Assume that you are an audit senior who has been assigned to the audit of ALU for the year ended 30 June 2024. You have been instructed by the engagement partner to gather the
relevant background information about the company as part of the procedures to plan the audit and obtain an understanding of ALU and its environment as per the Auditing Standard
Based on the information gathered and the understanding of the client and its environment, you need to plan the audit by providing comments on the following areas:
???You need to provide a detailed background description about ALU. This must include the information about its business operations, nature of revenue streams, product and services, market and competition, and regulatory environment. For the regulatory environment, vou must be specific as to what regulations affect the operation of ALU.
paracularly laws and regulations that the Alu needs to abide by in relation to thelt business activity in and outside of Australia. The information presented must be based on your in-depun understanding or companys operation. students who simply provide a summary of information from the annual report will not receive good marks. [20 Marks]
???Obtain an understanding of the corporate governance at ALu and perform a risk assessell,
[15 marks]
a. Use the greater of 5% of total assets (at 30 June 2023) or 10% of net profit (for the
vear ended su June cuzs, as the overall materlamy
b. Performance materiality is to be set as 85% of the overall materiality;
The Correct Answer and Explanation is:
Background Description of ALU
Business Operations and Revenue Streams
ALU, listed on the Australian Securities Exchange (ASX), specializes in building products, systems, and solutions. Its operations are segmented into Water Management, Building Envelope, and Housebuilding Products. The company primarily generates revenue from the United Kingdom, with additional operations in Europe, North America, the Middle East, the Far East, and other regions.
Products and Services
ALU offers a range of products including water management systems, building envelope solutions, and housebuilding products. These products are designed to meet the needs of the construction industry, focusing on sustainability and efficiency.
Market and Competition
Operating in the construction industry, ALU faces competition from other building product manufacturers and suppliers. The company’s focus on sustainable and efficient building solutions positions it to meet the growing demand for environmentally friendly construction practices.
Regulatory Environment
ALU must comply with various regulations in its operating regions. In Australia, this includes:
- Corporations Act 2001: Governs corporate conduct and financial reporting.
- Australian Securities and Investments Commission (ASIC): Regulates corporate behavior and enforces compliance.
- Australian Accounting Standards Board (AASB): Sets accounting standards for financial reporting.
- Australian Competition and Consumer Commission (ACCC): Oversees fair trading and competition.
Internationally, ALU must adhere to local regulations in each country of operation, including environmental, health and safety, and construction standards.
Corporate Governance and Risk Assessment
Corporate Governance Structure
ALU’s corporate governance framework includes a Board of Directors responsible for overseeing the company’s strategic direction and ensuring compliance with legal and ethical standards. The Board operates through various committees, such as the Audit Committee and the Corporate Governance and Compensation Committee, to manage specific areas of governance.
The company has established codes of ethics and conduct for directors, officers, and employees, promoting ethical behavior and compliance with applicable laws and regulations.
Risk Assessment
ALU employs a comprehensive risk management framework to identify, assess, and mitigate risks across its operations. The Board of Directors oversees risk management, with the Risk Management Department conducting internal audits and reporting findings.
The company utilizes a “three lines” model:
- First Line: Department managers identify and manage risks within their areas.
- Second Line: The Sustainability and ERM Executive Committee implements risk management policies and procedures.
- Third Line: The Risk Management Department conducts audits to ensure effectiveness.
This structure ensures that risk management is integrated into all levels of the organization, promoting a proactive approach to identifying and addressing potential threats.
Materiality Calculations
a. Overall Materiality
To determine overall materiality, we consider the greater of 5% of total assets or 10% of net profit for the year ended 30 June 2023.
Assuming:
- Total Assets at 30 June 2023: AUD 100 million
- Net Profit for the year ended 30 June 2023: AUD 8 million
Calculations:
- 5% of Total Assets = 0.05 × 100,000,000 = AUD 5,000,000
- 10% of Net Profit = 0.10 × 8,000,000 = AUD 800,000
The greater amount is AUD 5,000,000, which will be set as the overall materiality.
b. Performance Materiality
Performance materiality is set at 85% of overall materiality to reduce the risk that the aggregate of uncorrected and undetected misstatements exceeds overall materiality.
Calculation:
- 85% of AUD 5,000,000 = 0.85 × 5,000,000 = AUD 4,250,000
Explanation:
Setting performance materiality at AUD 4,250,000 allows the audit team to design audit procedures that are responsive to the risk of material misstatement. This threshold ensures that individual misstatements below this amount are still considered in the aggregate, maintaining the integrity of the financial statements. It also provides a buffer to account for the possibility of undetected misstatements, enhancing the overall effectiveness of the audit.
