Preliminary Analytical Review And Materiality Assessment Of LLC Company Annual Reports

About The Company

To gain success, any business needs a satisfied base of stakeholders. The stakeholders need transparency to generate trust on the company. This transparency is tried to be generated with the publication of financial information. The stakeholders get all the information they desire about the entity through these reports made for financial information.  However, the reports seem sceptical unless they are reviewed and opined by an independent professional. In this report, LLC Company (landlease group)  has been chosen to prepare this assignment. It is difficult to rely on whatever the company has published until the reliability is verified. This verification regarding the fairness is to be done only by a qualified professional. Auditor is the most appropriate professional meant for this work.

Auditing refers to the function wherein the auditor inspects and examines the financial accounts of an entity. After the examination is made and the control environment of the entity is analysed, the auditor frames an opinion. The opinion relates to whether, the accounts are being prepared truly and fairly, in all important and material aspects, in harmonisation with the relevant accounting standards and policies. This opinion acts as a trust binding agent for the users of information. An appraisal in this form by an unbiased third party, adds value to the financial reports. However, auditing is not a single day function, and encompasses several aspects. The current report is a discussion regarding those different aspects. The company chosen for the study purpose is Landlease Group (Louwers, Ramsay, Sinason, Strawser & Thibodeau, 2015).

LLC Company (landlease group) was founded in the year 1958 in Sydney. The vision behind the incorporation of this company has been the creation of a successful corporation that combines the aspects of construction, investment and development. Having operations diversified in Australia, Europe, Asia and the America, LLC Company (landlease group) has proven to be a top international infrastructure and property group. The annual reports issued by the company consist of the directors’ report, remuneration report and the financial statements for the financial year. The analysis of same as required is done in the following segments of report (Psaros & Seamer, 2015).

Audit is done in order to analyse the reliability of the financial statements of an entity. However, the auditor does not have enough time to audit all the transactions that company has entered into. Auditing is there to provide a judicious assurance regarding the financial statements. Auditing too cannot provide a 100 % guarantee regarding the fairness of financial statements. That is when the auditor feels the need of setting a level beyond which the transactions are considered highly important (Knechel & Salterio, 2016).

As per ASA 320, Materiality in Planning and Performing Audit, irrespective of the audit procedure followed, the auditor needs to understand the entity’s environment and the control levels present. This analysis and understanding is not done on an ambiguous goal. A certain level is to be decided after understanding the control levels and risk assumed in the entity. This level is a certain amount beyond which the misstatements found if any, or the omissions observed are considered material. These misstatements or omissions, either individually or in aggregate reach materiality (Hines, et al. 2015). Defining materiality is important, so that auditor design his audit procedure in a manner that can help in gathering sufficient and appropriate audit evidence. This shall help in eliminating any sort of risk observed regarding the fairness of transactions. Hence, materiality represents the certain level of amount which is having the capability to impact the decision of the users of the financial statements (Eilifsen & Messier, 2014).

All About Materiality

Quantifying materiality is a matter of individual and professional verdict of the auditor. There is no fixed ceiling as on what is the quantified level of materiality. For setting a monetary amount, various procedures are to be followed:

• Firstly a base amount is to be decided. After the base amount is decided it is multiplied by a certain percentage. Both the parameters are listed in the table below:

BASE AMOUNT	PERCENTAGE
Revenue	½ to 2 %
Expenses	½ to 2 %
Net income	5 to 10 %
Net asset value	½ to 1 %
Equity	2 %

The base figure is usually the net earnings. But there are situation where the earnings are highly fickle. This volatility breaks the trend pattern. In this kind of scenario, the auditor resorts to either the revenues, or expenses, or equity, or net asset value, whichever is the most stable.

• After a preliminary figure is reached on using the above table, the adjustments are made. These are the qualitative items that include the errors involving fraud, penalty risk for contractual violations, the economic conditions of the industry, the past trends of Landlease (Cohen, & Simnett, 2014).
• This adjusted figure is known as the materiality threshold (Eilifsen, Hamiton & Messier, 2017).

