This section focuses on the materiality aspect of the auditing process which is used by the auditor for determining whether the financial statements which is prepared by the company is free from material misstatements or not. The company which is considered for this assessment si Treasury Wine Estates ltd which is engaged in wine production and distribution business in Australia (Tweglobal.com. 2018). As per the annual reports of 2017, the management has effectively prepared the financial statements of the company.
The concept of materiality states that the auditor should consider items more closely whose misstatement can affect the whole financial statements and the interpretation for the same as well. The materiality of an item depends on the significance of the item or nature of the item (Eilifsen and Messier Jr 2014). Similarly, items which are complex in nature are also considered to be material in some respect and also items which are shown to be of high value as demonstrated in the financial statements of the company (Christensen, Glover and Wood 2013). Materiality can be of both types which are qualitative and quantitative in nature. The qualitative materiality items which are considered in the financial statements of the company and some examples for the same is net profit estimate, cost of goods sold estimates (Legoria, Melendrez and Reynolds 2013). On the other hand, there are also certain quantitative aspects in financial statements which are measured with the help of planning materiality which is estimated by the auditor at the initial planning stages of the audit.
The concept of planning materiality is related to the materiality estimate which the management of the company utilizes during the initial planning stage for the purpose of estimating the performance materiality of different items which are shown in the financial statements of the business. In order to arrive at the estimate of planning materiality, the auditor consider the highest value which is shown in the financial statement and which according to the auditor will make an efficient base for computing planning materiality of the business. In addition to this, the auditor uses his judgement for estimating a percentage which can be used for calculating an overall accurate estimate of planning materiality of the business (Todea, Joldos and Cioca 2013). In the case of Treasury Wine Estates ltd, the planning materiality of the business is computed considering the total assets of the business as the base as the same represents the highest value which is shown in the annual reports of the company. The percentage which is decided by the auditor considering the nature of the business and records of the past auditor is taken to be 2% The computation of planning materiality of the business is shown in the equations which is presented below:
The planning materiality of the business is computed in the above equation and the figure shows $ 105.586 million is to be considered to be performance materiality. With the help of planning materiality the auditor can compute the performance materiality of different items of the financial statements (Moroney and Trotman 2016).
The notes to accounts part of a financial statement is an important part as it contains explanation and interpretation of treatments of accounting transactions of the business. As per the annual reports which are prepared for by Treasury Wine Estates ltd, the management has prepared the notes to accounts effectively considering all relevant accounting standards and principles. The relevant disclosures and notes to accounts which are shown in the annual reports of the business are discussed below:
Analytica procedures are other names of key financial ratios which are also used in auditing for the purpose of identifying any risks which the business is facing during the year. It is a part of the compliance procedures which is applied by the auditor to judge the financial position, liquidity and efficiency of the business. The computation of key financial ratios of the business are shown in the below tables:
The above table shows computation of key financial ratios of the business for the year 2017. The liquidity ratio of the business is shown in the above table which comprise of current ratio, quick ratio and net working capital. Both quick ratio and current ratio of the business is shown to be appropriate and shows that the liquidity position of the business is ideal considering the estimates (Carraher and Van Auken 2013). The net working capital of the business is also appropriate which clearly shows that the business can easily take care of any current obligations of the business. The auditor needs to check the appropriateness of the current assets and liabilities of the business.
The profitability ratios of the business as computed is shown in the above table comprise of net profit ratio, gross profit ratio, return on assets and return on equity. The gross profit ratio and net profit ratio of the business has improved significantly from previous year’s analysis. The auditor need to assess the balances of revenues and expenses by applying vouching procedures. This will allow the auditor to judge whether the financial statements of the business are showing true and fair view. The return on assets and return on equity of the business are considered to be financial indicators for success of a business and both the estimates as calculated are showing positive results.
The asset management ratio of the business shows the efficiency of the business in terms of generating revenues with effective utilization of the assets of the business. The auditors needs to check whether the balances of assets are showing true view and also the valuation of the assets are appropriately done (Delen, Kuzey and Uyar 2013). The assets of the business show property plants and equipment in the balance sheet of the company. The auditor should opt for physical valuation of the assets of the business in order to ensure the value of assets are showing true view. In this respect the auditor can also take assistance from expert.
