Auditing & Assurance Services Computation Assessment Answer
Key Topics
- Executive Summary of the assessment
- The ethical code and standards set by the company related to the following areas:
- Risk assessment
- Computation of income statement and balance sheet ratio
- References
1. Executive Summary of the assessment
2. Focus in each headline the implication of ASX Corporate Governance Principles from your selected company
Conceptualize and explain how to your selected company implements ASX CGC principles.
3. Risk assessment (When performing an audit, you use risk assessment procedures to assess the risk that material misstatement exists. This step is very important because the whole point of a financial statement audit is finding out if the financial statements are materially correct. How exactly do you assess audit risk?) There are various steps of risk assessment procedures, but your report will focus mainly: Recognizing the nature of the company, what’s the company’s market overview? Who (if anyone) regulates the client? What’s the company’s business strategy? Computation of income statement and balance sheet ratio, and Development of common-size financial statements and focus on relevant audit risk and potential steps to reduce risk.
B. ASX CGS Principles:
The Principles and Recommendations are structured around, and seek to promote, 8 central principles:
1. Lay solid foundations for management and oversight: Your selected company should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated.
2. Structure the board to add value: Your selected company should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively.
3. Act ethically and responsibly: Your selected company should act ethically and responsibly.
4. Safeguard integrity in corporate reporting: Your selected company should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting.
5. Make timely and balanced disclosure: Your selected company should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.
6. Respect the rights of security holders: Your selected company should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively.
7. Recognise and manage risk: Your selected company should establish a sound risk management framework and periodically review the effectiveness of that framework.
8. Remunerate fairly and responsibly: Your selected company should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders
C. Risk Assessment
1. http://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf
Executive Summary of the assessment
The report constructed below shows the compliance of Downer EDI Limited with the policies of Australian Securities Exchange. This is a primary security exchange of the country where Australian Public Companies are listed and guided to comply with the policies and procedures set by the body (Loughrey, 2011).
The Corporate Governance principles guides the organizations to follow the procedure and policies which enable them to be more accountable to the shareholders and conduct ethical operations of the organizations. The broad framework of corporate governance also helps in mitigation of risks related to the governance of the organization.
Implication of ASX Corporate Governance Principles on Downer EDI Limited
The Principles and Recommendations are structured around, and seek to promote, 8 central principles:
? Lay solid foundations for management and oversight:
The board and management of the company has a very specific role and responsibility. Their responsibility include acting on behalf of the shareholders of the company and being accountable to them. They also need to deal with the challenges faced by corporate governance and corporate ethics.
In order to evaluate the performance of the board of directors and the management of the company, Downer has written agreements of employment which is often reviewed against appropriate measures including the aspects like the performance targets related to business plans and corporate objectives (Botica Redmayne, 2012). Also in the year 2014, the senior management of the company were evaluated for their performance by the feedback on the progress against the targets.
? Structure the board to add value:
The company presently consists of a chairman, six independent directors, one non-executive director and an executive director. The size, composition and skills of the directors are assessed by the Nominations and Corporate Governance Committee.
Also the company also encourage the external specialists to help in the selection of the executives, and important management of the company. All the elections and recruitment is done based on the rules set by Australian Securities Exchange.
The company ensures highest behaviour standards and business ethics, whenever they engage in activity related to the organization.
The ethical code and standards set by the company related to the following areas:
? Engagement with the shareholders
? Workplace Behaviour
? Protect confidential information
? Compliance with laws
? Prohibit corruption and bribery
? Safety in the workplace
? Sustainability
? Conflicts of Interest
In order to ensure ethics, the company have a whistle-blower policy under which the breaches of the Standard of Business Conduct is reported and investigated (Hasan et al., 2005). The company also ensure that the workforce of the company consists of a diverse group which help in making its business more sustainable. The Diversity and Inclusiveness Policy set by the company focus on diversity across the group. Currently, the company has objective to increase the participation and number of female employees in the company and provide more flexibility to its workforce. For this purpose, the company has set a women’s network which explores the barriers to opportunities and career progression of the female employees of the organization.
The integrity of the reporting the financial statements of the company is safeguarded by the Audit and Risk Committee of the company (Sbaraglia, 2009). This committee consists of independent directors and a chairman and has the following responsibilities:
? To look at the qualitative aspect of the accounting, auditing and reporting of the financial statements to the shareholders.
? To analyse the effectiveness of Company’s internal control system and risk management framework.
? To evaluate company’s risk profile and policies.
? Make timely and balanced disclosure:
The Disclosure Policy of Downer EDI Limited ensures that all the investors have timely access to the information about the company and that these are presented in clear and factual manner (Krishnan, 2007). It guides the disclosure of all market sensitive information. This committee comprises:
? One non-executive director
? Two Independent director and
? Group CEO
The company provides proper empowerment to its shareholders through:
? Effective communication with the shareholder (Hinde, 1997).
? Providing balanced and understandable information to shareholders.
? Making shareholders participate in the general meetings of the company.
The company has various policies for risk management in relation to interest rate fluctuations, foreign exchange risks, business risk, credit risk, tendering and contracting risk, etc. Various control measures is used by the company to safeguard the business prospects (Arens, Elder and Beasley, 2003). The company also employs a risk management framework through which it identify, evaluate and manage business risks. These risks are related to the external working environment of the company.
