Introduction
Overview of the audit program of NSX Limited
The trading system for equities markets is supplied by NASDAQ. The system has the ability to expand to other trading classes and markets as required. NSXA hosts the South Pacific Stock Exchange and the IR Plus trading facilities on its platform. NSXA is a recognized Market Operators in the ASX Settlement CHESS system for the settlement of equity trades. Equity trades are settled via the batch Delivery versus Payment mechanism. NSXA also allows the settlement of nominated securities by certificates on a broker to broker basis rather than through CHESS. The main objective of this audit program of NSX is to provide a framework that is detailed enough to ensure that sufficient appropriate audit evidence is collected and risks identified during risk assessment are responded to; ultimately obtaining a reasonable assurance to support the conclusion. This preliminary audit program focuses on substantive testing of final accounting balance and outlines the nature of work that will be done to ensure that each audit team member is aware and understands their responsibilities.
The following are included in NSX audit program as follows:
Insider Trading Prohibition;
Other relevant Corporations Act provisions;
Dealing in Shares issued by NSX Limited and its controlled entities;
Prohibition on Dealing in Financial Products issued over NSX Shares by Third Parties;
Dealing in listed financial products traded on NSX’s markets and other markets unrelated to NSX shares; and
Related Parties & Relevant Interests.
Audit objective(s)
The main mission towards the NSX audit ending balance of account(s) is to enable the auditor to form an opinion as to whether account balances are presented fairly in accordance to the legislation and accounting standards. Moreover, the auditor should be able to assess whether the transactions are bona fide and have been properly treated and claimed. To ensure sufficient appropriate audit evidence is collected, the audit program (Risk-based audit program) will focus on substantive test of transactions.
The samples selected are based on the assessment of overall audit risk as discussed in the ‘risk assessment’ section below.
Audit Risk Assessment
In the process of identifying and assessing the overall audit risk, we will take into account audit risk as defined in AUS 306 Materiality – the risk that auditors may express inappropriate opinions on financial information that is materially misstated and AUS 514 Audit Sampling and Other Selective Testing Procedures in considering the components of audit risks; Inherent Risk (IR), Control Risk (CR) and Detection Risk (D) (Australian Government; Auditing and Assurance Standard Board) .
Table 1: Risk Based Internal Audit Plan
Business Area/Activity Key Business risk
Description: Area where risk of material misstatement could be in the financial Report.
Operations Discovery Risk – the risk that no economically stoke will be discovered or found to be present in the company’s exploration license area.
Intangible Assets
Cash flow from operating activities.
Business Continuity Stoke Exchange Regulations- the exploration, development and production of Bitcoin and other financial exchanges that are hazardous to the environment and the company could be subject to liability for damage and losses by third parties resulting from its operations and/or incur substantial cost in regards to stoke exchange regulations
Cash and cash equivalent
Contingent liability- legal claims due to risks inherent to its activities
Going Concern BasisBusiness Continuity Funding Risk – The risk that the company may not be able to secure adequate funding through issue of equity to execute identified business opportunities Ability to continue as a going concern
Governance The security of tenure over the company’s asset may be adversely affected by change in government regulations in Romania
Non-current assets
Impairment of assets
(Table based on data obtained from Zeta Petroleum PLC; Report and financial statements, 2017)
Audit Risk Model
To keep the overall audit risk of engagements below acceptable limit, we have assessed and examined the level of risk pertaining to each component by gaining an understanding of the entity and its environment (Accounting Tools, 2017).
Applying the model: Audit Risk = Inherent Risk x Control Risk x Detection Risk
AR = f (IR x CR x DR)
Inherent Risk- the risk of a material misstatement in the financial statement arising due to error of omission as a result of factors other than failure of controls. Inherent risk in the audit of NSZ is significantly low given that:
The company is a well-established on National Stock Exchange of Australia
exploration and development concern (having been incorporated and audited since the year 2005).
As of 31st December 2017 the company does not have any subsidiary or complex network of related entities that could be misrepresented in the financial statement.
The company is operating in a relatively stable competitive environment
Control Risk- the risk of a material misstatement in the financial statements due to failure or inadequacy in the operation of internal controls of the company in detecting instances of fraud and error. The control risk of NSX also appears to be low considering the following factors:
NSX has adopted comprehensive systems of control and accountability as the basis for the administration of corporate governance.
Segregation of duties is well defined.
The company has a proper oversight and highly qualified audit committee. In compliance to safeguarding integrity in financial reporting the company has established an Audit Committee. Details of qualification and experience of members of the Committee is detailed.
