Evaluation Of Financial Statements And Audit Process: NBN Company Case Study

Overview of NBN Company

The financial statements which are prepared are to be evaluated so that their correctness can be ensured and this will be performed with the help of the audit process. The information which is material for all is considered under this so that proper disclosure in this respect is made. The overview of NBN is provided and with that inherent and control risks have been taken into account together with the manner in which they are affected. The manner in which they will be identified will be discussed. The report will be discussing the analytical procedure in which there will be the calculation of the ratios by which all of the components which are involved in the business will be evaluated. The various other aspects such as materiality, assertions which are involved will be discussed in the report. A sampling plan will be included in the last part of the report and all of these will be helpful in the making of the appropriate conclusion

NBN is the company which was established in the 2009 and is involved in providing the broadband network services in Australia and for that proper designing is undertaken. The main aim of the company is to provide the customers with the fastest network and that too at the least cost which will be affordable for them (NBN company, 2017). The company is providing the wholesale service and an open network is there for the same and the services are provided to the retailers on the same terms. With the introduction of the same, there was a high level of the competition which was faced in the market. This was established under the corporation act and is owned wholly by the commonwealth and is following the PGPA act which provides all the information in relation to the manner by which activities are to be performed.

In any business, there are various types of the risks which are involved and they are required to be identified. There is the need to gain the proper understanding in respect of them so that they can be treated in the proper manner (Maqellari and Dika, 2016). The audit process will also be including this and in that there are mainly four types of risks which are involved and they are a strategic risk, operational risk, financial risk, and legal risk. The description in relation to them for the proper understanding is provided below:

• Operational Risk:This is the risk which is related to the operations which are performed in the business and that will be required to be considered for the gaining of effective results (Baldauf, et. al., 2015). There is always the risk that failure of any kind may be involved in the business.  
• Legal Risk:Under this, it will be identified that whetherthe compliance has been made with all the laws and regulations which are applicable. This will be ensured as there is always some risk of the non-compliance involved with this.  
• Financial risk:The risk which is related to the financial aspects is included under this. All of the business involves this as the finances are affected by the various factors which are involved in the business and also from the macro factors (Khorwatt, 2015).
• Strategy related Risk:This involves the risk which is associated with the failure of the strategies which are involved in the procedures that are performed. They will have to be evaluated so that proper implementation of the strategy in a successful manner can be made possible.

Inherent and Control Risks

In the accounts that are prepared, there are chances of various errors which may take place and that also includes the misstatement. In Australia, there are various laws which have been made and they have to be followed so that no risk of misstatement is involved. It is necessary that of such events shall be identified and disclosed so that corrective actions for them can be taken so that proper reporting is made (Zaiceanu, et. al., 2015). In this, there are various risks which are involved and they are as follows:

Control risk: In the company, there is the need to have the appropriate internal control so that there are the proper practices which are undertaken. There is the risk which is involved in respect of them in which there are chances that internal control of the company is weak and by that adverse impacts will be made on the company and its performance. Under this, the misstatement is not detected in an easy manner and so that is the risk involved (Lacoma, 2018). This will be dealt with in a proper manner by the identification of the factors by which this is affected. The industry types and its activities will have to be evaluated together with the size of the accounts. The liquidity position will also be considered under this.

Inherent risk: This is the type of risk which is inbuilt in the system and it will not be possible to determine this as the process involved in this is very much complex. This is natural and it is not possible to eliminate it completely and will always be present in the records (Yazid and Suryanto, 2016). This is mainly due to the various environmental factors which affect the business and also the internal control is responsible for the same.

Detection risk: In the process of auditing this risk is involved due to the certain factors which cannot be detected from the available information. There will be more chances of this if the control risk is more as then the detection will be more difficult.

In the process of auditing, there is the model which is required to be performed and that is to be understood in a proper manner. There is the equation which is involved in that and the same is as follows:

Audit risk = Control risk * Inherent risk * Detection risk

The model states that in the determination of the total risk there will be the inclusion of the three aspects which will be making it complete and they are detection, inherent and control risk. They all involve certain aspects which are to be covered and by this, the proper estimation of the risk will be made. The company will be required to deal with them in an effective manner and that will be possible by the help of the audit committee which is established and the processes and policies which are undertaken by it (Griffin, 2018). In NBN there are several operations which are performed to carry on the network in a proper manner and there will be need of the strong internal control for the same. The inherent risk will be medium as there will be various events which take place and so various challenges are faced in maintaining them. Another risk which is faced is due to the transitions which are taking place in the process of the making of network operating organization. There is a high level of the competition which is faced and that also leads to an increase in the risk which is involved. The company maintains the system which is required to manage the contracts and in that also there is the high level of risk which is involved. Some of them are inherent and cannot be controlled. Security-related issues are also there and to deal with them there are various processes which are involved (Seidel, 2014). As the control is strong so the detection risk will not be much and there will be determination but the inherent risk are at the medium level which may inculcate certain issues.