The leverage ratio of the business shows the capital structure of the company. Debt ratio, debt equity ratio computation is shown in the above figure. The debt ratio and debt equity ratio of the business have declined as shown in the computation which is shown in the table above. This suggest that the management has made significant changes in the capital structure of the business and reduced slightly the debt capital usage of the business. The changes also suggest that the business is relying more on equity capital of the business (Kim, Kraft and Ryan 2013). The auditor needs to check the balances of equity share capital and also the debt capital in order to ensure that no balance which is shown in the balance sheet of the company for the year. The auditor needs to check relevant documents of the business regarding the debt capital which is shown by the business in the annual report of the company.
The cash flow statement of the company of the business shows the liquidity position of the business and also the classification of activities of the business which generates cash inflows for the business. The cash flow statement shows cash flow activities which are operating activities, investing activities and financing activities of the business. An extract of the cash flow statement of the company is shown below:
The maximum cash is generated from operating activities of the business which is shown to be $ 382.5 million and the same is shown to have reduced from the estimate which is shown in 2016. The maximum cash outflow of the business is shown in cash from financing activities of the business which is due to the excessive amount of loan repayment which is undertaken by the business during the year 2017. The main cash receipts for the business as shown in the cash flow statement is from receipts from customers which is from operations of the business. The maximum cash payments for the year is shown in the operating activities of the business which is cash paid to the suppliers of the business.
The main cash flow from investing activity which is shown in the cash flow statement of the company is purchase of property, plant and equipment which the management has undertaken during the year 2017. The main cash flow from financing activity of the business is payments for borrowings of the business and also the dividend which the business has undertaken during the year.
The going concern principle of a business is important in determining whether the annual reports are prepared for a continuity basis. The principle states that the business is carrying on its operations with no intention to cease from operations in near future. (Goh, Krishnan and Li 2013) The principle is fundamental in accounting and therefore the auditor needs to look out for the same.
As per the annual report which is prepared by the Treasury Wine Estates ltd, the business is showing improvements in profits of the business and the cash position of the business is also appropriate (Krishnan and Wang 2014). In addition to this, the company is meeting the expectations of the shareholders and also not having much of debt capital in the capital mix of the business. Therefore, it can be said that the going concern principle of the business is intact. The auditor needs to check for other indicators which can affect the going concern principle of the business.
As per the opinion of the auditor, the financial statements of the business is showing true and fair view with regards to the information which is shown in the annual reports of the business. The annual reports also follow all relevant accounting standards and provisions of Corporation Act 2001 of Australia. This signifies that the auditor has issued an unqualified audit report to the company signifying every thing is all right with the annual reports of the business.
The key audit matters of the business which is identified in the audit report includes inventories of the business which are wine products which are finished and semi-finished and therefore the audit needs to value the same in order to estimate the inventory valuation process of the business is accurate. The business has a policy of recording net sales when wine products are actually shipped off to customers and this is considered to be a key audit matter considering the circumstances of the business and auditor needs to check the quantity of wine which is shipped off and the value for the same.
References
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Eilifsen, A. and Messier Jr, W.F., 2014. Materiality guidance of the major public accounting firms. Auditing: A Journal of Practice & Theory, 34(2), pp.3-26.
Goh, B.W., Krishnan, J. and Li, D., 2013. Auditor reporting under Section 404: The association between the internal control and going concern audit opinions. Contemporary Accounting Research, 30(3), pp.970-995.
Kim, S., Kraft, P. and Ryan, S.G., 2013. Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), pp.783-823.
Krishnan, G.V. and Wang, C., 2014. The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), pp.139-160.
Legoria, J., Melendrez, K.D. and Reynolds, J.K., 2013. Qualitative audit materiality and earnings management. Review of Accounting Studies, 18(2), pp.414-442.
Moroney, R. and Trotman, K.T., 2016. Differences in Auditors’ Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research, 33(2), pp.551-575.
Todea, N., Joldos, A.M. and Cioca, I.C., 2013. Considerations Regarding Materiality Calculation and Audit Risk in the Context of the Guidelines for Audit Quality. Anale. Seria Stiinte Economice. Timisoara, 19, p.728.
Tweglobal.com. 2018. Annual Reports – Treasury Wine Estates . [online] Available at: https://www.tweglobal.com/investors/annual-reports [Accessed 2 Sep. 2018].
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