Details About The Company And The Industry
The audit report of any organisation can be prepared by the auditor only when he is able to gather sufficient and appropriate audit evidence. It is not possible to gather these evidences without a proper audit planning. Proper audit plan envisages in it several kinds of audit procedures. These range from simple trend analysis done with the help of analytical procedures to complex financial assertion analysis that the management gives. All this requires the auditor to define the scope of his work and get a clear understanding regarding the operations of the entity. The report presented in the current phase deals with the same issue of Resource Mining Limited (Byrnes, et. al 2018). A research has been made on the company Resource Mining Corporation Limited. The basic concept relating to audit is understood using the data and information available about the company from the annual report published. The materiality for the audit purposes is established for the Resource Mining Limited and the material account balances are identified. On the basis of this identification further analysis is done for the assertions that the management has given regarding those balances. The audit procedures required to remove any risk that lies in these account balances are figured out with the relevant documentation purpose.
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The company Resource Mining Limited is listed on Australian Stock Exchange. The industry in which the company is working is materials industry. The company is currently listed with a market capitalisation of $2.96 million. It is an independently registered company having operations related to mineral resources (Resource Mining Limited, (2017).
Resource Mining Limited is striving in the competition due to its innovative marketing, technical and financial skills. The long term goal of the company lies on construction of a strong business model lying on the development of minerals. The sustainability of the company’ mission is in the use of the skills for creation of long lasting wealth. Scientific innovation turns out to be the key strategy for the success of the company (Resource Mining Limited, (2016).
This audit risk model analysis the risk associated with the particular audit activities.
Due to the complex business nature of Resource Mining Limited, this company will have high detention, audit and control risk in its business functioning. It is analysed that company audit risk would be high due to the high detention and control risk. This Resource Mining Limited has high risk due to the increased business compliance program and strict regulatory listing requirements. The audit risk may arise due to the increased complexity of the undertaken work. The detention risk arise due to misstatement and manipulation made by company in its financial statement. The control risk arise due to the error and fraud made by the accountant while managing the business process of organization (Noreen, Brewer, and Garrison, 2014).
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Nature of company
The practical implication of the audit risk in the Resource Mining Limited could be done by implementing the audit risk model. The increased business compliance program and strict regulatory listing requirements has forced company to set high detention and control risk which will also eventually result to increased audit risk in the audit assessment program. This has shown that there would be chances that material recorded in the books of account may be wrong and misleading (Resource Mining Limited, (2017).
This could be determined on the basis of the audit risk model undertaken in this research
The control risk is high as company does not have any internal control department which could assess the discrepancies and issues in its audit reporting frameworks.
The control risk could be set to .20 and in order to have to 10% audit risk, company would set its detention risk 10%. It reflects that company could only have 10% audit risk in its audit reporting frameworks due to its high control and detention risk
Audit Risk = Inherent Risk x Control Risk x Detection Risk
10% = 20% x .5%
20% = Detection Risk = .5%
.05%
The crux is that company could have 10% audit risk which company would have in audit risk model (Srivenkataramana, 2018).
The analytical procedures help the auditors in understanding the scenario of progression or digression that Resource Mining Limited is experiencing. These procedures involve making comparisons of the financial and non-financial information that is available for the company and the other companies in the same industry. The comparisons are sought to be made within the company or outside the company. However, the data of the company over the years is used to determine whether the company is progressing as per its past performance and the data of the competing companies is used to determine the overall standing of the Resource Mining Limited as compared to its competitors (Richstein, and Farrenkopf, 2015).
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Liquidity Ratio
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2015
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2016
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2017
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Current Ratio
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.28
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.29
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.30
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Quick Ratio
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0.13
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0.07
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0.22
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A table is presented below that details the various ratios that are being calculated for the company focusing on different areas like the efficiency, profitability, liquidity and solvency. Data for the Resource Mining Limited is used for three consecutive years to look into the level of performance.
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RATIO CATEGORY
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SELECTED RATIO AND DESCRIPTION
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2015
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2016
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2017
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Liquidity Ratio: these ratios help in assessing the short term creditworthiness of the Resource Mining Limited (Resource Mining Limited, (2017).
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CURRENT RATIO: this ratio is helpful in identifying the number of times Resource Mining Limited has current assets as compared to its current liabilities. The assessment of the position to pay off the current liabilities is assessed (Durrah, Rahman, Jamil, and Ghafeer, 2016).
Formula: Current Assets
Current Liabilities
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0.29
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0.02
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0.02
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Activity/Efficiency ratio: this ratio helps to understand the level of effectiveness with which the company operates (AICPA., 2017).