Though the company does not maintain a separate internal audit function; due to its relative size, the board, as a whole oversees the effectiveness and continued strive for improvement of the internal control processes.
The assessment of inherent Risk(IR) and Control Risk(CR) are low in both cases. In this respect, the assessment of Detection Risk has been set at a relatively higher level. Keeping the firm’s policy of overall audit risk below 10% and assuming inherent Risk and Control Risk are set low at 40% each, the assessment of Detection Risk will be:
Working:
Audit Risk = Inherent Risk x Control Risk x Detection risk
0.10 = 0.40 x 0.40 x Detection Risk
0.10/0.16 = Detection Risk
Therefore, Detection Risk(DR) will be 0.625 ~ 62.5%.
Detection Risk- the risk that the auditor will fail to detect a material misstatement in the financial statement. The Detection risk is set at a relatively high level of 62.5 per cent, in order to prevent the audit risk from exceeding 10%.
The nature of these risks makes the use of substantive procedures to the audit, necessary.
In assessing the overall audit risk, the factors taken into account are:
Prior audit experience and knowledge
Nature and complexity of operations
Nature and availability of supporting documentation
Size and complexity of the company and
The qualifications/competency of staff (Accounting Tools, 2017).
Analytical procedures
In compliance with AUS 512 Analytical Procedures some reliance has been placed on analytical procedures as a substantive procedure. However, it is important to note that in the assessment of risks, analytical procedures may not detect a material misstatement when in fact a material misstatement exists (Australian Government; Auditing and Assurance Standard Board).
Analytical procedures performed are in relation to comparison of financial information (information in financial statements) over the last three years providing a trend analysis of the four key ratios as:
Table 2: Analytical procedure: prior-period financial information(Appendix 1 )
Selected Ratio 31st December 2019 31st December 2018 31st December 2017
Short Term debt paying ability/Liquidity Ratios
Cash ratio 6.22 5.43 0.30
Quick ratio 6.58 5.75 0.78
Current ratio 6.58 5.75 0.78
Activity Ratios
Inventory turnover Nil Nil Nil
Debtors turnover Nil Nil Nil
Solvency ratios/Ability to meet long –term obligations
Debt to equity 0.15 0.01 -7.08
Materiality
As per the AUS 302 Planning and AUS 306 Materiality the factors considered when considering material account balances and the appropriate materiality level are:
Prior audit experience and knowledge
Nature and complexity of operations
Overall assessment of engagement risk
Nature and availability of supporting documentation
Size and complexity of the company
The qualifications/competency of staff
There are five main types of account: assets, liabilities, revenue, expenses and equity. Each account holds several different individual accounts. For materiality purpose account balances considered material are: Non- current assets, assets held for sale, cash and cash equivalent, account receivables, inventories, account payables, prepaid expenses and accrued expenses.
We determine materiality to be considered ‘as the magnitude of an omission or misstatement that, individually or in the aggregated, could reasonably be expected to influence the economic decision of the user of the financial statement’. In calculating “planning materiality” ISA 320 (paragraph 10), we set:
5% of net assets as an appropriate benchmark to determine materiality given that, year 2017: £10,000 was similarly based on 5% due to low activity during that year; a phenomena recurring this present year as per NSX Quarter Report 30th June 2018 or
2% of total assets;
ISA 320 (paragraph 11), “performance materiality” is set at 75% of the above materiality levels and defined ‘as an amount or amounts that is less than the materiality for the financial statement as a whole (“overall materiality”), set to reduce the risk that the aggregated total of uncorrected misstatements could be material to the financial statement’ (Australian Government; Auditing and Assurance Standard Board).
Justification for level of materiality set is based on the inverse relationship that exists between audit risk and materiality ISA 320 paragraph A1. The higher the audit risk (in this case 10%) the lower the materiality will be set (thus, 5% is an appropriate level for materiality).
Table 3: Substantive procedures
Account Balance
Amount Assertion(s) Audit Procedures Audit Evidence
Asset 1: (Intangible Asset) exploration assets N/A Occurrence, Rights and Allocation, Completeness, Accuracy, Cut-offs Review lease agreements
Sample asset additions and disposals
Sample purchase requisitions and trace back to detailed records of PPE
Review useful life of assets. Lease agreement (document)
Titles (document)
Purchase requisition documents.
