AF304 AUDITING

Semester 2 – 2020

Individual Assignment
(15%)

Name: Shilpa Shivangni

Student ID: S11158771
Table of Contents

Introduction
Nitro Software Ltd is a paper productivity agency. It allows companies of all sizes to remove

paper improve business operations and push digital innovation by offering PDF efficiency and

eSigning to all in a simple, inexpensive solution. The products of the company include Nitro Pro

consisting of PDF maker, PDF editor, PDF translator, Merge PDF, PDF annotator, Protect PDF,

among others, Nitro Cloud consisting of electronic signatures, partnership, and Nitro Analytics.

The business publishes in two categories, Contract and Permanent, Maintenance and Service, the

bulk of which come from the Permanent, Maintenance and Support categories.

Nitro Software Limited was founded in Melbourne and was launched in 2005. In year 2019, it

got 10000 Business customers and also sold 2 million plus licenses. Also, in the same year it got

listed in ASX (Australian Stock Exchange). The goal of this company is to provide us with

paper productivity solutions that are very high intuitive, it can be used from any computer, they

are adaptable to any workflow, and integrated with the most commonly used applications for

industry.

All in all, this report will report will identify and explain key audit matters that were raised in the

report that may lead to material misstatement in the financial report. It will use ratio analysis to

the financial report information for two years together with explaining how the results of the

analytical procedures influence the planning decisions for the audit of the company. Finally,

from the financial report, two revenue and two expense item will be selected from the statement

of profit and loss and other comprehensive income, two asset and two liability items will be

selected with one item from the equity section of the statement of financial position and for the

selected items, key assertions will be identified with describing the audit procedures that would

be performed to gather sufficient audit evidence.

1) Key Audit Matter

Key Audit Matter How the scope of the audit responded to
the Key Audit Matter
1) Revenue Recognition The following procedure were performed to

Revenue identification is a crucial address the key audit matter:

audit concern due to the following:  Built an overview of the mechanism

 The magnitude of the of the Group's acknowledgement of

deferred sales and contract revenues from the sale of perpetual

properties recorded by the licenses and services, including

Company and the associated factors that affect whether revenues

identification of income are accepted on a principal or

during the year organization basis.

 The degree of judgment  Check the organizational efficacy of

included in the main main controls over the cash

assumptions used to distribution mechanism to assign

maximize and, eventually, cash receipts to the relevant invoice/

to amortize the transaction customer.

costs of the deal.  Performed risk-based, tailored

 The importance of sales for protocols for sales transactions and

the Group's financial settled on a sample of supporting

performance documentation

 Used data assurance tools to

evaluate tax transfers

 recalculated the effect of the

 identification of sales on the

deferred revenue balance by

evaluating a selection of contracts

 Obtained the contract expense

estimation, carried out statistical

quality tests, and measured the

reasonableness of the useful life

forecast and amortization in the

light of the most recent details

available on contract periods and

renewals.

 Evaluated the adequacy of the

disclosures made in Note 4 with

respect to the provisions of the

Australian Accounting Principles.

Revenue is acknowledged when there is a deal between the Group and the customer and

when the ownership of goods or services is passed to the customer in a sum that

represents the consideration that the Group hopes to obtain in return for such products or

services. It states that the revenue should be reported after the revenue-generating process

has been performed or when it has been paid, rather than when the revenue-generating

process is currently collected. The most significant factor to follow the revenue

recognition standard is that it means that your records reflect what your profit and loss

margin looks like in real time. It's important to preserve your financial reputation.
2) Share-Based Payments The following procedure were performed to
 In addition to its current short-term and address the key audit matter:

long-term incentive programs, the  Gained an appreciation of the

Organization approved a new long- essence of reward schemes

term incentive strategy during the year  Read the terms and conditions of

ended 31 December 2019. As such, the the separate reward package

Company accepted a share-based arrangements

payout expense of $0.84 million for the  Evaluated the group's estimation of

year in respect of the rights issued on the probability of meeting the

the shares that were given following remaining criteria applied to any of

conclusion of the Group's initial public the agreements.

offering.  Evaluated the Community process

This was a major audit concern on the for determining the fair value of

basis of the decision of the major equity options, and settled on

judgments and calculations used to valuation inputs for supporting

assess the fair valuation of the share- documentation, including external

based payment cost. records, and the employee's letter of

bid.

