Discuss about the Experimental Methods of Materiality Judgment.
The statement has been formed with considering its title which actually helps in understanding the working of an organization in relation to the corporate governance principles and risk assessment procedures and steps to mitigate risk. Medibank Private Limited which is upcoming and major private health insurance Provider Company in Australia has been selected to frame this statement. In the first part of the report synopsis of the report has discussed which helps in understanding the intention for creation of the report. The second part of the report helps in understanding the structure of the report. The third parts helps in having an analysis on the how the Australian corporate governance principles has been applied by the given company and its eight principles has been discussed in detailed so that compliance of the company can be checked or assessed. The fourth part of the report helps in understanding the different risky areas so that corrective and preventive actions can be taken by the management of the company and correct opinion can be framed by the auditor about the affairs of the chosen company with regard to true and fair view. The report has been concluded with proper recommendations. The report has been prepared using the annual report and corporate governance statement of Mediback Private Limited for the year ending 2017.
ASX has laid and formed different policies, rules and procedures which help in maintaining the commitment of the Australian government towards ethical business environment. The ASX has framed eight corporate governance principles which has been conversed below:
In this the company has disclosed the different roles and positions hold by board members and their responsibilities in relation to their roles. These included the procedures and policies adopted by the company in formation of management. The company has divided this section into 8 headings. They are Board, Chief Executive Officer, Appointment of Directors, Appointment Terms, Company Secretary, Diversity Inclusion and Belonging, Non Executive Directors and their performance measurement, Chief Executive Officer and their assessment of performance (Company Official Website, 2017).
The board of the company is the backbone of its management. The board of the company should be according to the nature, need and size of the company. Medibank private limited has created the board in bifurcated manner which helps the company to achieve its goals and objectives. The company has divided its board work and responsibilities in Nomination committee helps in obtaining the statutory positions in the board required to fulfill the fiduciary positions, Matrix which helps in bifurcation of the board members as per their skills, Board members, director’s independence, chairman, training and Induction.
The company has a code of conduct to react and act in organizational behavior as mentioned in its corporate governance statement. The company is taking ethical values and ethics in doing business as a very grim matter. For making adequate decision making the company has directed all its management people to act as per defined guidelines and within the pre defined framework so that mistakes can be avoided at management level only.
This corporate governance principle ensures the maintenance of integrity of reporting by the company to its different stakeholders. The company has divided the three heads which helps in maintaining the integrity of the reporting. The first is Audit committee which helps assessment of financial data and other transactions on monthly or quarterly basis. The second is Assurance committee which helps maintaining the assurance that all the internal procedures adopted by company are in proper place. The third is auditor of the company who provides his opinion on the true and fair view of the financial statement.
This principle helps in fulfilling the disclosure requirements of the company’s information to users of accounting. The company’s management has to ensures that the right information to be disclosed at the right time and in the lawful right manner. This also helps in preventing the insider trading in the company. The company can sure about this fact by publishing different report on quarterly, half yearly and annual basis.
The security holders are owners of the company who put in their hard core money for the smooth functioning of the company and had brought the securities issued by the company. The company has taken major steps to ensure that the security holder’s wealth will remain maximized at all the times. For this the company has disclosed all the information relating to its working on their official website. They have organized the investor relations programmed under which the security holders are in direct contact with chairman of the company through emails. Also the company is communicated through electronic medium about the meetings schedules and decisions in meetings to their security holders so that information can be reached to them in time.
The company has taken positive steps in the risk assessment and its management. The company has formed risk committee, risk management framework and its review, internal audit committee, classification of risks as per their nature to recognize and manage risk in their corporate governance statement.
The company has adopted the feature of maintain the remuneration and people so that it can survive in future and have reduce labor turnover. The has developed different approaches which helps its employees to work more effectively and efficiently with the aim of achieving individual goals along with company’s goals in long run.
This shows that the company has created impact in internal and external environment in which it is working and which makes it to survive in long run with stakeholder’s wealth maximization.
