Auditing Procedures And Risk Assessment For Gold Mountain Ltd

Audit Risk Model

The following report is prepared with an aim to obtain an understanding of the auditing procedures in context to an organization listed on Australian Security Exchange. The report contains the required auditing steps and audit program for Gold Mountain Ltd that is principally engaged in extracting and developing a range of highly valuable mineralized zones across the Australia. In order to perform assessment of audit risk for the company, the key business risks have been examined. The report also discusses the analytical procedures for determining the financial health of Gold Mountain for the last three consecutive years, by computing ratios and metrics. In addition to this, the audit risk model is also applied to the company for identifying the materiality, and degree of detection and inherent risks. A comprehensive series of audit steps have also been adopted, along with the preparation of a sampling plan for the effective testing of material misstatement.

A risk is an integral element of any business whether it is operating at a small or large level. Business risks refer to those unpredictable events which can cause a substantial loss to a company, including the failure of business (Gold Mountain Limited, 2017). In context of Gold Mountain Ltd, there exist general as well as some specific risks associated with its operations, which are largely not in the control of the Company and its Directors. The Business risks in Gold Mountain are mentioned below, which have the potential to affect the future the market value of the Company’s shares, and its entire financial state.

The operations of Gold Mountain are affected by numerous risks. These include inability to locate mineral deposits, letdown of predicted grades in mining, operational and procedural complications, sovereign risks, problems in operating plant and tools, automatic failure or plant collapse, unexpected metallurgical risks increasing extraction costs, industrial accidents and clashes, and sudden rise in the costs of spare parts, consumables, plant and machinery.

The activities of the Gold Mountain are bound by the Australian laws and guidelines of Papua New Guinea concerning the environment. Since the firm deal in exploration and mining projects, the Company’s business is expected to have an impact on the ecology through pollution, and soil degradation (Gold Mountain Limited, 2016). Thus, the company is bound to conduct its activities by adhering to the established environmental standards.

The economic risks of Gold Mountain include General economic surroundings, fluctuations in the inflation and interest rates, changes in currency exchange rates affecting the firm’s exploration and production functions, along with its ability to subsidize these activities.

Audit Work Steps

Irrespective of the Gold Mountain’s operating performance, the share market also affects the value of its listed securities. These risks include general economic position, changes in investor attitude towards a particular market sector, the demand and supply of capital, establishment of tax reform or new law, and terrorism or other warfare.

In order to identify the significant risks in the misstatement of financial accounts of the company and issue fair opinion, the auditor should consider and analyze all the related business risks of the company, as required by ISA 315.

Audit risk model refers to a concept that consists of inherent risk, control risk, and detection risk, assisting the auditor in applying the suitable auditing procedures for transactions revealed in the client’s financial statements. In context of Gold Mountain, this model is applied with respect to three elements namely IR, CR, DR (Lenz, and Hahn, 2015). Inherent risk indicates the risk occurred due to complicated transaction when there is no internal controls in the company, while control risk signifies the risk of unrecognizing and non-prevention of major error or fraud timely by the existing internal control system (Gold Mountain Limited, 2017). On the other hand, detection risk is the risk that the auditor would fail to point out a misstatement existing in any transaction or account balance.

For auditing the financial statements of Golden Mountain, the auditor would apply the audit risk model in the following steps:

1. Establishing a planned audit risk level for every type of transaction such as bills payables, investments, cash, etc.
2. Assessing the degree of CR and IR in the view of business risks, and other risks imposing due to any misstatement (Gold Mountain Limited, 2016).
3. Resolving the audit risk equation for the required level of audit risk (AR).
4. The result could either be qualitative or quantitative, and the auditor has the right to give qualified opinion in case he finds greater risk level.

The formula for Audit Risk Model is:

Outcome: The following table shows the results of AR model for Gold Mountain Ltd, along with the needed audit evidences, on the basis of the Annual Report 217:

Implication: The implication from above is that inherent risk is not required to be set at a maximum automatically in order to reduce the likelihood that risk aspects will be reviewed independently. As an alternative, the auditor needs to be competent enough to make collective measurements of the risks to effectively decide the degree of substantive test (Rashidfarokhi et al., 2018).

