Factors that stress materiality in audit
Materiality can be considered to be one of most important notions for auditors. Particularly, misstatements that entail omissions can be considered to be material when in collectively or separately they can exert influence decisions of users of financial statements (Knechel & Salterio, 2016). In itself, materiality in audit comprises of both qualitative as well as quantitative facets. As such, materiality in the process of performing as well as planning the audit lays stress on the below mentioned factors–
- opinion on the subject of materiality are mainly based on varied situations and circumstances that comprise of characteristics along with size of misstatements
- Misstatements can be regarded to be material in case if it can exert impact on decisions of users concerning the financial assertion (Junior, Best & Cotter 2014).
- Opinions designed are based on common requirements of users as a group
According to qualitative research approach, materiality is approximated to be 5% of firm’s net earnings before tax for the particular year under deliberation. Nevertheless, the materiality is a subject of specialized professional opinions. As a result, in case if the firm’s net earnings is observed to be volatile then there are other scales and points of references that might be taken into account, such as firm’s revenue or else gross profit (Simnett, Carson & Vanstraelen, 2016). Nevertheless, for majority of the profit earning firms, the most fitting benchmark is the firm’s net income before tax. Profit gained before tax for the year ended 30th June 2017 of Charter Hall Group is registered to be $ 281 million. Thus, misstatement can be regarded to be material in case if the same amounts to be ($ 281 *5%) = $ 14.05 million or else over and above that.
Cash as well as cash equivalent can be considered to be material in its nature. Seeing that cash is for all time exposed to misappropriation, thievery and misuse, firm’s total cash can be assessed and the balance can be matched with the statement of bank. Moreover, the assessor can test out all the transaction of cash associated receipts, coupons, vouchers and approval to assure that there are no misstatements (Jelinek, 2015). Analysis of the annual report of the firm Charter Hall Group helps in identifying the fact that the cash and cash equivalents of the firm has increased from $145 million in 2016 to $174 million in 2017. In this case, the receipts of the payments in cash and statements of banks can be examined appropriately.
Receivables can be considered to be a material item as receivables are those items that turn into bad debts when remain due for a long period of time. Thus, in a bid to verify the status of firm’s receivables, the assessor has the need to undertake debtor’s aging analysis and present queries concerning the ones that are due for over and above the period of credit allowance (Taylor?Alexander, 2017). In this case, receivables registered to be $65 million during 2017 can be said to be material in terms of size.
The qualitative research approach for materiality
Audit procedures such as classification testing can be undertaken to examine whether purchase records for different fixed assets were appropriately categorised within the correct account for fixed assets. The total assets of the firm are observed to have increased from $1421 million in 2016 to $1873 million in 2017. Real estate properties of the firm have also increased from $15 million in 2016 to $19 million in the year 2017. The basic audit that can be carried out in this regard is the investigation and thereby establishment of the fact that the asset of the firm subsists.
A wide range of approximately 50% to roughly 75% of planning materiality can be regarded as acceptable misstatement for Charter Hall Group as level of risk concerning financial statement is sensible. Again, the tolerable misstatement is founded to ascertain low level for particular items that are separately important under specific financial items, for example, firm’s cash, accounts receivables as well as inventories (Helin, & Babri, 2015).
Different items from the firm’s disclosure that are significant for the process of audit are hereby discussed in detail below: –
Asset Impairment – For the purpose of undertaking audit on asset impairment, the assessor might consider verifying all the supposition utilized for enumerating the value that is in use and assessing the fair value that is reduced by the specific cost of selling. However, for the purpose of auditing of impairment of asset, the carrying amount of specific assets can be verified with asset register and other related documents (Moroney, 2015). Essentially, the auditor of the firm might also consider testing out and checking depreciation techniques together with market value of assets of the firm matched with firm’s assets to ensure that the appropriate process has been implemented.
Contingent liabilities – this is the credible requirement of the firm that may perhaps add to the firm’s payables founded on diverse forthcoming contingent event. However, if the firm’s contingent liability becomes material otherwise if whole amount cannot be anticipated, the evaluator shall estimate probability and likelihood of happening of events. Fundamentally, likelihood can be probable, sensibly possible otherwise remote. In a bid to review likelihood, the assessor can apply specialised professional opinion (Gaynor et al., 2015). Nevertheless, for plausible class of contingent liabilities the assessor can apply unique accounting treatment. Additionally, the liability can be presented in the notes segment of the disclosure section.
Profitability ratios are primarily utilized to evaluate the company’s potency to acquire profit in comparison to expenses of the firm. Essentially, net profit margin of the Charter Hall Group reflects the profit retained with the firm after making disbursement for different operational, financial as well as taxation expends of the firm. However, based on analysis of key ratio it can be hereby stated that the operating profit ratio of the firm has increased from 103.93 % in 2016 to 113.89% in 2017 reflecting an upward moving trajectory and a desirable financial situation. Again, gross profit margin shows a fluctuating trend throughout the period 2014-2017. This ratio initially dipped during the period 2015 in comparison to the year 2014. Thereafter, it further declined in the year 2016. However, later on during the period 2017, this ratio improved considerably, reflecting a favourable financial condition (SURYANTO, 2017). Again, return on firm’s asset represents profitability of the firm in comparison its assets (Davies & Aston, 2017). Essentially, it reflects the level of efficiency of firm’s management in utilizing its assets for generation of earnings.
