ASSIGNMENT 1(2500 Words)
This assignment requires you to undertake audit procedures used mainly during the planning phase of the audit process. Each individual will be assigned a company by the lecturer to use as part of the assignment. You will need to access the company report from 2021 for this company .
1. Provide an overview of the company’s operations including the identification of key business risks. Justify your selection of the key business risks.
2. Apply analytical procedures to the Balance Sheet in the latest available financial statements and identify the two key account balances at risk of material misstatement. Justify your reason for selection of these accounts.
3. Identify the two key assertions at risk for each of the two key account balances selected. Justify your selection of these assertions.
4. Outline the procedures you would use to gather sufficient and appropriate audit evidence regarding the assertions identified in point 3 above
Justify your selection of the audit procedures.
1. Overview of the Company
The objective of this study is to provide an exposition of AMP Limited’s enterprise, underscore significant risks to the organization, scrutinize the Balance Sheet of the most recent financial statements, and bring to the fore two substantial account balances that could be significantly undervalued. This report will also detail the procedures that must be followed in order to gather enough and appropriate audit evidence about the two main assertions that have been identified as vulnerable for each of the two key account balances that have been selected.
Financial services leader AMP Limited has its corporate headquarters in Australia. The company provides a wide range of financial products and services, such as investments, insurance, banking services, pensions, and other means of saving for retirement. Since its founding in 1849, AMP Limited has grown to rank among Australia’s top providers of financial services. More than 5 million consumers and more than $250 billion in assets are now being managed by the organization.
The fact that AMP Limited works in a highly regulated and fiercely competitive industry exposes the business to a variety of risks. The main threats that AMP Limited faces in the business environment include regulatory and compliance risks, operational risks, reputational risks, financial risks, and strategic risks.
The regulatory environment in which AMP Limited operates offers risks associated with compliance and regulation. Many different laws and rules that control how business is done apply to the provision of financial services. The corporation could face monetary fines, legal action, and brand damage if certain laws and regulations are not followed.
The regular operations of AMP Limited expose company to a number of operational hazards. These risks include technical failures, human error, and fraudulent conduct. Failure to adequately manage operational risks may lead to financial losses, harm to the company’s reputation, and regulatory body action.
Reputational risks could be brought on by the company’s image and brand reputation. Any unfavorable news that arises from misconduct or poor customer service has the ability to damage the company’s reputation and drive away customers.
Due to its financial operations, the company is subject to a number of risks, including credit risk, market risk, and liquidity risk. The company runs the danger of experiencing financial losses as well as reputational damage if these risks are not controlled.
Potential risks to the company’s strategic position are brought on by its strategic choices and course of action. These risks include factors like competition, changes in customer preferences, and technological advancements. The company stands the danger of losing both its competitive advantage and its market share if strategic risks are not properly managed.
The two key account balances that are potentially significantly misrepresented will be identified in the section that follows by using analytical techniques to the Balance Sheet of the most recent financial statements that are readily available.
Risks related to regulations and compliances, Risks related to operations, risks related to operations, Risks related to finance, and strategic dangers are among AMP Limited’s most pressing concerns. The following explains why these particular dangers were chosen:
- Risks related to regulations and compliances: The banking and financial services sector is highly regulated, and failing to comply with the norms of such regulation can result in significant monetary fines, other penalties, and harm to a company’s reputation. This is especially true in the case of businesses that provide financial services. As a result of the nature of its operations within the financial services sector, AMP Limited is required to adhere to a wide range of regulations and fulfill a number of compliance duties. These regulations and standards include those that concern to the provision of financial advice, the insurance industry, the superannuation industry, banking, and the fight against the laundering of illicit funds. In the case that these standards are not met, the firm may be exposed to substantial legal and financial repercussions, such as a penalty from regulatory bodies, compensation for customers who have been affected, and the loss of its license. If those requirements are not met, the company may be subject to these repercussions.
- Risks related to operations: The company’s operations are subject to various operational risks, including IT system failures, data breaches, fraud, and errors. Any disruption to the company’s operations can result in significant financial losses, reputational damage, and regulatory sanctions. Furthermore, the company’s reliance on third-party service providers and outsourcing arrangements also exposes it to operational risks.
- Risks related to reputation: Customers’ confidence and trust are crucial to the financial services industry; thus any negative news or public perception can be extremely damaging. AMP Limited’s reputation has been threatened in the past by a number of factors, including Australia’s Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry, which revealed pervasive instances of wrongdoing in the sector.
