The materiality concept means that the firm must disclose any item that is found to have noteworthy influence in the financial statements. The nature of the item must be significant enough to impact financial statements. Items that are important enough to matter are material items. For example if a customer owes $ 2 million dollars to a company which has a net asset worth $ 2 million the nature of the item is material in nature . not reporting it would have a significant impact on the financial statements. The materialtity concept is provided by the auditor while he performs and plans the auditing procedures. It is also applicable in assessing the consequence of misstatements that have been identified on the audit and uncorrected misstatements, if any as well on the financial statements(Edgley, Jones & Atkins, 2015). The concept of planning the level of materiality needs to be set before the financial statements are prepared. The materiality needs to be reviewed. The audit can move forward if and only if the information makes an assessment that there is an opportunity for the auditor to incorporate a lower level of materiality at the beginning of the audit. The materiality, in practice is reassessed at least one time.. That can happen during the final audit and before the issue of the audit report. This is known as final materiality(Kugler,2016). The auditor can set performance materiality as well. The performance materiality includes amounts that is less than the whole financial statements materiality. (Ngu & Amran, 2018).
As per the annual report of the company , the cash flows, consolidated financial position may be materially affected by fluctuations in the Australian dollar and the local currencies with which the business deals . This is a performance materiality. The foreign exchange rates is very fluctuating in nature and hence if the value of the dollar depreciates in respect to any local currency, the earnings of the company will take a significant hit(Engel, 2014).. Such fluctuations are not planned and can happen anytime. The quantitative estimate as per the last year is A$ 116.8 million.
After reviewing the notes and disclosures that is found in the financial statements the following issues have been observed:
The ones that will have special significance include:
The audit procedures that need to be performed include :
Key ratios and analysis
|
Key ratios |
2014 |
2015 |
2016 |
2017 |
|
Return on equity(%) Return on assets(%) Current ratio Financial leverage Receivables turnover |
-4.73 -3.19 1.63 1.44 20.96 |
5.57 3.97 1.99 1.36 19.04 |
-10.98 -7.94 2.05 1.40 14.30 |
10.72 7.66 2.07 1.39 15.00 |
A key analysis of the key ratios can be as follows:
Return on equity-Return on equity is the amount of net income that is earned by the company in relation to the equity capital of the firm .thus is a measure that suggests how effective the company is in terms of turning the cash that is invested into the business into a greater gain and acquiring sound financial profits of the company(Utami,2017). The greater the return on equity, the more efficient the company is . An analysis of the return on equity for four years suggests that the company has made improvement in earning income in relation to the sum of money invested from 2014 to 2015. It again made a negative amount of income compared to the investment it made in 2016 and then finally made a positive improvement in the following year. This suggests that the company has achieved an inconsistent return on equity, in the four years. The auditor needs to assess whether the amount of return that is shown in the financial statements is accurate or not. He also needs to assess whether the capital invested by the firm is properly valued or not . He needs to verify the accuracy of these two amounts(Nashihin & Harahap, 2014)..
Return on assets- this suggests the income earned by the firm in relation to the total investments made by the firm . It is a measure suggesting how effective the company is utilising its assets in earning income. The greater the return on assets is, the more effective the company is (Heikal, Khaddafi & Ummah, 2014). The above analysis suggests an inconsistent flow of return on equity over the four years. The company achieved an improvement in 2015 over 2014, while the ratio significantly came down in 2026. It rose again in 2017 , which suggests a positive influence on the financial statements of a company in that year. The auditor must verify the existence of the assets. He must verify whether the individual assets are correctly valued or not( Zamboni, & Litschig, 2018).
Current ratio- Current ratio implies the ratio of current assets to current liabilities. A higher current ratio suggests that the company has more current assets in relation to its current liabilities ,which suggests that the company has a sound liquidity position(Barman & Sengupta, 2017). In the analysis , the company has achieved an improvement year after year. The liquidity position of the company is achieving year after year. This suggests that the company is steadily improving its abilities to pay back its liabilities year after year. The auditor must verify the existence of the current assets and liabilities and see whether the corporation is actually in a sound position to pay off its liabilities in due time. He must assess the liquidity risk of the company and sees whether the current assets can be sold within a span of one year in order to pay off its current liabilities.
Financial leverage- Financial leverage is the amount of debts that the company uses to buy more assets.it is employed to avoid using too much equity and buy assets with debt capital( Ichsani & Suhardi, 2015) The financial leverage of the company over the four years has found to have exceeded 1. It suggests that the company is highly dependent on borrowings to fund off its assets. The auditor needs to assess the liquidity risk of the company. He also needs to assess the level of borrowings and the amount of debt financing employed by the company( Zamboni, & Litschig, 2018).
Receivables turnover – The receivables turnover ratio measures how efficiently a firm utilises its assets and makes timely collection of money from debtors. On analysing the four years , the turnover shows a decreasing trend in the first two years and it shows a rise in 2016 and 2017. This suggests that the company has made a significant improvement in collecting money from the debtors. The auditor needs to verify the balances of each debtor individually and follow up individually each debtor personally in order to know when they paid back the money due to the company(Zamboni, & Litschig, 2018).
