Background of Nanosonics Limited
As the title of the report suggest, the whole report will be revolved around the audit. Without the audit of the financial statements of the company no users, including the stakeholders of the company and shareholders of the company will not rely upon the financial working and the condition of the organisation. Therefore, audit is defined as the backbone and supporting hand to the functioning of the organization. Audit includes the independent function which involves the checking and verification of the books of accounts. Before starting of an audit, the auditors shall develop the audit plan. The audit plan includes the activities that are required to be performed and majorly includes the heads of accounts which are required to be checked on an independent basis. Heads of accounts are classified on the basis of the materiality of the items present therein and in case any further decision is required then the same shall be adopted and implemented frequently.
For the purpose of the report the company – Nanosonics have been selected. At first the knowledge of the company is required to be done as to the name of company, its origin, date of incorporation, purpose of the company. Thereafter, from the annual report of this company, five significant accounts have been identified and obtained in addition to the item, included in five able, the most significant accounts which are the high risk level. Then the materiality level has been judged for each of the items so identified level has been selected for the month of March 2018. After that what can go wrong in each of the item has been discussed in detail with respects to the process of the audit risk assessment. Then the report will end after the conclusion and interpretation.
The company selected for the purpose of the report is the Nanosonics Limited. It has been head quartered in the area of Sydney, Australia. The company is the listed company which is listed in the recognized stock exchange of Australia and therefore all the provisions of the listing rules will be applicable. It has been established in the year of two thousand and one and listed in the year of two thousand and seven.
The company is engaged in business of providing the services in relation to prevention of the infection present in the hospitals and is regarded as the innovator. The company has developed the major product Trophon, which is regarded as the solution which is universally applicable for reducing the way where the cross introduction of the patients will not happen and also helps in preventing the Healthcare Acquired Infections.
Five Significant Accounts and Analysis
In the year of two thousand and nine, the company has introduced the new technology namely Trophon. It is the unique and the updated technology for the surface of ultrasound probes and for the intra cavity. Since the company has been growing with high pace, in the year of two thousand and fifteen the company name has been mentioned in the Australian Stock Exchange list of top three hundred companies and mentioned as ASX 300 index. As of current date, the company has the offices in North America, Canada, United Kingdom and Europe with the employment of more than one and hundred sixty five.
The company prepares the annual report of the company and publishes on it website on yearly basis. Along with the annual report the company also declares the half yearly and quarterly results. The financial statement of the company has been ended up with the 30th of June 2017 (Company Official Website, 2017). Therefore, judging the financial analysis.
In the audit plan, the nature of the business of the company along with the history so as to enable the team members to have the quick understanding of the business of the client which will make them to audit the document at very ease (Ullah , 2014). :
In this head, the annual report of the company will be discussed on detail as to how the identified items of the financial statement are more prone to the risks and that risk pertains to the material misstatements. Material misstatements are referred to as the situation whereby its presence nay leads to the ineffective and inefficient making of decision. Therefore, these material misstatements shall be taken as serious and with proper care otherwise the financial statements will not serve the purpose of the users of the financial statements rather will remain only the formality. The significant account has been analysed through the analytical procedures. Analytical procedures is first step towards the audit planning as it will help the auditors to have an understanding of the business of the client and the changes that the company has made from the previous year. This has further helped the company to have the areas listed where there are the chances of having potential risks. The significant accounts are as follows:
- Sale of Goods and Services – In the consolidated statement of profit and loss and other comprehensive income, the sale of goods and services have been considerable increased from 42796 thousand dollars from the financial year ending 30thof June 2016 to 67507 thousand dollars in the financial year ending 30th of June 2017. There has been 57.77 percentage increases in the sale figure from 2016 to 2017. The increase is considered as the drastic increase. As pee the note number 2.1 of the annual report of the company, the revenue of the company has been increased because of the increase in the business located at North America. In this the revenue has been increased from 39029 thousand dollars from the financial year ending 30th of June 2016 to 62305 thousand dollars in the financial year ending 30th of June 2017. No other explanation has been given by the company nor has any note been disclosed in the annual report of the company due to which from the point of view of the auditor the same shall be treated as the one having the risk of material misstatement. It is because of the sure assumption that any form of manipulation might have been to generate the higher revenue either due to some debt covenant or because of any other means (ACCA, 2016).
