The primary purpose of this paper is to examine the 2017 annual report for Cleanaway Waste Management Company (CWY) to determine the level of materiality that should be used for the audit of the company’s financial statements for the fiscal year ending 2017. In addition to this, this report also gives a preliminary analytical review on the information provided by the company. It also seeks to address key balance sheet and profit and loss ratios over the period 2014 to 2017. Furthermore, the report reviews the cash flow statement of the company and discusses the primary cash receipts and cash payments of the company during the year ending 2017.
As per the provisions of the International Standards on Auditing (ISA) 320, materiality refers to misstatements or omissions of key financial items which are considered to have significant effects on the economic decisions made by various financial statements users of an entity. The nature and magnitude of materiality is however, highly influenced by the size of the reporting entity or firm, as well as the nature and size of the financial item being reported. In Cleanaway Waste Management Company, the level of materiality determined is to be used in the audit of its financial statements for the year ending 2017 (Aicpa, 2017).
In the audit of financial statements, materiality is used to represent significant misstatements or errors in the reported amounts. Misstatements or errors in financial statements are amounts which have not been recorded or corrected. In normal financial statement audits, auditors must seek to identify and report the dollar amount of such errors and misstatements on a predetermined schedule that normally lists two major categories of errors and misstatements in financial statements (Liu, 2015). For instance, this includes amounts recorded and reported in financial statements which have not been recorded correctly. They are transactions which were generally not recorded correctly since they were posted in incorrect amounts or in wrong accounts. In addition to this, the schedule also shows amounts which were supposed to have been recorded in the financial statements but were eliminated (Moeller, 2016).
In regard to these errors and misstatements in the financial statements of Cleanaway Waste Management Company, it is essential for the auditor to calculate and determine the exact dollar amounts of such misstatements or errors as contained in the financial statement of the company. Regarding errors which have been based on an estimated adjustment, the auditor must consider them to have resulted from deficiencies or weaknesses in the internal controls of Cleanaway Waste Management Company. Therefore, the auditor must consider reviewing each and every item of the company’s financial statement against an acceptable level of materiality which is determined during audit planning, with a view to determining and ascertaining whether he should make necessary adjustments to the financial statements or not (VALLABHANENI, 2018).
In determination of the levels of materiality for Cleanaway Waste Management Company, the auditor must take into account various factors and bases, which are very key. For instance, the level of materiality adopted must be in relation to various uses and purposes for which the audit of the company’s financial statements is intended. Therefore, it is necessary for the auditor to understand the financial information which is considered very valuable and useful to decision makers and users of the financial information reported in such reports. For instance, regarding issues that relate to solvency or regulation, the level of materiality is highly dependent on the industry or firm benchmarks in solvency ratios. In addition to this, for purposes of appraisal, the level of materiality is specifically influenced by the net income or net worth of the company, as well as its earnings per share for the given operating period. Furthermore, for general purposes in relation to the company’s financial statements, the level of materiality depends highly on the net surplus as well as the net capital or net income of the company (Fiedler, & Fiedler, 2010).
Besides, the level of materiality is influenced by other features or characteristics of the company, including its size and access to capital, as well as the stage of organizational life cycle. The financial strength of a company or firm is also considered a critical factor in determining its level of materiality that should be used in the audit of its financial statements. It has generally been postulated that as an entity approaches a certain materiality threshold, the standard of materiality for work which relates to that threshold becomes more rigorous (Wells, 2014).
Determination and ascertainment of dollar amounts which are considered material misstatements and errors in the financial statement of Cleanaway Waste Management Company is highly influenced by objectivity of the independent auditor of the firm. Auditors usually apply a specific range or percentage of materiality to dollar amounts of each item in the financial statements taken in their entirety. This range or percentage is normally chosen as a benchmark for ascertain the maximum level of materiality beyond which financial statements and reports must not be misstated, since this would have significant impacts on decision making capabilities of financial statements users. These chosen benchmarks are usually based upon items of financial statement such as gross profit or total revenues (Key, Riddle & Institute of Internal Auditors, 2012).