The sustainability report presented by the company every year, describes the approach it use to manage environmental and social sustainability risks. There is also an internal audit team which evaluates the effectiveness of the internal control measures. This team is different from the external auditors and they directly report to Audit and Risk Committee. This committee helps the board members to evaluate various risks faced by the company and strategies to deal with it.
8. Remunerate fairly and responsibly:
The company has a remuneration committee which helps the board and management in the following ways:
? It formulates the policies for remuneration and incentive to be paid to the employees.
? It also formulates the policies for recruitment, performance, retention and termination of all the senior executives of the company.
? Other incentive plans like equity based is evaluated by this committee.
? This body also looks after the superannuation and the retirement payment plans for the company.
However the task for remuneration of the executive and non-executive directors is the responsibility of the Nominations and Corporate Governance Committee (Lama and Anderson, 2015). These committee designs the remuneration policies in such a way as to motivate the employees and executive to work for long term growth of the company.
Also the fee approved by the shareholders of Downer for non-executive directors is $2 million as on 30th October 2008. As according to the ASX principles, the retirement benefits are allocated by the company and is provided in the financial statements every year.
Risk assessment
There are various steps of risk assessment procedures, some of the important ones are:
Recognizing the nature of the company- By understanding the nature of the company helps in understanding its environment in which it operates. The factors which help in understanding a company include:
Operations, Ownership and governance- The compliance with the corporate governance policies of the company help to indicate the degree of risk associated with the operations of the business.
Class of transactions- The auditors have the responsibility to analyse the transactions that are materially misstated by analysing the internal and external factors affecting the transaction (da Silva Rosa, Etheridge and H Y Izan, 2007).
Related parties- An audit is conducted of the related parties transactions. These transactions include the goods or services sold to the members of the management, certain items are purchased from the entity related with the management. These cases has a very high risk of material misstatement in the financial statements of the company. Some of these risks may include the risk of fraud, inappropriate accounting of the revenues, non-disclosures of the important information that might affect the decision of the investors.
The company deals with building and sustaining of the assets, infrastructure and facilities of the client companies (Johnson, 2017). It operates in six different industries which include, construction and maintenance, Rail, engineering, utilities, transport and mining. Thus the organization has a very wide scope of opportunities and the risk associated with the external factors of the company is less. When the organization faces challenges in either one of the sectors, it can earn higher revenue from other industries. Thus factors such as recession does not impact the operations of the company to a great extent.
The company has it competitive advantage in provide unique and quality services to the clients which relates to more than one industry. With this competitiveness, the company earns important contracts in the markets of Australia and New Zealand. Recently the company has gained contract for Carrapateena underground mining services which is valued over $660 million. Thus ability of the organization to gain such huge project reflect its strong hold on the market.
The services provided by the company to various clients is often regulated by the policies of the industry in which the client operates. These policies might relate to trade barriers, energy use, credit policies, taxation policy, governance policy, technological policies, etc. These policy adherence by the client company affect the operations and solution provided by Downer EDI Limited. The company has to provide the engineering and construction solution to the client within the framework of these policies. Hence the company has to deal with various laws and adherence to those laws.
What’s the company’s business strategy?
The company faces many challenges while it operates to provide services to the clients. However each risk is identified and proper strategies is constructed to face the challenge. Being an engineering and infrastructure management firm, Downer EDI Limited is constantly faced by the challenge of newer technological developments that take place in the field of engineering. However the company has adopted a strategy to meet this challenge by constantly upgrading itself in technological knowledge, being proactive in innovation of new technologies, using more appropriate technology for performing services of the clients. The company has a program called, “Fit for Business” under which the company aims to save $250 million across all industries by using better and more upgraded technology for performing business. As mentioned by the chief information officer of the company, this act would help align the company’s business strategy and helps in reducing risks by meeting the growing demands of the business.
Computation of income statement and balance sheet ratio
Gross Margin Gross Profit/Sales 12.23%
Net Margin Net Profit/ Sales 2.49%
Operating Margin Operating Income/Sales 3.58%
Earnings per share Income available to shareholders/ average outstanding shares
Price-earnings ratio Market value of share/EPS
Times interest earned ratio EBIT/interest expense 6.3 times
Return on shareholders’ equity Income after taxes/equity 0.061
Quick Ratio (Current assets- inventory)/ Current Liabilities 0.866
Current Ratio Current Assets / Current Liabilities 0.964
Debt/Equity Ratio Total debt/ Equity 1.30
Days Sales Outstanding Receivables/Revenue *365 88.95
Days Inventory Outstanding Inventory/ COGS *365 17.26
Days payable outstanding Accounts Payable/ COGS *365 30.19
Common size income statement
Common size balance sheet
The procedure for risk assessment are as follows:
Inquiring about the management and other entities- In this segment, the environment under which the financial statements have been prepared is analysed by a team of external auditors. The internal auditors of the company evaluate the effectiveness of the internal control system (Mohseni, 2014). The team of lawyers evaluate the risks associated with non-compliance of regulations and policies.
Analytical procedure- This procedure helps in measurement and analysis of the company’s financial performance.
Inspection and Observation- Through this procedure, the organizations operations are analysed and an inspections of the documents is done which include sales invoice, purchase books, bookkeeping documents, etc.
References
Botica Redmayne, N. (2012). Essentials of Auditing, Assurance Services & Ethics in Australia: An Integrated Approach20121Essentials of Auditing, Assurance Services & Ethics in Australia: An Integrated Approach. Massey: Massey University 1st ed. Journal of Accounting & Organizational Change, 8(1), pp.120-122.
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