HA3032-Auditing Assessment: Developing an Audit Program for Kain & Shelton (K&S) Corporation Ltd
Trimester T1 2019 Unit Code HA3032 Unit Title Auditing Assessment Type Group Assignment + Group Presentation (In – Class) including power-point slides Assessment Title “Developing an Audit Program for a selected publically listed Company” Purpose of the assessment (with ULO Mapping) Students are required to:
1.1- Identify and distinguish between tests of controls, substantive tests of transactions, and substantive tests of balances.
1.2- Identify and understand when the auditor will undertake substantive audit procedures in response to specific assessed risks of material misstatement.
1.3- Understand how assertions relate to account balances
1.4- Understand how to select the most efficient and effective combination of audit procedures that allows them to achieve the audit objective
1.5– Active participation in an “audit team context” with professional group discussions
1.6- Co-operation with fellow students to produce a joint assignment in a report format on time and to a high standard along with power-point slides. Weight 30% of the total assessment Total Marks Group Assignment (20 marks) + In Class Presentation (10 marks) = 30 marks Word limit Maximum 3,000 words.
Company Name: K & S CORPORATION LIMITED
ASX CODE: KSC
SECTOR: Transportation
Solution
Introduction:
Kain & Shelton (K&S) Corporation Ltd is a public ltd company providing services related to transportation. The company is registered at the Australian stock market, and the headquarters are located in Australia. The company was formulated back in 1945, and the parent organization of K & S Corporation Ltd is A.A. Scott Pty Limited. Company is associated with providing services related to transportation, Logistic, warehousing, contract management, distribution, and fuel distribution in different parts of Australia & New Zealand. Company is focused on operating in three different segments, which are Australian transport, New Zealand transport, and most importantly, fuel. It is also associated with providing services related to Railway, road, coastal sea export-related packaging, and delivery of properly integrated supply chain and related system in Australia and New Zealand. Company has approximately 2,814 employees according to the recent annual reports of the company (Bloom Berg, 2019).
Initially, in 1945, the company was a private ltd company but later on, it was converted into a public ltd company in 1988 when Alan Scott purchased K&S. In 1978, the revenue of the company was approximately 5 million US dollars, which significantly increased to approximately 50 million US dollars by the end of 1986. Letter on, in 1988 the company was converted into a public ltd company when it was purchased by Alan Scott. By the end of 1993, the revenue of the company was significantly increased tell 150 million US dollars on an annual basis. The increase in revenue was mainly due to the increase in several transportation-related products and services offered by the company to its customers. In 2012, the company expanded its operations in New Zealand. The operations in New Zealand were expected by acquiring Cochrane’s transport in New Zealand. This was one of the most significant steps taken by the management to expand its business operations beyond Australia.
This provided a significant amount of consolidation opportunity to the management and provided them support to increase their market share not only in Australia but in New Zealand as well. Later on, in 2010, K&S successfully purchased Pacific transport to increase their focus towards the region of Western Australia. This provided a significant opportunity to top-level management to increase their focus and market share specifically related to Western Australia. Up until 2017, K&S was successfully able to acquire different other companies under the transportation industry in Australia as well as New Zealand. This also increased the line of products and services offered by the company to customers and related stakeholders in Australia and New Zealand (KS Group, 2019).
Control Test, Substantive test of transactions, and Substantive test of balance:
Test conducted by the auditor to analyses the accuracy related to the monetary amounts associated with transactions in books of accounts and account balances are known as substantive testing. This testing is considered one of the most significant elements of the audit procedure. It is entirely different from testing controls. Substantive testing in auditing procedures is mostly utilized to identify whether the disclose information is correct while the control test in the audit procedures are utilized to determine whether the implemented information system and control system is equipped with tools to promote incomplete correctness formulation of financial statements. It is important to understand that it is important to implement substantive testing in audit procedures regardless of the results obtained from the control testing (Sarwoko & Agoes, 2014).
Generally speaking, it is believed in audit procedures that if the control testing results are positive suggesting that the internal control system implemented in the organization is strong then the level of substantive testing is reduced and if the auditor identifies with the help of control testing that the internal control system of the organization is weak then substantive testing part of the audit procedure is made strong and significant. It is important to apply substantive testing in audit procedures in case of weak internal control system prevailing in the organization after identifying it by control testing. If the controls implemented in the organization are effective than the chances of error and mathematical inaccuracy in the financial disclosures of the company are reduced significantly, and this might allow the auditors to reduce their level of substantive testing significantly (Safari Books, 2019).
K & S Corporation Ltd is a public ltd company based in Australia. It is important and mandatory for public limited companies to conduct annual audits from independent auditors for the financial disclosures formulated by the company. Top-level management is responsible for formulating the financial disclosures of the company according to the auditing standards. It is the responsibility of the auditors to make sure that the financial disclosures of the public ltd company being audited are free of material misstatement and there is no material inaccuracy related to the financial statement balances and transactions (Young & Moyes, 2014). While conducting the substantive testing related to public organization, auditor can use different tests like auditor can analyze the issuance related to bank confirmation in order to analyze the ending cash balances, auditor can also physically match the fixed assets with the fixed assets amount available in the books of accounts, auditor can also communicate with the suppliers of the company in order to verify whether the account payable balance is mentioned in the balance sheet are correct, auditor can also contact lenders of the company in order to verify whether the loan amount mentioned in the balance sheet is correct, techniques utilized for calculation of inventory valuation can also be analyzed and other different significant techniques can be utilized by the auditor in order to implement substantive testing during the audit procedures (Steven, 2017).
