Audit And Assurance: Benefit Of Materiality And Analytical Procedures In Audit

Materiality in Planning and Performing Audit

With the ramified economic changes and complex business structure, the concept of audit and assurances of the financial statement of company has been gaining momentum throughout the time. Audit function helps to strengthen the trust that shareholders and other users can lay over the financial statements of an entity. The main purpose of audit and assurance is to strengthen the transparency and truthfulness of the financial statement of company. The current report highlights the benefit of the concepts of materiality and analytical procedures in any audit. The company used for the research purpose is Janus Henderson Group. In the later sections of report the cash flow statement and the audit report for financial year 2017 are also reviewed.

1.In simple words, materiality defines the quantity that can make a difference in the user’s opinion. It is important to consider materiality because audit is able to provide only a reasonable level of assurance. It means that all the errors or frauds could not be detected by an audit due to the inherent limitations of the Janus Henderson Group. So the focus area is brought in limelight by using the materiality levels (Chan, & Vasarhelyi, 2018). Materiality represents that amount which is expected to create an influence on the users of the financial statements. This happens when the misstatements and the omissions either individually or as a sum total are reaching or exceeding this materiality amount. The ASA 320, Materiality in Planning and Performing Audit puts emphasis on the auditor’s responsibility to determine materiality for the financial statements. Materiality is decided right from the start of the audit (Christensen, Eilifsen, Glover & Messier, 2018).

Choosing any materiality level is a matter of professional judgement. Further, for certain account balances or the class of transactions, the auditor can choose a lower amount to be the materiality level, if the risk level is expected to be high. This is known as performance materiality. Different basis can be used for calculating a quantitative level of materiality. They can be (Eilifsen, Hamilton, & Messier Jr,. 2017).

• 1 % of revenue
• 5 % of net income
• ½ to 1 % of net asset value
• ½ to 2 % of the revenues or expenses

The most common criteria usually selected are the percentage of the net income. The percentage usually taken lies between ranges of 5% to 10%. However, when Janus Henderson Group is tend to be highly volatile or there lies huge risk on the profit earning capacity, other benchmarks are used. They can be the revenue, or expenses as discussed above or even a certain percentage of owner’s equity can also be taken. Further adjustment of this amount should be made owing to the various qualitative aspects. These can be related to past materiality levels, industry conditions, misstatements identified due to fraud, etc. (Eilifsen, Hamilton & Messier, 2017). The audit procedure which need to be followed in this would be assertion test. 

Analytical Procedures

On looking at the financial statements of the Janus Henderson Group by reading, the net income is selected as the perfect basis. The net income after taxes turns out to be $ 655,500,000. 5% of the same comes down to be $ 32,775,000. This figure needs to be adjusted for the changes observed in the income tax patterns. The reason is that because of tax patterns the income after tax is varying largely as compared to previous years. So, for the audit purpose the materiality level is assumed to be AUD 33,000,000 (Jans, Alles, & Vasarhelyi, (2014).

The most highlighting disclosure made in the Janus Henderson Group’s annual report is of the merger that completed on May 30, 2017. This merger has contributed a net income of around $ 173.1 million. Further, there is a one-time tax benefit that the company has attained for $ 340.7 million. This is on account of changes in U.S tax laws. Specific audit procedures are required to be performed to gather knowledge regarding the reliability of these transactions. The auditor needs to conduct specific external analysis too for the same. Written confirmations from the management should be obtained regarding the accuracy of merger operation (Czerney, Schmidt, & Thompson, 2014).  

2.Preliminary Analytical Reviews are applied at the planning stage of any audit. These reviews help the auditor to obtain a clear understanding regarding the entity and the environment in which it operates. ASA 300, planning an Audit of Financial Report states that these reviews are a significant component of the risk assessment procedures. Further, ASA 520 Analytical Procedures defines the analytical procedures. As per the ASA, these procedures analyses the relationship that lies between the financial and non-financial information. This analysis helps to evaluate the financial information (Jans, Alles & Vasarhelyi, 2014).

KEY RATIOS	2014	2015	2016	2017
CURRENT RATIO	1.91	1.47	1.73	2.23
FINANCIAL LEVERAGE	1.61	1.63	1.52	1.50
NET MARGIN (%)	39.70	21.32	14.85	37.59
RETURN ON ASSETS (%)	16.34	9.45	6.01	14.15
RETURN ON EQUITY (%)	27.20	15.32	9.49	21.31
RETURN ON INVESTED CAPITAL (%)	23.86	13.80	9.25	17.17
RECEIVABLES TURNOVER	2.57	2.89	2.66	4.60
FIXED ASSETS TURNOVER	39.33	49.96	47.32	39.74

The above table reflects various ratios for financial years from 2014 to 2017. The ratio trends show that the ratios have improved over the financial years except the fixed asset turnover ratio. This rise in the ratios shows that the company performance is improving. With improvement comes higher risk. The key risk areas identified, the relevant assertions and the audit procedure for solving the same are tabulated as follows (Louwers, et al. (2015).

