HA3032 Developing an Audit Program for CSL Limited Assessment Answer
Answer
| Developing an Audit Program |
Introduction:
In the current scenario, there are a lot of opportunities for investors to invest in various business organizations. The return on investment depends on the profitability of the organization and the way of organization in which it operates. The investors review and analyze the financial statements of the organization before any investment.
To increase trust and provide accurate information of the financial position of organization an external assistance is required. An external opinion is required on financial statements to check whether the information given by the organization is true and correct. A group of professional persons provide opinions on financial statements known as Auditors. For providing an opinion an audit procedure is followed by auditors (CSL Limited, 2020).
There are a number of audit procedure that auditors have to follow as per the size and nature of organization such as:
- Set up an audit risk model
- Ratio analysis to perform the analytical procedure
- Decide materiality level
- Sampling
- Inquiry, observation, inspection, and recalculation of work
Under this report, complete information is given on different audit procedures that an auditor includes in the audit program to get sufficient and appropriate audit evidence. In this report, the entity chosen is CSL Limited a company related to Pharmaceuticals, Biotechnology & Life Sciences industry. The different audit procedures are being applied to this organization to provide an example of how the audit procedures work practically (Lu, Simnett, & Zhou, (2019).
Organization and the respective industry details in brief:
CSL Limited is a biopharmaceutical company, manufactures plasma-derived products, develops and delivers innovative medicines that save lives, protect public health, and help people with life-threatening medical conditions live full lives. The registered office of CSL limited in Australia. The company GICS industry group is Pharmaceuticals, Biotechnology & Life Sciences. the main area of work of CSL limited is to develop and deliver high-quality medicines that treat people with rare and serious diseases. CSL limited earns more than 85% of overall company revenue with substantial markets in the Asia Pacific, Europe, and North America. The businesses of CSL Limited is CSL Behring and Seqirus. CSL Behring discovers, develops, and delivers products in the industry for treating rare and serious diseases. Seqirus is a leading provider of in-licensed vaccines and specialty pharmaceuticals in Australia and the Asia Pacific regions (Barr-Pulliam, et al. 2017).
Audit Risk Model:
Audit Risk Model is a tool used to identify and understand various audit risks arises during audit procedures of an organization. Audit risk may be considered as the product of detection risk, inherent risk, and control risk. By applying the audit risk model, auditors try to minimize audit risk to an acceptable level. However, there are various risks arise during the audit which cannot minimize and manage by auditors during audit procedure.
Audit Risk = Inherent Risk * Control Risk * Detection Risk
Inherent Risk refers to a material misstatement in the financial statement arising due to error or omission as the number of transactions involved. In the case of CSL Limited, the inherent risk is higher as there are chances of material misstatement in its financial statement due to the high complexities of financial statements (CSL Limited, 2020).
Control risk refers to a material misstatement in the financial statement arising due to absence or failure in the operation of relevant controls of the entity. In the case of CSL Limited, the control risk is moderate as the company has to follow rules and regulations for accounting and reporting of financial statements. In CSL limited, there is higher control as a company has to file financial statements with the domestic and international markets (CSL Limited, 2020).
Detection risk refers to the risk that the auditors fail to detect a material misstatement in the financial statements. In CSL limited, detection risk is lower as there is lower chances of fraud, errors and omission due to the involvement of highly experienced accountant and professional team (Davis, & Hay, 2012).
The model that is used to identify the audit risk of the audit procedure implemented to check transparency and true and fair view of the financial statement of the company is known as the Audit Risk Model.
Audit Risk implication of the CSL Limited
As details mentioned above, it can be said that the CSL limited is having high reporting risk and accounting rules compliance risk. The company may face issues related to the legal compliance and risk of errors and frauds in financial statements. The audit risk of CSL limited is computed by-product of inherent risk, control risk, and detection risk. The audit risk in CSL limited is high due to the higher inherent risk and higher control risk (Gore, 2019).
