ACC6030 Auditing & Assurance Services Online Tutoring

Case study
You are investigating and reporting on the “true and fair” status of the financial statements of a high-profile company given in the “Independent Audit report” and importantly focussing on the details given in “Key Audit Matters” by this company’s Auditor.

Required
You need to investigate the facts of the case study and using the risk-based auditing approach, auditing concepts, case laws and other information which you have learnt in this unit, including
Auditing standards such as:
• ASA 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment
• ASA 320 – Materiality in Planning and Performing an Audit
• ASA 330 – The Auditor’s Responses to Assessed Risks
• ASA 560 – Subsequent Events
• ASA 570 – Going Concern
• ASA 700 – Forming an Opinion and Reporting on a Financial Report
• ASA 705 – Modifications to the Opinion in the Independent Auditor’s Report
• ASA 706 – Emphasis of Matter Paragraph and Other Matter Paragraphs in the Independent
Auditor’s Report
• APES 110-Code of Ethics for Professional Accountants

The above list is only illustrative and your case study report is NOT required to address all the above mentioned Auditing standards. You can include other Auditing standards covered in this
unit, as related to this company. You need to discuss the impact and relationship of the auditing standards so determined above, in the context of auditing theories, concepts, regulations, practices and other topics which you have learnt in this unit, such as:
• Business risk
• Corporate Governance
• Ethics and culture
• Whistle-blowing
• Inherent and control risks
• Action by creditors, shareholders and regulatory agencies
• Internal control
• Reporting obligation of auditors
• Auditor’s negligence and contributory negligence
• Auditors independence, duties and continuity
• Aggressive accounting policies used in financial statement
• Fraud and misappropriations
• Regulatory bodies

The above list is again illustrative only and your case study report is NOT required to address all the above mentioned topics. You can include other topics of this unit, as related to the company assigned to you for investigation. You can then derive your Conclusions and

Recommendations.
Please use the Australian Standards of Auditing (ASA) even if they are NOT Australian companies, as they are based on International Standards of Auditing (ISA) for this report. The length of this case study written report is 20 pages (+/- 2 pages) in PDF or Word format using Ariel 12pt font, 1.5 spacing, excluding any Appendices (for data, tables, graphs and diagrams) and references at the end in PDF or Word format.

Important:
Please ensure that the written report has the following six (6) main headings in its structure. Marks
will be given specific to these main headings as per the Marking Criteria below:
• Executive Summary
• Problem Statement
• Methodology
• Findings
• Implications of findings
• Conclusions and recommendations

 

Solution

 

I. Problem Statement

A. Brief Overview of Company

Altium Limited is an American, Australian-domiciled owned public software company that provides PC-based electronics design software for engineers who design printed circuit boards. Financial year 2020 has proven to be an exceptional year. Altium began the year with the momentum of recent years rapid growth and was well on the way to achieve its goal to become the clear market leader in the PCB design tool industry and from that position of strength to enter a new phase of industry dominance and industry transformation (Annual Report , 2020).

B. Problems in Financial Statements

Following the above-mentioned objective, we have identified the following problems through investigating financial statements and audit report of the company:

1. Misstatement of revenue

The company is involved in providing number of different services i.e. different performance obligations. IFRS15 revenue from contracts with customers requires that the transaction price shall pe allocated between each performance obligation based on standalone selling price of each performance obligation. There is a risk management has not appropriately allocated the transaction price resulting in misstatement of revenue.

Further, the basis for allocating transaction prices requires significant judgement to assess its reasonableness of stand-alone price is not readily available. This further increase the risk of misstatement.

The different performance obligation may have different points of recognition i.e. whether to recognize them over a time or at a point of time as per IFRS15 revenue from contracts with customers. There’s a risk that management might not have recorded the revenue as per the recognition criteria of IFRS leading to misstatement of revenue (IFRS Organisation ).

2. Overstatement of other receivables

	2020	2020	Variance in $ 000	Variance in %
Trade receivables	59,454	45,404	14,050	31%
Receivables written off during the year as uncollectable	224	274	(50)	18.3%

During the year 2020, trade receivables excluding other receivables have increased by $ 14.1 million i.e. 31% whereas the revenue has increased by $17.32 million (10%) there is the risk of overstatement of trade receivables as the trade receivables may include long due outstanding balances which may require provision for doubtful debt or may need to be written off.

The receivable written off have decreased by the 18.3% despite the increase in trade receivable balance. This decrease enhances our risk of overstatement of trade receivable.

3. Misstatement of Provision

Provision for ECL	610	369	241	65%
Receivable 3 to 6 months overdue	286	62	224	361%

As the aging of trade receivable, the amount of 3 to 6 months overdue has shown the significant increase of 361% whereas the provision for expected credit loss has shown

increase of 65%. This indicates the risk of understatement of provision as management may not have recorded adequate provision as per “IAS 37 provisions and contingent liabilities”.