- Risks related to Finance: The business is vulnerable to a number of different types of financial dangers, such as risk of credit, liquidity risk, market risk, and interest rate risk. These dangers could lead to considerable monetary losses, which would have an effect on the company’s overall financial performance and stability.
- Strategic Dangers: Long-term objectives and strategic choices may be threatened by shifts in the competitive landscape, technological developments, and macroeconomic situations. If the company is unable to respond to these changes, it could hurt its long-term profitability and development.
2.Application of analytical procedures to the Balance Sheet and identification of key account balances at risk of material misstatement:
Analytical approaches are used by auditors to investigate the information they have access to, specifically the linkages and patterns within the financial data. By using these techniques, auditors can better spot unusual fluctuations in financial data that may point to the presence of significant misstatement concerns. This section will apply analytical procedures to the Balance Sheet from the most up-to-date financial statements available for AMP Limited in order to isolate the two potentially relevant account balances.
A static summary of a company’s financial situation at a specific point in time can be obtained via the Balance Sheet, which is a financial statement that offers this information. The resources available to the organization, as well as any commitments and ownership interests, are detailed in the financial statement. The analysis of a company’s balance sheet can provide vital insight into the company’s financial health, solvency, and liquidity.
The following information may be found on the Balance Sheet of AMP Limited as of the 31st of December in 2021:
|Amount (AUD ‘000)
|Cash and cash equivalents
|Property, plant and equipment
|Liabilities and Equity
|Amount (AUD ‘000)
|Total liabilities and equity
The examination of AMP Limited’s balance sheet reveals that the company has committed a sizeable percentage of its assets to investments as well as property, plant, and equipment. This business choice could possibly expose the company to risks such as market volatility, asset depreciation, and product obsolescence. In addition, the total amount of the company’s liabilities and equity are very close to being equal. This suggests that the company uses a substantial amount of leverage, which makes the business susceptible to the financial risks associated with debt repayment and restructuring.
Key Account Balances at Risk of Material Misstatement:
Following an examination of the Balance Sheet, we have determined the following to be the two primary account balances that are susceptible to significant overstatement:
Borrowings: According to the information provided by the Balance Sheet, a sizeable amount of AMP Limited’s obligations are held in the form of a balance in its borrowings account. Because the valuation of borrowings is affected by a variety of circumstances, including interest rates, foreign exchange rates, and the terms of the borrowings, there is a chance that this account will contain an error that is material in nature. The borrowing can be maintained through diverse financial instruments such as bonds, bank loans, and commercial paper, each of which presents distinct value considerations. This introduces additional intricacy to the methodology employed for determining the value of the asset.
Investments: According to the Balance Sheet, the outstanding amount in the borrowings account constitutes a significant proportion of AMP Limited’s obligations. The presence of a material error in this account is plausible due to the impact of various factors, including interest rates, foreign exchange rates, and borrowing terms, on the valuation of borrowings. Various financial instruments such as bonds, bank loans, and commercial paper can serve as means of borrowing, and each of these instruments necessitates a distinct approach to valuation. Consequently, this introduces intricacy to the methodology employed in ascertaining the value of the asset.
Justification of Selection of Key Account Balances:
The following arguments provide backing for the proposition that investments and borrowings ought to be categorized as the primary account balances that are vulnerable to significant underestimation.
Complexity: The valuation of an investment or loan at a given point in time is influenced by a multitude of factors, including but not limited to market conditions and prevailing interest rates. The aforementioned circumstances may have a substantial impact on the valuation of both assets and liabilities.
3. Identify the two key assertions at risk for each of the two key account balances selected. Justify your selection of these assertions
When conducting an audit of the Balance Sheet, it is essential to identify the two primary account balances. For each of these balances, there are two critical assertions that are at risk.
- Cash and Equivalents of cash
The following statements represent the two primary assertions that may be erroneous concerning the balance of Cash and Cash Equivalents:
- The Value and Existence Claim: Consequently, the auditor assumes the obligation of ascertaining the accuracy and validity of the cash balance as reported on the balance sheet, in light of this assertion. Additionally, it is crucial for the auditor to ascertain the accuracy of the financial value attributed to the cash balance. Given the possibility of an exaggeration or distortion of the cash balance, it is crucial for the auditor to collect adequate information to authenticate the precision of the stated balance. It is imperative for the auditor to verify the genuineness of the reported cash balance and identify any potential instances of tampering, such as deceitful inclusions, exclusions, or temporal incongruities. The assertion of existence is potentially compromised; thus the level of risk is elevated. If the valuation of the cash balance is insufficiently assessed, such as when the bank balance is not reconciled or when there are discrepancies in the reconciled balance, the validity of the valuation claim may be compromised.
