Auditing and Materiality Analysis on K and S Corporation

Question: Discuss about the Auditing and Materiality Analysis on K and S Corporation. Answer: Introduction: Financial statements tends to assist investors in their decision making process through transparency in the preparations of balance sheet, income statement and other financial statements. The presence of principle agent relationship, whereby the agent that is the companys executives have a tendency towards behaving in a manner so as to further their own agendas and interests at the cost of the principles, the shareholders. External auditor has been provided to operate independently towards examining the financial statements and other relevant documents in order to identify any form of material misstatements. The ceiling upon the non-audit service fees accepted by the auditors followed by compulsory declaration by the external auditors regarding whether audit has been conducted with due independence reiterates the external auditors role. The credibility of a companys financial proceedings is gathered from the external auditors report. In terms of regulatory measures to be undertaken, the roles of external auditors are imperative as based upon the audited financial statements the evidences can be gathered about a corporate entity. The inputs from the external auditors report is relevant to the management, stakeholders and regulators of the organization, thereby the requirements towards standardization of auditory proceedings in order to mitigate audit risks is paramount. ASA 210, paragraph A23, A24, A25 and A26 states that the auditor, at the inception of audit engagement requires preparing a written financial document that may result towards declaration of the scope of financial report auditing. Further, the aforementioned articles requires the auditor to mention through writing the responsibility on the part of the auditor and companys management team, evaluating the framework utilized for the different sets of auditory proceedings. Such measures are undertaken to ensure a clear notion of the degree of reliabilit y in case of occurrence of material misstatements and misrepresentation of sensitive facts. Purpose of the report: The report is focused upon deriving an audit planning based upon the relevant sets of data regarding financial statements and corporate proceedings that has been provided in the K Ss Annual Report for the financial year 2015. This report seeks to assist in evaluating the different forms of audit risks that are prevalent in the organization through standardized auditory proceedings. Further, the report involves identifying five accounts that are imminently at risks towards being misstated in terms of the material data or information contained in them. The assessment of audit risks relating to the aforementioned five account are to be undertaken in order to gauge the degree of reliability upon the data of these accounts. Inferences and conclusion has been drawn concerning the different set of factors that has been assessed about auditory programs and evaluation of risks pertaining to material misstatements. Understanding the clients business: In order to initiate auditory proceedings, it is imperative to analyze KSs business operations, the quantum of mergers and acquisitions that has been undertaken by the company followed by the financial data pertaining to the different financial periods. Further, analysis of the effects of different sets of economic variables upon the companys operations, such as change in overall degree in demand owing to slow growth process is significant. It is in the sense that such analysis may result towards proper evolution of the companys current financial position and the probability of material misstatements in the company affairs. Entity Analysis: Kain Shelton (KS) is engaged primarily in logistics, freighting and transportation business since its incorporation as a public listed company in 1984 (Ksgroup.com.au. 2016). The company has undertaken several key acquisitions in transportation, haulage and carriers. During the past two decades the company has had made acquisitions of Stepnell Transport, Cochrane Transport, Truganina, Regal Transport and Pacific Transport amongst others (Ksgroup.com.au. 2016). These acquisitions show the level of diversification and market consolidation that the company has undergone. The varied forms of businesses such as oil carrier, manufacturer logistics, liquid and semi liquid carriers, transportations for mining products, warehousing has resulted towards presence of varied sets of assets and investment in KSs portfolio. The company has been found actively involved in financial fraud to the tune of over $7 million as ascertained by McGrathNicol (Ksgroup.com.au. 2016). Despite efforts on the part of the company management, towards recovering back the aforementioned amount the company has not been able to display any material proceedings regarding the claim. In case of the financials, the operating revenue has considerably highlighted a large quantum of increase over the past five years with an increase from $523.4 million in financial year 2011 to $699.2 million in 2015. Moreover, the operating revenue has displayed a considerable increase from $586.2 million to the present $699.2 million highlighting an increase of over 30% in the past 12 months . Comparatively, its operating cash flow has seen a marginal increase in from $47.3 million to $48.1 million showing an increase by just $0.8 million (Ksgroup.com.au. 2016). Economic and Industry Analysis: The slowdown in economic growth has affected the logistics and carrier sector largely owing to the fact that the consumer demand for products has fallen resulting in downsizing of production level in order to mitigate the risks regarding cost overruns. Moreover, territory wise the demand for