This shall be considered as one of the high risky accounts as only because of this inflation only many businesses have been collapsed during the year.
- Derivative Financial Instruments – In the consolidated statement of financial position and other comprehensive income, the amount of the derivative financial instruments have been considerable increased from 35 thousand dollars from the financial year ending 30thof June 2016 to 338 thousand dollars in the financial year ending 30th of June 2017. There has been a manifold percentage increase in the sale figure from 2016 to 2017.
Materiality Level for Each Account
It has been mentioned in the annual report that the company uses the derivative financial instruments in order to hedge the currency exposure. Derivatives are defined as the asset which defines the value of the asset on its own. It includes forwards, options, futures, forward contracts, etc. The foreign exposure has hedged to the great extent. The forward exchange of contracts shall be of lesser amount and with the change and shall not be of higher amount. The hedge shall be diversified. As keeping all the money at one place will only be at risk always. It is because if the place where all the currency have been kept and in case of any uncertain event the company will be in higher loss.
Therefore, in this way the company’s exposure to foreign currency is at risk.
- Trade and Other receivables- The next account which can have the material misstatements is the trade receivables. It is because of the fact that the trade receivable in proportion to the increase in sale of goods or services is very less. It is because of the fact that most of sales that are made have been received in cash or cash equivalents. The major risk is that the company is not able to collect the amount from customers due to which there always be the liquidity risk and there will be the risk of having the debtors as time barred and after that the company will have the right to not to make payment and will therefore write off the trade and other receivables amount. Secondly the company is not able to collect cash from customers which are pending for so long. New sales have been made and cash has been received from them. It means that the company’s cash collection policy is very liberal and will in this way lead to big fraud (Anastasia, 2015).
- Impairment- As per the note to the financial statements of the company, the company has not charged any impairment during the year. It means that all the assets of the company meet the criteria of impairment and there has been no need of charging the impairment. It is because of the fact that recoverable amount will be less than the cost of property plant and equipment. Impairment is calculated after deducting the carrying amount and the recoverable amount. In case the recoverable amount is lower than the carrying amount then the carrying amount shall be reduced till it achieves the minimum level of recoverable amount. No mention has been given for the calculation of the recoverable amount and impairment thereon.
For the calculation of the impairment of assets the cash generating units are identified, the present value of cash inflows will be defined and then the carrying amount will referred and compared. In case any impairment is identified then the necessary adjustment shall be made.
Thus, the impairment is the very important factor and it delivers the exact value of each item of the property plant and equipment. The risk will be present in terms of the value of the property plant and equipment. .
- Operating Income before Tax – Last item which has been considered for the study from the annual report of the company for the risky head is the operating income before income tax. In the given case, the company has achieved the operating income before tax as dollar 13852 thousands in the year ending 2017 whereas in the year ending 2016 the company achieved the amount of dollar 136 thousand. With the corresponding increase in the sales income, the profit income has been increased due to which it depicts that the expenses have not been increased considerably. It exhibits that there has been some risk associated with the figure of the profit before tax and the same is required to be looked after.
As analytical procedures helps in making the comparison intercompany as well as Intra Company through the figures stated in the financial statements. Through these figures the materiality can be judged so as to plant the audit.
The term materiality is concerned with the importance of the item present in the financial statement of the company and its effect on its presentation of the financial statements. If the item is material then it will be disclosed separately in the financial statements so that the users of the financial statements of the company can have the better idea as to how the same has been dealt with it. While planning the audit, the materiality concept shall be considered in full and no deviation shall be there as without following the materiality concept the plan could not be made and cannot be streamlined. Thus, the materiality levels shall be defined and presented in the concise manner so as to enable the users to have the idea as to how to perform the further functions of audit. The level of materiality is set by the Audit manager of the firm and then it shall be informed to each and every member of the audit firm. For each of the following heads of the financial statements of the company, the following material level has been created and mentioned below:
- Revenue from Sale of Goods or Services – the materiality level shall be kept as high because of the reason that the revenue has increased manifold and accordingly the net profit has been increased and secondly with the increase in the revenue of goods and services the chances of manipulation is high and hence it has been treated as high material items (PCAOB, 2017).