- Assertion completeness: In order, for this assertion to hold validity, it is presupposed that all monetary exchanges have been duly recorded in the accounting ledgers and that no instances of unrecorded cash transactions have occurred. In order to ensure the completeness of cash transactions, it is imperative for the auditor to gather sufficient evidence, as there exists a possibility of omission of certain transactions. The completeness assertion may be compromised if there are discrepancies between the cash amount and the bank statement, or if the cash amount has not been reconciled to the bank statement.
- Plant, Equipment and Property
There are two primary assertions that are susceptible to risk in the Property, Plant, and Equipment balance.
- Defining Existence and Value: In order to assert this claim, it is imperative that the organization possesses the legal authority to utilize all tangible resources as depicted in the Balance Sheet. It is possible that the entity lacks the legal authority to employ the Property, Plant, and Equipment that has been reported. Therefore, the auditor must amass sufficient evidence to ensure that the assertion of rights and responsibilities is appropriate. In the event that a business has obtained an asset through a lease agreement that has not been properly documented, or if the asset is being held by a third party but is being claimed by the entity as its own, the entity’s claims regarding its rights and responsibilities may be at risk of being called into question.
- The assertion of rights and obligations: Legal possession or entitlement to use the Property, Plant, and Equipment listed on the Balance Sheet is required for this statement to be true. It is the responsibility of the auditor to collect sufficient evidence to determine whether or not the entity actually possesses the rights and duties claimed with respect to the declared Property, Plant, and Equipment. If the business has engaged into a lease arrangement but has not acknowledged it as such, or if the asset is in the custody of a third party but the entity is asserting ownership over it, the entity’s assertion of rights and responsibilities may be in jeopardy.
Selection Justification: These representations were chosen because of their significance to the financial statements as a whole and their close relationship to the two primary account balances. There is an increased risk of material misrepresentation since these statements rely on the judgment and estimation of management.
4. Outline the procedures you would use to gather sufficient and appropriate audit evidence regarding the assertions identified in point 3 above Justify your selection of the audit procedures.
In order to collect sufficient and acceptable audit evidence for the aforementioned statements, the following audit procedures might be carried out:
Non Tangible Assets: Conducting a physical inspection of assets enables us to authenticate their existence and confirm their incidence. Verification of the existence of assets can also be conducted by cross-referencing contracts and purchase records.
With regards to valuation and allocation, it is possible to scrutinize the methodology employed by the company and assess the suitability of the fundamental assumptions. The comparison between the fair market value of assets and their carrying amount can be made.
Properties Investment: The act of physically observing the qualities enables us to confirm their existence and manifestation. Evidence of the properties’ existence may also be ascertained through perusal of sales records, rental records, and lease records.
With regards to valuation and allocation, an analysis of the company’s methodology can be conducted to determine the suitability of the underlying assumptions. The carrying values of the properties may be juxtaposed with the market value of analogous properties.
The justification for using these particular audit methods is provided below:
- The method of auditing through physical inspection can provide concrete and credible evidence of the existence of assets. The process involves physically verifying the location and condition of assets as documented in the records.
- The review of contracts and agreements is a method of auditing that can provide evidence of the presence of assets. The process involves verifying the contracts to ensure that the assets were acquired or leased during the relevant accounting period and are accurately recorded.
- The aforementioned audit procedure provides substantiation that the assessment and distribution of assets are accurate by scrutinizing the valuation approach employed. The process involves scrutinizing the assumptions utilized in the company’s valuation procedure to determine their validity. The utilization of this approach has the potential to reveal errors and biases in the process of valuation.
- The audit procedure of comparing the carrying amount of assets with their fair value serves as evidence for the rationality of the former. The procedure involves comparing the recorded value of the assets in the financial statements with their current market value. This approach is beneficial in ascertaining whether the assets have been overestimated or underestimated.
Conclusion: AMP Limited’s business is exposed to various types of risks, including regulating and compliance risks, operational risk, reputational risk, financial risk, and strategic risk, which are considered to be the most significant threats. The account balances of intangible assets and investment properties are two crucial components that may exhibit substantial discrepancies. The primary concerns for these funds are centred around the concepts of existence, occurrence, value, and allocation. The acquisition of adequate and appropriate audit evidence pertaining to financial statements can be achieved through various audit procedures, such as physical inspection, contract and agreement analysis, valuation technique evaluation, and fair value comparison. The implementation of these checks will guarantee the absence of significant errors being disregarded and will instil a sense of assurance in the accuracy of your financial records.