Auditing & Assurance

MAC005
Trimester 2 2020 ASSIGNMENT

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Contents
Introduction.................................................................................................................................................3
Ratio analysis...............................................................................................................................................3
Risk assessment & area of audit focus.........................................................................................................4
Conclusion...................................................................................................................................................8

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Introduction
This report aims to provide an opportunity to extend an understanding and practical
application of the key audit skill. The key audit skill is used throughout the audit and is
deemed very useful in showing the potential earning management issue. It facilitates the
preparation of key audit matters for enhancing knowledge to develop a useful document
for audit engagements. Financial report of ABC Learning from 2000-2007 is analysed
using Analytical review techniques for identifying earning manipulation. Key audit
matters are auditor’s professional judgement used in the audit of financial statements for
a financial year. It is based on essential matters communicated through current
governance. It is an integral part of an auditor’s report. Likewise, “Key Audit Matters
Report” outlines the key material account required for further investigation and audit
procedure. The auditing themes that are explored are organisational dispersion,
digitalisation, transparency and market volatility. It is prepared to perform an overall
review of the financial statement after the audit to assess the consistency of financial
statement with an understanding of auditor. Moreover, it helps to find out irregularities
and prepare risk assessment to consider any audit procedure necessary.

Ratio analysis
It refers to the quantitative methods used for gaining an insight into a firm’s operational
efficiency, profitability and liquidity after studying financial statements. It helps in
establishing a relationship between different types of ratios and interpret them. It also
supports in making a quantitative judgement on the financial position. In order to assess
the financial performance of ABC Learning Center Limited liquidity ratio, profitability
ratio, solvency ratio, activity ratio, market ratio and leverage ratio was used. Higher the
profitability ratio, better the performance of the firm. Net profit margin, EBIT margin,
EBITA margin, ROIC and NOPLAT has taken a downturn from 2004 onwards. It
indicates that the company must perform careful analysis for improving performance.
Activity ratio shows the effectiveness of the firm in the utilization of resources for
business operation. Invested capital turnover, PPE turnover, long term assets turnover and
assets turnover has taken an upward trend after enjoying a modest decline from 2002-
2004. It shows higher efficiency of ABC learning in the utilization of resources.
Liquidity ratio shows the ability of a company to meet short term obligation. Both the
current ratio and quick ratio show a huge decline in 2007 compared to previous. The
massive decline raises a serious question in the firm’s ability to overcome short term

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 obligation. Solvency ratio shows the firm’s ability to meet debt obligation. The value of
the firm is determined by how much debt they have and how they pay the debt. Net debt
of the company has increased by 13.92 times in 2007 from 2006. The increase in the debt
shows the high reliance of firm in outside capital for operating business. It shows the
problem of a firm in effective utilization of funding. It has led to a significant rise in
gross debt/ cash flow and net debt/ cash flow. Similarly, net interest coverage ratio has
declined with a borrowing of a massive amount of funds.

Market value ratio evaluates the price of the company in the market. It shows whether or
not the company is overpriced or underpriced. A significant indicator of market ratios
such as enterprise value, price/book value, book value per share, NTA per share and cash
per share shows that the value of a company has diminished significantly in 2007
compared to other years. In overall, the company has performed significantly negatively
arising from the poor performance of significant financial ratios.

It is used by auditors to compare ratios of the current year with the previous year. The
material difference in the ratio is explained by the auditors. Higher differences indicates a
problem as well as benefits.