For the company LLC Company (landlease group) the following results are gathered:

	2015	2016	2017	2018
Net Income	618,600,000	698,200,000	758,600,000	792,800,000
Revenue	13,226,000,000	15,029,000,000	16,587,700,000	16,460,100,000
Expenses	15,126,100,000	16,832,100,000	18,470,700,000	18,942,700,000

From the analysis of the above table, it is clear that the LLC Company (landlease group)‘s net profits are following a steady growth. So the net profit being the most favourable option to compute the materiality level, it is chosen (Edgley Jones, & Atkins, 2015). The net profit figure for financial year ending in June 2018 is selected as the base amount. The percentage figure selected is 5 %.

So, preliminary level of materiality = $ 792,800,000 * .05

               = $ 39,640,000

Making the adjustments as mentioned above, the materiality figure taken is $ 40,000,000.

As per the analysis of the drafts disclosed after the financial statements of o Landlease Group, certain matters that may cast significance on the audit are mentioned as follows:

LLC Company (landlease group) is following the practice of capitalising the development costs incurred in the projects as inventory. The capitalisation is done over the lifetime. The method used for carrying this inventory is lower of cost or net realisable value. This involves forecasting the future sales, sales price, and the related costs. However, for the long term projects, there lies a huge uncertainty and complexity in forecasting (Fisher & Krumwiede, 2015).

In this situation, the auditor of LLC Company (landlease group) must seek the help of an expert as per ASA 620, using the work of an Auditor’s Expert. The expert can help in analysing the forecasts for a few text sample projects selected. This way reliability can be established for the valuation done by entity (Kanatov, Atymtayeva & Yagaliyeva, 2014).

Audit procedure

In understanding the nature of LLC Company (landlease group)  and its working, the auditor at times need to perform analytical audit  procedures. These are those audit procedures that help the auditor to gather sufficient and appropriate audit evidence. It is done by setting and establishing a relationship between the financials available for the entity. The same relationship is tried to be used for the non-financial data.

As per ASA 300, planning an Audit of Financial Report, this analysis is useful at the planning stage itself. Key ratios related to the balance sheet and profit and loss statement are calculated to perform a trend analysis (Brown-Liburd, Issa & Lombardi, 2015). The following table presents the key ratios that are computed from the financials of Landlease Group:

KEY RATIOS	2014	2015	2016	2017	2018
CURRENT RATIO	.68	0.67	0.66	0.58	0.96
Quick ratio	.38	.42	045	040	.69
NET MARGIN (%)	4.69	4.68	4.65	4.57	4.82
RETURN ON ASSETS (%)	3.59	3.56	3.72	3.85	4.19
RETURN ON EQUITY (%)	12.50	12.34	12.96	12.99	12.71
RETURN ON INVESTED CAPITAL (%)	9.62	9.54	10.21	10.41	9.95
RECEIVABLES TURNOVER	11.55	11.01	12.98	13.67	11.48
Payable turnover	15.5	16.5	17.5	16.7	18.5
FIXED ASSETS TURNOVER	37.89	37.30	38.48	38.66	36.97
Inventory turnover ratio	17.7	19.9	22.5	18.5	22.5
Debt to capital ratio	15.69	15.5	17.5	19.5	22
Interest coverage ratio	17.7	18.5	19.5	16.5	20.5
Dividend pay-out ratio	7.7 %	8.5%	9.5 %	11.5 %	12 %

As per the above table the following results are analysed:

Current ratio : improved

Net margin : improved

Review Of Draft Notes And Disclosures

Return on assets : improved

Return on equity : declined

Return on invested capital : declined

Receivables turnover : declined

Fixed assets turnover : declined

Debt to capital ratio : Improved

Dividend pay-out ratio : Improved

The trend of the data of LLC Company (landlease group) set by these ratios generates certain doubts. These are expressed in terms of the risk areas. The certain management assertions that are considered in risk are also determined.

The audit procedure in LLC Company (landlease group) is required to be followed to remove the uncertainty and reach a conclusion is mentioned in the table below (Edgley, Jones, & Atkins, 2015).