logistics has subdued owing to the fact that the growth of the manufacturing sector has been hampered severely. The dynamism observed in the context of changing preference levels has resulted towards changing production patterns followed by changing levels of logistical requirements. In terms of road freights, the sector has highlighted slow growth while the B-Doubles, which KS owns by a significant number, has contributed the highest revenues derived from road freights. Figure 1: Road Freight during the last 50 years (Source: bitre.gov.au, 2016) However, it is also imperative to note that the B-Double carriers can operate on a limited sets of routes, thereby the prospects of high-income generation by the road transport has been subdued. Further, the advent of rapid growth in international logistical movements has resulted towards implementation of new sets of logistical contracts whereby the imported goods are delivered directly into the importers premises by the third party logistics (3PL) provider. This has diminished the practice of loading freights from the ports and terminals in order to deliver them to the customer/importers premises. Figure 2: Major Road Freight routes (Source: austlogistics.com.au, 2016) Moreover, companies with large sets of distributional requirements have been actively seeking to develop their own sets of logistics. For instance, the US based online retailing company Amazon has since its inception relied upon 3PL providers such as FedEx to deliver its goods until shifting to develop its own logistical systems. The advancement in terms of trucking and logistics through newer sets of energy efficient and technology driven carriers have the potential towards reducing the cost margins pertaining to logistics industry. In addition, launching of B-Triples carriers may result towards high levels of growth. KS has highlighted vast amount of investment in terms of acquiring numerous sets of transport agencies. Thereby, the company has an affinity towards customizing itself with the new sets of technologies and market penetration activities. The company has displayed optimum levels of adaptation to market scenarios through acquiring different routes and mediums of freight t ransport. Regulatory Analysis: The Australian Logistics Council (ALC) tends to regulate the different sets of policy formulation, policy implementations regarding transport and logistics business in Australias states (pc.gov.au, 2016). The different sets of operations and management of logistical industry are moderated by the council. The delay in terms of documentation on the part of local governments, metropolitan councils and resolving of issues pertaining to the companies engaged in logistical operations has been streamlined through the presence of ALC. The Council provides additional benefits to its corporate members through increasing the threshold levels of freights that can be transportation by a single carrier. Thereby, being a member of ALC results in aggravated levels of benefits derived by KS. The National Regulator on Heavy Vehicles (NHVR) tends to regulate the quantum of logistical activities conducted by the companies using heavy road carriers (pc.gov.au, 2016). Further, in terms of ownership of logistical assets, transport carriers and the different sets of heavy vehicles, the NHVR takes up annual evaluation of the degree of assets ownerships. Thereby, the company has additional sets of regulations pertaining to the assets held by it. The framing of policies during the period between the transportation of goods and the loading and unloading can result in limiting the revenue generating capability of logistics companies. The different sets of zoning issues regarding statewide operations can result towards potential adverse impacts upon the level of issues pertaining to different sets of data. However, recent reforms with the objective of improving the national infrastructure has created high growth and revenue generating opportunities for companies such as KS through de velopment of transport corridors, extending the intermodal connections and undertaking different sets of measures concerning the future expansions logistical businesses. Material Misstatements: Several factors are required to take into account in order to ascertain the accounts that are susceptible towards material misstatements. The primary determinants based on quantitative materiality tend to come from the accounts that contain transactions of significant financial figures (Bigus, 2012). Further, the quantum of transactions taking place through such materially significant accounts can also be taken into considerations in selecting the material accounts. Moreover, the changes in the composition or value of such account over the previous financial years can also be construed as a basis for determining materiality (Sharbatoghlie and Sepehri 2015). For instance, an unusual increase in the figures of an account and its subsequent repercussions on the profitability and performance measures can be regarded as a material change. In addition, the accounts that are deemed relevant for computation of key financial ratios such as solvency, efficiency, liquidity and profitability can be considered as accounts containing risks of material misstatements. In the current report, the selection of accounts with material degree of risks tends to be formed after taking consideration the industry dynamics, the rate of growth and the degree of increase in a particular figure over last year. The five accounts with high risks of material misstatements are: Revenue Account Depreciation and Amortization Account Employee Expense Account Fleet Expense Account Cash A/C and Marketable Securities A/C Calculation pertaining to planning materiality: ASA 320 states the framework pertaining to planning materiality in terms of financial statements (auasb.gov.au, 2016). The net profit after tax is prescribed to have a percentage of 5% materiality benchmark in usual circumstances. Moreover, the benchmark upon revenue figures usually is approximately 1%. Paragraph 10 of ASA 320 states the fact that the benchmarks should be stated for the financial statements as a whole. Further, paragraph 11 and 12 of ASA 320 states the fact that the auditor can review the materiality benchmark from time to time as assess whether there arises any requirement pertaining to changing the benchmark level (auasb.gov.au, 2016). The degree of past involvement of the company in fraudulent activities followed by unusual degree of changes in the levels of revenue figures, depreciation figures coupled with cash, fleet and employee expenses provides for situation to reduce the benchmark. Thereby, the benchmark upon the revenue levels can be ascertained to be at 3%. The acceptable levels of misstatements can be ascertained at a level of 40 percent of the 3 % benchmark level. Thereby, the acceptable set of misstatements comes at 1.2 % of revenue (0.40 * 3%). The above benchmarking has been undertaken after taking account the degree of sensitivity of the shareholders and other stakeholders towards presence of material misstatements in KSs financial figures. The aforementioned degree of overall risks of material misstatements has been ascertained after taking into account the different levels of data. Assessment of the five accounts: ASA 450 tends to highlight the degree of examinations conducted upon the financial statements of the entity towards locating or ascertaining the degree of material misstatements (auasb.gov.au, 2016). The different sets of data pertaining to the different degree of assessment relating to the aforementioned five accounts can have adverse repercussions pertaining to the decision making of the investor s Preparation of Audit Documentation under ASA 230 shows the evidence as regards to the conclusion or inferences draw from the audit clients financial statements (auasb.gov.au, 2016). The revenue or operating revenue account can have a high degree of increase owing to the inclusion of previous years receivables. The cost of goods sold in the account tends to display the fact that the operating and input costs have declined over the past financial period from the levels of $63,545 to $56,936. Therefore, it can be inferred from the above figure that the COGS has declined while the revenue margins has increased over 30% as compared to previous financial periods. Thereby the degree of data pertaining to the different sets of revenue and COGS highlights anomaly in the revenue figures. The employee expenses has showcased an increase from $185,218 in the financial period of 2014 to $219,172. An increase of over 18% in the employee expenses raised queries regarding significant amount of development in the degree of employee benefits and facilitating the degree of benefits towards the level of employee salaries, bursaries and bonus income. The annual report along with the website does not declare any material levels of initiatives in terms of improvement in employee strength or any kind of significant employee based programs. Further, the expenses could arise from a high degree of nonlinear and unaccountable bonuses that are linked with high levels of revenues in order to mitigate the high jump in the revenue figures. The depreciation and amortization expenses have displayed high levels of increase by over 45% from figures pertaining to financial year 2014. The depreciation expenses have highlighted such a high level of increase without a substantial increase in the asset levels of the organization. The degree of data that tends to be showcased by the amortization expenses displays a deliberate measure on the part of the company to undervalue its profitability. The cash and cash equivalent account has displayed a drop in its levels over the past financial period. This can be attributed to high degree of payments made by the company or high quantum of credit sales undertaken by the company. However, the degree of increase in the debtors and receivable levels tends to highlight the fact that the data pertaining to the companys cash levels may be resulted from misappropriation, manipulation or the degree of data regarding cash and quick assets. Moreover, it can also be observed that the figure pertaining to the creditors highlights the fact that the company has paid off its creditors substantially. Thereby, with a large degree of increase in the levels of revenues coupled with lowering of cash levels raises queries regarding financial management policies undertaken by the company. The lack of substantial increase in the levels of debtors and no material changes in the levels of creditors in terms of the level of financial data suggests that th ere is a high probability in terms of material misstatements. Further, the fleet expenses have shown a high degree of increase in value as compared to previous periods. This can be attributed from the fact that the operations of the company has increased exponentially. However, the increase in the levels of assets held by the company is insignificant compared to the rise in revenue levels, amortization and depreciations costs resulting in an inference that such as high quantum of increase in the fleet expenses is not rational in financial terms. Conclusion: The assessment pertaining to KS results displayed that the company has experience high revenue margins over the past financial period. The company is engaged in the logistics and transportation business and has operations in Australia and New Zealand. For the past 25 years, the company has highlighted large degree of acquisition in terms of transport agencies, logistics and road freight carriers. 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