In the given case, it is deemed that the audit risk of CSL limited is 15%, inherent risk is 70% and control risk is 60%. Then, in this case detection risk would be 35.71%.
Computation of detection risk on the basis of following formula:
Audit Risk = Inherent Risk * Control Risk * Detection Risk
0.15 =0.70 * 0.60 * Detection Risk
Detection Risk =0.15/0.42 = 0.3571 = 35.71%
Analytical Procedures for auditing:
The Analytical procedure involves comparisons of different sets of financial and operational information to understand the financial and non-financial transactions of organizations. Various ratios are calculated between various financial and non-financial figures. The analysis provides an understanding of the trend and direction in which the organization operate. The ratios that are calculated under the analytical procedure are as follows. The liquidity position of the company has shown that company has strong deployment of the funds in its operating assets. The efficiency of the company is strong and with the low financial leverage CSL company could easily sustain in market.
Selection of Materiality and Material Account Balances in the CSL Limited:
During the audit procedure applied to the financial statement by the auditors, it is difficult for auditors to do an audit of every aspect of financial statements. Auditors have to decide materiality and performed the audit in a limited period of time with limited resources. If every aspect of the financial statement is reviewed by the auditor then it became time-consuming and costly. Therefore, auditors have to decide the materiality of account balance and decide which account balance should be checked in detail. The selection of account balance cannot do on a random basis or without any reasonable basis. Auditors used different audit tools for the selection of account balance as per the materiality level (Chan,., Guo,, & Mo, 2019).
Materiality refers to the part of the financial statement that is so substantial that it affects the decision of a person who gets knowledge of it. Materiality is a qualitative concept which requires professional knowledge of auditor. However, auditor's judgment is based on the quantitative level of materiality (Tello, et al.2016).).
Auditors follow a series of steps to identify materiality based on Revenue, net profit, assets & liabilities. For example, in the case of CSL Limited materiality calculated based on revenue. In that case consider that if any transaction more than 4% of revenue then it covers under materiality. In that case, net income is not taken under consideration as net profit increased from previous year profit with high volatility.
Total Revenue and other income for the year ended 2019:US$8538.60m
4% of revenue:(US$8538.60m*0.04)=US$341.54m
(CSL Limited, 2020).
In the case of CSL Limited, there is constant growth and an increase in profit. However, there is a high amount of transactions involves therefore materiality set at US$300m. Based on this materiality level, various account balances are reviewed by the auditor. Following are the account balances that reached materiality level and consider for audit procedure (Sierra-García, et al. 2019).
| Assets | Amount (US$m) | Liabilities | Amount (US$) |
| Cash & Cash Equivalent | 657.80 | Trade and other payables | 1407.70 |
| Receivables and Contract assets | 1821.70 | Interest-bearing liabilities | 4662.80 |
| Inventories | 3038.80 | Retirement benefit liabilities | 307 |
| Property, Plant, and Equipment | 4484.30 | ||
| Intangible assets | 1878.30 | ||
| Deferred Tax assets | 378.70 |
(CSL Limited, 2020).
