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.
110 marks|
The Correct Answer and Explanation is:
1. Background Description of ALU (20 Marks)
Company Overview:
Aristocrat Leisure Limited (ALU) is a global gaming technology company headquartered in Sydney, Australia. It designs, develops, and manufactures gaming machines, digital social casino products, and systems for both land-based and online platforms. The company operates in over 90 countries and employs thousands of people globally.
Business Operations:
ALU operates under two primary segments:
- Aristocrat Gaming (land-based): Supplies Class III gaming machines and systems to casinos.
- Pixel United (digital): Offers mobile and online social gaming through titles like Cashman Casino and Raid: Shadow Legends.
Nature of Revenue Streams:
- Land-based gaming revenue: Sale and lease of gaming machines and systems.
- Digital revenue: In-app purchases, advertising revenue, and game monetisation.
- Recurring revenue forms a large portion, especially in digital games and gaming operations leases.
Products and Services:
- Slot machines and gaming cabinets
- Game content and themes
- Casino management systems
- Social mobile games via Pixel United
- Licensing and platform development
Market and Competition:
ALU faces global competition from companies such as:
- International Game Technology (IGT)
- Light & Wonder
- Konami Gaming
In the digital space, competitors include Zynga and Playtika.
Regulatory Environment:
ALU is subject to strict laws in multiple jurisdictions:
- Australia: Must comply with the Australian Gambling Act 2001, Corporations Act 2001, ASIC and ASX Listing Rules.
- United States: Licensing and operational compliance with individual state gaming commissions (e.g., Nevada Gaming Control Board).
- Europe: Adheres to General Data Protection Regulation (GDPR) and various EU gambling regulations.
- Other Jurisdictions: Compliance with anti-money laundering (AML), counter-terrorism financing (CTF) laws, and gambling-specific legislation.
2. Corporate Governance and Risk Assessment (15 Marks)
Corporate Governance:
ALU has a structured corporate governance framework:
- Independent Board of Directors
- Sub-committees (Audit & Risk, Remuneration, Sustainability)
- Internal Audit Function
- Adherence to ASX Corporate Governance Council principles
Risk Assessment:
Key risks include:
- Regulatory Risk: Operations span complex jurisdictions.
- Cybersecurity Risk: Digital gaming relies heavily on secure systems.
- Revenue Recognition: Digital revenue and lease models can be complex.
- Intellectual Property Risk: Game content is highly IP-dependent.
- Market Risk: Changing player preferences and economic cycles can affect earnings.
3. Materiality Assessment (15 Marks)
a. Calculate Overall Materiality:
Assume (from 2023 Annual Report):
- Total Assets at 30 June 2023: AUD $10 billion
- Net Profit (NPAT): AUD $1.3 billion
Materiality threshold is greater of:
- 5% of Total Assets = $500 million
- 10% of NPAT = $130 million
👉 Overall Materiality = $500 million
b. Performance Materiality:
= 85% of Overall Materiality
= 0.85 × 500 million = AUD $425 million
4. Extrapolate Half-Year Results to Predict Year-End (20 Marks)
Assume ALU’s Half-Year 2024 (as of 31 Dec 2023):
- Revenue: AUD $3.2 billion
- Net Profit: AUD $640 million
To extrapolate:
- Annual Revenue ≈ $3.2B × 2 = $6.4 billion
- Annual NPAT ≈ $640M × 2 = $1.28 billion
Adjustments may be made for seasonality and known H2 events (e.g., game launches, regulations, cost changes).
5. Planning Analytical Procedures (20 Marks)
Balance Sheet Analysis:
- Receivables Turnover: Compare to past years to detect delays or revenue manipulation.
- Intangible Assets: Growth in capitalised development costs—check for overstatement.
- Inventory: Unusual increases might signal obsolescence.
Income Statement Analysis:
- Revenue Growth: Sudden increases could indicate aggressive recognition.
- R&D Expense vs Capitalisation: Check for expense deferral.
- Marketing/Advertising Trends: Link with user acquisition strategy in Pixel United.
Common Risk Areas:
- Revenue Recognition (ISA 240): Timing and classification in digital vs land-based.
- Valuation of Intangibles: Impairment risks especially in digital IP and goodwill.
- FX Risk: Due to international operations and acquisitions.
6. Going Concern Assessment (ASA 570) (10 Marks)
Financial Indicators:
- Positive signs: Consistent profit, high recurring revenue, strong cash flows.
- Red flags: High R&D costs, acquisitions, or rapid expansion—possible strain on liquidity.
Non-Financial Indicators:
- Regulatory Changes: Potential revocation or suspension of licenses.
- Legal Proceedings: Pending litigations could impact viability.
- Market Trends: Decline in gaming popularity, competition, or platform restrictions (Apple/Google).
- Cybersecurity Breaches: Could damage trust and user base.
Conclusion
ALU appears to be a financially robust entity with a well-diversified revenue base and high recurring income, especially from its digital operations. However, key risks include its reliance on consistent game performance in the mobile segment, compliance with increasingly stringent global regulations, and the high pace of innovation required to remain competitive. No immediate red flags indicate doubt about its ability to continue as a going concern. However, monitoring future debt levels (if used for acquisitions), cash flow sustainability, and regulatory compliance is critical.