 The adequacy of the reports made in

Note 15 was measured in the light

of the criteria of the Australian

Accounting Principles.
Share-based payment allows an company to identify share-based payment transfers (such

as shares issued, share options or share appreciation rights) in its financial statements,

including transfers with staff or other parties to be resolved in cash, other securities or the
entity's equity instruments. Share based payment is important as it can be used to settle

creditors of a company where the cash balance is assumed to be tight. However,

valuations of share based payments could offer a fair value that is higher than expected.
3) Lease Accounting and adoption The following procedure were performed to

of new accounting standard address the key audit matter:

AASB 16 Leases  Evaluated if the current accounting

The company followed the Australian practices of the Company complied

Accounting Standard AASB 16 Leases with the criteria of AASB 16.

(AASB 16) as of 31 December 2019.  Evaluated the measurement of the

The new strategy and the resulting contract under the conditions of the

implementation effect are disclosed in leasing arrangement and the criteria

Note 13. of the Australian accounting

This is a crucial audit concern due to principles.

the following:  Evaluated the aggregate interest

 Importance of the effect on the rates used to measure the lease

move to the financial statements against external quotes from lenders

 Judgment included the in near proximity to the date of

implementation of the current commencement of the contract.

AASB 16 criteria to assess the  The statistical precision of the lease

average borrowing rate for discount equations was checked.

lease payments.  The adequacy of the reports made in

Note 13 was measured in the light

of the criteria of the Australian

Accounting Principles.
 For investors, leases have a major role to play in assessing the leverage and liquidity of a

business, so these additional primary disclosures can improve clarity and comparability

between firms. It is also important for the company to follow new accounting standards

as it helps to measure the performance of the organization as required.

2) Ratio Analysis

Ratio and formulae Year 1 Year 2

Calculation Calculations

(2018) (2019)
1) Profitability
Gross Gross Profit/ Sales *100/1 =28560/ 32406 *100 =32022/ 35672 *100

Profit =88.13% =89.80%

Margin
Nitro Software limited had incurred a gross profit percentage of 88.13% in 2018 and 89.80% in
2019. The result shows an increase of 1.67% in the percentage of gross profit which is good for

the business. This increase might have been because of increase in the sales in the business. In

this case, more users might have subscribed to the software provided by this company which

has led to the increase in subscription and also gross profit as a whole.
Net Net Income/ Sales *100/1 =(5282)/ 32406 *100 =(8100)/ 35672 *100

Profit =-16.30% =-22.71%

Margin
The net profit margin for 2018 as calculated was -16.30% negative and for the year 2019 was

-22.71% negative. It represents the losses rather than profit, as a percentage of sales. It means

that the expenses might have exceeded the sales. The business needs to pinpoint the reasons ans

work on the area of sales so that there is an increase in net sales leading to a positive net profit

margin.
2) Solvency
Debt to Total Debt/ Total Assets =34812/ 27817 =41943/ 75340

Assets =1.25:1 =0.56:1

Ratio
Debt to Asset ratio is used to calculate the growth of a business over time by its purchased

properties. The debt to equity ratio for 2018 was 1.25:1 and for 2019 was 0.56:1. This ratio had

decreased in the year 2019 which is good for the business as it suggests that the assets are

funded by the equity and the risk for bankruptcy is low.

Debt to Total Debt/ Total Equity =34812/ -6995 =41943/ 33397

Equity =-4.98:1 =1.26:1

Ratio
The debt to equity ratio for year 2018 was -4.98:1 and for 2019 was 1.26:1. 2018 showed

negative debt to equity result. This was because the amount of equity as reported in the balance

sheet showed a negative amount. This shows that the company has a negative net worth. 2019

showed a positive ratio which is good for the business as investors might be interested to invest
as it will be less risky.
3) Liquidity
Quick (Current Assets-Inventory)/ Current =(10386- 0)/ 22151 =(53771-0)/ 25892

Ratio Liabilities =0.47 =2.08

The quick ratio as calculated showed 0.47 for 2018 and 2.08 for 2019. It has increased which is

good for the business. 2018 showed a lower ratio which means that the company may not be

able to fully pay its current liabilities in the short term while 2019 showed 2.08 which means

business can pay off its current liabilities in the short term.
Current Current Assets/ Current Liabilities =10386/ 22151 =53771/ 25892

Ratio =0.47 =2.08

The current ratio shows whether the business will pay the obligations owed out of the existing

assets within one year. The current ratio for 2018 was 0.47 and for 2019 was 2.08. 2018 has a

lower ratio which means that the business is not in a position to pay its debts. 2019 showed a

better ratio of 2.08 which means that the business has enough cash and is in a position to pay its

debts.
3) Explain how the results of your analytical procedures in 2) influence your planning

decisions for the audit of the company.