Analytical Procedures

This is the procedure in which the financial information of the company will be evaluated in the proper manner so that the position of the business can be ascertained and for this ratios will be calculated which will be covering all the areas of the business (Adewuyi, 2016). The calculations for the same are provided hereunder:

Particulars	2017	2016	2015
Current assets	1804	1982	1454
Quick assets	1772	1955	1438
Current liabilities	2877	1825	1540
revenue	922	403	161
Average debtors	247	119.5	79
Average Fixed assets	17865.5	13031	10839
Total assets	24127	18552	13259
Net income	-4244	-2750	-2019
Total debts	9168	6529	5551
equity capital	14959	12023	7708

Particulars	Ratio	Formula	2017	2016	2015
Liquidity ratios	Current ratio	Current  assets/current liabilities	0.63	1.09	0.94
Activity ratios	Quick ratio	Quick assets/current liabilities	0.62	1.07	0.93

By the help of these ratios the liquidity of the business is evaluated. This will be helping in identification of the manner in which payment of liabilities will be made (Nuhu, 2014). There is the need to make the improvement in this as they are very low in comparison to what is required to be maintained.

Ratio	Formula	2017	2016	2015
Fixed asset turnover	Revenue / Fixed assets	0.05	0.03	0.01
debtors turnover ratio	Revenue / average debtors	3.73	3.37	2.04

By the help of them, the efficiency of the business to use its various resources is ascertained. In this various asset such as fixed assets and debtors are considered and there is the need to make the modification in the manner the fixed assets are utilized (NBN Company, 2017).

Ratio	Formula	2017	2016	2015
Net profit ratio	Income/Sales *100	-460.30	-682.38	-1254.04
Return on total assets	income / total assets*100	-17.59	-14.82	-15.23

The levels of the profits which are maintained by the company are evaluated with the help of this and it can be ascertained that the company is not making the profits and there are losses which are made. The losses are declining and that will be beneficial.

Ratio	Formula	2017	2016	2015
Debt equity ratio	Total debts/ Equity capital	0.61	0.54	0.72

The debt position of the company in comparison to equity is evaluated with the help of this. The debts are less than the equity and this is positive as the interest expenses which are incurred will be saved (NBN Company, 2017).

In the business, there are various transactions which take place and out of them, several of them are material which will be required to be focused upon. The errors and misstatements which are involved by which the decision making will be affected and business will have to face the impact will be considered as material. There is the standard which is framed for the same which is ASA 320 in which materiality for planning and performing of the audit is undertaken (ASA 320, 2009). By this, it can be said that there are several factors by which the materiality is affected. In this, the nature of the business will be important and it will be required that information in relation to this will be considered as material. In this, the size of the business will also be considered which will be deciding the materiality level (Tleubayeva, et. al., 2015). If the size of any transaction is big then it will be considered as material and will have to be taken into consideration in the making of the accounts and also the disclosure in relation to all of them will be made by NBN. The various agreements which are made by the company are material and shall be considered.

The identification of the materiality is not easy and for that, there will be a proper process which will be followed and in that qualitative and quantitative aspects will be considered. The main point which will be considered in this is the identification of all those areas in which the materiality is involved (Loughran, 2018). The main aspects which will prove to be risky will be determined and assessment of that will be made and in that internal control will also be considered so that no issues arise due to that. There will be a proper process which will be followed so that the control on the inherent risk is made. The items will be provided with the ranking according to the materiality and then there will be the identification of misstatement if any. The findings which are obtained will be used to plan the future actions.