In determining the level of materiality in relation to the unrecorded and uncorrected misstatements and errors in the financial statements of Cleanaway Waste Management Company, the auditor adopt the 5% rule (Media, 2012). This rule is very useful in generally determining an acceptable range of materiality that should be used in the audit of the financial statements. In accordance with this rule, the dollar amount of misstatements and errors is determined with key consideration to a certain range or limit of materiality level, which must not be exceeded. The auditor must therefore, consider taking appropriate audit measures and tests to ascertain whether the actual misstatements happened or not. Therefore, in the audit of Cleanaway Waste Management Company, 5% is considered the acceptable level of materiality which must not be exceeded in audit of its financial statements for the year ended 2017. Misstatements in the financial statements of Cleanaway Waste Management Company exceeding are therefore considered material, and the auditor must issue a qualified audit report (Dennis, 2015).
Upon critically reviewing the various draft notes and disclosures accompanying the draft annual report of Cleanaway Waste Management Company, there are various significant issues which were observed. For instance, the company prepares its financial statement based on certain accounting estimates which are considered critical. Actual results may occasionally vary significantly from these various estimates. For example, according to the disclosure note on recoverable amount of property, plant and equipment, Cleanaway Waste Management Company evaluates each of its cash generating units on every reporting period with a view to determining if there are any potential indicator of reversal or possible impairment in such assets. The company makes impairment provisions for any indicators of impairment losses on such assets. The company tests for impairment goodwill and other intangible assets having indefinite life annually, with disregard as to whether there are potential impairment indicators. Additionally, the company determines the recoverable amount of the cash generating units based on calculations in value in use of the assets, which usually require use of key assumptions and estimates. These calculations are based on projected cash flows which may change significantly, thus influencing the actual net cash flows in the future (Cleanaway Waste Management Company, 2018).
In addition to this, Cleanaway Waste Management Company makes a provision for remediation and rectification of landfills. These provisions are however based upon the present value of projected cash outflows that are expected to be incurred in remediating the landfills. These expenses includes certain costs such as remediation, capping costs of the landfill site, rectification costs and costs related to post closure monitoring activities. In measuring these provisions, the company needs to make significant estimates and assumptions including inflation rates and discount rates, which may be very difficult to ascertain. This may result in uncertainties may lead to significant variations in the actual future expenditures and the current provisions. These are believed to materially influence the company’s financial statements, should such uncertainties occur (Jubb, 2010).
According to the results obtained from the above ratio analysis and the nature of business and its markets of Cleanaway Waste Management Company, there are various apparent trends and changes in its key ratios that need to be discussed. For instance, the return on shareholders’ equity for the group company increased from 2.42% to 3.97% during the financial years ending on June 30, 2016 and June 30, 2017 respectively. The company’s Earnings per Share (EPS) also increased by 1.70 cents in the financial years ended 2016 and 2017. However, the debt to equity ratio dropped by 1.27% during the financial years ending 2016 and 2017. The current ratio of Cleanaway Waste Management Company also dropped by 0.15 during the two financial years (Cleanaway Waste Management Company, 2018).
The auditor of Cleanaway Waste Management Company must consider making the following assertions in regard to classes of transactions and disclosures related to the financial statements of the year ending 2017.
The independent auditor must ascertain that the events and transactions recorded in the financial statements of Cleanaway Waste Management Company have actually occurred and they pertain solely to the company. This can be done through examination and inspection of the original books of accounts such as purchase vouchers and payment vouchers (Hayes, & Schilder, 2014).
The auditor must also make sure that all events and transactions that occurred during the financial year ending 2017 of the company have been appropriately recorded in its financial statements. The auditor can accomplish this by examining the financial records of the company critically, against the original documents in its books (Arens, Elder & Beasley, 2016).
Furthermore, the auditor must ascertain the accuracy of the recorded amounts. He can do this through a critical examination of the financial records of Cleanaway Waste Management Company with a view to ascertaining that the transactional amounts have been appropriately recorded and key issues disclosed through adequate disclosures (Crain, Hopwood, Pacini & Young, 2018).
A review of the cash flow statement of Cleanaway Waste Management Company for the financial year ending 2017reveals that a majority of the company’s cash inflows were generated from the cash flows from its operating activities, which amounted to $281 million. The company generated net cash flows amounting to $189.6 million from its operating activities during the financial year ending 2017. However, the largest cash outflows of the company were reported from its investing activities, which amounted to $187 million. During the financial year ending 2017, Cleanaway Waste Management Company received primary cash receipts totaling to $353 million. The company also reported primary cash payments amounting to $298.3 million (Cleanaway Waste Management Company, 2018).