One of the major areas in the corporate working which helps in development of auditing is Risk Assessment (Leung, 2015).Risk assessment is consider as crucial in framing opinion about the company (ACCA, 2016; Abidin&Baabbad, 2015). The risk assessment procedures are many which can be applied but the report has more focus on identification of the business environment of the company, identification of internal control policies, assessment of misstatement with helps of ratios and trends so that proper opinion about the company under consideration can be framed (AASB, 2009; Weiss, 2014 and Mock, 2015).
The entity under review is an Australian company which is listed in ASX Stock exchange and is in the business of providing private health insurance along with travel, life and pet insurance (Company Official Website, 2017). Insurance industry is considerably at high risk prone as compared to other industries as insurance is done to protect the future and its uncertainty. The business environment is one of the major factor which assessing the risk for the company (Capital Markets Advisory Committee Meeting, 2013).
Major controlling authority of the company is Insurance Regulatory and Development authority of the Australia. The company has to follow all the guidelines and regulations as laid down by the authority to work under Insurance industry. The adverse impact of not following the same can harm the interest of its stakeholders both in terms of financial penalties and in term of continuity of the company (Company Official Website, 2017 and Vasarhelyi, 2014).
The other controlling authority for the company is ASX Stock exchange which regulates all the companies which are registered in Australia (Cooper, 2015). In the given company, the company is following the guidelines in relation to committees which are required to form as specified in corporate governance report of the company for the 2017. The company is open for huge penalties or removing the name from ASX stock exchange if the company will not take preventive action soon to mitigate the risk (Baird,, 2015).
The company has three policies which helps the company to run the business effectively. The first policy has main focus on customers of the company. This policy also helps the customers of Medibank to think positive towards the uncertainty in life. The second policy which is following by company is process simplification. The policy which the company is following is liveliness in work environment which helps in having more skilled and talented people in the company so that better performance results can be achieved.
The above business polices of the company are making the company more prone towards risk as in case of process simplification, some of the customers may have trust issue of losing the information from company’s system easily (Kharisova, 2014).
One of the most commonly used methods to assess risk is Ratio Analysis (Glover, 2014; Ullah, 2014). The following is the performance and position ratios of Medibank Private Limited for the year 2017:-
|
Ratios |
Calculation |
Description |
Potential Audit Risk and Solution |
|
Current ratio (Current Assets /Current Liabilities) |
Year 2017 – 3000.40 / 1564.70 = 1.92 Year 2016 – 2812.50 / 1518.50 = 1.85 |
It means that the company has current assets to pay the current liabilities in comparison to the earlier year. |
The major risk is that the current assets are not increasing at the rate at which the current liabilities are increasing. |
|
Debt to Equity (Debt / Equity) |
Year 2017 – 1742.7/ 1719.08 = 1.01 Year 2016 – 1687.50 / 1578.70 = 1.07 |
There has not been much difference in the ratios but still the debt has been increased at equivalent terms with the equity. |
The major risk is that with the considerable increase in the debt and equity the ratio has not changed which doubts on the effective management of funds of the company. |
|
Equity to Total Assets (Equity / Total Assets) |
Year 2017 – 1719.08 / 3462.50 = 0.50 Year 2016 – 1578.70 / 3266.20 = 0.48 |
The equity ratio has been increase from 0.48:1 in 2016 to 0.50:1 in 2017. |
It shows that the management is taking more debt funds in the company capital structure which is one of the risk factors. The company is moving in high risk environment which results in shut down of the business (AASB, 2009; Anastasia, 2015; Chen, 2017). |
|
Ratios |
Calculation |
Description |
Potential Audit Risk and Solution |
|
Net Profit (Net profit / Revenue) |
Year 2017 – 449.50 / 6797 = 6.61 Year 2016 – 417.60 / 6741.80 = 6.19 |
The net profit ratio has been increased with the increasing rate. Each dollar of revenue worth 6.61% as net profit. |
It states that there has been increase in the profit margin and the potential audit risk may be under reporting of Expenses. |
|
Ratios |
Calculation |
Description |
Potential Audit Risk and Solution |
|
Return on Total Assets (Net Profit / Total Assets) |
Year 2017 – 449.50 / 3462.50 = 12.98 Year 2016 – 417.60 / 3266.20 = 12.78 |
It denotes that how much return each assets will give on its effective utilization. |
The return on total assets has been increase by 20 cents with the increase in the value of the asset. The risk is upon the reporting of the net carrying value of the asset. |
Risk assessment can only be completed by implementing the methods which helps in diminishing the risk factors in business environment and policies. The following can be some methods by which risk situation can be minimized in business:
Conclusion
Medibank Private Limited is the health insurance provider company in Australia in private sector and it is also providing the travel, life and pet insurance services to its customers. Insurance business is very much open for risks. To prevent the same to be done, the company along with auditors have to assess and identified the material misstatements over particular intervals so that necessary corrective and preventive actions can be .From the above report, it can be concluded that the company under consideration is properly following the corporate governance principles as laid down by Australian stock exchange.
