@2012Audit Plan for Acacia Coal LimitedUnderstanding the entity and its environmentIt is very important for we the auditors to obtain an understanding of the client business to enable him identify and assess any possibility of material misstatement in the client’s financial statements and to design on how to perform further audit procedures incase of any risk in the client business (Gay and Simnett 2010). Financial performance of the entity In the review of the firm’s financial performance, Acacia Coal Limited has had a reduction in total income from $947,202 in 2010 to $(178,728) in 2011.
That is, the group recorded a consolidated loss of $178,728 in 2011. It also recorded a reduction in the value of trade and other receivables from $229,713 in 2010 to $20,139 in 2011 a clear indication that the company is not financially healthy and there is a possibility that the firm will fail in future. Revenue for the company increased from $904,904 in 2010 to $1,401,286 which indicates that the company was bale to obtain an increase in revenue from the sale of its products, a situation anticipated to increase in future.
Net cash outflow from operating activities also increased from a loss of $417,501 in 2010 to $792,867 in 2011. The company has been under pressure due to the loss it incurred and this may put pressure on the management to either misstate the financial statements or to take action to improve the performance of the business. Understanding of the financial performance of the company will enable the auditor to determine whether such pressures exist which may increase the risks of material misstatements (Gay and Simnett 2010).
Nature of the entityNature of the entity includes operations, ownership and governance structure and the way entity is structured. The nature of the business in Acacia Coal Limited which is a mining company is that, the company will invest huge sums of money in exploration in search for new coal sites. This type of operation costs the firm high amounts of money which may bring in any profit if there is a failure in any of its exploration investments. The kind of operation done by Acacia Coal Limited is a risky and requires the company to incur high processing costs.
The ownership structure of Acacia Coal Limited consists of directors and a company secretary. Most of the directors hold shares with the company and are directors of other listed companies in the same sector. The financial recording framework in Acacia Coal Limited is in accordance with the Corporations Act 2001 and it complies with the Australian Accounting Standards (Gay and Simnett 2010). Industry Regulatory and other external factors This type of business is also prone to risks associated with material misstatements which are due to economic, political, competitive, social and technical factors (Kana et. al 2007).
The mining industry is a form of a long term business which may involve significant estimation of costs and revenues giving rise to risks of material misstatement in the company’s financial statements. For example, an application made for the easterly adjoining EPCA1801 comprising of 7 sub-blocks was lodged on 1 July 2009 and has not yet been granted to date. In this case, political factors pose high risks to the company.