According to the cash flow statement of Cleanaway Waste Management Company, the company recognized various non-cash financial and investing activities. For instance, the company received significant amounts from sale of its property, plant and equipment totaling to $2.4 Million. Cleanaway Waste Management Company also made payments in relation to these items amounting to $144.1 Million. In addition to this, the company makes a payment of $31.7 to purchase businesses and non-controlling interests (Cleanaway Waste Management Company, 2018).
According to question 2 and 4, Cleanaway Waste Management Company experiences key risks with regard to its going concern. For instance, the company depends highly on cash inflows from its operating activities. This is because its investing and financing activities have generated negative net cash flows during the financial year ending 2017. Furthermore, majority of the company’s cash outflows were reported from its investing activities. This indicates that Cleanaway Waste Management Company may not be able to generate positive net cash inflows from its investing activities due to its huge amounts of cash outflows resulting from these activities, which highly contradicts the company’s going concern (Reding, & Institute of Internal Auditors Research Foundation, 2013).
There are several audit procedures that are highly recommended for Cleanaway Waste Management Company in order to address these risks. For instance, the management of the company must diversify its operations with a view to ensuring that the company does not solely depend on cash flows from its operating activities. Additionally, the company management must consider reducing or cutting on its expenses materially, with regard to its investing activities. The company should retain a significant amount of its net income for use in future expansions as well as maintaining the financial liquidity and solvency of the company in order to guarantee its continued future operations (Verschoor, 2008).
After a review of the Company’s financial report of Cleanaway Waste Management Company for the year ending 2017, it has been observed that the external auditor issued an unqualified opinion with regard to the company’s financial statements. The auditors, in their opinion, ascertained that the financial statements of Cleanaway Waste Management Company are prepared according to the Generally Accepted Accounting Standards (GAAP). The financial statements give a true and fair reflection on the financial position of the company as at June 30, 2017, and its financial performance for the year then ended (Cleanaway Waste Management Company, 2018).
Conclusion
According to the discussion in the above sections, the financial statements of Cleanaway Waste Management Company have been prepared according to the Generally Accepted Accounting Principles (GAAPs). The financial reports are a true and fair view of the financial position of the company as at 31st December 2017 as well as its financial performance for the financial year then ended.
References
Aicpa. (2017). Auditing Standards 2017: Codification of Statements on Standards for Auditing Standards. John Wiley & Sons Inc.
Arens, Al, A, Elder, R., & Beasley, M. (2016). Auditing, Assurance Services & Ethics in Australia. Sydney: P. Ed Australia.
Cleanaway Waste Management Company (2018). Retrieved from https://www.cleanaway.com.au/
Crain, M. A., Hopwood, W. S., Pacini, C., & Young, G. R. (2018). Essentials of Forensic Accounting. Somerset: John Wiley & Sons, Incorporated.
Dennis, I. (2015). Auditing Theory. New York, NY: Routledge.
Fiedler, B., & Fiedler, B. (2010). Student guide to accompany Essentials of auditing, assurance services and ethics in Australia: An integrated approach [1st ed.]. Frenchs Forest, NSW: Pearson Australia.
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Jubb, C. (2010). Assurance & auditing: Concepts for a changing environment. s.l.: Thomson Learning.
Key, J., Riddle, C., & Institute of Internal Auditors. (2012). Sawyer’s: Guide for internal auditors. Altamonte Springs, FL: Institute of Internal Auditors Research Foundation.
Liu, J. (2015). Study on the Auditing Theory of Socialism with Chinese Characteristics, Revised Edition. Hoboken: Wiley.
Media, B. P. (2012). ACCA F4 – Corp and Business Law (Eng) – Study Text 2013: Study Text. London: BPP Learning Media.
Moeller, R. R. (2016). Brink’s modern internal auditing: A common body of knowledge. Hoboken, NJ: Wiley.
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VALLABHANENI, S. R. (2018). WILEY CIAEXCEL EXAM REVIEW FOCUS NOTES 2019, PART 1: Essentials of internal auditing. S.l.: JOHN WILEY & SONS.
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