Substantive audit procedures related to material misstatement:
To analyses, the substantive testing procedures applied by the auditors in case of K & S Corporation Ltd can be verified from the independent auditor’s report of the company. To analyses independent auditors report, annual report 2018 of the company has been analyzed. According to the auditor report, key audit matters have been properly disclosed in the audit report. Key audit matters suggest that the auditors have properly analyzed the financial disclosures of the company to make sure that there is no material misstatement during the formulation of the financial disclosures. To identify any kind of material misstatement, auditors analyzed the appropriateness related to the significant assumptions made by the top-level management related to impairment. Auditors specifically analyzed the cash flow projections of the company, discount rate associated with the operations, growth rates, and other related valuation techniques adopted by the management were analyzed by the audit team to analyses their appropriateness. This is one of the most significant examples of substantive testing procedure implemented by the audit team during the audit of the company (K&S Corporation Limited, 2018).
To better understand the material misstatement situation related to the financial disclosures of the company, external market data were compared with the historical accuracy of the forecasting technique adopted by top-level management. This helped the audit team to identify whether the cash flow forecast is consistent or not. It is one of the primary and most significant responsibilities of the auditor is to make sure that the formulated financial disclosures of the company are free from any kind of material misstatement because any kind of material misstatement can influence the decision making of the investors and stakeholders of the company. All the significant information should be disclosed in the financial disclosures, which are capable of influencing the decision making of the investors & stakeholders of the company (De Kleijn & Leeuwen, 2018).
Assertions related to account balances:
Management assertions are considered one of the most significant aspects of audit procedures. This concept is primarily used in audit procedures during the audit of the financial disclosures of the company. Auditors are deeply dependent upon different types of assertions provided by the management regarding business operations. Management assertions are divided into three basic classifications, which are transaction level assertions, presentation and disclosure assertions, and account balance assertions (Curtis et al., 2016).
As far as transaction level assertions are concerned, they are classified into five different items, and these items are mostly related to the income statement of the company. These items are accuracy, completeness, classification, occurrence, and cutoff. Account balance assertions are divided into four classifications, which are completeness, existence, write and applications, and valuation. Presentation and disclosure assertions are the third classifications, which is further divided into five items, which are completeness, accuracy, rights and obligations, occurrence, and understand-ability.
Most of these assertions have duplication at the time of implementation because these are interlinked and associated with each other. It is important to understand that each of these assertions mentioned has a different objective and are used for different aspects related to the financial disclosures of the company. These assertions are mostly analyzed according to the statement of comprehensive income, statement of financial position, and notes to the account related to the client of the auditor (Bragg, 2017).
It is important for the auditor to obtain an appropriate letter containing the management assertions from the top-level management to start the proceedings related to the audit procedures. Without this letter from the top-level management, it is not possible for the audit team to start the audit procedures or to initiate audit-related activities. Auditor of K & S Corporation ltd properly obtained a letter from the top-level management containing the management assertions to start the audit procedures. One of the most significant reasons for not starting the related audit procedures by the auditor is the inability you receive the letter from the top-level Management related to the management assertions. This significantly provides evidence to the audit team that top-level management might be engaged in any kind of fraud or material misstatement of financial disclosures of the company. In such case, it is significantly recommended for the auditor to enhance their level of substantive testing to make sure that the information disclosed in the financial disclosures is appropriate and all the material information has been properly disclosed in the financial disclosures of the company by the top-level management (Kilgore, 2014).
Audit procedures application to achieve audit objectives:
The auditors can implement different techniques to improve the overall performance of audit procedures. Some of the techniques have been disclosed in this paper. It is important for the auditors to understand the entity and Organization for which they are conducting the audit. Understanding the organization is not only enough but understanding the internal control system implemented in the organization is also very much important. By understanding the entity or organization, the auditor can analyse and judge the inherent risk related to the organization. For instance, most of the government organizations have a high rate of inherent risk, while public companies and private companies have a low rate of inherent risk (Farr, 2017).
Another significant technique, which should be implemented by the auditors to improve the overall performance of audit procedures, is a proper and effective assessment of control activities implemented in the organization. Analysis of control activities helps the auditors to formulate plans related to substantive testing related to the financial disclosures of the company. It is important for the auditors to make sure that they analyze the control activities by keeping in mind their ultimate goal of the audit which is to obtain proper and reasonable assurance to make sure that the financial disclosures of the company have been formulated without any kind of material misstatement (Fay & Negangard, 2017).
