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7156AFE Auditing and Assurance: Analysis of Medibank

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Questions:

Choose the most recent annual report of a listed company and assume that you are part the audit engagement team. Also assume the annual report is the draft annual report and proceed to answer the following questions.

Q1.

Determine the level of materiality to be used for the audit of the group accounts for the year ending in 2015. Your answer should include a discussion of the nature of materiality, and a description of what materiality represents in terms of the audit of a set of financial statements, and should discuss the different bases and considerations employed in arriving at materiality. Explain the rationale behind your choice of a certain levels of materiality. Provide a quantitative estimated of materiality for your company.

Q2.

The audit partner has requested you to prepare a preliminary analytical review on the information provided by your company. The partner suggests that as a minimum you address key ratios in the statement of comprehensive income and statement of financial position over the 2012 to 2015. Based on the results and the nature of your company’s business and its markets, outline the apparent trends and changes in these ratios, the key areas for the audit and the matters that will have to be addressed in the audit plan. Give examples of relevant assertions and at least one audit procedure for each assertion.

Q3.

Review the various draft notes and disclosures in the annual reports. Highlight those that may have significance to the audit, e.g. contingencies, and outline the audit procedures that you will need to perform.

Q4.

Review the statement of cash flows. Which category of cash flows provided the majority of cash inflows? Which category had the greatest outflows?

Identify the primary cash receipts and cash payments during the year.

What are the main non-cash financing and investing activities?

Using the results of questions 2 and 4, evaluate the going concern risk of this company.

What audit procedures would you recommend to address this risk.

Q5.

Review the audit report for 2015 financial report. What type of opinion was expressed?

Are there any additional sections or paragraphs indicating any auditing issues? If any, describe the nature of these issues in detail. Also explain how would you incorporate it in the audit report?

Answers:

Introduction

  • Largest publically funded organizations health care company in Australia.
  • Operated by Department of Human services, health care support to private and permanent Australian residents.
  • Listed on the Australian Stock Exchange
  • Covers around 30% of the market having around 4 million customers in aggregate.
  • Ranked 7th in the 9 health insurance companies in terms of customer services in Australia.

1.Materiality And Its Basics

  • Measure of significance or importance above which the checking or detailed audit procedures needs to be applied.
  • It is a qualitative factor and not quantitative.
  • Determination of materiality depends on the lot of factors:

Nature of the entity; 

Size of the organization; 

Transactions of the entity;

  • Level of internal control maintained by the entity;
  • Professional judgement and estimate of the auditor.
  • Applied both at the time of planning as well as performing the audit.
  • As per KPMG, materiality rule should be materiality to be 1.84 times of (Assets or revenue, higher)^2/3, however, it can be a measure of revenue, gross profit, net profit, assets, etc.

2. Preliminary Analytical Review Using Ratio Analysis

  • Auditors apply substantive and analytical audit procedures to conduct audit.
  • Substantive procedures include vouching and verification.
  • Analytical audit procedures includes trend analysis, ratio analysis, variance analysis, etc.
  • Results from ratio analysis of Medibank:
  • Gross margin has been constant, net profit has risen from 2% to 6%
  • EBITDA, EBITA and EBIT % has increased implying cutting of overhead and indirect costs
  • Return on equity increased 3.5 times to 28% implying growth.
  • Profitability ratios multiplied 2.5 times shows good and healthy business
  • Current and quick ratio is as per the industry trend of 2:1, shows good solvency position.

3.Draft Notes And Disclosures In The Annual Reports & Audit Procedures

  • Notes on accounts and disclosures as per IFRS requirements and reporting requirements.
  • Important highlights include detailed analysis on:
  • Underwriting result of the insurance
  • Overall valuation of the assets at the fair value
  • Recording of the deferred costs
  • Valuation of the intangible assets
  • Other significant notes include reporting on earning per share, the segment reports, the overall diluted earnings, etc.
  • Books of account has been prepared as per the AASB framework of accounting.

4.Cash Flow Analysis

  • Majority of the cash flow from operating activities - $ 312.8 Mn, major receipts being premium receipts and the complementary service receipts.
  • Major outflows include payment for the claims and receivables and payments to the suppliers and the employees.
  • Major investment was done in the fixed assets as well.
  • Opening CCE : $895.1m; Closing CCE: $708.0m.
  • Overall decrease in the flow of cash over the year.
  • Other major non-cash financing and investing activity includes:
  • claims expense;
  • medical expenses;
  • depreciation expenses

Going Concern Assumption And Audit Procedures

  • Based on the analysis, the company holds the going concern assumption true:
  • All the ratios are positive as compared to industry;
  • The company is doing well in terms of profits;
  • It is compliant of all regulations and reporting requirements;
  • It has no intention to sell the business in near future.
  • Audit procedures to be applied in case of risk of material misstatement include application of:
  • Substantive audit procedures
  • Analytical audit procedures

5. Audit Report, 2015

  • As per the auditor’s report, the company is compliant of Corporation Act, 2001 and that all the professional codes of conduct.
  • Company has prepared its financials using relevant IFRS and Australian Accounting Standards.
  • Auditor has disclosed that its responsibilities include expression an opinion on financials prepared and not finding the risks and misstatements.
  • Auditor has applied independence while auditing and reasonable judgements and estimates.
  • Auditors have also confirmed on the remuneration report and that it is prepared as per Corporation Act, 2001.

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