Question

QUESTION

You are required to obtain a copy of a financial report for STRATEGIC ENERGY RESOURCES LIMITED for the year ended 30 June 2019. The best way to locate their financial report is to go to their website and download a copy. This will normally be found under “Investor Information”, “Shareholder Information” or similar tabs on a company’s website.

REQUIRED

1)  Identify and explain three key or significant audit matters that were raised in the audit report that may lead to the risk of material misstatement in the financial report . (For every Key audit matter identified, discuss how the auditors responded to each matter raised. You are to discuss your own point of view about each of the key audit or significant matters, how they are important and their impact on the financial reports if not corrected. )

2)Apply analytical procedures to the financial report information of Strategic energy resource limited for at least two years. For this purpose, restrict your procedures to ratio analysis (use at least two ratios each for profitability, solvency, and liquidity).

3) Explain how the results of your analytical procedures in 2) influence your planning decisions for the audit of the company.

4) From the financial statements of Strategic energy resource limited, select two revenue and two expense item from the Statement of Profit or Loss and Other Comprehensive Income, two asset and two liability items and one item from the equity section of the Statement of Financial Position.

For the nine selected items:

a)     Identify the key assertion(s) at risk in relation to the balances described for each of these nine selected items in the financial report.

b)     Describe the audit procedure(s) you would perform to gather sufficient appropriate audit evidence on each of these assertions to ascertain

the fairness of the value of each of these nine items stated in the financial report.

Answer 1

1) Identify and explain three key or significant audit matters that were raised in the audit report that may lead to the risk of material misstatement in the financial report.

Material uncertainty as regards going concern

Uncertainty regarding going concern indicates the inability of the firm to continue in operations. This could be due to accumulated losses, legal action etc.

In the current case, the auditors have clarified that net loss of $694,845 which indicates material uncertainty and casts doubt on the group’s ability to continue as a going concern. It is clarified in note no 2 that the financial statements have been prepared on the assumption of the entity continuing as a going concern which is dependent on the consolidated entity ability of being successful in exploration projects and accessing additional sources of capital. It has been clarified in the note that no adjustments have been made relating to recoverability and classification of assets and liabilities.

Exploration and evaluation of assets

During the year management has recognised impairment loss of $ 105,522. In accordance with AASB 6 Exploration for and Evaluation of Mineral Resources, the Group is required to assess at each reporting date if there are any triggers for impairment which may suggest the carrying value is in excess of the recoverable value.

The process undertaken by management to assess whether there are any impairment triggers in each area of interest involves an element of management judgement.

This area a key audit matter due to the significant judgement involved in determining the existence of impairment triggers.

How the above issues were addressed by the audit:

· Assessing the accuracy of impairment recorded by determining if:

o Tenements had been relinquished;

o Tenements had not had any expenditure incurred since the prior period; Tenements were planned to be relinquished in the future, and

o Tenements did not have any budget expenditure in the forecast period.

· Performing a comprehensive review of management's assessment of impairment indicators in line with AASB est 6 and whether tenements are considered to be feasible and or active;

· Evaluating the accuracy of capitalised costs by substantively testing a sample of additions during the year and assessing whether they have been appropriately capitalised in line with AASB 6;

· Assessing the appropriateness and uniformity of the accounting policies for Exploration & Evaluation Expenditure with the prior period and the requirements under AASB 6

· Reviewing current exploration tenements

· Assessing appropriateness of related financial statements disclosure

2) Computation of ratios

Type of ratio	Ratio	Formula	2019	2018
Profitability	Interest coverage ratio	Profit before interest and tax / interest	-	-
			(since there is no long-term debt)
	Return on capital employed	Profit before interest and tax / (debt + equity) X 100	(694845)/18,68,292 X 100 = -37.19%	(766260) / 22,26,592 X 100 = -34.41%
		(since the company is not having any significant activity and return is negative)
Solvency	Debt equity ratio	Debt / equity	0 / 1868292 = 0	0 / 22,26,592 = 0
	Equity to total assets	Equity / total assets	1868292 / 1960430 = 0.95	22,26,592 / 22,91,393 = 0.972
Liquidity	Current ratio	Current assets / current liabilities	10,88,384 / 92,138 = 11.81	16,87,610 / 64,801 =26.04
	Quick ratio	Quick assets / quick liabilities	(1088384 – 17445) / 92138 = 11.62	(1687610 – 10742) / 64,801 = 25.88

3) Planning decisions

Based on the above, the company has no significant operations during 2018-19. The audit procedures would involve detailed scrutiny of account receivable to assess the collectability. Cash and bank balances are the major component of current asset which needs to be confirmed by obtaining independent bank confirmations. The non-current assets also need to be evaluated for their collectability since the company has no significant business operations.

4) Key assertion at risk for selected items

S no.	Item	key assertion(s) at risk	audit procedure(s) you would perform to gather sufficient appropriate audit evidence to ascertain the fairness of the value
1	Sundry income	Existence and inclusion in the current year	Matching with source documents Scrutiny with receivables and cash ledger
	Interest income	Non existence of investment and overstatement	Correlation with receipt from borrowers and / or investment made
	Employee benefit expense	Payment for lay off Employee benefit plans may involve bogus payouts	Payroll register Matching payroll processing with monthly payouts Management approval for all retrenchment plans
	Corporate expenses	Understatement to boost profits	Detailed analysis of individual heads
	Cash and cash equivalents	Existence and completeness	Balance confirmation from banks Physical verification of cash in hand Verification and scrutiny of cash ledger
	prepayments	Overstatement – the prepayment does not exist	Matching the prepayment with unfilled contract
	Trade payable	completeness and valuation and allocation. This is because the bigger risk is that the client has omitted amounts from the balance, which is then understated.	Confirmation on segregation of duties Evidence of payment after year end Cut-off testing is establishing the last valid transaction (using document numbers) in the current financial year and testing transactions with lower document numbers to ensure that they are included in the current financial year
	Other payable
	Issued capital	Existence, proper procedures for issue	Checking of member register Share transfers etc. (since this company may have a chance of buy out)