analyzed (Penn and Pennix, 2017). The material correctness of the account is what is required in the end. Therefore, the auditor shall confirm the account if free from any material misstatement.

Apart from the nature of the method adopted for sampling, the sample size is required to be determined. The auditor shall reflect the risk related to mistaken acceptance, confidence level, expected fraud, and tolerable error.

If 5000 records exist in multiple small dollar transactions then it will be divided by the sample size i.e. 50. The resultant will be 100 and is considered as an interval number. Further, the records are organized in sequence using software so that the starting point can be picked.

Once the size of the sample is selected from the recorded population, the relevant process for audit is required to be carried out in order to differentiate items (Robertson and Robertson, 2012). For instance, the account for repair and maintenance will be audited first and the book such as bill of landing will be audited thereafter.

The step includes determining whether the account balance is properly considered or not. If the misstatements are under the level of acceptance then the auditor can conclude the account as substantially correct.

Conclusion

The report can be concluded by mentioning that audit plays an essential role in providing transparency in the operations of the company. The analysis depicts that the operations of Resonance Health Ltd are exercised according to the defined principles of ASX and Australian Accounting Law. However, some variations exist in the accounting figures of the company in the past three years with valid reasons. Moreover, the plan of sampling for Resonance Health Ltd is beneficial in analyzing the features of different items and identifying misstatements if any.

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