Another significant technique, which can be adopted by the auditors to improve their audit procedures, is the utilization of projected values, assessment of calculations, and related techniques. By analyzing the annual report of the company related to 2018, it can be suggested that auditors were able to formulate the cash flow projections discount rate and were able to analyses different valuations related to different accounting procedures like depreciation, amortization, and other related matters.
Audit planning is considered one of the most significant areas, which is considered responsible for massive disagreement between different auditors associated with the audit procedures. Some auditors consider audit planning as a massive burden while some of the auditors consider this technique as efficient and effective to improve the audit results and procedures.
The primary objective of conducting an audit is to analyses the internal control system implemented in the organization, analyzing the Arithmetic accuracy of the transactions and books of accounts. It is also associated with verifying balances of accounts. Auditors in different combinations apply the techniques mentioned above to achieve the primary and basic objectives of the audit procedures, as mentioned in this assignment.
Conclusion:
The assignment was focused on the investigation of different audit procedures that can be adopted during the audit. It also analyzed the testing controls, substantive testing of transactions, substantive testing of balances, and other related aspects of the audit. These factors were analyzed in the context of K & S Ltd company. The results of the study suggested that control tests are very much important for the auditor to identify the strength of the internal control system implemented in the organization. Strength of substantive testing is mainly dependent upon the results of test control. It has been generally seen that substantive testing is strong if the internal control is weak and vice versa.
One of the most significant objectives and primary objective of the audit is to make sure that the figures disclosed in the financial statement are arithmetically correct, and they do not have any error. This is achieved with proper implementation of control tests and substantive testing. These measures were properly implemented by EY during the audit of K&S limited. Another significant responsibility of the auditor is to provide an independent opinion regarding the financial disclosures of the company whether the information disclosed in the financial disclosures is free from any material misstatement and to make sure that it does not contain any kind of fraud from an accounting perspective. During this procedure, it is the primary responsibility of the top-level management to provide a letter of assertions to the auditor to provide written evidence to the auditor that the numbers disclosed in the financial disclosures are correct without any fraud.
The independent audit report of K&S limited identified some key matters in audit key matters paragraph of the audit report. It is the responsibility of the auditor under international auditing standards to identify and disclose key audit matters in the audit report to enhance the information for the shareholders to help them in their decision making process. The audit report of K&S Corporation ltd suggests that auditors EY properly utilized different assessment techniques like analysis of assets valuation, analysis of growth rate, formulation of cash flow projections and other related information to conduct the audit of the financial disclosures of the company. All other information disclosed in the annual report 2018 for the company is under the responsibility of the management and auditor is not responsible for providing opinion on it.
References
Bloom Berg, 2019. Company Overview of K&S Corporation Limited. [Online] Available at: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=876896 [Accessed 20 May 2019].
Bragg, S., 2017. Management assertions in auditing. [Online] Available at: https://www.accountingtools.com/articles/what-are-management-assertions-in-auditing.html [Accessed 20 May 2019].
Curtis, E., Humphrey, C. & Turley, W.S., 2016. Standards of Innovation in Auditing. AUDITING: A Journal of Practice & Theory, 35(3), pp.75-98.
De Kleijn, R. & Leeuwen, A.V., 2018. Reflections and Review onthe Audit Procedure: Guidelines for More Transparency. International Journal of Qualitative Methods, 17(1), pp.1-8.
Farr, L., 2017. How to improve audit planning effectiveness and efficiency. [Online] Available at: https://www.journalofaccountancy.com/news/2017/jun/improve-audit-planning-effectiveness-efficiency-201716722.html [Accessed 20 May 2019].
Fay, R. & Negangard, E.M., 2017. Manual journal entry testing: Data analytics and the risk of fraud. Journal of Accounting Education, 38(1), pp.37-49.
K&S Corporation Limited, 2018. K&S Corporation Limited Annual Report 2018. [Online] Available at: http://www.ksgroup.com.au/wp-content/uploads/documents/KSAnnRep18FINAL.pdf [Accessed 20 May 2019].
Kilgore, A., 2014. Audit quality. Managerial Auditing Journal, 29(9), pp.9-16.
KS Group, 2019. Corporate History. [Online] Available at: http://www.ksgroup.com.au/history.html [Accessed 20 May 2019].
Safari Books , 2019. Tests Of Transactions And Tests Of Balances (Study Objective 9). [Online] Available at: https://www.oreilly.com/library/view/accounting-information-systems/9781118162309/c07-17.html [Accessed 20 May 2019].
Sarwoko, I. & Agoes, S., 2014. An Empirical Analysis of Auditor’s Industry Specialization, Auditor’s Independence and Audit Procedures on Audit Quality: Evidence from Indonesia. Procedia – Social and Behavioral Sciences, 164(1), pp.271-81.
Steven, B., 2017. Substantive testing. [Online] Available at: https://www.accountingtools.com/articles/what-is-substantive-testing.html [Accessed 20 May 2019].
Young, R. & Moyes, G.D., 2014. An examination of the effectiveness of test-of-controls audit procedures for detecting fraud. International Journal of Auditing Technology, 2(1), pp.22-36.