Assertion: Occurrence Test whether transactions actually took place
Assertion:
Rights and Obligations Whether company has legal claim to asset stated in the financial statements
Assertion: Completeness All fixed and tangible assets owned by company are recorded in the financial statements
Assertion:
Accuracy Amount recorded are accurately stated.
Depreciation method used conforms to GAAP (generally accepted accounting principles.
Impairments are correctly addressed.
Assertion: Cut-offs All transaction are reported and recorded in the proper financial period.
Asset 2: Cash at Bank £198,000 Existence, completeness, Accuracy, Valuation and allocation, cut-off, presentation and disclosure Request and examine bank confirmation.
Undertake tests of bank reconciliations,
Agee the bank balance on bank confirmation with balance on bank reconciliation and cash book.
Trace deposits in transit, outstanding cheques and other reconciling items to cut-off bank statement
Bank Confirmation certificate from the Bank (Document).
Obtain copies of client’s bank reconciliations (Document).
Enquiry and notes of reconciling item (oral)
Assertion- Existence
Ensure that cash stated as at year-end date actually exists
Assertion- Completeness Ensure there are no unrecorded cash items i.e. all cash items are included in year-end date
Assertion- Accuracy Ensure cash at bank stated on the reconciliation is accurate
Assertion- Cut-off To ensure correct amounts are recorded in proper period.
Assertion- Presentation and Disclosures To ensure that the cash and cash equivalent and related statement of comprehensive income entries are correctly disclosed in the financial statements in accordance with legislation and accounting standard.
Assertion: Detail tie-in Details in the cash balance agree with the related master file/general ledger
Asset 3: Account Receivable £12,000 Completeness, Existence, Occurrence and Cut-off, Valuation, Accuracy and Classification , Presentation and Disclosure Consider sending positive confirmation on few representative accounts.
Inspect duplicate deposit slips and supportive document.
Review subsequent collections
Perform roll-forward procedures.
Send positive and negative confirmation on fewer individual significant items Account receivable confirmations (document)
Blank confirmations (document)
Assertion: Completeness All receivables transactions and account balances that should be included are recorded in financial statements.
Assertion: Cut-off and Occurrence All transactions have been recorded in the proper period.
All receivables occurring during the period have been included in the financial statement.
Assertion: Existence All the recorded receivables exist as at balance sheet date
Assertion: Valuation and Classification All the accounts, loans, notes receivables and related valuation allowances have been properly classified and included at correct amount.
Assertion: Presentation and Disclosure All information is accurately stated, clearly described and disclosed in accordance to with legislation and accounting standard.
Asset 4: Inventory N/A Existence, Completeness, Valuation and Allocation, Rights and obligations Trace items than can be physically seen to the Inventory Count sheets.
Inspect purchase order invoices to confirm company name is present.
Obtain written confirmation of items held by third party
Compare gross margin numbers of previous years.
Compare inventory turnover ratio with prior years
Comparison of unit costs of inventory with previous years Inventory Count Sheets (document)
Written confirmation from 3rd Party
An inventory count program checklist.
Purchase invoices (document)
Assertion: Existence All recorded inventory exists as at balance sheet date
Assertion: Completeness All existing inventory that should be recorded in the inventory account balance are fully recorded.
Assertion: Valuation and Allocation Pricing used to value inventory are materially correct i.e. lower of cost or Net Realizable Value (NRV).
Inventory quantities on customers’ perpetual records reconcile with physical inventory on hand
No impairment issues
Rights and Obligation The company actually owns rights to all the inventory item listed.
Inventories are not pledged as security/collateral.
Asset 5: Prepaid expenses N/A Existence, Completeness, Rights and Obligations, Valuation, Presentation Obtain from company an analysis of prepaid insurance.
Obtaining independent confirmation of insurance coverage and terms from the insurance company.
Reconcile insurance expense and the general ledger amount.
Confirm whether related liability and finance cost with respect to finance insurance premium are recorded
Vouch significant premiums to premium notices Independent confirmation document from insurance company
Tax bills document
Assertion: Existence and completeness Balances of Prepaid expenses exist.
Account Balance is materially correct
Assertion: Valuation or Allocation Balances are allocated to future periods and/or realized in the ordinary course of business
Prepaid expenses with no continuing balance are removed from books
Assertion:
Presentation Prepaid balances are properly presented, clearly stated and classified in the financial statements and disclosed
Liabilities
Liability 1: Trade payables £27,000 Existence, Completeness, Cut-off, Valuation Circularization of payables
Test sample of vouchers for presence of authorized order and receiving report
Trace sample of voucher to the purchase journal
Compare dates on both transactions recorded and sample vouchers.