Many measurements based on estimates are inherently imprecise and subjective in nature and involves significant judgements and assumption. Since the measurement of provision is an estimate, there is the risk that these judgements and assumptions may not be reasonable enhancing the risk of misstatement of provision (Annual Report , 2020).

II. Methodology

A. Risk-based Auditing Approach

IIA defines risk based internal auditing (RBIA) as a methodology that links internal auditing to an organization’s overall risk management framework. RBIA allows internal audit to provide assurance to the board that risk management processes are managing risks effectively, in relation to the risk appetite. Every organization is different, with a different attitude to risk, different structure, different processes and different language. Experienced internal auditors need to adapt these ideas to the structures, processes and language of their organization in order to implement RBIA. RBIA seeks at every stage to reinforce the responsibilities of management and the board for managing risk. If the risk management framework is not very strong or does not exist, the organization is not ready for RBIA. More importantly, it means that the organization’s system of internal control is poor. Internal auditors in such an organization should promote good risk management practice to improve the system of internal control ( Maycock , 2014).

1. Identifying and analyzing audit risks

As per “ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment” auditor is required to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial report and assertion levels, through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.

 

2. Overview of Audit risk

Audit risk is the risk that an auditor will not detect errors or fraud while examining the financial statements of a client.

The three types of audit risk are as follows:

• Control risk. This is the risk that potential material misstatements would not be detected or prevented by a client’s control systems.
• Detection risk. This is the risk that the audit procedures used are not capable of detecting a material misstatement.
• Inherent risk. This is the risk that a client’s financial statements are susceptible to material misstatements (Ali, 2020).

3. Business risk

Business risk is defined in ASA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment. The definition states that business risk is a risk resulting from significant conditions, events, circumstances, actions or inactions which could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies (Auditing Standard ASA 315). Risk of material misstatement is defined in ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with ASAs as the risk that the financial statements are materially misstated prior to audit. Risk of material misstatement comprises inherent risk and control risk (Auditing Standard ASA 200).

Business risks can be broken down into operational risk, financial risk and compliance risk. Each of these components can have a direct impact on the financial statements, and therefore understanding the components of business risk can help the auditor to identify risks of misstatement, and to design a response to that risk (Corporate Finance Institiute ).

4. Financial, Compliance and Regulatory risk

Altium operates in many countries around the world and is subject to multiple regulatory and compliance regimes. Altium’s ability to manage relations with key regulatory agencies in all the markets in which it operates, including Australia, Europe and the United States is essential to smooth operations. Altium works with several external experts world-wide to ensure compliance with specific accounting, compliance and regulatory reporting requirements, personal data privacy issues such as GDPR, tax and reporting in Australia and other markets as well as export control requirements worldwide (Annual Report , 2020). Here is also an issue arising in relation to ASA 250 Consideration of Laws and Regulations in an Audit of Financial Statements. ASA 250 requires that if the auditor becomes aware of information concerning an instance of non-compliance, the auditor shall obtain an understanding of the act and the circumstances in which it has occurred. Further information to evaluate the possible effect on the financial statements should also be evaluated. Therefore, the audit plan should contain planned audit procedures which are sufficient for the audit team to conclude on the accounting treatment and on whether the auditor has any reporting responsibilities outside the Group, for example, to communicate a breach of international environmental protection legislation to the appropriate authorities (Auditing Standard ASA 250).

 

B. Ratio Analysis

Looking at the other ratios, the current ratio and gearing ratio do not indicate audit risks; however, more detail is needed to fully conclude on the liquidity and solvency position of the Group, and whether there are any hidden trends which are obscured by the high level analysis which has been performed with the information provided (Annual Report , 2020).

C. Consolidation of foreign subsidiaries

Given that the Group has many foreign subsidiaries, including the recent investment in Altium Software India Private Limited and Altium insurance Inc, audit risks relating to their consolidation are potentially significant. There are also audit risks relevant to the Group’s foreign subsidiaries on translation of these subsidiaries’ assets and income into group’s functional currency. According to IAS 21 The Effects of Changes in Foreign Exchange Rates, the assets and liabilities of foreign subsidiaries should be retranslated using the closing exchange rate. Its income and expenses should be retranslated at the exchange rates at the dates of the transactions. The risk is that incorrect exchange rates are used for the retranslations. This could result in over/understatement of the assets, liabilities, income and expenses which are consolidated, including goodwill. It would also mean that the exchange gains and losses arising on retranslation and to be included in group other comprehensive income are incorrectly determined. In addition, in case of mid-year acquisition, income and expenses should have been consolidated from that date. There is a risk that the full year’s income and expenses have been consolidated, leading to a risk of misstatement of Group profit (IAS Plus , 2009).

 

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