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 1. Audit Risk Assessment and Determining of Materiality
1.1. Audit Risk Model
1.1.1. Inherent risk

Externa Issue Level of

l factor inherent risk
Political The Malaysian government implemented various restrictions Medium
and lockdown by issuing movement control orders to restrict
movement to contain COVID-19. The group only operated
On warm idle mode during this period.
The gross incurred more overhead cost for plant shutdown of
RM15.25 million during the mandatory shutdown in June
2021.
Econom As a result of the uncertain economic conditions and Low
ic shrinking of the domestic market, the group changed focus to
the export market and, more so, China.

Therefore, the group faces foreign currency risk on sales,

purchases, and borrowings denominated in foreign currencies.

This can result in declined business volume and reduced

profits as well as financial losses.

Social Contractor fatality increased to one person. Secondly, there is High

a challenge in monitoring SOP in the workplace, hence the
likelihood of increased virus transmission in the Klang area.
Technol Ann Joo's hybrid Blast furnace-Electric Arc furnace Low
ogy technology provides flexibility in raw material components to
Electric Arc furnace, reduces the electricity consumption rate,
and increases general productivity through hot metal charging
produced by Blast furnace.

These coke suppliers won various accolades regarding

environmental improvement initiatives and programs.
Environ The group is keen on emission along its value chain. The low
ment group is also compliant with regulations related to
environmental protection
Legal The company has established a policy duped SHE to low
implement activities related to process safety, disaster
prevention, occupational safety and health, and environmental
conservation.
Overall High

Generally, the inherent risk for Ann Joo is high

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 1.2. Control Risk

Issues Control
risk
Board governing business practices by the Malaysian Code Code in Low
line with Corporate Governance by Bursa Malaysia

Establishment of board charter, CodeCode of ethics, and

conduct
Ensuring that whistleblowing policy is implemented

Overseeing the strategic risk and internal control framework to

attain company goals

Delegates responsibilities to committees such as AC, JRC,

LTIPC, GLCCC, SSC, and GMC.
Compositi The audit committee is composed of independent directors Medium
on who can encourage independent judgments

Ann Joo maintains 1/3 instead of majority independent Non-

executive Directors.

There is a conflict of independence decisions where they do

not align with the shareholders' interest at heart.

Risk Combined board committees performed a combined assurance Medium

manageme model to control critical risks.
nt
Framework The model has three defense lines.
 Supervision of daily operations by management
 Ensuring groups operation is compliant with various rules and
regulations
 The activities of the internal audit gave board oversight and
independent assurance

Audit Reviewed monthly group management meetings and at the low

committee quarterly group legal and credit committee meetings and
internal audit department work to take note of the management
risk.

Assesses the effectiveness of the group internal control system

on behalf of the board

Reviews the group's internal audit department's work and

examines the report prepared by the internal audit department.
Internal Board is committed to provision of direction to the company Low
control Transactions control are established through segregation of

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framework duties

Ann Joo implements and communicates standard operating

procedures to enable employees to fully understand all the
ongoing business activities.
 Each of the above indicates that the group has effectively
conducted internal control, hence reducing Control risk.
Disclosure All the projected control risks are very well disclosed Low
Overall Generally, all the stakes have been controlled low

1.3. Audit risk

Inherent Control risk RMM (IR*CR)

Low Low Very low
Low Medium low
Low High Moderate
Moderate Low Low
Moderate Moderate Moderate
Moderate High High
High Low Moderate
High Moderate High
High High Very high

Therefore from our assessment, Ann Joo's high inherent risk and low control risk of

material misstatement will be moderate. Therefore Ann Joo has a medium detection risk hence

an intermediate level of audit risk. Auditors are required to perform intermediate substantive

procedures.

1.4. Overall materiality and performance materiality

1.4.1. Overall Materiality

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 Two methods can be used, and this is the single rule and average method.
1.4.1.1. Single rule

Single rule Amount as per FS Ratio (%) Materiality Amount

(RM “000”) “RM 000”
5% (EBT) (74,306) 5% 3715.30
O.5% (total assets) 2,231,610 0.5% 1,115,805
1% (equity) 1,105,585 1% 11,055.85
0.5% (total revenues) 1,891,199 0.5% 9455.99

Financial 2016 2017 2018 2019 2020

statement Item (RM”000”) (RM”000”) (RM”000”) (RM”000”) (RM”000”)
Revenue 1,870,050 2,195,212 2,322,108 2,221,435 1,891,199
Profit before 202,128 252,861 149,947 (161,982) (74,306)
taxation
Total assets 2,320,828 2,388,848 2,731,332 2,498,922 2,231,610
Equity 1,068,139 1,227,339 1,325,249 1,204,634 1,105,585
Debt 1,252,689 1,161,509 1,406,083 1,294,288 1,126,025
Debt to Equity 1.17 0.95 1.06 1.07 1.02

According to the data presented above, profit before taxation is seen to have decreased

and fluctuated by a very great margin. For instance profit dropped from 202,128,000 in 2016 to

(74,306,000) within a period of five years. Nonetheless, the group's financial statement indicates

that the profit before tax is very volatile from year to year. A benchmark like profit before tax

over the period might be used to weed out the observed volatility; however, this will not remove

the fact that materiality will differ greatly because it is never the best benchmark, especially for a

profit-making company.