In order to conduct audit program in Gold Mountain Ltd, the auditor would require to discover the business risks first in order to analyze the company’s response to those risks, and gather evidence of their implementation (Shariman et al., 2017). Then after, the auditor would review the risk of major misstatement for the purpose of determining the required audit procedures. The assessment of the errors and frauds in financial statements would also be done by the auditor. For recognizing the type of misstatement, the auditor would find out:

The variation between the amount, presentation or classification of the constituents of financial statement accounts, and Australian Auditing principles:

• The exclusion of any item in financial statement, or account,
• A disclosure note in financial statement that is not shown in accord to Australian Auditing principles.

After the above steps, the auditor would collect the required and reliable audit evidences in the Gold Mountain in order to arrive at accurate conclusions. Since one method to gather evidences does not fit in all situations, therefore the auditor would require exercising professional care while selecting the method or combination of methods according to the type of risk and audit tasks. For this purpose, the auditor would carry out:

• Analytical procedures: to see the difference between the amounts recorded in company’s accounts and the ‘should be’ amounts.
• Confirmations: to ask for verifying management assertions.
• Scrutinize the records: to ask the company for relevant papers and compile with management assertions
• Observation: monitoring the activities of company’s staff and managers to gain an understanding of their jobs and related processes (Hossain eta l., 2017).
• Recalculation: to confirm the accuracy of mathematical calculations in company’s financial records.
• Re-performance: to conduct Companies accounting and internal control system ensuring that the applicable rules are complied with effectively.
• Scanning: to monitor the transactions recorded on the general ledger or reports.
• Client tour: examining to ensure the existence of all assets and liabilities in the balance sheet.

In addition to above, the auditor would also require to carry out additional substantive procedure for determining the allocation and valuation of assertions and their existence, using following testing:

• Positive confirmation from third party through more samples and receivables.
• Investigation of material account balances created at the closing of year to check the credibility.
• Assessment of substantive receipts, and delivery records to verify the authenticity of amounts in the books.
• Vouching of debtors’ balances at the year-end through the source documents. The auditor then requires to examine the omission of relevant information in the financial books of the company that should be disclosed according to the applicable standards.

Responding to the misstatements would be the another audit step in Gold Mountain, which would be based on the identification of risk factors affecting the business operations and the risk of undervaluation/ overvaluation. The auditor then establishes the extent of detection risk and plans audit procedures to effectively respond to the identified risk factors.

The final step in the audit program would be the documentation of auditor’s findings in the audit report.  An audit report contains a written opinion of the auditor about the company’s financial statements, in a standard format, as per the guidelines of International Auditing Standards. The following report opinion may be issued by the auditor:

• A clean opinion, if the financial statements show an honest results of the firm’s financial state.
• A qualified opinion, if there exist any scope restrictions that were forced upon the auditor’s job (Johnstone et al., 2013).
• An adverse opinion, if there exist a lot of material misstatements in the financial accounts.
• A disclaimer of opinion, which can be produced due to some situations. For instance, the auditor might be pressurized by the management, or there was a any issue with the company.

International Accounting Standard 330 states that Analytical procedures act as evidences during an audit, and specify probable risks of deception or inaccuracy in the financial documents of a client, which can be examined later, in detail (Gold Mountain Limited, 2016). The analytical procedures for Gold Mountain Limited have been performed underneath, with the help of computing ratios and metrics for the financial statements of 3 consecutive years:

Computation of ratios:

The above table indicates that operating costs in 2017 are much higher in comparison to the past two years. It means the expenses are perhaps misstated by Gold Mountain. Thus, it is essential for the auditor to examine the its occurrence.

From the above calculation, it can be stated that appropriate cost control has not been maintained in Gold Mountain in spite of the substantial loss in sales. In order to check this, it is crucial for the auditor to evaluate operating costs for all the three years of the company (Gold Mountain Limited, 2017).

Asset turnover ratio refers to the capacity of a firm to make sales using all its assets competently. The above table shows that this ratio of Gold Mountain has been increasing for last three years. Therefore, the auditor is required to test out all the assertions of the firm affecting this ratio significantly so as to recognize that if there is any misstatement of sales or assets in the balance sheet. 

It can be said that the ROCE of Gold Mountain has been varying extraordinarily from the year 2016 to 2015 and then to year 2017. It specifies that the firm might has been increased issuing more equity shares or started raising loans. Thus, the auditor is needed to monitor all the assertions carefully to ensure that there is no misstatement in the financial statements.

The quick ratio is one of the useful tool to identify a firm’s liquidity position when the stock reduces over time. This is because the payment of current liabilities is dependent on the receivables and cash (Gold Mountain Limited, 2017). This ratio of Gold Mountain is not ideal in the three years. However, in order to check the reliability, the auditor needs to analyze the business and constituents of the company.