Account Balance	Amount ($’m) 2017	Assertions identified	Procedures for audit	Audit Evidence
Cash and cash equivalents	1184	Rights & Obligations The company will be having all the rights on the available balance Existence: All of the amounts which are involved in this exists in reality and so this assertion is applied.	All of the bank statements and the cash book will have to be reconciled to match in a proper manner. The deviation if any will be considered and the reason for that will be identified.	Bank reconciliation List of cheques which have been issued and presented (AASB, 2006).
Intangible assets	1760	Rights & Obligations All of the assets are under the right of the company which makes this assertion applicable. Existence: The company will be having all the assets which have been reported and so their existence is confirmed.	All the agreements which have been made in relation to them will be considered and with that, the laws which are applicable shall be identified so that their compliance is verified.	Certificates which are available The agreements which have been entered
Inventories	32	Valuation This is applied as inventory will be valued as per the applicable standard. Completeness: Under this, the finished goods are included which are complete and so this is applied	Physical verification which is made will be checked and the register of the stock will be considered. Proper reconciliation of balances will be made to eliminate any kind of error	Register in which issue and receipt of stock are recorded and with that, the other documents of verification will be used.
Property	20508	Existence: The property which is held is physically present and so its existence is ensured (Freedman, 2018). Rights & Obligations The company will be having all the rights and obligations in relation to it.	The purchase agreement will be considered and with that, the physical verification is also made in relation to them	Certificate of ownership and physical verification report will be used
Trade receivables	334	Valuation The proper value of them shall be maintained so that collection is made appropriately. Completeness There shall be proper records which are maintained for them and that makes it applicable.	The records maintained for the same will be evaluated and also the list of debtors will be considered so that the ones due from long will be identified	The register of receivables will be used and also direct verification from them is made
Liability
Trade and other payables	2560	Completeness: The amount which is reported in the accounts is complete Existence: There will be verification that they will be received by the company.	The register of purchases which are made will be evaluated and also the verification can be made from the clients.	Purchase slips, bank statements and other records which are maintained.
Other liabilities	497	Existence: Involvement in the balance sheet on the final date Valuation The valuation of them is made as per the standards which are set.	The liabilities will be evaluated by checking the bills for which they are made and also if there is any tax treatment for this them it will also be considered	The tax-related documents and other details by which the liability is arising will be checked.
Provisions	181	Completeness The provisions are recorded in the final accounts which ensure their completeness (Kharisova and Kozlova, 2014). Valuation: They are values by using all the available information in a perfect manner.	The liability for which provision is made will be identified and then the manner calculation is done will be taken.	Related documents and calculation sheet
Financial liabilities	5889	Valuation and accuracy They are accurate as recorded after verification from the bank Completeness: All of the repayments and interests are taken into account	Agreement for the loan will be verified and then all the amounts which are to be paid will be considered. The interest calculations will be made and also the verification will be obtained from the bank.	Interest calculation, Loan agreements,

Material Account	Sampling method	Size-selected for sampling	Main object
Cash and cash equivalents	Sampling will be selective (Bhat, 2018).	50 events amounting to more than $100000 and 15 events amounting less than $10000	The material cash transactions will be evaluated
Intangible assets	Sampling will be selective	The audit will be performed in relation to the patents, copyrights, and licenses	By the help of this, the verification will be made in relation to all the assets which are recorded
Inventories	Random Counting method (Healthknowledge, 2018).	There will be a selection of the random 25 units from each lot	By this the physical verification will be made and also the quality will be tested(MURRAY, 2018).
Plant and property	Complete testing (Gleeson, 2018).	The transactions in relation to plant will be checked thoroughly	The existence and the valuation will be rechecked and any kind of error will be eliminated
Trade receivables	Random sampling	Any of the 30 transactions from each 100 will be selected and verified	It will be ensured that they are real and no wrong entries are made
Trade and other payables	Judgment sampling	The payment details will be verified on the basis of judgment	The authorization will be made that they exist and are the liability of the company
Other liabilities	Selective sampling	The transactions which are of the high amount will be chosen and verified (Singh and Masuku, 2014).	It will be ensured that all of them are incurred and not just fake
Provisions	Judgement sampling (Singh & Masuku, 2014).	The expenses for which provision is made will be evaluated	By this, the accuracy of the provision valuation will be ascertained
Financial liabilities	Direct verification	The bank statements will be checked and the bank will be contacted (Alvi, 2016).	The liabilities which are shown will be verified and accounts will be reconciled

Conclusion: 

The report above is providing the information about the company and its business and also the risk involved in the business has been identified. The main risks which are involved in the audit and the model which is used in relation to them has been taken into consideration. The calculation of the ratios is made by which the performance of the company is evaluated. There are the assertions and the material accounts have been selected for which they are identified with the manner in which they will be verified. The materiality aspect has also been considered and on the basis of all a sampling plan is designed at the end of the report.

