Developing An Audit Program For A Selected Listed Company

Substantive test of transactions

Substantive test of balances

These tests are done for the measurement purpose that is whether the transactions are recorded in proper period and at proper amount.

      Whether the item is disclosed and classified as per relevant accounting policies and relevant statutory laws and requirement.

       Test of balances are done to check that there is no assets and liabilities left to be recorded.

      It also verifies that event actually took place during the relevant period.

Objective of audit

PRIMARY OBJECTIVE:

Audit is conducted to express an opinion on financial statement that is the primary objective is reporting. Reporting on whether the financial statement provides true and fair view.

SECONDARY OBJECTIVE:

The secondary objective is to detect the misstatement in financial statement and not to frame such an opinion if the auditor is unable to confirm or refute the risk of fraud.

NATURE OF BUSINESS ENTITY:

§  Business operations: Alderan resources ltd is company that is involved in natural resources. The company is popularly known in natural resources industry for providing metal exploration and production services.

§  Investments and Investments activities: Alderan resources ltd is investing and expanding aggressively and decided to begin drilling at Accrington and Perseverance which is company’s current high drilling program.

§  Financing and financing activities: Recently the company has raised $3 million through placement of 5 million shares in which maximum are solid and reliable shareholders for the investment purpose mentioned in above point.

§  Financial reporting practices: The Company follow the practice of generating quarterly cash flow statement which shows cash generated from operating activity, investing activity and financing activity.  So for the quarter ending 31^st march 2018 net cash and cash equivalent was $A6, 43,000

PERFORMING ANALYTICAL REVIEW PROCEDURE

As per ASA 520 analytical review procedure means evaluation of financial information through analysis of relationship of both financial and non-financial data.

It includes comparing:

a)      Information with prior period

b)     Future results such as budgets and forecast

c)      Analyzing industry information for the sake of comparing results.

d)     Analyzing financial information using appropriate ratios and key areas which may be affected due to risk of material misstatement.

This may contain either simple comparison policies or complex analysis that advanced automated or statistical techniques.

Performing substantive procedure shall involve:

1)      Considering suitability of substantive analytical procedure that is determining suitability of such procedures for a particular item.

2)      These procedures are usually used for those events or transactions which are tend to be predictable that is which may regularly occur at regular intervals. It can be used to estimate or compare ratios such as gross profit ratio and other profit related ratios.

3)      Reliability of data also plays an important role in performing analytical procedure for example information obtained from external source shall be more reliable than information obtained from internal source as it may be modified or filtered by the management or internal personnel’s.

4)      Such procedures are also influenced by measuring comparability of information available that is whether the information available is comparable or not.

5)      The information available for performing such procedures shall be relevant. For example profit ratios for nonprofit organizations.

6)      It involves developing expectation for recorded values and such expectations should be accurate and precise so that many misstatements can be easily accessed and identified

Key ratios which can help in analyzing financial performance and financial position of last 3 years:

1.      Return on assets=Net income or loss/Total assets*100

2.      Return on equity= Net income or loss/shareholders equity

3.      Current ration=current assets/current liabilities

4.      Cash ratio=cash +liquid securities/current liabilities

Where invested capital=total equity + long term debt involved to finance the company

 Explanation of selected four ratios

A.     Return on assets is ratio that shows the percentage of income earned on total assets employed. It is a very effective ratio which let us know whether the assets employed are facilitating the company in generating revenue or not.

In case of Alderan Resources pvt ltd the ROA is (17.19%) which is due to highly incurred losses which are due to increase in expenses such as administration expenses, depreciation expenses and impairment of exploration and evaluation expenditure which may be due to investment in heavy drilling project but ROA has improved as compared to previous year which was (24.75%) that is 2016.

B.      Return on equity can be said to as net income earned or attributable to shareholders directly. It helps the shareholders whether the money invested in the company are providing them regular return or not but in this case the ROE is (.17) which means that there are no profits and in turn means that zero dividend payout ratio.

C.      Current ratio is liquid ratio which shows that current asset will be sufficient to pay off the current liabilities. Most appropriate current ratio is 2:1 but Alderan resources ltd has 32.85 which is more than satisfying for a loss incurring company and which is mostly due to humongous cash and cash equivalent.

D.     Cash Ratio is the ratio that identifies whether the current cash and cash equivalent is able to repay short term liabilities. As discussed above the cash available is more than sufficient to repay short term debt and long term debt to some extent.

If compared with previous year(2016) the cash and  cash equivalent has increased and short term liabilities have decreased concluding high cash ratio as compared to previous year.
PERFORMING ANALYTICAL PROCEDURE FOR FINANCIAL STATEMENT AND FINANCIAL PERFORMANCE

Following are the procedures to be performed:

      INSPECTION: This step incorporates examining of records, documents and also the tangible assets. Analytical procedure consist of obtaining documentary evidence originating from third party and also which are remained with third party which is usually called the External evidence which is far more reliable than internal evidence.

It also contains documentary evidence from the entity and also contained with entity which is usually known as internal evidence.

Inspection also includes documentary evidence which originates from third party and which can be founded with entity and vice versa.