- Derivative financial instruments – In the changing market conditions specially the currency market, it is very dangerous to have the currency exposure at such high levels and secondly if there is the reasonable doubt of believing that it might be at risk then the materiality level shall be kept at high and not low or medium.
- Trade receivable and others – The movement of the debtors and the receivables shows that there has been irregular flow of transaction. The company is receiving the cash from current sales and the debtors which are pending from years is not being properly managed due to which the level of debtors are high in comparison with the earlier years. Therefore, in this case the materiality level shall be kept as medium as there will not be the major effect in the financial statements.
- Impairment – The Company has not done the impairment testing and calculation. The impairment shall be done on a yearly basis. There will always be something in market known as the impairment indicators, which help the company to judge whether the particular asset shall be impaired or not. Whether there are indicators or not, the company shall make the calculations as the impairment will reduce the cost of the assets. Thus, impairment shall be kept at high level because of the fact that it has the impact of reducing the value of the assets.
- Operating Income before tax – The materiality level shall be high. It is because; the operating income has been increased manifold and has led the company into the profit making company by 13716 dollars thousand from the sales increase of 17989 dollars thousand. Thus, in this manner the operating income before tax is material for the purpose of the audit planning.
Following things can go wrong out of the five accounts selected for checking of the most risky accounts.
- The balances of debtors may be found as accurate. It is because of the fact that the debtors which is showing as outstanding as on 30-06-2017 may contain the debtors from the current sales and the balance pending from earlier debtors might have been received in the current year as the cash collection from customers. If this is the case then the materiality level be low and it will not have any serious impact on the auditing treatment of the company.
- The sales figure as shown by the financial statements of the company may be found correct. It is because of the factor of increase in demand. If this is the case then there will be less chances of manipulation and therefore the materiality level which earlier was recognised as the high will now get converted into low level.
- The third instance which can go wrong is the impairment. If at the end of the reporting period it is observed that the property plant and equipment is not liable to be impaired due to the fact that no indicator is present for the assets. As and when the impairment clause is corrected the high level of materiality will get transferred to the low materiality level.
- The fourth instance which can wrong is of the derivatives of financial instruments. As there will always be the risk of having the foreign currency and for hedging that risk everyone enters into the derivatives through which their foreign currency exposure gets safe and there will not be any loss depending upon the market conditions. As per the given market scenario, the foreign currency can have the material effect but in case the market goes in favour of the company then there will be the chances that it may be removed from the high materiality items to the low material items.
In this manner, if something go wrong, these will be the results and appropriate changes in the materiality level of the audit plan.
Conclusion
The annual report of the company contains the financial statements of the company along with the director’s report and the auditor’s report. The financial statement consists of the balance sheet, statement of profit and loss and cash flow statement. The company – Nasonics Limited though is the listed company in Australia but still there are accounts which are prone to the material misstatements and these accounts are required to be checked at time of the audit as to whether these areas and material misstatements are present or not and accordingly the plan has been developed. In order to conclude the report, it has been exhaustive one and have detailed the similar observations.
Therefore, it is recommended to have the audit done in accordance with the Auditing and Assurance standard.
References
ACCA, (2016), “Analytical Procedures”, available on https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html accessed on 28-04-2018.
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 28-04-2018
Company Official Website, (2017), “Annual Report”, available on https://www.nanosonics.com.au/about/nanosonics-story/ accessed on 30/04/2018
PCAOB, (2017), “Analytical Procedures” available at https://pcaobus.org/Standards/Archived/Pages/AU329A.aspx accessed on 28-04-2018
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 28-04-2018
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