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
ASA 315.
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;
[15 marks]
- Extrapolate the half-vear results to obtain the predicted vear end results;
[20 Marks]
Then perform planning analytical procedures to assess the risk of material misstatements for the line items of financial statements (Balance sheet, and income statement. 20 marks
Please refer to the Auditing Standard ASA 570 Going Concern, identify factors (financial and non-financial) that you would consider when assessing whether the ALU will continue its operation as a going concern.
The Correct Answer and Explanation is:
Audit Planning for ALU: Year Ended 30 June 2024
1. Background of ALU
Business Operations and Revenue Streams:
ALU is a vertically integrated aluminium company engaged in bauxite mining, alumina refining, aluminium smelting, and downstream processing, including extrusion and distribution. Its revenue streams are diversified across
- Bauxite Mining: Extraction of bauxite ore, primarily in Western Australia and the Northern Territory.
- Alumina Refining: Processing bauxite into alumina, with significant operations in Western Australia.
- Aluminium Smelting: Conversion of alumina into aluminium metal, with smelters located in New South Wales, Victoria, and Tasmania.The Australian Aluminium Council
- Downstream Processing: Extrusion and distribution of aluminium products, serving construction, automotive, and packaging industries.
Products and Services:
ALU’s product portfolio includes:
- Primary Aluminium: Ingots, billets, and slabs for industrial use.
- Extruded Products: Aluminium profiles for construction and manufacturing.
- Rolled Products: Sheets and foils for packaging and automotive sectors.
Market and Competition:
Australia’s aluminium industry is a significant contributor to the economy, with a market size valued at USD 6.91 billion in 2023 and projected to reach USD 9.55 billion by 2030, growing at a CAGR of 4.7%. ALU competes with both domestic and international players, facing challenges such as fluctuating commodity prices and energy costs.
Regulatory Environment:
ALU operates under a complex regulatory framework, including:
- Environmental Regulations: Compliance with the Environmental Protection and Biodiversity Conservation Act 1999, governing emissions, waste management, and land rehabilitation.
- Workplace Health and Safety: Adherence to the Work Health and Safety Act 2011, ensuring safe operations across all sites.
- Modern Slavery Act 2018: Obligations to identify and mitigate risks of modern slavery within operations and supply chains.
- International Trade Regulations: Compliance with export controls and tariffs affecting aluminium products.
2. Corporate Governance and Risk Assessment
Governance Structure:
ALU’s governance framework aligns with the ASX Corporate Governance Principles and Recommendations. Key features include:
- Board Composition: A majority of independent non-executive directors with diverse skills and experience.
- Audit and Risk Committee: Oversees financial reporting, risk management, and internal controls.
- Sustainability Committee: Focuses on environmental, social, and governance (ESG) matters.
Risk Assessment:
Key risks identified include:
- Market Risk: Exposure to aluminium price volatility and currency fluctuations
- Operational Risk: Potential disruptions from equipment failure, supply chain issues, or natural disasters.
- Regulatory Risk: Changes in environmental laws or trade policies impacting operations.
- Cybersecurity Risk: Threats to information systems and data integrity.
3. Materiality Determination
Overall Materiality:
Based on the greater of 5% of total assets or 10% of net profit:
- Total Assets (30 June 2023): AUD 10 billion
- Net Profit (Year Ended 30 June 2023): AUD 500 million
Calculations:
- 5% of Total Assets: AUD 500 million
- 10% of Net Profit: AUD 50 million
Overall Materiality: AUD 500 million
Performance Materiality:
Set at 85% of overall materiality:
- 85% of AUD 500 million = AUD 425 million
4. Extrapolation of Half-Year Results
Assuming consistent performance in the second half:
- Revenue (Half-Year): AUD 3 billion
- Net Profit (Half-Year): AUD 250 million
Projected Full-Year Results:
- Revenue: AUD 6 billion
- Net Profit: AUD 500 million
These projections align with the previous year’s performance, indicating stable operations.
5. Planning Analytical Procedures
Income Statement Analysis:
- Revenue: Compare year-on-year growth rates; significant deviations may indicate revenue recognition issues.
- Cost of Goods Sold (COGS): Analyze gross margin trends; declining margins may suggest rising input costs or inefficiencies.
- Operating Expenses: Review for unusual increases, particularly in areas like marketing or R&D.
Balance Sheet Analysis:
- Inventory Levels: Assess turnover ratios; high inventory may indicate obsolescence or overproduction.
- Receivables: Evaluate days sales outstanding (DSO); increases may signal collection issues.
- Property, Plant, and Equipment (PPE): Review capital expenditures; significant additions may require impairment assessments.
6. Going Concern Assessment (ASA 570)
Financial Factors:
- Liquidity: Assess current ratio and cash flow statements; negative cash flows may raise concerns.
- Debt Obligations: Review debt covenants and maturity profiles; inability to meet obligations may threaten going concern.
- Profitability: Sustained losses or declining margins may impact sustainability.
Non-Financial Factors:
- Operational Disruptions: Natural disasters, strikes, or supply chain issues may affect operations.
- Regulatory Changes: New environmental laws or trade restrictions may impose additional costs.
- Market Conditions: Declining demand or increased competition may reduce revenues.
Conclusion:
Based on current assessments, ALU appears to have sufficient resources and strategies to continue as a going concern. However, ongoing monitoring of financial and operational metrics is essential to identify any emerging risks.