Obtain suppliers’ statements and reconcile to selected payable ledger accounts Vouchers
Purchase requisition forms
Purchase orders
Vendors invoice
Assertion: Existence Payable account balances recorded exists
Assertion: Completeness All transactions that the business was subjected are clearly and fully reported and recorded
Assertion: Cut-off All company Purchases transactions are recorded in the correct reporting period.
Assertion: Valuation All payable account transactions have been recorded at their proper valuation.
Liability 2: Accrued Expenses N/A Existence, Completeness, Valuation and allocation, Rights and Obligations
Assertion: Existence Expense account balances recorded actually exist
Assertion: Completeness All items that should be included in the accrued expenses are correctly recorded. There is no omission or understatement of liabilities
Assertion: Valuation and Allocation Amount in accrued expense account is appropriately valued and recorded.
Assertion: Rights and Obligations
The company has an obligation to repay the accrued expense balance
Liability 3:
Long-term Liability- Loans N/A Existence, completeness, Valuation and Allocation, Rights and Obligation, Classification, Presentation Obtain confirmation from bank
Use of disclosure checklist to ensure compliance with relevant legislation
Review Board meeting Minutes where official authorization to take a long-term liability was given Loan agreement Document
Board Minutes
Assertion: Existence Loan Balance really does exist.
There are no overstatement or understatement
Assertion: Completeness There are no omissions. Long term loan balance is recorded and disclosed as it should be
Assertion: Rights and Obligations The entity has a legal obligation to repay a liability
Assertion: Accuracy, Valuation and Allocation All amounts/ balances are valued, recorded and disclosed as appropriate
Assertion: Classification and Presentation Amount included is recorded in the proper accounts
Presentation of long-term liability in financial statement complies with accounting standards, are clearly stated, relevant and easy to comprehend
Liability 4: differed tax and current tax N/A Completeness, Existence, Classification, Rights and Obligations Request copies of tax forms filed by entity Corporation Income Tax Return
Sampling plan
When planning a sample for each material account balance, we will consider the following factors:
The characteristics of the items compromising the account balances to be tested
Tolerable misstatement and
The specific audit objective under consideration
Example of sampling for substantive tests of details of account balances
To detect understatements in recorded account payables, the appropriate sampling plan will involve obtaining a sample from subsequent cash disbursements in which the omitted items are recorded.
In determining the most appropriate sample size to test each account balance, regardless of the sampling method used, the factors to be considered are: the risk of incorrect acceptance, confidence level, tolerable error and expected error.
Assuming there are 5000 items/records in a particular group of transaction, the appropriate size of a sample will be determined by dividing population size by sample size
(Population size)/(sample size) = 5000/100 = 50
The number 50 is the interval in which the 5000 records will be arranged (using preferred sampling method to pick a starting point). Once sample size is selected and drawn from the whole population i.e. account transactions, audit procedures can be performed and conclusion drawn as to whether the account balance is materially correct.
References
Exchange, S. and Moody, A., 2012. NSX Announcement-MGT Resources Limited (NSX: MGS) Lodgment of Prospectus with ASIC.
Mutual, O., 2014. Index to the financial information. Independent review, 41.
Houghton, K.A., Jubb, C. and Kend, M., 2011. Materiality in the context of audit: The real expectations gap. Managerial Auditing Journal, 26(6), pp.482-500.
Moroney, R. and Trotman, K.T., 2016. Differences in auditors’ materiality assessments when auditing financial statements and sustainability reports. Contemporary Accounting Research, 33(2), pp.551-575.
Appendix 1
Liquidity Ratios Formula:
Cash ratio = (cash and cash equivalents)/(current liabilities)
Quick Ratio= (Cash+marketable securities+account receivable)/(current liabilities)
Current Ratio= (current assets)/(current liabilities)
Activity Ratios formula:
Inventory turnover = (cost of goods sold)/(average inventory)
Debtor turnover =(net credit sales)/(average account receibvable)
Solvency Ratio Formula:
Debt to equity ratio = (Total Liabilities)/(Shareholders^’ Equity)
Equity ratio = (Total Shareholder Equity)/(Total Asset)
Profitability Ratios Formula:
Gross margin = (Revenue-Cost of Goods Sold)/Revenue
Net profit margin =(Net profit)/Revenues
Asset turnover = (Net Sales)/(Average Total Assets)
Return on total asset (Earnings before Interest and Tax (EBIT))/(Total Net Assets )