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INVENTORY TURNOVER RATIO: This ratio is used to understand the number of times the inventory of the organisation shuffles. This is the best measure to understand whether the company is effective in selling its inventory or not (Agha, 2014).
Formula: Cost of goods sold
Average Inventory
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|
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Profitability Ratio: these ratios determine the return the Resource Mining Limited generates on different parameters.
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RETURN ON ASSETS RATIO: this ratio helps the user to get an understanding of how well the company is able to utilise the assets to generate profits. In other words, the profit generated as a proportion of assets is calculated (Khan, and Khokhar, 2015).
Formula: Net Income
Average Total Assets
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-8.69
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-24.07
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-293.61
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Solvency Ratio: this is the ratio that helps in understanding the creditworthiness of the company in the longer run.
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DEBT-EQUITY RATIO: the work of this ratio is to determine the ratio of the debts with the equity that company holds. An idea of the Resource Mining Limited’s proportion of outside funds to owned funds is gathered (Kajananthan, and Velnampy, 2014).
Formula: Total Liabilities
Total Equity
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0.13
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0
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0
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Solvency ratio
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2015
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2016
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2017
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Financial Leverage
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.35
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–
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–
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Debt/Equity
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.12
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–
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–
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The above table analysis shows that the Resource Mining Limited is not working well in any of the aspects. The profitability of the Resource Mining Limited is declining as well as the operating effectiveness is also very low (Appelbaum, Kogan, and Vasarhelyi, (2018).
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Profitability
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2015
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2016
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2017
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EPS
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-30.4
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-39
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-27
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Net profit ratio
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-37.58 %
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-34.45%
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-31.96 %
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EBIT
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-28 %
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-27%
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-26%
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Return on assets
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-12%
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-20%
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-18%
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Audit Risk Mode
Further the long term and short term creditworthiness is far from average.
Any entity for which an external auditor is hired and the audit function is required to be carried out, requires the auditor to classify the transactions. The classification becomes must because of some inseparable limitations that the audit function carries. The time frame given to complete an audit function is limited. Further, the company has too many transactions going on (Resource Mining Limited, (2017). It is practically impossible for the auditor to check all the transactions and events that are taking place in the company. At some point certain level of segregation is required to be done. This segregation is possible only when the auditor gets an understanding of the areas that are highly material and have the ability to influence the decision that the users shall take (Baldauf, Steller, and Steckel, 2015).
The quantification of materiality involves certain steps. These steps are listed in the table below. Along with the steps taken in the given company are mentioned (Aprisilya, and Mawardi, 2016).
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STEPS TAKEN FOR QUANTIFYING MATERIALITY
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IN THE CASE OF RESOURCE MINING CORPORATION LIMITED
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Step 1: choosing a stable base among net profits, revenues, total expenses or total equity. The amount that is to be taken as a base needs to be the one that has been the least volatile over years (Resource Mining Limited, (2017).
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· The base amount chosen for this company is total expenses. The amount reported for the expenses is $748,022 (Resource Mining Limited, (2017).
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Step2: selecting a percentage from a window of 1-10%. The percentage is selected on the basis of risks that are expected to prevail in the company (Resource Mining Limited, (2017).
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· For the Resource Mining Corporation Limited, the percentage chosen is 1%.
Hence, the value comes to be $7,480.
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Step 3: making adjustments in the amount calculated to arrive at the figure of planning materiality (Krahel, and Titera, 2015).
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· Looking at the weak position of the company and the negative returns that the company is showing, the materiality level has to be brought down much lower than the calculated. Hence, the materiality in quantified terms comes down to be $7,000 (Resource Mining Limited, (2017).
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ASSETS
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LIABILITIES
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Cash and cash equivalents
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Trade and other payables
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Trade and other current assets
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Provisions
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Plant and equipment
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Interest bearing liabilities
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Non-interest bearing liabilities
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ACCOUNT BALANCE
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AMOUNT
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ASSERTION
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AUDIT PROCEDURE
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AUDIT EVIDENCE
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1. Cash and cash equivalent
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$ 51,460
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Completeness, Rights and Obligations, Existence
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1. The cash totals must be made to check whether they tally with those mentioned.
2. The confirmations of the bank balance must be made from the banks (Resource Mining Limited, (2017).
3. .
4. Management must be asked and enquiries should be made from them regarding the major transactions done in cash (Resource Mining Limited, (2016).
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· The management enquiry questionnaire.
· The cash and bank passbook copies.
· The statement that reconciled the cash and bank balance.
· The confirmation balanced received in written form from the bankers.
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Goodwill
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54254
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Completeness, Rights and Obligations, Existence
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5. A statement must be made which tallies and reconciles the revaluation of the assets
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· Use of impairment test.