      Observation:  Next step in performing analytical procedures to analyze the financial performance and financial statement is observing the process and workings performed by others. Example being overseeing the counting of stock done by management or the stock department head.

      Inquiry/Confirmation : It consist of enquiring or obtaining accurate and appropriate information from a knowledgeable advisor who may provide appropriate advice and on the basis of such response further actions may be taken. For example applying ASA 505 external confirmation and asking for confirmation from debtors for balance statement or obtaining copies of balance in the books of debtor/suppliers.

      Calculation/workings: This step consists of verifying mathematical or statistical accuracy of accounts and calculation solely done by employees or professional in a company.

      Reviewing analysis : This step of analytical procedure involves reviewing the significant trends, ratios and comparing such trends and ratios and performing further procedures for any unusual event or transaction occurred during the review process.

      Re-Performing the work done: Last step of this procedure is redo the work which is performed by the management and the company’s personnel’s so that the auditor shall get the idea of how  the work is performed in the company and if there is any fraud or any misstatement is to be detected or need to be assessed or communicated to the top management. 

Concept of materiality of account balances as per ASA 320

Materiality: Material account balances are those which may affect the judgment of users of financial statements. For e.g. for equity shareholders net profit attributable to equity shareholders is of utmost importance as their dividend payment is dependent on such profits.

Usually percentage is used as benchmark for some material balances.

For e.g. any expense exceeding 2% of total revenue shall be disclosed separately rather than shown as some additional information.

Determination of account balances which are material for planning purposes

As per ASA 320 Misstatement can be found in components of financial report or statement such as assets , liabilities, equity , revenue or expenses.

Also it states that whether there are any items whether there are any items or account balances which require attention of users of financial statement(such as sudden rise in profits and consistent negative losses. 

So if statement of financial statements is considered there are many expenses which can be considered material for planning purpose which are administration expenses, employee benefit expense and also share based payments.

These components are considered material because there is quite a high increase in such expenses if compared with previous year that is the year ending 30^th June 2016.

Most important of them all is share based payment which is maximum of all and was not at all opted by employees during the previous year. Here it is assessed that due to such consistent losses the users of financial statement shall put their attention on such negative losses and expenses which are giving rise to such consistent losses.

Capital structure also plays an important role in determining the materiality of account balances in planning, in other words whether the company is financed by long term debt or shareholders equity. If the company is financed by long term debt it may give rise to uncertainty of repayment which may lead to company going into bankruptcy. But the Alderan Resources ltd is solely financed with shareholders equity which includes mainly the shares issued through seed capital raising that is $10,50,000 in which the money is raised from friends and family which may give rise to related party transaction in future.

ASSETS

ASSERTIONS

EXPLAINATIONS

CASH AND CASH EQUIVALENT

EXISTENCE

ACCURACY

CONTINUITY

Ø  As there is increase in cash and cash equivalent as compared to previous year so it is to be checked whether such amount of cash actually exist or not

Ø  It is also to be checked whether the cash balance are reconciled that is the recording of cash is accurate.

Ø  Also it is to be verified whether the continuous internal controls are made for cash as there is maximum misappropriation in cash.

TRADE RECEIVABLES

OCCURANCE

RIGHTS

VALUATION

Ø  It is to be checked in such case whether the transaction or event even took place or not. For e.g. it can be done by directly confirming from the debtors.

Ø  It is the right of the entity to claim the amount from debtor as asset can be referred to as right of the entity.

Ø  Valuation of trade receivables are also to be verified whether valued at proper amount.

PLANT AND EQUIPMENT

EXISTENCE

VALUATION

Ø  Existence of plant and equipment should be checked by verifying title deeds, transfer deeds and agreement with lessor in case of lease.

Ø  It is to be ensured that the plant and equipment are properly valued that after proper depreciation and amortization.

EXPLORATION AND EVALUATION EXPENDITURE

OCCURANCE

COMPLETENESS

DISCLOSURE

Ø  It is to be checked in case of such expenditure whether such expenditure took place and for what purpose it took place.

Ø  Also the completeness of the expenditure is to be checked whether all the expenditure are complete or not.

Ø  It is also to be examined whether the such expenditure has been properly presented and disclosed as per proper standards and requirements.

EQUITY

ASSERTIONS

EXPLAINATIONS

TRADE PAYABLES

MEASUREMENT

OBLIGATION

Ø  In trade payables it is very important that the payables are recorded in proper period and at proper amount.

Ø  It is to be ensured that the payables are liability of an entity that is they are an obligation to be paid at an given date.

LOAN PAYABLES

EXISTENCE

VALUATION

OBLIGATION

Ø  It is to be examined whether such long term loans exist during the year or not.

Ø  Valuation of such loan payable should be at proper amount as it may influence the decision of users of financial statement.

Ø  It is to be made sure that company has acknowledged their obligation to be paid to other party from which the loans has been raised.

ASSETS

ASSERTIONS

AUDIT PROCEDURES

CASH AND CASH EQUIVALENT

TRADE RECEIVABLES

PLANT AND EQUIPMENT

EXPLORATION AND EVALUATION EXPENDITURE

EQUITY

ASSERTIONS

AUDIT PROCEDURS

TRADE PAYABLES

LOAN PAYABLES