Discussion on Materiality

The main purpose of this report is to take into the consideration the process of audit for the purpose of materiality which is required to be considered by the auditor at the time of recognizing any materiality misstatement in the financial statement. According to “IAS 320” The concept of materiality is treated as the vital audit scope as it is the main factor in ascertaining in financial statement major and minor misstatement (Lakis & Masiulevi?ius, 2017). The substantial misstatement is determined based on the materiality degree of an item and how it effects the process of decision making for investors and additional estimates that are reported in financial reports. The current report assesses the materiality aspects of the Skycity Entertainment Group Ltd which performs its business under Australian Stock Exchange.

The “International Standard on Auditing 320” state that the purpose of the audit financial statement is to provide the auditor with the opinion to express as whether the financial statements are prepared based on all material respects in compliance with the applicable framework of financial reporting (Christensen et al., 2018). To ascertain the business materiality, it is auditor’s obligations to consider both the qualitative and quantitative aspect. The auditor under the qualitative materiality aspects is required to take into account business items of substantial type namely the net profit, inventories, change in method of accounting and legislations.  

In assessing the qualitative materiality aspects, the auditor must evaluate the proportionate percentage change on appropriate basis to determine the materiality degree for different items which is presented in the annual financial report of business (Choudhary et al., 2018). Charging of materiality percentage is reliant on the judgement of auditors depending upon the size of business and the nature of functions taken by the business. Through materiality planning estimations of different items are computed (Knechel & Salterio, 2016). Henceforward, the concept of materiality is regarded as the vital element in planning the audit process.

While in quantitative materiality aspects different basis of estimations are considered in planning the materiality and business performance (Moroney & Trotman, 2016). The different basis of materiality judgement that is taken into the considerations is reliant on the significant items stated in the profit and loss statement as well as the balance sheet of SkyCity Entertainment Group Ltd. With respect to the income statement the bases that are considered are the net profit before interest and tax and total amount of revenues produced. Based on the balance sheet the total assets of the SkyCity Entertainment would also be considered.

Quantitative Estimate of Materiality for Skycity Entertainment Group Ltd

In order to evaluate the materiality of SkyCity Entertainment Group Ltd the annual statement of 2017 is considered. The data obtained from the financial report provides suggestion that the company reported a decline in the net revenue in comparison to the sales revenue reported in 2016. Most of the company considers the items that possess greater value which ultimately forms the base in ascertaining the materiality of business (Hayes et al., 2014). The total amount of assets is considered in determining the materiality of SkyCity Entertainment Group Ltd with the company reporting the total assets of $2,278,331 during the financial year ended 2017. An estimated percentage of 5% is considered for materiality planning of SkyCity Entertainment Group Ltd. The materiality planning for SkyCity Entertainment Group Ltd is given below;

Planning Materiality = Total Assets x 5%

Total Assets = $2,278,331 x 5%

= $113,916.55

As understood from the above computation the materiality planning for SkyCity Entertainment Group Ltd is considered in terms of the total assets and 5% is regarded as the percentage on which the auditor would form its judgement. Based on the materiality planning, the materiality performance for numerous different items is given below;

The significant items and disclosure for SkyCity Entertainment Group Ltd is given below;

IFRS 15: Revenue from Contracts with Customers: NZ, IFRS 15, Revenue from the customers with the contracts is associated with the recognition of revenue and laying down the principles for reporting the useful information’s to the financial statement users, regarding the nature, amount, timing and uncertainty of revenue together with the cash flow that originates from the contracts of the entity’s customers. Revenue is identified when the customers acquires the control of the goods and hence possess the ability of directly using and getting the benefits from the products and service (Skycityentertainmentgroup, 2018). The standard helps in replacing NZ IAS 18 Revenue and BA IAS 11 Construction Contracts and associated interpretations. The standard is effective for the company from the annual period commencing from 1 January 2018 and previous application is allowed.

NA IFRS 16: Leases: Under the NZ IFRS 16, a contract is a lease given the contract provides the right of controlling the use of the identified asset for the period in exchange of considerations. Under the IAS 17, a lease was required to create difference between the finance lease and the operating lease (Skycityentertainmentgroup, 2018). However, under the NZ IFRS 16 the entities are now required to identify the liability of lease that would reflect the future lease payments and right of using the asses for eventually all the leases.

Review of Statement of Cash Flows

The analytical review is regarded as one of audit technique which is used to measure the reasonableness of the accounting balance or amounts that are reported in the financial statements (Henderson et al., 2015). The report would be offering the users with information based on numerous aspects such as liquidity, profitability, asset management ratios, leverage ratios and valuation ratios.

Profitability ratios represents the class of financial metrics which is used to determine the ability of the business in generating the earnings that are relative to the related expenditure (Khan, 2015). under the profitability ratios operating profit margin is computed for SkyCity Entertainment. The operating profit margin in the last three years stood relatively at 0.23 however in 2017 the ratio declined to stand 12%.

Furthermore, the net profit margin also reported a tumultuous trend over the last four years. The ratio in 2016 stood 15% however in 2017 the ratio declined to 5%. It is vital for the auditor to implement the appropriate process of verification to recognize the expenditure that is reported by the business while executing its business functions.