Risk assessment & area of audit focus

Areas of audit Focus Your Perspective (Why) Audit Work to be
(Account / Area) performed (Approach &
Assertions covered)
Infrastructure assets We must evaluate the
valuations for suitability for
It dominates a balance sheet.
asset groups which
•These assets are kept at a is revalued this year and could
reduced accrued market value receive a letter of reliance
loss and are regularly re- from the professional valuer
evaluated. appointed by ABC Limited.
Specifically, we should
analyze primary valuation
inputs and explore valuation
strategies for suitability.
•We must also determine how
the asset data given to the
valuer represent the asset data
•Execute processes to insure
that valuations have been
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The integrity of rates strike, The relevant law is in force
collection and invoicing that needs to be adhered to in
order for the rate strike to be
legitimate. In the case of local
authorities, fail to abide with
the rating legislation and the
related conditions for
consultation can pose serious
risks to the integrity of revenue
from the ratings.
Derivatives and debt ABC access debt via a bank
facilities facility. ABC has
documentation standards and
debt conveniences in this area.
•ABC is indeed a guarantor of
the entire obligation and
financial reporting
requirements mandate that the
Council accept the similar
nature of the responsibility for
guarantee.
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correctly reported in the
general ledger and fixed
assets registry.
•For asset groups that are
not revalued in the present
year, the principles behind the
historical assessment should
be checked against existing
asset management strategies
to ensure that they stay
relevant.
We must check the processes
of the Council and ensure that
the tariff strike complies with
the local govt Rating Act and
verify whether the tariffs hit
are correctly added to the
ranking index and invoiced
when necessary.
Get an overview of all new
loan service arrangements
signed during the year. •We
must obtain a notice from
third parties regarding unpaid
debt and exchange positions
at year-end. •Process analysis
to avoid drawdowns. •Take
long-lasting or existing
designation into account.
•Confirm the derivative
positions in effect at the end
of the year and recommend
revaluing those contracts due
to materiality. •Review of
statements relevant to holding
debt and exchange positions.
•Ensure Debt
Information reporting of The Company will monitor its We should update our
non-financial performance results against service quality interpretation of key
and efficiency metrics performance reporting
contained in the Long Term processes and study the
Strategy. Such acts are collation methodologies used
essential to supply the •We should analyse the
audience with a "performance Service Performance
story." Declaration on a sample basis
to assess that the metrics were
•Our audit judgment on the
recorded and that outcomes
service performance report
were accomplished as
includes conformity with
stipulated.
generally accepted accounting
practices and whether or not
service performance report •We must assess the
represents the real business completeness and
value of the Board over a appropriateness of success
while. management procedures.
•Reporting mechanisms are at • Assess the
risk of inadequacy in comprehensiveness and
monitoring efficiency, and thus efficacy of the performance
the possible inability to framework used.
adequately disclose to the
public the availability of
crucial utility services.
Legislative compliance This exists in a highly- We must consider to what
legislated urban environment. extent it maintains processes
From an audit standpoint, it is and procedures for controlling
vital that we are kept aware of and maintaining its
any cases of non-compliance. conformity with the
•From an auditing viewpoint, legislation;
central areas of legislation •We must examine both the
include: procedures in place to ensure
conformity with appropriate
Local Authorities Act 1968; laws and the possible
enforcement or violation of
Local Government Act legislation;
2002;
Local Government Act
•We must evaluate and check
2002; The Local
the company's compliance
Government Financial
with regulatory provisions
Reporting and Prudence
specifically impacting the
Regulations 2014;
type, substance and

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 presentation of the financial
results, fiscal reports and
others that may have a
profound impact on the
activities of the companies.
Core control of operating Management cost We must monitor credit card
expenditure, tendering and appropriateness is a subject of utilisation to get confirmation
procurement concern to the taxpayers. the spending was expended
for a reasonable cause.
• We should analyse places of
possible vulnerability for
suitability.
• Ensure proper procedures
and safeguards are in
operation.
Employee entitlement Employee entitlements may be We must perform compliance
misunderstood, or entitlements monitoring of the
charged wrongly. management 's payroll
•The payroll systems may still procedures and controls. •The
not adequately record the quality of accepted employee
expenses of the employees in entitlements at year-end
should be measured, and their
the general ledger. •Annual
the identification and
report shall allow
measurement of contracted
company to publish reports on
entitlements checked.
severance compensation.

• By reviewing significant
one-off compensation to
workers, we will determine
how any severance
compensation are provided
during the year, along with
the notification of such
payments.
Specific area of focus This identifies several key
points to be addressed We will carry out the
throughout the audit process. following procedures to deal
Areas of interest to our ABC with these issues:
audit this year include:
•Gain insight into the quality
• Fraud risk of investment management
•Asset management practices. •Review the
credit management's fraud
•Compliance with

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CCO Consideration
assessment rules •Compliance identification and mitigation
with other policies and practices and procedures.
regulations Keep dialogue with managers
•The indicators of non- and other proprietors in the
business/accounting method.
financial results
•Remuneration and allowances
for elected Keep alert to fraud measures
members •Disclosure of during the execution of our
severance pay audit procedures, including
completion of our spending
and payroll monitoring
controls. We would also
perform systematic analysis
processes to ensure the
changes are fair and following
our standards in principal
account balances.
The organisation shall fund •We would be consulting with
participation in different forms management to seek to find a
of CSR activities constructive approach to this
unintentional arbitration
consequence.

Conclusion
The report has provided an understanding of essential audit skills for effective facilitation
of critical audit matters. Ratio analysis of the company shows that the performance of the
firm is not satisfactory concerning its past. The company has actively focused on a
crucial area of audit focus by highlighting perspective on involvement and audit work to
be performed. In overall, the report was very crucial in highlighting the importance of
auditing and assurance for the company.