The materiality concept is the most fundamental concept of the audit. At the planning stage of an audit engagement, the auditor has to determine the level of materiality for the overall financial statements of the entity. The basic purpose of setting the overall materiality at the stage of audit planning is that it serves as the basis for the determination of performance materiality (ICAEW, 2017). Also, it helps in clearly deciding the thresholds for the accumulated misstatements in the financial statements of the company. An item or transaction related to the business of entity is said to be material when it becomes relevant to influence the decisions of the users of financial statements of the entity. Audit materially is primarily bifurcated into two categories i.e. materiality in terms of size of the item or transaction (quantitative materiality) and materiality in terms of nature or of the item or the circumstances of the company (qualitative materiality).
As the determination of level of materiality is purely based on the decision of the auditor and there is not specific set of guidance on determination of materiality, the materiality in the present case of Regis Resources Limited, the annual report of the company for the year ending 2017 will be referred.
While examining the income statement of the company, the materiality level that has been set out for the profits from the continuing operations at the percentage of 5% of the total revenues earned by the company. It has been found that the profit from continuing operations is 25% of the total revenue hence the reasons must be evaluated in detail. It has also been observed that the amount of impairment has significantly increased in year 2017 since last financial year i.e. 2016 (Regis Resources Limited, 2016). In year 2016, the total impairment losses that were recognised in the financial statements were only $ 21. However, in 2017, the reported losses on the ground of impairment of non-current assets particularly the exploration and evaluation assets are $ 2939. The actual reasons for the reporting of such significant losses must be assessed by examining the records of assets. It must be checked whether such exploration assets have actually been relinquished or expired in the reported period.
While examining the statement of final position, it has been found that the deferred tax liabilities constituted the significant component of non-current liabilities of the company. For this purpose 5% is set as the materiality level in this regards. Since, DTL of the company in 2017 exceeds 5% of the total non-current liabilities, these items must be examined more carefully by applying detailed audit procedures. The percentage set for retained profits is 10% of the total shareholder’s equity. The reported amount in regards to retained profits is quite higher than the materiality level and hence the sources of retained earnings must be assessed in details.
Since, the company has executed a contract to purchase the McPhillamys project’s license and for this purpose it has made a payment of cash of $ 3.25 million, the materiality must be set for the cash balances to understand the impact of such transaction on the overall assets of the company as well as on its overall liquidity position. The cash balance at the year-end 2017 must be evaluated applying the detailed audit procedures (Annual Report, 2016). Moreover, it is necessary to obtain necessary and appropriate audit evidences to verify the cash account balances. The necessary evidences in this regards could range from the licensing documentation, bank statements through which the payment has been made (Kachelmeier, Schmidt & Valentine, 2017).
Analytical procedures are the important aspect of the audit process and it entails evaluation of the financial information contained in the financial statements of the entity. It involves various processes which range from simple comparative study of key financial results to the deployment of complex models which involves various relationships of the data (ACCA, 2017). As a part of analytical procedures, the auditor has to make both inter firm and intra firm comparisons of the key financial data of the company. In intra firm comparisons, the financial data of the company is compared with the financial data of the same company but from different years. In inter firm analytical procedures the financial data of the company is compared with that of its industry or a particular competitor of the firm (PWC, 2017).
Analytical procedures are used to obtain adequate knowledge of the business of the client entity and to assess and analyse the risk of material misstatements contained in the financial statements of such entity. They are also used as the substantive audit procedures of audit to apply test of details to the key financial assertions. These procedures help the auditor to form an opinion on the truth and fairness of the financial statements (Elder, Beasley & Arens, 2011).
As a part of analytical procedure, the financial statements of Regis Resources Limited have been analysed from year 2014 to 2017. A trend analysis of key financial ratios related to the major components of financial statement has been performed. The said analysis is undertaken by taking 2014 as the base year. The liquidity position of the company has been found to be enhancing with each passing year. This has been observed through the increasing trend of current and quick ratio. The profitability position of the business also seems to be improved since 2014 as depicted by the net and gross profit margin as well as the return on equity.
The key risk areas are the asset management of the company as the efficiency ratios of the company are showing that it is not able to manage its assets efficiently. Further the solvency ratios of the firms have shown that it has sound management of capital structure and hence it does not have to face financial risk.