KEY RISK AREA	AUDIT ASSERTION	AUDIT PROCEDURE
FIXED ASSETS	Valuation	The fixed asset turnover ratio of LLC Company (landlease group) has declined whereas the return on assets has improved. This may be due to the improper valuation of the fixed assets because the overall earnings and revenues both have shown a rise (Christensen,., Glover, & Wood, 2012).  This may be reduced by the auditor by physically verifying the condition of the assets and taking the help of a valuation professional to correctly value them.
TRADE RECEIVABLES	Rights and Obligations	There is a risk that the receivables shown in the financial report are not even the receivables. They may be a chance that any settled customer is shown as a non-settled debtor. This calls for cash embezzlement. To resolve this and reduce risk, the auditor should go for external confirmation. He must call for balance confirmation from the debtors directly.
SALES OR TURNOVER	Occurrence	There is a doubt regarding the figure of revenue present in the books of in Landlease Group. The revenue has risen but all the turnover ratios have shown a decline. This risk has to be reduced by cross checking the inventory register with the debtor register and cash book. The credit and cash sales need to match with the inventory register.
CURRENT LIABILITIES	COMPLETENESS	The current ratio of the company has improved. This casts a doubt on whether the liabilities are actually less than the current assets in comparison with the previous year. Or whether the complete current liabilities are not recorded. The auditor needs to check the nature of all the current liabilities and check the logs of payment made to settle them. The process of external confirmation can also be relied on.

The cash flow statement of LLC Company (landlease group) records all the transactions that relate to the cash activities. From the cash flow statement the activity that has generated the highest cash inflows is recorded to be that of investing activities. The amount generated is $ 221.8 million. The activity that has used the major cash balance is financing activity having a total of $ 397.8 million.

The activities that primarily generated cash are:

• Sales revenue
• Redemption of investments
• Repayments received from associates/joint ventures
• Disposal of consolidated entities
• Proceeds from borrowings

The activities that primarily used cash are:

• Cash payments for business operations
• Payment of interest
• Acquisition of investments and property
• Repayment of borrowing
• Dividend payment

LLC Cash flow

2018 2017 2016 Customer Receipts ($M) 16,354 16,255 16,028 Net Operating Cash flow ($M) 72.8 146 853 Net Investing Cash flow ($M) 222 70 1 Net Financing Cash flow ($M) -398 8 -620

The main non-cash financial and investing activity comprises of the conversion of convertible securities without using cash, acquiring assets without cash, issuing debt or securities to settle claim, and etc. but as per the analysis of the financial statements of LLC Company (landlease group), no such activity is ascertained (Cohen,  Krishnamoorthy,  & Wright, (2017).

The only activity that can cast a doubt on the going concern of the LLC Company (landlease group)  is the disposal of the consolidated entities by the company. However, the management has asserted no doubts regarding the company’s position to continue business. To remove the doubt that the auditor might have regarding the ability of the company to continue due to this transaction, he must try to analyse the same. The reasons for the disposal must be asked for and the sale agreement should be checked.

Audit procedure to manage the risk

The main audit procedure which will be followed to address the audit risk would be implementing AUDIT ASSERTION test.

The independent auditors have issued and clean and unmodified report for LLC Company (landlease group). There are no additional sections or paragraphs highlighting any issues. Only as per the requirements of standards, the auditor have separately mentioned certain key audit matters relation to inventories, construction and development revenue and equity accounted investments.

Additional section

Audit matters relation to inventories, construction and development revenue and equity accounted investments. However, there is no separate opinion on them.

Nature of the issue

These are the capital nature issues. They are the most significant matters, which auditor thinks that the shareholders should be aware of (Czerney, Schmidt & Thompson, 2014).

Audit opinion

Company has given the opinion that company has complied with the all the applicable rules and regulations. It has given un-qualified audit opinion that company has no issues with the corporate governance.  

References

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Cohen, J.R. & Simnett, R., (2014). CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.

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Hines, C.S., Masli, A., Mauldin, E.G.& Peters, G.F., (2015). Board risk committees and audit pricing. Auditing: A Journal of Practice & Theory, 34(4), pp.59-84.

Kanatov, M., Atymtayeva, L., & Yagaliyeva, B. (2014, December). Expert systems for information security management and audit. Implementation phase issues. In Soft Computing and Intelligent Systems (SCIS), 2014 Joint 7th International Conference on and Advanced Intelligent Systems (ISIS), 15th International Symposium on (pp. 896-900). IEEE.

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