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· Rights and obligations
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The entity is completely authorised and able to deploy the cash and bank balance they have for the purpose of carrying on the entity’s business.
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· Completeness
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Any amount of cash or bank balance has not been missed. All the entries have been counted and the final balance is provided.
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· Existence
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The cash that has been reported by the Resource Mining Limited is present with it either in physical cash form or in the form of bank balance.
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2. Trade and other current assets
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$ 21,145
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Completeness, existence, valuation
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1. The component of the trade receivables of the entity must be confirmed by requesting them to make confirmations in written form.
2. The details of the other current assets must be checked to identify the nature of the assets and the amount of transactions happened that involved them.
3. The value that has been provided to the assets under this balance should be checked.
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· The list of all the assets that fall in this account balance.
· The confirmations that the receivables have provided.
· The valuation calculations made by the management.
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· Existence
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The assets that have been mentioned are existent and available at the time of balance sheet date.
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· Completeness
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All the other current assets and the receivables that should have been entered in this list have been entered.
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· Valuation
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The valuation done for the elements of these account balances is reliable (Resource Mining Limited, (2017).
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3. Plants
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$ 142,283
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Completeness, existence, valuation
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1. There must be physical inspection of the assets that the entity has listed.
2. The condition in which the assets lay in the company must be checked to see whether the valuation done has been correct or not.
3.
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· .the report of valuation provided by the valuation expert.
· The commentary on the physical condition of the assets.
·
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4. equipment
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$52124
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Completeness, existence, valuation
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4. Help of experts of valuation of tangible assets must be taken to validate the valuation (Resource Mining Limited, (2016).
5.
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· The asset list of the Resource Mining Limited.
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· Existence
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The physical and tangible assets exist on the date of financial reports.
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· Completeness
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There is inclusion of all the tangible assets while calculating the account balance (Resource Mining Limited, (2017).
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· Valuation
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All the fixed assets have been valued as per the current date valuations.
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1. Trade and other payables
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$ 384,922
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Completeness, rights and obligations, existence
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1. The payables and the creditors must be asked to give their confirmations in written form which includes the balance due and the time when the payment is required to be made (Resource Mining Limited, (2017).
2. The Resource Mining Limited’s purchase policy must be checked to look into the credit terms and tenure laid by the creditors.
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· The validation received from the payables and the creditors.
· The list of the Resource Mining Limited s payables and creditors.
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· Completeness
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The balance of all the parties to whom the Resource Mining Limited owes the amount is entered.
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· Rights and obligations
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There is a liability on the head of the entity to pay off the payables.
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· Existence
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The trade payables that have been entered in the balance sheet are the actual creditors of the Resource Mining Limited and they stand due on specific time periods from the balance sheet date.
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2. Interest bearing liabilities
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$ 7,558
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Valuation, completeness
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1. The interest calculations must be checked using the interest rates on these liabilities. After doing this the same should be used to check whether the portion of interest due on current basis is entered in the current laities.
2. The valuation done must be reconciled keeping in mind the compounding and time value of money effects on the same.
3.
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· The draft of the issuances made to public.
·
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Current liabilities
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$ 7542
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Assertion test
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4. The drafts of any issuances made to the public or the parties from whom money has been raised on these instruments must be checked.
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· The interest compounding policies.
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· Valuation
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All the interest bearing liabilities have been valued appropriately. No under or over valuation exists (Resource Mining Limited, (2017).
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· Completeness
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Each and every balance irrespective of the amount has been entered in respect of the interest bearing liabilities (Resource Mining Limited, (2016).
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3. Non-interest bearing liabilities
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$ 4,111,987
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Valuation, existence
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1. The nature of this account balance must be explored in detail owing to the high value it has got.
2. The management must be contacted to give their concerns and assertions related to these instruments.
3. Details of the lenders must be taken to ask for random confirmations from them regarding the due amount and the due date of payment.
4. The trend in this particular account should be seen to look for the pattern in which payments are being made by the Resource Mining Limited.
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· Written record of details gathered from management.
· The confirmations that have been sought from the lenders.
· The previous trend of payment and failures.
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4. Other liabilities
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$ 41252
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Assertion test
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5. The borrowings that have been acquired without any interest do exist as on the reporting date.
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· The policy of valuing the liabilities is in accordance with the terms.
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· Existence
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The borrowings that have been acquired without any interest do exist as on the reporting date.
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· Valuation
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The policy of valuing the liabilities is in accordance with the terms set at the time of availing the borrowings(Resource Mining Limited, (2017).