References
AASB, (2009), “Analytical Procedures – ASA 520”, available on https://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf accessed on 22-04-2018.
Abidin, S., &Baabbad, M. A. (2015), “The use of analytical procedures by yemeniauditors”,Corporate Ownership & Control, 12(2), 17-25.
ACCA, (2016), “Analytical Procedures”, available on https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html accessed on 22-04-2018.
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 22-04-2018.
Baird, I.S, (2015). “Toward a contingency model of strategic risk taking”, Academy of management Review, 10(2), pp.35 – 47
Capital Markets Advisory Committee Meeting, (2013), “Conceptual Framework” available on https://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP%203%20conceptual%20framework.pdf accessed on 22-04-2018
Chen, S., (2017), “Refer to Materiality as a Legal Concept”. Journal of Corporate Accounting & Finance, 28(2), 55-61.
Company Official Website, (2017), “Annual Report”, available on https://www.medibank.com.auaccessed on 22-04-2018.
Cooper S, (2015), “A Tale of Prudence”, available on https://www.ifrs.org/Investor-resources/Investor-perspectives-2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF accessed on 22-04-2018.
Gary S., (2017), “The Importance of Inherent Risk Factors: Auditor’s Perceptions”, Australian Accounting Review, 3, Pp 38-44.
Glover, (2014),“Between a Rock and a Hard Place: A PathForward for Using Substantive Analytical Procedures in Auditing Large P&L Accounts:Commentary and Analysis”. Auditing: A Journal of Practice & Theory, 34(3), 161-179.
Kharisova, F. I., (2014),“Applying the category of Assertions (orpreconditions)» in audit of financial statement”. Mediterranean Journal of Social Sciences, 5(24), 180
Leung P, (2015), “Modern Auditing and Assurance Services”, Wiley John and Sons, Ed. 6, Pp 425-463, 582-684.
Mao, M., (2014), “Experimental Methods of Materiality Judgment on Auditor’s Experience and Performance” In 3rd International Conference on Science and Social Research (ICSSR 2014) Atlantis Press.
Mock, T. J, (2015). “Auditors’ Risk Assessments: The Effects of Elicitation Approach and Assertion Framing” Behavioral Research in Accounting, 28(2), 75-84.
Ullah A, (2014), “Planning and Audit of Financial Statements” available on https://leaccountant.com/2014/12/08/asa-300-summary-planning-an-audit-of-financial -statements/ accessed on 22-04-2018
Vasarhelyi, M. A., (2014),“Embracing the Automated Audit: How the Audit Data Standards and Audit Tools Can Enhance Auditor Judgment and Assurance” Journal of accountancy, 217(4), 34.
Weiss D, (2014), “Faithful Representation” available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October%202014.pdf accessed on 22-04-2018.
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