Audit assertion, procedures, and audit work steps for selected account balances:
| Account Balance | Value (US$m) | Audit Assertion | Audit Procedure (Audit work steps) | Audit Evidence |
| Cash & Cash Equivalent | 657.80 | Existence of cash: The balance of cash and cash equivalent shown in the balance sheet should be matched with cash in hand or cash at bank or total of both. Complete as per record: Complete cash in hand and cash at the bank should be taken in account of the balance sheet figure (Haffajee, et al. 2019). | The Cash balance as shown in the balance sheet should be matched with hard cash and cash in the company's bank account and lockers. The cash sales transactions should check with cash sales invoices to check the accuracy of sales transactions mentioned in the cash book. To check debit entries in the cash book, check supporting receipts and payment slips. Do a proper analysis by asking from the accountant about the frequency of cash transactions and the period in which the cashbook updated. The frequency of cash transactions should be compared from the previous year and if there is a high difference then identify the reason for the same. | Copy of cash book Copy of bank passbook Receipt of all cash transactions Ledger of cash and bank Bank reconciliation statement |
| Receivables and Contract assets | 1821.70 | Existence of Receivables: The amount shown as due from receivable should be reconciled with account balance confirmation received from debtors. This amount represents the amount that the organization entitled to receive from customers on credit sales. Rights & Obligations: The organization has legal right on the amount due from debtors on credit sales. The organization has the right to sue the debtors in case of non-payment against credit sales (Schmidt, Wood, & Grabski, 2016).). | the Amount shown as receivable should be confirmed from the external source i.e. taken confirmation from debtors for outstanding dues and period from which payment is pending. Auditors should check sales invoices, credit notes, records of bill receivables to reconcile balance available in the financial statement. Auditors also take management representation letter in case of overdue receivable balances (Filce, et al. 2019). | Account balance confirmation letter received from debtors at the year ended. Credit period allowed to debtors. Credit sale invoices A-List of outstanding debtors at the year ended. Management Balance confirmation letter |
| Inventories | 3038.80 | Existence: Inventory should be matched with the inventory register of the organization. Proper physical verification is necessary in case of inventories. In the case of a pharmaceutical company, inventories should be reviewed on a timely basis and disposed-off expired medicines. Valuation: Valuation of inventories is important whether it is valued on market price or cost of construction. Which method is applied for the valuation of inventories as per nature? | the amount shown in the financial statement should be reconciled with the inventory register maintained by the organization. Analysis of the valuation method used for the valuation of inventory. Treatment of Slow-moving, non-moving and expire inventories done by the organization. Review of purchases invoice with inward supply register. Reconcile purchase register and inwards supply register. Review of the purchase invoice to check the legal right of the organization of stock available. | Copy of inventory register Copy of inward and outward supply register inquiry from the accountant about slow-moving, non-moving, expired inventory Purchase invoices Management confirmation letter |
| Property, Plant, and Equipment | 4484.30 | Existence: Assets should be physically available in the organization against which value reflected in the financial statement. Right & Obligations: The organization has legal rights on assets that are shown in the balance sheet. The organization has the right to sell or dispose-off assets at any time (Knechel, & Salterio, 2016). Valuation: A proper valuation method should be applied that reflects a true and accurate value of assets. | The auditor must visit the organization to verify whether assets are physically available in the organization. To check whether they are in working condition or not. The valuation method used by CSL limited for valuing its assets with the help of a valuation expert report. Depreciation method applied to assets during the life of assets that reflect the true and accurate value of assets. The auditor must check purchase agreements of assets to check the legal right of the organization. If any property was taken on lease, then check lease agreement, time-period of the lease, treatment of expenses incurred in said case (Sardasht, & Rashedi, 2018). | Copy of asset purchase contract Copy of lease agreement List of assets duly signed by management that reflect assets available with the organization are physically check Report on Valuation of assets by a valuation expert. A copy of the report of the fixed assets audit is conducted in the organization. |
| Intangible assets | 1878.30 | Valuation: The valuation of intangible assets should be done correctly that reflect the true value of assets. It should be depreciated and amortized as per rules and regulations over the life of assets. Existence: Intangible assets should be available with the CSL limited as shown in the financial statement. | Auditors should take external advice in the form of external valuation expert to revalue of self- generate intangible assets by CSL limited. The auditor should check purchase agreement or contract in case of the intangible assets that are purchased from outside. The auditors should check whether accurate rates applied for depreciation and calculation of depreciation. | A purchase agreement for the acquisition of Intangible assets Valuation report of a valuation expert List of the rate of depreciation that applied on intangible assets Calculation of depreciation and carried forward value of assets from the previous year Details of purchase and sell of any asset |