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The auditors have decided the materiality for the financial accounts, but this step in itself is not enough. The materiality lays the areas that are must to be checked and that too at the initial phase itself. There is a need for the auditors to further partition the transactions on which audit procedures are required to be applied. That can be done by using the sampling technique (Resource Mining Limited, (2017). The auditors can incorporate the statistical sampling technique and use the materiality levels to base the samples. The number of samples selected shall depend on the risk that the auditor has assumed while gathering an understanding about the entity and the inter controls present. In the sampling technique, it is evaluated that it is practically impossible for the auditor to check all the transactions and events that are taking place in the company (Resource Mining Limited, (2017). However, at certain level, segregation is required to be done. If there is high reliability over the internal controls, the auditor can choose not to go much deeper in all the transactions and just select some statistical samples from the whole population. That sample shall be used to perform the audit procedures and formulate an opinion on (Munteanu, 2018). This sampling technique would not only help in detention of the risk but also increase the overall outcomes of the audit process system. This sampling technique is very much required to control the risk associate with the audit risk model (Resource Mining Limited, (2017).
Practical implication of the audit risk model in Resource Mining Limited
Conclusion
The crux of this report is that due to the complex business nature of Resource Mining Limited, it will have high detention, audit and control risk in its business functioning. It would face high audit risk due to the high detention and control risk. Every successful operation in the field of audit and assurance requires the use of techniques that helps the auditor in shortening the time taken to perform the task and increasing the value of the results obtained. The current report has focused on those certain areas that are must to be kept in mind and that helps in diligent performance of the audit function. The analytical procedures also has been used to assist auditors in understanding the scenario of progression or digression which company might face in its legal regulatory compliance program. The assertion test and observation have been used to identify the possible issue in the business program of the organization.
References
Agha, H. (2014). Impact of working capital management on Profitability. European Scientific Journal, 2(2), 49-52.
AICPA. (2017). Audit guide: Audit sampling. 2nd ed, Australia: John Wiley and Sons.
Appelbaum, D. A., Kogan, A., and Vasarhelyi, M. A. (2018). Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics. Journal of Accounting Literature, 40, 83-101.
Aprisilya, T., and Mawardi, W. (2016). Analisis Pengaruh Total Asset Turnover, Book To Market Ratio, Debt Equity Ratio Terhadap Expected Return Dengan Trading Volume Acitivity Sebagai Variabel Intervening (Studi Pada Perusahaan Perbankan yang Terdaftar pada BEI Periode 2010-2014). Diponegoro Journal of Management, 5(2), 417-430.
Baldauf, J., Steller, M., and Steckel, R. (2015). The Influence of Audit Risk and Materiality Guidelines on Auditors’ Planning Materiality Assessment. Accounting and Finance Research, 4(4), 97.
Byrnes, P. E., Al-Awadhi, A., Gullvist, B., Brown-Liburd, H., Teeter, R., Warren Jr, J. D., and Vasarhelyi, M. (2018). Evolution of Auditing: From the Traditional Approach to the Future Audit 1. In Continuous Auditing: Theory and Application (pp. 285-297). 2nd ed, Australia: Emerald Publishing Limited.
Durrah, O., Rahman, A. A. A., Jamil, S. A., and Ghafeer, N. A. (2016). Exploring the relationship between liquidity ratios and indicators of financial performance: An analytical study on food industrial companies listed in Amman Bursa. International Journal of Economics and Financial Issues, 6(2), 435-441.
Kajananthan, R., and Velnampy, T. (2014). Liquidity, Solvency and Profitability Analysis Using Cash Flow Ratios and Traditional Ratios: The Telecommunication Sector in Sri Lanka. Research Journal of Finance and Accounting, 5(23), 163-171.
Khan, M. N., and Khokhar, I. (2015). The effect of selected financial ratios on profitability: an empirical analysis of listed firms of cement sector in Saudi Arabia. Quarterly Journal of Econometrics Research, 1(1), 1-12.
Krahel, J. P., and Titera, W. R. (2015). Consequences of Big Data and formalization on accounting and auditing standards. Accounting Horizons, 29(2), 409-422.
Munteanu, V. (2018). Application of the sampling selection technique in approaching financial audit. Quarterly Journal of Econometrics Research 12(1), 14-19.
Noreen, E. W., Brewer, P. C., and Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.
Resource Mining Limited, (2016), available at https://www.annualreports.com/Company/Mineral-Resources-Limited.,
Resource Mining Limited, (2017), annual report, available at https://www.annualreports.com/Company/Mineral-Resources-Limited., Accessed on 19th September, 2018
Richstein, H. J., and Farrenkopf, E. (2015). U.S. Patent No. 8,996,978. Washington, DC: U.S. Patent and Trademark Office.
Srivenkataramana, T. (2018). Application of Statistical Sampling to Audit and Control. DHARANA-Bhavan’s International Journal of Business, 12(1), 14-19.
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