The return on assets for the company represents the tumultuous trend during the last four years. The return on assets for the company in 2015 stood 6.85 while in 2016 it marginally declined to stand at 6.81 however in 2017 the ratio stood as low as 1.94. The decline in assets is significant and the auditor must authenticate Sky City current assets to determine the main reason of such variations. The return on equity reported by Sky City also represents the identical trend as the ratio in 2016 stood 13.09 while in 2017 the ratio stood 4.19 representing a major decline in net income.

Liquidity ratios is defined as the class of financial metrics that employed to ascertain the ability of the debtors in paying off its present obligations for debt without increasing the external capital (Hoskin et al., 2014). The current liabilities are assessed in relation to the liquid assets so that the coverage of short debts can be measured in times of emergency.

The current ratio for Sky City stands below the industry standard of 1.00 as the ratio all through the four years has stood below the industrial standard. The current ratio in 2017 stood relatively as low as 0.36. Similarly, the quick ratio for the company over the period of four years represented a fluctuating trend as the ratio declined to 0.33 in 2017. There is an indication that the company may feel to meet its short term debt obligations and a quick verification should be conducted by the auditor to determine the cause of such variations.

Assessment of Going Concern Risk

The net working capital for the company stood negatively all through the span of four years. This can be viewed as the matter of grave concern since in the past four years the current liabilities stood greater than the current assets. This ultimately contributes to the problems of liquidity. The obligations of the auditor remain in evaluating the values of the current assets so that it can assure that the financial report provides a true and fair value of the reported figures.

Turnover or Asset Management Ratios: 

The asset management can be defined as the ratios that forms the key in assessing how efficiently and effectively a business manages its assets to generate sales revenue. The asset management ratios are often termed as the turnover ratio or the efficiency ratios (Barth, 2015). The receivables turnover ratio can be viewed as the vital business item and the ratio is highly vulnerable to material misstatement. The fixed asset turnover stood somewhat similar all through the span of four years except in 2017 where the ratio declined to 0.70. Similarly, the total asset turnover ratio throughout the four-year span stood relatively stable but declined to 0.40 in 2017. Therefore, it is necessary for the auditors to conduct the verification of the assets as this would help in correctly valuing the assets.

The leverage ratio can be defined as any form of ratios that helps in indicating the extent of debt that is incurred by the company against the entity with several other accounts in the balance sheet, income statement and the cash flow statement (Warren & Jones, 2018). The debt ratio for the company reported a positive trend over the period of last four years as the company in 2017 reported a lowest of 0.47. The total debt reported by the company with respect to total assets is also lower. Moving to debt to equity ratio the company has reported an improving debt to equity ratio. With the declining proportion of debt, the debt to equity ratio in 2017 has stood to 0.37. There are no major changes in the equity capital but the business remains dependent on the implementation of debt. The auditor is required to carry out the audit risk test related to the debt capital of business to assure that it does not creates an impact on the business. Furthermore, the auditor must assess whether there is fair representation of debt capital in the financial statement.

Audit Procedures to Address Going Concern Risk

The valuation ratio refers to assessing the worth of business (Schipper et al., 2017). The price earnings ratio stood relatively lower throughout 2014-16 however it increased to 0.57 in 2017. The company reports a rising trend price earnings. The dividend yields also reflected a fluctuating trend with the ratio relatively standing 5.22 in 2017. Nevertheless, the obligations of the auditor remain vested in evaluating the share capital of SkyCity which the company has accumulated.

The cash flow from the operating activities represents the receipts from the customers. The income tax paid the company stood $30,412 and the net cash inflow from the operations stood $279,524.

The cash flow from the investing activities represents the purchase from the property plant and equipment of 154,617. The investing activities also included the payments made for the intangible assets of 3,970 with net cash outflow from the investing activities standing 158,587.

The cash flow from the financing activities comprised majorly of repayment of borrowings of 38,972 with dividend payment to shareholders of 30,713. The cash & cash equivalent at the end of the year stood $90,309.

The concept of going concern is viewed as the fundamental principle in the context of accounting (Elliott, 2017). The concept assumes that during and beyond the succeeding financial period the company would complete its present plans by using the current assets and would continue to meet its financial obligations. As understood the position of liquidity and profitability reflects a declining trend since the current assets and net profit has reflected a declining trend. The auditors must provide advice to Sky City in placing greater dependence on the equity capital instead of placing focus on the debt capital.   

PWC are the auditors of Sky City Entertainment Group Ltd. According to the opinion of the auditor the consolidated financial statement of the company and its subsidiaries present a fair view. The cash flow of the company complies with the NZ IFRS and IFRS. The key audit matter included the considerations relating to the carrying value of goodwill and casino licence intangible assets. The intangible assets were made by using the DCF for every cash generating unit.    

References:

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1. (2018). Our Business – SKYCITY Entertainment Group. Retrieved from https://www.skycityentertainmentgroup.com/our-business
2. (2018). Reports & Presentations: 2017 – SKYCITY Entertainment Group. Retrieved from https://www.skycityentertainmentgroup.com/investor-centre/financial-information/reports-presentations/2018

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