| Deferred Tax assets | 378.70 | Valuation: The valuation of deferred tax assets should be calculated as per rule and guidelines issued by the government. Completeness: Deferred tax assets should involve all areas that affect tax treatment and deferred tax benefits next year. | The auditor should check the tax implication of various income and expenditure on the tax treatment of the organization. Valuation and calculation of deferred tax benefits and treatment shown in the financial statement. Auditors should check mathematical accuracy of calculation as per rules and regulations. | Check various income and expenses shown in profit & loss statements that have taxation effects. Calculation of deferred tax benefits |
| Trade and other payables | 1407.70 | Rights & Obligations: The amount is shown in the financial statement shown accurate obligation of the organization. The creditors have legal rights against the organization. Existence: All creditors and payables included in the financial statement, the balance of them shown actual figures that are dues at that time. | The auditor should take external confirmation in the form of the confirmation letter received from creditors. The time period in which it is liable to pay. The auditor should check the purchase invoice of credit purchases to reconcile with balances of creditors and check the accuracy of major creditors. | Creditors confirmation letter directly received from the creditors Major credit purchase bills List of creditors with balances Management confirmation letter |
| Interest-bearing liabilities | 4662.80 | Valuation: The amount shown in the financial statement should reflect the accurate value of the amount due. Rights & Obligations: The organization must repay the loan and interest on loan amount within due date as per contract. | The auditors should check the loan agreement and contract made at the time of the loan taken. The auditors should check that amount reflects in the financial statement is true and accurate by confirming the The auditor should check the calculation of interest as per the applicable rate of interest on liabilities. | Copy of contract and loan documents Calculation of interest on liabilities List of loan liabilities taken along with interest rate applicable. Calculation of total interest liability Management confirmation letter |
| Retirement benefit liabilities | 307 | Valuation: The amount shown in the financial statement should be accurate and true as per payroll and as per rule and regulation. Rights & Obligations: The organization mu pay retirement benefit liabilities that are shown in the financial statement (Shafiee Sardasht, & Rashedi, 2018). | The auditors should check that retirement benefits shown in the financial statement are true and accurate as per contract made with employees and retirement benefits mentioned by the organization. The calculation sheet of retirement benefits should match with the amount shown in the financial statement. | the Contract made with employees List of employees retired during the period List of working employees in the organization Detail of retirement benefits provided by the organization |
Audit Sampling:
As per ASA 530, audit sampling means the application of audit procedures to less than 100% of items within a population of the audit procedure. Sampling is done on the basis that each sample is selected on a reasonable basis and represents the entire population.
In the case of CSL limited, this ASA is important under audit procedure as this organization has inherent limitations for audit function. The auditors have to perform the audit within limited time and with limited cost, an auditor can't do an audit of each account balance of financial statement. Therefore, auditors select samples that represent the overall population to provide overall opinion and provide reasonable assurance on the financial statement (Mock, Srivastava, & Wright, 2017).
In the case of CSL limited, materiality is followed to choose samples that represent the overall financial statement of the organization. A proper audit program is designed by using both materiality and sampling. Samples are selected in many forms, but sampling is beneficial if it is done on a systematic and scientific basis (Demartini, & Trucco, 2017).
Scientific Sampling refers to the selection of samples on certain criteria, not a non-reasonable selection from the financial statement. In the above case, sampling is done based on a materiality level that works as a scientific sampling. Sampling depends on the risk that the auditor recognizes at the time of audit commences. During the audit procedure, if the auditor feels that materiality is set at a very high level or criterion used for sample not cover the entire risk, then the auditor can change the material level or increase sample size according to the observation found (CSL Limited, 2020).
Conclusion:
From the above-mentioned details, it is clear that to provide a most appropriate audit opinion, an audit must be conducted in a highly professional manner. The independence of auditors is the most important requirement for performing any audit procedure properly. Audit documentation is also part of audit means to keep a proper record of all audit documents based on which audit is conducted. An audit is not a complete guarantee of the accuracy of financial statement as an audit is done on the sample basis and there is always, a certain risk which cannot mitigate or removed during audit procedure. The Audit of the financial statement of CSL limited provides a provision of reasonable assurance. The report concludes that the CSL limited is having audit risk due to high inherent risk and control risk. However, as per the financial statement performance of the Company is good, effective, and constant in the market regularly.
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