 Profitability

Profitability ratios are a class of financial metrics used to measure the ability of a

company to produce profits compared to its income, operating costs , balance sheet

assets, or shareholders ' equity over time, using statistics from a single point of time.

Profitability ratios are more useful when compared to comparable firms, the company's

own past, or the typical ratios for the company sector. The two profitability ratios chosen

were gross profit margin and net profit margin. The gross profit margin has increased in

the year 2019 which means that company is operating efficiently. The net profit margin

for both the years showed a negative result which means that there was less sales in that

current year. Also, it would be maybe because product pricing may not have been high to

cover the expenses and cost of making it. Profitability ratios help in the planning

decisions as it shows whether the company is effectively running or not.

 Solvency

The solvency ratio is a primary metric used to calculate an enterprise's ability to satisfy

its debt commitments and is also used by potential company lenders. The two solvency

ratios chosen were debt to assets ratio and debt to equity ratio. The debt to assets ratio is

vital as it determines the financial risk of a company. For this company, the debt to assets

ratio had declined in the year 2019 which is generally good for the company as it shows

that the assets are funded by the equity and the risk of bankruptcy is low. It helps the

management to decide how much the company’s resources are owned by the shareholders
 and creditors. The debt to equity ratio for 2018 was negative that shows that the company

has a negative net worth while 2019 showed a positive result. This will attract more

investors as it will be less risky. Calculation of solvency allows businesses to make

critical strategic choices to guarantee potential sustainability.

 Liquidity

Liquidity ratios are relevant because they show you whether a company can pay off its

short-term debt. The two liquidity ratio chosen were quick ratio and current ratio. The

quick ratio has increased in the year 2019 which shows that the company can pay its

current liabilities in the short term. Current ratio had increased in the year 2018 when

compared to 2018 which is good for the business as it shows that the business has enough

cash and is in a position to pay its debts. All in all, the liquidity ratios help the company

to decide whether the business will be able to pay its debts on time or not and this will

also allow the decision makers to know whether the effectiveness of the management and

business
4) Key Assertions in Relation to the Selected Elements with its Audit Procedures

Elements Key Assertion(s) at Risk Audit Procedures

Revenue
1)Subscription  Accuracy  Tracing the sales invoices,

(sale of cloud The revenue transactions ledgers and sales journal

enabled software) should be recorded correctly and also accounting

without any errors. records to see whether the

 Completeness amounts recorded are

The transactions relating to correct.

revenue that should have been  Scan the sequential

recorded have actually been number of sales invoices in

recorded. the sales journal; verify

 Occurrence that the missing figures are

Determining whether the not unrecorded sales and

revenue transactions recorded provide an adequate

have actually been recorded clarification.

and are related to the relevant  Track sales invoice to

accounting period and are customer order and bill of

related to the client. lading to ensure that sales

 Cut-Off have genuinely occurred

All the revenue transactions and products have been

 that have been occurred should delivered to consumers.

be recorded in the correct and  Inspect the dates on the

relevant accounting period. invoices to equate them

with the dates on which

the items are delivered to

trace the dates reported in

the sales journal and the

financial documents in

order to ensure accurate

financial time entries.

1)Perpetual  Accuracy  Verify the chosen purchase

Licenses and The revenue transactions invoices and

Support Revenue should be recorded correctly accompanying

without any errors. documentation to ensure

 Classification that they are adequately

All revenue transactions prepared.

should be correctly classified  Inspect the supporting

in compliance with the documentation to ensure

appropriate accounting that the controls/reviews

principles. have been carried out

 Completeness correctly.