1.4.1.2. Average/ Blend Method

The blend method was first proposed by Lesile (1985). He suggested that materiality can

be computed using stable amounts like equity or assets. Nonetheless, those who are not in

tandem with his school of thought argue that revenue is the most appropriate to use in materiality

judgments; payment is likely to fluctuate more than equity and assets. Thus, in circumstances

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where guidance is not provided regarding the method of determining materiality, the above blend

method is considered the most reliable. The technique relies on the four critical items in the

financial statements and averages them, as shown below.

Single rule Amount as per FS Ratio (%) Materiality Amount

(RM “000”) “RM 000”
5% (EBT) (74,306) 5% 3715.30
O.5% (total assets) 2,231,610 0.5% 1,115,805
1% (equity) 1,105,585 1% 11,055.85
0.5% (total revenues) 1,891,199 0.5% 9455.99
Total (RM) 1140032.14
Category number 4
Overall Materiality 285008.035

As computed above, the blend method provides an overall materiality amount of RM

2,852,008,035 is within the range of 11,055,850 and 1,115,805,000 in the previous single rule

method. The finding of the amount to be used to judge materiality shows that there are various

methods that different auditors can employ to decide on materiality after they have been

provided by similar data and conditions when they use any of the two methods. Therefore, the

fluctuations in finding the amount using the other methods are likely to make auditing workload

dissimilar among different auditors auditing the same clients. To reduce this variance, we

recommend the use of the average method, and therefore the overall materiality will be

2,852,008,035

2. Performance materiality

To find performance materiality for each of the asset and liability accounts, all the related

charges have been disclosed. The method employed to determine performance will include

using the following percentages; 75%,60%, and 50% of the total materiality to differentiate

the accounts that have been less misstated to the highest.

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Assets Liabilities

Non-current assets Non-current Liabilities

PIPE Provision for employee’s benefits

Intangible assets Loans and borrowings

Investment in subsidiary Deferred tax liabilities

Other investments

Deferred tax assets

Current Assets Current Liabilities

Receivables, deposits and Payables and accruals

prepayments Loans and borrowings

Amount due from contract customer Derivative and borrowings

Inventories Current tax liability

Derivative assets

Current tax assets

Cash and cash equivalents

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 2.1. Low performance materiality

Accounts Computation Performance materiality

Intangible RM 2,852,008,035 *75% RM 2,156,256,026

Investment in

subsidiaries

Investment in

properties

Other investments

Amounts due from

contract customer

The accounts categorized above are considered to be low performance in terms of materiality.

And therefore, the performance materiality to be used is 75% of the overall materiality. The cash

and cash equivalents accounts are made up of cash on hand, balances, and deposits placed in

licensed banks that are not pledged and are highly liquid investments with very low-risk changes

in value since they are readily convertible to a known amount of cash. They also include bank

overdrafts. Intangible assets are goodwill, research and development, and subsequent

expenditure. Intangible assets are seen as low risk because they are not sensitive to economic

changes or supernormal situations. The company has robust internal control that ensures that

investments are evaluated well before re-appro, investing risk below. Finally, the amount owed

from investment customers is anticipated to increase economic benefits in the future, and

therefore it is likely to be of very low risk.

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1.3. Moderate performance materiality

Accounts Computation Performance materiality

Current tax assets RM 2,852,008,035 *60% RM 1,711,204,821

Current tax liabilities

Deferred tax assets

Deferred tax

liabilities

Derivative assets

Derivative liabilities

Receivables, deposits

and repayments

The above-stated accounts are considered to have a moderate risk of material misstatement and

the performance materiality is 60% of overall materiality. The tax accounts are reliant on the tax

accounts and therefore are recognized about the amount of the transactions that have been

recorded in the financial statements. Consequently, they are assessed to be having a moderate

risk. On the same, not derivative assets and liabilities are considered to have medium risk

because their fair value changes are likely to affect profitability and loss of the company.

However much the company is expected to be faced by a challenge of credit risk, the risk of

defaulting on receivables, and the risk that other subsidiaries are likely to make a payment late,

Ann Joo has a robust monitoring procedure running hence making this risk to be medium.

1.3. High-performance Materiality

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Accounts Computation Performance materiality

Inventory RM 2,852,008,035 *50% RM1,426,004,018

Loans and borrowings

Payables and accruals

PIPE

Provision for employee

benefits

The above accounts are seen to have a high risk of material misstatement and the

allocated performance of overall misstatement. The inventories are seen to be of very high risk

due to the measures issued to contain Covid-19. These measures have greatly affected Joo ann's

operations, and there is a high likelihood that stock will pile. Property plants and equipment are

seen to have very high risks because they are very likely to be affected by economic changes and

potential misuse and misappropriation by related parties. Finally, the provision for the

employee's benefits doesn't provide any information that is likely to be referred, which suggests

that it is hazardous.

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