Cash Flow Statement
The cash flow statement displays where the entity’s cash is being generated and where it is applied. It is useful for analysing the liquidity and long term solvency of the company.In this company , the most significant inflow has been generated from operating activities. The investing activities and financial activities have yielded a cash outflow(Ball et al .,2016) .
Answer 1
As per the cash flow statement of the company the cash flow from operating activities brought about the maximum amount of cash inflow to the company(Lewellen & Lewellen, 2016). The amount brought in was $266.4 million.
Answer 2
The financing activities of the company bought the maximum amount of cash outflow to the company .The amount was $ 67.5 million(AnnualReports.com, 2018).
Answer 3
The primary cash receipts include that of the receipts from customers to the extent of $5274.6 million, the proceeds that the company received from sale of the assets that are held for use to the extent of $48 million. The primary cash payments include that of the payments that the company made to suppliers and employees to the extent of $ 5000 million, the payments that the company made for property, plant and equipment to the extent of $ 126.5 million. It also includes the repayment of borrowings that the company made to the extent of $300.5 million and the dividends paid to its shareholders to the extent of $ 63.5 million.
Answer 4
The main cash financial activities include the borrowings made by the company to the extent of $ 303 million and the repayment of borrowings to the extent of $ 300.5 million. The main cash investing activities include the acquisition of property, plant and equipment to the extent of $ 126.5 million (AnnualReports.com, 2018).
The going concern risk refers to the risk of liquidation for the conceivable future, usually regarded in the next one year. The auditor concluded that the company faces no such risk unless the management decides to cease operations themselves. There is no such material uncertainty that exists that can impact the going concern risk of the company. However future conditions or events may cause the Group to stop functioning as a going concern (Krishnan & Wang, 2014).
The audit procedures that can be implemented in this regard is making sure the net profit of the firm is correct or not, making sure that the assets and liabilities exist and have been correctly valued .The aim of audit procedure should be that the firm should not hide any evidence of material uncertainty that can impact its status as a going concern.
According to the auditor, the financial statements of the corporation give a true and fair view of the financial position of the company. It also need to comply with the Australian Accounting Standards and Corporations Regulations 2001. The auditor has made a qualified opinion on the basis of having obtained adequate appropriate audit evidence of the financial statements(Tsipouridou & Spathis, 2014).
As per the report of the auditor the carrying value and existence of inventories indicated audit issue. Inventories are measured at lower of cost or net realisable value .Cost on the other hand is determined by either the first in or first out method or weighted average method. However while auditing, there was found to have no proper method of valuation and evaluating the appropriateness of the allocation of costs while determining the weighted average costs of inventories.
References:
Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2016). Accruals, cash flows, and operating profitability in the cross section of stock returns. Journal of Financial Economics, 121(1), 28-45.
Barman, A. N., & Sengupta, P. P. (2017). DETERMINANTS OF PROFITABILITY IN INDIAN TELECOM INDUSTRY USING FINANCIAL RATIO ANALYSIS. International Journal of Research in Management & Social Science, 25.
Edgley, C., Jones, M. J., & Atkins, J. (2015). The adoption of the materiality concept in social and environmental reporting assurance: A field study approach. The British Accounting Review, 47(1), 1-18.
Engel, C. (2014). Exchange rates and interest parity. In Handbook of international economics (Vol. 4, pp. 453-522). Elsevier.
Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.
Hillary, R. (2017). Introduction. In ISO 14001 (pp. 11-16). Routledge.
Ichsani, S., & Suhardi, A. R. (2015). The effect of return on equity (ROE) and return on investment (ROI) on trading volume. Procedia-Social and Behavioral Sciences, 211, 896-902.
Krishnan, G. V., & Wang, C. (2014). The relation between managerial ability and audit fees and going concern opinions. Auditing: A Journal of Practice & Theory, 34(3), 139-160.
Kugler, M. B. (2016). The Materiality of Sponsorship Confusion. UCDL Rev., 50, 1911.
Lewellen, J., & Lewellen, K. (2016). Investment and cash flow: New evidence. Journal of Financial and Quantitative Analysis, 51(4), 1135-1164.
Nashihin, M., & Harahap, L. (2014). The Analyis of the Efficiency of BPR-S: Production Function Approach Vs Financial Ratios Approach. Procedia-Social and Behavioral Sciences, 115, 188-197.
Ngu, S. B., & Amran, A. (2018). Board Diversity and Materiality Disclosure in Sustainability Reporting: A Proposed Conceptual Framework. Management, 5(4), 1-14.
Sims Metal Management Ltd – AnnualReports.com. (2018). Retrieved from https://www.annualreports.com/Company/Sims-Metal-Management-Ltd [Accessed 1 Sep. 2018].
Tsipouridou, M., & Spathis, C. (2014). Audit opinion and earnings management: Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Elsevier.
Utami, W. B. (2017). Analysis of Current Ratio Changes Effect, Asset Ratio Debt, Total Asset Turnover, Return On Asset, And Price Earning Ratio In Predictinggrowth Income By Considering Corporate Size In The Company Joined In LQ45 Index Year 2013-2016. International Journal of Economics, Business and Accounting Research (IJEBAR), 1(01).
Zamboni, Y., & Litschig, S. (2018). Audit risk and rent extraction: Evidence from a randomized evaluation in Brazil. Journal of Development Economics, 134, 133-149.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download