References

• AASB, 2006. Auditing Standard ASA 500 Audit Evidence. [Online] Auditing and Assurance Standards Board. Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_500_28-04-06.pdf[Accessed 10 September 2018]
• Adewuyi, A. W., 2016. Ratio Analysis of Tesco Plc Financial Performance between 2010 and 2014 in Comparison to Both Sainsbury and Morrisons. Open Journal of Accounting, 5(03), 45.
• Alvi, M., 2016. A manual for selecting sampling techniques in research.
• ASA 320, 2009. Materiality in Planning and Performing an Audit [Online] gov Available at https://www.legislation.gov.au/details/f2009l04080[Accessed  10 September 2018]
• Baldauf, J., Steller, M. and Steckel, R., 2015. The Influence of Audit Risk and Materiality Guidelines on Auditors’ Planning Materiality Assessment. Accounting and Finance Research, 4(4), p.97.
• Bhat, A., 2018. Types of Sampling: Sampling Methods with Examples | QuestionPro. [online] QuestionPro. Available at: https://www.questionpro.com/blog/types-of-sampling-for-social-research/ [Accessed 10 September 2018].
• Freedman, J., 2018. Audit Procedures to Ensure the Existence of Assets. [online] chron.com.Available at: https://smallbusiness.chron.com/audit-procedures-ensure-existence-assets-58809.html [Accessed 10 September 2018].
• Gleeson, P., 2018. Audit Procedures for Fixed Assets. [Online] comAvailable at https://smallbusiness.chron.com/audit-procedures-fixed-assets-39853.html [Accessed 10 September 2018]
• Griffin, D., 2018. Types of Business Risk. [online] chron.com. Available at: https://smallbusiness.chron.com/types-business-risk-99.html[Accessed 10 September 2018].
• Health knowledge, 2018. Methods of sampling from a population. [Online]. Health knowledge. Available at: https://www.healthknowledge.org.uk/public-health-textbook/research-methods/1a-epidemiology/methods-of-sampling-population[Accessed 10 September 2018]
• Kharisova, F.I., and Kozlova, N.N., 2014. Applying the category of «Assertions (or preconditions)» In an audit of the financial statement. Mediterranean Journal of Social Sciences, 5(24), p.180.
• Khorwatt, E., 2015. Assessment of Business Risk and Control Risk in the Libyan Context. Open Journal of Accounting, 4(01), p.1.
• Lacoma, T., 2018. The Importance of an Audit Risk Model. [online] chron.com. Available at: https://smallbusiness.chron.com/importance-audit-risk-model-22294.html [Accessed 10 September 2018].
• Loughran, M., 2018. How to Determine What Is Material in an Audit – [Online] dummies.coAvailable at https://www.dummies.com/business/accounting/auditing/how-to-determine-what-is-material-in-an-audit/  [Accessed 10 September 2018]
• Maqellari, M. and Dika, I., 2016. Materiality And Risk Essential Pillars Of The Auditor’s Work. European Scientific Journal, ESJ, 12(10).
• MURRAY, M., 2018. What You Should Know About Cycle Counting in the Warehouse. [online] The Balance Small Business. Available at: https://www.thebalancesmb.com/cycle-counting-in-the-warehouse-2221188 [Accessed 10 September 2018].
• NBN Company, 2016. Annual report. [online] Annual report. Available at: https https://www.nbnco.com.au/content/dam/nbnco2/2018/documents/corporate-reports/nbn-annual-report-2015-161.pdf [Accessed 10 September 2018].
• NBN Company, 2017. Annual report. [online] Annual report. Available at: https https://www.nbnco.com.au/content/dam/nbnco2/2018/documents/corporate-reports/nbn-annual-report-2016-2017.pdf [Accessed 10 September 2018].
• Nuhu, M., 2014. Role of Ratio Analysis in Business Decisions: A Case Study NBC Maiduguri Plant. Journal of Educational and Social Research, 4(5), 105.
• Seidel, T. A., 2014. The effective use of the audit risk model at the account level.
• Singh, A.S. and Masuku, M.B., 2014. Sampling techniques & determination of sample size in applied statistics research: An overview. International Journal of Economics, Commerce and Management, 2(11), pp.1-22.
• Tleubayeva, S.A., Daribayeva, L. and Seitzhanova, L.S., 2015. DETERMINING THE MATERIALITY OF AUDIT ON THE PRACTICE OF KAZAKH ENTERPRISES. Theoretical & Applied Science, (2), pp.55-64.
• Yazid, H. and Suryanto, T., 2016. An investigation of factors influencing audit quality according to Islamic audit: a study for the Jakarta Islamic index. International Journal of Economics and Business Administration, 4(1), pp.20-38.
• Zaiceanu, A. M., Hlaciuc, E., & Lucan, A. N. C., 2015. Methods for risk identification and assessment in financial auditing. Procedia Economics and Finance, 32, 595-602.