After reviewing the statement of cash flows of Regis Resources Limited for the year 2017, it has been observed that the major flow of cash in the company occurred due to the operating activities undertaken by the business. Operating activities are those activities that are directly related to the core operations of the business i.e. the provision of goods or services. The majority of cash inflows are generated from the operating activities in the form of revenue collected for the sale of gold. Even the outflow of the cash has majorly occurred due to the operating activities. The major amount of funds was spent for the payment made to the suppliers as well as the employees and for the payment of income taxes paid. Therefore the primary cash receipts for the year 2017 were the collection of gold sales amounting $ 540,048 and primary cash payment was amounting $ 300,416 towards the payment made for purchases and for the wages and salary. During the financial year 2017, Regis Resources Group entered into an arrangement of hire purchase for the purchase of second Komatsu WA600 loader for its Duketon Gold Project. The total amount that was financed for the acquisition of the loader was $ 1,222,000. It was the only non-cash financing and investing activity undertaken by the group during 2017 (Annual Report, 2017). However, since such purchase was not made through the cash payment, it is not involved in the cash flow statement.
The financial statements of the company have been prepared on the basis of the going concern assumption. This assumption contemplates the continuity of the company’s normal business activities and also on the realisation of the assets held by the company along with the settlement of liabilities of the business. The use of going concern assumption in the preparation of financial reports assumes that the company will be able to fulfil all its commitments related to the contracted leases along with all its fixed costs (ACCA, 2017). The Regis Group is consistently evaluating the option to fund the development cost of Duketon Gold Project. The increasing profits and the sound working capital management of the company have allowed it to use the going concern assumption for its preparation of annual accounts (Tsipouridou & Spathis, 2014).
The company has no significant reason that normal credit facility as well as operating lease facility will not be continued to be provided by the trade suppliers of the company. Also, it is expected that the company will be able to square off its operational commitments that are going to be due in near future. Moreover, since the company has no contingent liability as at the reporting date, no events are expected to occur that will affect the financial position of the company. On the basis of this, it can be said that the company is not facing any going concern risk. The assessment of going concern ability of a firm is the responsibility of the management of the company. It is the responsibility of auditor to evaluate the correctness of the assumption used by the management. To examine the correctness of the going concern assumption of Management, it is necessary to collect sufficient and necessary audit evidences that prove the appropriateness of entity’s assumption of going concern. The auditor must also conclude whether there is any material uncertainty that casts doubt on company’s ability to continue for the foreseeable future. If auditor finds any event or evidence that proves that the assumption of entity’s ability for long term is not appropriate, it is necessary on the part of auditor to express an appropriate opinion as per the requirements of ISA 570 ‘Going Concern’ (Arens, Elder & Mark, 2012).
Looking at that section of annual report of the company where the auditor’s opinion is incorporated, it can be said that the auditor has issued a clean report by expressing unqualified opinion. An unqualified opinion is formed by the auditor when the auditor believes that the financial statements of the company contain no material misstatement and hence depicts the true and fair view of entity’s financial performance (Louwers, et. al., 2017).
Along with the clear report, the auditor of the company has disclosed certain key audit matters separately. Key audit matters are those matters which require significant user’s attention but do not contain any kind of material error or misstatement. These matters influence the decisions of the readers of the auditor’s report (Eilifsen, et. al., 2013). Following are those matters that have been identified as the KAMs by the auditor of the company:
References:
ACCA. (2017). Analytical Procedures. Retrieved from: https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html
ACCA. (2017). Going Concern. Retrieved from: https://www.pwc.com/im/en/services/Assurance/pwc-understanding-financial-statement-audit.pdf
Arens, A.A., Elder, R.J. and Mark, B. (2012). Auditing and assurance services: an integrated approach. Boston: Prentice Hall.
Messier, W.F., Glover, S.M. and Prawitt, D.F. (2008). Auditing & assurance services: A systematic approach. Boston, MA: McGraw-Hill Irwin.
Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F. (2013). Auditing and assurance services. McGraw-Hill.
Elder, R.J., Beasley, M.S. and Arens, A.A. (2011). Auditing and Assurance services. Pearson education.
ICAEW (2017). Materiality in the audit of financial statements. Retrieved from: https://www.icaew.com/-/media/corporate/files/technical/iaa/materiality-in-the-audit-of-financial-statements.ashx
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K. (2017). The disclaimer effect of disclosing critical audit matters in the auditor’s report. Retrieved from: https://magazine.bus.miami.edu/_assets/files/faculty-and-research/conferences-and-seminars/accounting-seminars/KSV_93014.pdf
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C. (2015). Auditing & assurance services. McGraw-Hill Education.
PWC. (2017). Understanding a financial statement audit. Retrieved from: https://www.pwc.com/im/en/services/Assurance/pwc-understanding-financial-statement-audit.pdf
Regis Resources Ltd. (2015). Annual Report. Retrieved from: https://www.regisresources.com.au/reports-2/annual-reports
Regise Resources Ltd. (2016). Annual Report. Retrieved from: https://www.regisresources.com.au/reports-2/annual-reports
Sirois, L.P., Bédard, J. and Bera, P. (2018). The informational value of key audit matters in the auditor’s report: evidence from an Eye-tracking study. Accounting Horizons.
Tsipouridou, M. and Spathis, C. (2014). Audit opinion and earnings management: Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.
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