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]
4. 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.
110 marks|
The correct answer and explanation is:
Background Description of ALU
Aluminium (ALU) is a chemical element with the symbol Al and atomic number 13. It is a silvery-white, soft, non-magnetic, and ductile metal. Aluminium is the third most common element in the Earth’s crust and has a wide range of applications due to its properties such as low density, corrosion resistance, and conductivity.
Business Operations and Revenue Streams
The aluminium industry encompasses the extraction of bauxite ore, refining it to produce alumina, and then smelting alumina to produce aluminium metal. Companies in this sector operate across the entire value chain, including mining, refining, smelting, and manufacturing of aluminium products. Revenue streams are primarily derived from the sale of aluminium products, which are used in various industries such as automotive, aerospace, construction, and packaging.
Products and Services
Aluminium products include:
- Primary Aluminium: Produced through the smelting of alumina, used in manufacturing processes.
- Aluminium Alloys: Created by combining aluminium with other elements to enhance properties for specific applications.
- Aluminium Products: Such as sheets, foils, and extrusions used in diverse applications.
Market and Competition
The global aluminium market is characterized by significant competition, with major players operating in various regions. Companies compete based on factors like production efficiency, technological advancements, product quality, and sustainability practices. The market is also influenced by global economic conditions, trade policies, and demand from key industries.
Regulatory Environment
Aluminium companies are subject to a range of regulations aimed at ensuring environmental protection, worker safety, and fair trade practices. In Australia, key regulatory bodies include:
- Australian Securities and Investments Commission (ASIC): Regulates corporate activities and financial services.
- Australian Prudential Regulation Authority (APRA): Oversees financial institutions to ensure stability.
- Australian Competition and Consumer Commission (ACCC): Promotes competition and fair trading.
- Clean Energy Regulator: Administers legislation to reduce carbon emissions.
Recent initiatives such as the Australian Government’s $1.24 billion commitment to green aluminium production aim to support the industry’s transition to renewable energy sources and reduce carbon emissions. citeturn0search1
Corporate Governance at ALU
Effective corporate governance is crucial for aluminium companies to ensure transparency, accountability, and ethical business practices. Key aspects include:
- Board Structure: Composition of the board with diverse skills and experience.
- Regulatory Compliance: Adherence to environmental and safety regulations.
- Stakeholder Engagement: Maintaining relationships with investors, employees, and communities.
- Risk Management: Identifying and mitigating operational and financial risks.
Risk Assessment
Risk assessment involves identifying potential risks that could impact the company’s operations and financial performance. This includes evaluating market risks, operational risks, regulatory compliance risks, and environmental risks. A thorough risk assessment helps in developing strategies to mitigate identified risks.
Materiality Thresholds
Materiality thresholds are used to determine the significance of financial information. For audit planning, materiality is often set based on a percentage of total assets or net profit. In this case, the greater of 5% of total assets (as of 30 June 2023) or 10% of net profit (for the year ended 30 June 2025) is used as the overall materiality threshold.
Performance Materiality
Performance materiality is set at 85% of the overall materiality threshold. This is the amount set by the auditor at less than materiality to reduce the risk of undetected misstatements to an acceptably low level.
Extrapolation of Half-Year Results
Extrapolating half-year results involves projecting the full-year financial performance based on the available half-year data. This helps in identifying trends and potential issues early, allowing for timely corrective actions.
Analytical Procedures
Analytical procedures involve evaluating financial information by studying plausible relationships among both financial and non-financial data. In the context of auditing, this includes comparing current financial statements with prior periods, budgets, and industry averages to identify any anomalies or areas that require further investigation.
Going Concern Assessment
Assessing the going concern assumption involves evaluating whether the company can continue its operations for the foreseeable future without the need to liquidate or significantly reduce the scale of operations. Factors to consider include:
- Financial Factors: Such as profitability, liquidity, and solvency ratios.
- Operational Factors: Including supply chain stability, production capacity, and workforce competence.
- Market Factors: Like demand for aluminium products, competition, and economic conditions.
- Regulatory Factors: Compliance with environmental and industry-specific regulations.
A comprehensive assessment of these factors helps in determining the company’s ability to continue as a going concern.
Note: The above information is based on general industry knowledge and may not reflect specific details about a particular company named “ALU.”