KEY RISK AREA	AUDIT ASSERTION	AUDIT PROCEDURE
FIXED ASSETS	Existence	There lies a risk that the fixed assets mentioned in the report of Janus Henderson Group are not even existent on the balance sheet date. The audit procedure required to confirm the existence is the physical verification of the entity’s business place. This shall ensure the presence of the assets and their physical condition.
TRADE RECEIVABLES	Rights and Obligations	There is a risk that the receivables shown in the financial report are not even the receivables. They may be a chance that any settled customer is shown as a non-settled debtor. This calls for cash embezzlement. To resolve this and reduce risk, the auditor should go for external confirmation. He must call for balance confirmation from the debtors directly.
SALES OR TURNOVER	Occurrence	There are chances that the boosted revenue shown in the income statement of Janus Henderson Group is just hype. The company might have manipulated books to boost the profit. The inventory balance at the start of the period and at the end needs to be reconciled. This shall ensure the auditor that the sales have actually made and do relate to the organisation.
CURRENT LIABILITIES	COMPLETENESS	Huge risk is there that the company has not recorded all the liabilities in its books. There may lay unrecorded liabilities that Janus Henderson Group is obliged to pay. For this, the auditor again needs to resort to external confirmation. As discussed earlier, confirmation must be made with the creditors and short term lenders.

3.Review Of Statement Of Cash Flow

The review of the cash flow statement of Janus Henderson Group reveals the following results. The activity that provides the majority of cash inflows is the investing activity. The cash generated of Janus Henderson Group by the investing activities is reported to be $ 519,500,000. Financing activity tends to be the activity that entails majority cash outflows. The cash outflow reported is $ 504,700,000 (Jelinek, 2015).

Cash Flow Statement Review

The primary cash receipts identified for the company are:

• Sale or maturity of investments
• Cash acquired from acquisition  of JCG
• Investment income received from consolidated funds
• Proceeds from issue of options
• Proceeds from settlement of convertible note hedge

The primary cash payments include:

• Purchase of property, plant and equipment
• Net cash paid on settled hedges
• Dividend payment to shareholders
• Third party sales in consolidated seeded investment products
• Settlement of stock warrant
• Purchase of common stock for stock-based compensation plan

The non-cash financial activity could have been of the convertible senior notes and convertible note hedge and warrants. But both the instruments have been settled with the use of cash payment and cash receipts. There has been no conversion that has been given any affect (Mala, & Chand, 2015).

As seen from the above cash transaction and the merger that the company has entered into, there seems no risk against the going concern. The company has become a part of recent merger and have successfully and profitably acquired a company. Even cash has flowed into the newly merged company out of the acquisition. There is cash inflow even on account of changed taxation policies of U.S. This makes it sure that there is no visible risk on the going concern of the company. However, there can be a fraud that is hidden and that can harm the going concern capacity. To reduce the risk of the same, the auditor should try to gather sufficient and appropriate audit evidence. The control environment should be analysed. Risk level should be ascertained to identify the level of trust that could be done on entity’s internal control. Analytical procedures should be performed near the end of audit too to identify any significant changes (Czerney, Schmidt & Thompson, 2014).

Review Of Audit Report

The opinion presented in the audit report for financial year of Janus Henderson Group 2017 is unqualified opinion.  The auditor has clearly stated that the presentation of the financial information is fair in terms with the requirements. There is no qualification or modification or adversity represented in the audit report by the auditor. The report is issued all clean. The same is observed from the analysis made in the report. No discrepancies have been observed in the financial information (Brown-Liburd, Issa, & Lombardi, 2015).

Conclusion 

After evaluating all the details and facts about the audit and assurance of the financial statement of Janus Henderson Group, it could be inferred that auditors needs to comply with the all the applicable laws and regulations which could be used to strengthen the true and fair view of the financial statements of company. It has been observed that auditors evaluate whether company has complied with the accounting standards and applicable laws while formulating the financial statements. In this assignment, is Janus Henderson Group was assessed and it was found that auditors gave the non-qualified audit report which reflects that company has complied with the all the applicable laws and regulations and kept its business more transparent to its stakeholders. 

References

Brown-Liburd, H., Issa, H., & Lombardi, D. (2015). Behavioral implications of Big Data’s impact on audit judgment and decision making and future research directions. Accounting Horizons, 29(2), 451-468.

Chan, D. Y., & Vasarhelyi, M. A. (2018). Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.

Christensen, B. E., Eilifsen, A., Glover, S. M., & Messier, W. F. (2018). The Effect of Materiality Disclosures on Investors’ Decision Making, (2), 451-468

Czerney, K., Schmidt, J. J., & Thompson, A. M. (2014). Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?. The Accounting Review, 89(6), 2115-2149.

Eilifsen, A., Hamilton, E. L., & Messier Jr, W. F. (2017). The Importance of Quantifying Uncertainty: Examining the Effect of Audit Materiality and Sensitivity Analysis Disclosures on Investors’ Judgments and Decisions, 9(6), 2115-2149.

Jans, M., Alles, M. G., & Vasarhelyi, M. A. (2014). A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), 1751-1773.

Jelinek, K. (2015). The auditing profession: Accounting for some things. Business Horizons, 5(8), 48-69

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.

Mala, R., & Chand, P. (2015). Judgment and Decision?Making Research in Auditing and Accounting: Future Research Implications of Person, Task, and Environment Perspective. Accounting Perspectives, 14(1), 1-50.