Auditing and Assurance Services (Australian) - Assignment Example

45 and Wen, 2011). The audit plan will, thus, include procedures to gather “audit evidence of events or conditions and related business risks” that will impact the Group’s “ability to continue as a going concern” (ASA 570, par. 17). There should also be procedures to review management’s assessment, if there’s any, or to discuss with management its assessment of the Group’s ability to continue as a going concern (ASA 570, par. 19 and 20). The subsequent events review should also emphasize reviewing subsequent events that may or may not indicate that the Group still has the ability to continue as a going concern.

Related to the going concern issue is the news that the financial guarantors of Reliance Rail had claimed that there were already “events of default under the consortium’s debt financing documents” (Kelly, 2011). In addition, page 44 of the 2011 Annual Report stated that, “based on legal advice received”, the claim is not expected to “adversely affect the delivery” of the Project’s contract. With this development, the audit plan, in the assessment of the Company’s internal control structure, should include procedures to assess how management identifies legal matters for recording or for disclosure.

The plan should also include an initial independent assessment on whether or not this issue is actually a legal matter and if it is, plans to obtain representations from the Company’s or the Group’s legal counsel should be incorporated. Significant Accounts and Balances Page 41 of the 2011 Annual Report disclosed that the Group is using the Forecast – Cost – At Completion or FCAC to estimate the total costs it will incur in the project. The cost components are based on management’s assumptions, estimates and judgment and these significantly affect a lot of accounts and balances in the Group’s financial statements.

There is, thus, a need to understand management’s processes and assumptions for coming up with these estimates, how they affect the individual balances and what will happen to the balances if the actual costs are not consistent with the estimates. When auditing the related expenses (such as materials and labour), the significant assertions that should be included in the audit plan are completeness, accuracy and cut – off. Since the risk of misstatement and the audit risk for these balances are higher, the materiality level should be set at the lower range (i.e., 1% - 2% of pre – tax income) and the preliminary materiality level should be set accordingly and documented through the audit planning documents.

Page 43 of the 2011 Annual Report disclosed that “approximately 170,000 hours of Engineering and 60,000 hours of Drafting will be applied to the project at a fully burdened labour rate”. With this, the labour account will be classified as a significant account for audit purposes, with a high risk of misstatement. The audit plan should include assessing and testing internal controls that are related to labour costing (regular and overtime costs), inputting of man – hours, calculating payroll costs and summarizing the total cost for the period.

Information Technology (IT) audit should also be considered to test the internal controls around the IT infrastructure to assess if labour cost is being appropriately recorded and summarized in the computerized system. Substantive audit procedures should revolve around testing and analysing the actual