How To Collect Audit Evidence: A Study On Near Map Limited

The Importance of Audit Planning

Question:

Discuss About The Collect Audit Evidence Has Been Described?

Auditing plays a very important role in the finance function and is considered as important activity on which every person including the government and the related agencies relies and functions. Auditing gives an insight of the business of various companies and provides the disclosures whether the company is performing as per the governing rules and regulations. Audit planning is considered as the major step in the process of audit as it forms the basis as to how the audit shall be started. In this report the company – Near Map Limited has been chosen for the study. The financial report for the financial year ending 30^th of June 2016 has been considered. The planning process has been detailed in four major headings – initial audit planning, clients business, assessment of risk and preliminary analytical procedures. Each of the four steps has been detailed with reference to the Near Map Limited. After performing the planning process, the number of suitable that will be performed in order to collect the audit evidence has been described. In the last the study has been ended up with the conclusion summarizing the report and the recommendation as to what is the better for the auditor and the client.        

For executing any kind of work, it is necessary to develop the plan as to how the work shall be conducted and in what manner the way will lead to early and efficient completion of the work. The similar fact applies to the audit process. If the plan for audit has not been prepared then the auditor will end up with nothing at the end and the work done will all be futile. Therefore, Planning of an audit plays the very important role in the whole audit process. As per the Auditing Standard of Australia 300, an auditor shall plan his audit for the following purpose:

• Avoiding any type of misunderstanding with the client
• Avoid the high cost of audit and keep it at reasonable margin and
• Providing the auditor or the audit team guide to obtain the sufficient and reliable audit evidence (AASB, 2006; Ullah, 2014).

In this report, the audit planning has been detailed with the four major steps. These steps have been detailed below.

The first step in the audit planning is to accept the new company as the client and performing the initial audit planning. In this step following four functions are performed:

• Before accepting the client engagement, the client is investigated as to at what position the company have the standing in the market, how far stable is the client in the financial terms and the nature of the relations that the client has with the earlier accounting firm.
• Next function is to determine as to why the company gets its books of accounts audited by our firm. The same has been finalized with the discussion of the management.
• Then the understanding with the client is obtained after obtaining the engagement letter. The engagement letter is in documented form which contains the objectives of the audit, roles and responsibilities of the auditor and the client, detail of the services to be provided, scope of the engagement including the limitations if any and the understanding of fees.
• After having the agreement, if the auditor requires the opinion from the outside consultants, then it shall also be the part of the initial audit planning.

In the given case, audit firm KPMG, Sydney is the auditor of the company for the year ending 30^th of June 2016 which has authenticated the financial statements through its audit partner Trent Duvall (Company official Website, 2016). The client investigation is to be conducted and engagement letter is required to be obtained. 

Client Investigation and Acceptance

As per the paragraph number 11 of the Auditing Standard of Australia number 315, the auditor shall obtain two types of information. One is related to obtaining the understanding of client’s nature of business and the industry within which the company is operating. Along with that the company’s nature with regard to the governance and the structure is detailed (AASB, 2013). Following functions have been performed:

• Nature of the business operation of the company. The company under study – Near Map Limited is the company registered in Australia and listed on the Australian Stock Exchange. The company – Near Map Limited is engaged in the operations of the web page which delivers the details of the addresses of banks, houses and etc along with their latitude and longitude figures. It contains the technology which provides the better presentation of the addresses with the photos in high quality definition. The company’s major source of revenue is the Subscription revenue which is accounted for in the books of accounts as per the life of the contract (Company official Website, 2016).
• Assessment of the risk which is common to the industry. As the company – Near Map Limited is linked with the Information Technology sector, there is always be the risk of having the outdated technologies as compared to the competitor.
• The company’s governance system shall be assessed along with the ethical climate of the business so as to place the reliance on the level of the financial reporting.

In this step, the auditor is majorly concerned with the material misstatements that may be contained in the financial statements of the company due to the risk present in the client business. Second concern of the auditor is the non compliance with the rules and regulations in case of having the business risk. These risks are primarily explained by the management of the company. 

In the given case, as the company is engaged in the Information technology sector, the chances of having the impairment of intangible assets is higher and hence the auditor is required to check the impairment indication at reporting date along with the proper calculation (Company official Website, 2016). 

This is the fourth major step in the audit planning process. These procedures are performed to have the clear understanding of the operations of the company and the clear assessment of the risk. The procedure details the assessment of the financial ratios and comparing the same with the previous years so as to analyze the major changes and plan the audit accordingly.

STATEMENT SHOWING THE RATIO ANALYSIS
			($’000)
S. No.	PARTICULARS	2016	2015
1	Liquidity Ratios
a	Current Assets	18236	25025
	Less Current Liabilities	23106	20194
	Working Capital	(4870)	4831
b	Current Ratio	0.79	1.24
2	Profitability Ratios
a	PBT	(4693)	627
	Revenue	30882	23702
	Net Profit Magrin	(15)	2.65
b	Assets	44267	45369
	Average Assets	44818	45369
	Revenue	30882	23702
	Asset Turnover Ratio	68.91	52.24
c	EBIT	(4693)	627
	Average Assets	44818	45369
	ROA	(10)	1.38
d	PAT	(7135)	(789)
	Equity	18493	22580
	Average Equity	20537	12443
	ROE	(35)	(6)
3	Long Term Solvency Ratios
a	Debt	25774	22789
	Equity	18493	22580
	Debt to Equity	139.37	100.93
5	Market Strength Ratios
a	Earnings Per Share	(2.01)	(0.24)

From the above ratios, it is clear that the company is not functioning very well and is under the higher risk of liquidity due to the negative working capital and low current ratio and similar other ratios like decreased earnings per share, negative net profit margin (Company official Website, 2016).

Apart from performing the analytical procedures, two tests are required to be done. One is the test of controls and the other one is the substantive tests.

• Test of controls – In this test, different types of audit evidence are required to be obtained. At first the personnel of the company is enquired about the procedures of the authentication and the approvals and after that the sample sales or purchase invoices are checked whether the procedures are followed. Similarly the roles and responsibilities of the personnel are checked with reference to the practicality of the business.
• Substantive Tests – There are three types – test of transactions, analytical procedures and test of balances. First test check the misstatement that can affect the correctness of the accounts. Second test includes the comparisons and relationships and third test emphasize on checking of the balances of ledger accounts appearing in the financial statements of the company.

Conclusion

To conclude, the nature of the company business is required to be understood and the reasons as to why the company wants to change the auditor and the analysis of the risk shall be taken seriously.

It is recommended to prepare the exhaustive audit plan first before proceeding with the audit as the analysis have shown very areas where there are high chances of having the material misstatements.

References

AASB, (2006), “ASA 300 – Planning and Audit of a Financial Report” available athttps://www.auasb.gov.au/admin/file/content102/c3/ASA_300_28-04-06.pdf accessed on 13/09/2017.

AASB, (2013), “ASA 315 – Identifying and Assessing the Material Misstatements through understanding the entity and its Environment” available at  https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standar            d_ASA_315.pdfaccessed on 13/09/2017.

Company official Website, (2016), available on https://www.nearmap.com.au/about accessed on 13/09/2017

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 13/09/201