Cash and cash equivalent in the audit
There are different types of assertion that may possibly be associated to profitability ratio is level of accurateness. It might be that different items of expends as well as incomes might not have been properly registered in full amounts. Therefore, audit process for this assertion shall be to test out that firm’s records for expends and earnings (Louwers et al., 2015). This is mainly to examine whether accurate amount has been registered and to ensure that there is no overstatement or understatement.
Stability ratio of the firm Charter Hall Group – The important financial ratio on stability analyses the overall debt amount that can be supported by the business entity. Essentially, this ratio is also implemented to determine financial leverage of the firm Charter Hall Group. Again, Debt equity ratio enumerates overall proportion of firm’s assets that are funded by means of borrowings. In particular, it can be seen that on an average roughly 34% to around 38% of firm’s assets are funded by using borrowed funds (Ferrell & Fraedrich, 2015).Again, debt equity ratio also enumerates the overall debt and equity proportion of the firm to fund assets. In this case, it can be recognized that equity proportion of the firm has considerably increased during the period so as the debt. Also, the debt to equity ratio has also increased although insignificantly during the period 2017 in comparison to the year ago period.
Varied categories of assertion that might perhaps be associated to the ratio on stability is essentially accuracy. It might be the fact that different debt items, assets along with equities of the firm might not be properly registered in the financial assertions of the firm. Therefore, in that case, audit procedures might possibly involve the processs of verification of all the associated documents on purchase of assets, data on borrowings, examination of register for sales and catalog share issue (Carson, Fargher & Zhang, 2016).
Liquidity ratio of the firm Charter Hall Group – liquidity ratios are primarily utilized for the purpose of measuring overall liquidity condition of the firm. The current ratio is calculated for testing out whether the firm’s current assets of Charter Hall Group are adequate enough to repay their current obligations. Based on the enumerated financial ratio it can be said that current ratio has decreased 2.06 in 2014 to 1.86 in 2017. Thus, the liquidity condition of the firm can be said to have deteriorated throughout the specified period.
Receivables and audit
A kind of assertion that may perhaps be attached to stability ratio is essentially accuracy in addition to classification. In this case, it might be the fact that different current assets as well as current liabilities items might perhaps not have been registered in full amounts (Cohen & Simnett, 2014). Also, it might however so happen that firm’s current assets as well as liabilities might not have been appropriately categorised. This means that non-current assets/liabilities might have been categorised and identified as current. In this case, audit processes for this specific assertion would involve examination and verification of different pertinent documents and register for firm’s current assets as well as current liabilities.
Based on analysis of the statement of flow of cash for the year ended 30th June of the year 2017, it can hereby be stated that majority of cash inflows pare mainly from the operating categories during the year 2017. The positive flows of cash in the operating segment mainly stem from alterations in liabilities and negative flows in the section are mainly due to alterations in accounts receivables. The total inflow of cash particularly from operating activities has increased considerably throughout the period 2014 to 2017. It can be observed from the statement of flow of cash that the total outflow of cash for investing activities of the firm has enhanced considerably during the period 2014 to 2017 except a fall in the year 2016. The primary area of outflow of cash in this segment is “Investment”. Again, cash inflow from the financing actions of the firm has also sharply increased throughout the above mentioned period except for the year 2016. The main inflow of cash in this segment has been from sale purchase of particularly stocks. Thorough analysis of stream of cash from financing activities reveals that the dividend disbursements of the company has also increased during the current period of 2017 in comparison to the year ago period. In the annual report the there has been no non financial identified in the cash flow statement. However the investing activities consist of various investment related payments and loans. The auditor of the firm utilizes the risk that has been assessed of material misstatement for determining the suitable risk detection level for asserting the financial statement. The greater the risk of material misstatement, the less is the level of risk of detection needed for reduction of audit risk to a level that is appropriately low.
Asset impairment and audit
Founded on the performance of the firm, it can be hereby observed that profitability situation; stability arrangement and efficiency position of the corporation has enhanced throughout the period 4 years. In addition to this, According to the auditor’s report there is no risk attached to the organisations going concern. However, there is a chance for the company to improve its liquidity position by paying off the obligations that is short-term. Hence, no risk with the organisation’s going concern that could be identified (Andrikopoulos et al., 2016).
The auditor produced the unqualified report to specifically Charter Hall Group for the year ended 30th June 2017. According to their feedback the financial report of the company and the businesses controlled by it is complied with the Corporation Act 2001. It addition to that involves the following –
- The Financial statements represents a true and fair view of the financial position of the company as on 30thJune 2018 and the financial performance for the year end
- It is complied with Corporation Regulations 2001 and the Australian Accounting Standards.
References
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