Current assets are employed by an entity to oblige its existing short term liabilities. The current ratio tells how efficiently the current assets are used by the management to discharge its debts. If the ratio is less than 1, it means that the situation is not good as the company may not have enough assets to repay debts. The above table states that in all the three years, the company’s current ratios do not seem correct. Thus, the auditor should monitor all the assertions before arriving at any conclusion.

Sampling refers to the execution of an audit course of action by the auditor to less than hundred percent of the assertions within a set of transactions or account balances in order to evaluate some crucial characteristic (Hyatt, and Taylor, 2013). In context of Golden Mountain Limited, the auditor would go for following steps:

Since outstanding commission is a risky expense account in financial statements, for the audit, the auditor would first inspect the exactness level and classification of assertions for this particular account. This precision can be confirmed when the transactions are recorded correctly in the respective accounts. Finally, the auditor would require to confirm that these accounts are truthful and do not include any substantial misstatement.

Before determining the number of transactions the auditor is needed to sample, he has to first look into the risk of any wrong acceptance, error, confidence level, and probable fraud (Miglani et al., 2015).

For instance, there are 3500 records in a group of transactions of less amount. The auditor would split 3500 by 50 (the population or sample size). It equals to 75, which would considered as the interval number. Afterwards, the auditor would sort out these records in a proper order with the help of computerized tools.

After the assortment of sample size and picking of sample from the entire selected population of records, the auditor would need to carry out the suitable audit practices that could vary from one assertion to other (Gold Mountain Limited, 2016). For example, the auditor could pursue the transactions which occur in the outstanding commission account to the records from the journal and ledger accounts.

The ultimate step in the process of audit sampling plan for Gold Mountain Limited would be to find out whether the account balance is significantly correct or not (Cohen et al., 2013). If in general the misstatements are beyond the reviewed defined extent, the auditor has the right to give negative opinion that the accounts are not largely overstated or understated, and there is no necessity for increasing the sample for the purpose of checking more accounts.

Conclusion

On the basis of above report, it can be concluded that auditing is crucial for a company so as to get a clear picture of its functions to the stakeholders. The above discussions reveal that Gold Mountain is operating in loss, however, the principles and guidelines specified by the Australian Accounting Statue and Australian Securities Exchange are strictly followed.

References

Gold Mountain Limited (2016) Annual Report 2016. [Online]. Available at: file:///C:/Users/sd/Downloads/nASXggkJK_GMN_1475224200.pdf (Accessed: 20th September, 2018).

Gold Mountain Limited (2017) Annual Report 2016. [Online]. Available at: https://www.asx.com.au/asxpdf/20180302/pdf/43s46j0z7jn9bp.pdf (Accessed: 20th September, 2018).

Cohen, J. R., Hoitash, U., Krishnamoorthy, G., and Wright, A. M. (2013) The effect of audit committee industry expertise on monitoring the financial reporting process, The Accounting Review, 89(1), pp. 243-273.

Hyatt, T. A., and Taylor, M. H. (2013) The effects of time budget pressure and intentionality on audit supervisors’ response to audit staff false sign?off, International Journal of Auditing, 17(1), pp. 38-53.

Johnstone, K., Gramling, A., and Rittenberg, L. E. (2013) Auditing: a risk-based approach to conducting a quality audit. USA: Cengage learning.

Hossain, S., Yazawa, K. and Monroe, G.S. (2017) The Relationship between Audit Team Composition, Audit Fees, and Quality, Auditing: A Journal of Practice & Theory, 36(3), pp.115-135.

Lenz, R., and Hahn, U. (2015) A synthesis of empirical internal audit effectiveness literature pointing to new research opportunities, Managerial Auditing Journal, 30(1), pp. 5-33.

Rashidfarokhi, A., Toivonen, S. and Viitanen, K. (2018) Sustainability reporting in the Nordic real estate companies: empirical evidence from Finland, International Journal of Strategic Property Management, 22(1), pp.51-63.

Miglani, S., Ahmed, K. and Henry, D. (2015) Voluntary corporate governance structure and financial distress: evidence from Australia, Journal of Contemporary Accounting & Economics, 11(1), pp.18-30.

Shariman, J., Nawawi, A., Salin, P. and Azlin, A.S. (2017) Public Sector Accountability-Evidence from the Auditor General’s Reports, Management & Accounting Review, 16(2).

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