It checks whether all the  Track chosen invoices on

revenue that has occurred has sales invoices and sales

been reported in the accounts. journals to ensure that they

 have been registered as

sales revenue
Expense
1)Employee  Occurrence  Track the invoices of the

Benefit Expense The costs that have been seller on the purchased

reported have already existed orders and on the products

and are relevant to the obtained notices (receiving

customer. reports) to ensure that the

 Accuracy products were obtained as

All expense transaction the cost was reported.

occurred should be recorded  Tracing the expense

correctly. transaction in the ledger,

 Completeness sales journal and

All the expenses that were accounting records to

needed to be recorded have verify the mathematical

actually been recorded. accuracy of the expense

 Cut-Off transactions.

All expense occurred should  Track chosen products

be recorded in the correct issued buying order

accounting period. notices and dealer invoices

 Examine the date reported

in the General Ledger and

equate it to the date of

delivery of the invoices

 and the goods.
2)Cost of Sales  Occurrence  Vouch the chosen

The costs that have been transactions on the

reported have already existed supplier's invoices to

and are relevant to the ensure that the transactions

customer. reported are centered on

 Classification the supplier's invoices.

Whether all expenses occurred  Tracing the expense

have been correctly classified transaction in the ledger,

 Accuracy sales journal and

All expense transaction accounting records to

occurred should be recorded verify the mathematical

correctly. accuracy and the

 Cut-Off correctness of the expense

All expense occurred should transactions.

be recorded in the correct  Cut-off assertions can be

accounting period. checked by analyzing the

date reported in the

General Ledger and

matching it to the date of

receipt of the supporting

invoices and the receipt of

the notes.

 Expense invoices can be

 matched by sales order and

products purchased by

notice prior to entry of the

accounting system.
Assets
1)Trade and  Existence  Pick a sample of shipping

Other Whether the amount of $6663 records, such as billing and

Receivables stated in the statement of loading, and track back to

financial position under the sales invoices, and then to

element trade and other sales and accounts

receivables does actually exist. receivable in the ledger

 Right and Obligation account.

The client shall have the right  Conduct accounting audits

to manage the accounts on the subject of factoring,

receivable used in the financial checking the loan

statements. arrangement and checking

 Completeness the minutes of the board of

All the assets including the trustees for any evidence

accounts receivables that were that receivables have been

supposed to be recorded sold or factored.

should have been recognized  Pick a sample of customer

in the statements. orders and check the

(Understatement of assets dispatch notes and sales

should be omitted). invoices and the posting of

 the trades’ receivable

account in the general

ledger.
2)Property, Plant  Rights and Obligations  Examine the ownership

and Equipment The company has a legal title papers or title deeds of the

which owns the ownership to chosen items to ensure that

the asset they actually belong to the

 Completeness individual.

All the assets including the  Reconcile and equate the

accounts receivables that were PPE registry with the

supposed to be recorded general ledger.

should have been recognized  Check the depreciation

in the statements. process of the client to

(Understatement of assets determine whether it is

should be omitted). compliant with the

 Accuracy, Valuation and applicable accounting

Allocation principles.

The amounts of the fixed asset

which is property, plant and

equipment and the relevant

information should be

recorded appropriately and

correctly that is it should

reflect the true value of the

 assets.
Liabilities
1)Trade and  Completeness  Get accounts payable

Other Payables Accounts payable amounts naming the customer and

listed on the balance sheet do casting and cross-

shall contain all accounts casting on the general

payable expenses that have ledger to ensure that their

accrued during the accounting balances are balanced.

period.  Select a selection of the

 Existence accounts payable and

Whether the accounts payable supply them with

listed on the balance sheet still supporting documentation,

exist at the reporting date. such as sales orders and

 Presentation and Disclosure invoices from vendors.

Trade and other payables  The reconciliation of a

should be accurately and sample of the supplier's

properly recorded in the statements and the

balance sheet and should be accounts payable also

disclosed as notes in the guarantees assessment.

statements.
2)Borrowings  Existence  Do the reconciliation of

The debt liabilities listed on the balances with the

the balance sheet still occur on general ledger.

the reporting date. Whether the  Track the income of the

amounts listed in the balance contribution of the loans to

 sheet does actually exist or not. the cash receipt and the

 Valuation bank statement

All debt commitments have  Confirm the loan with the

been reported in the correct lenders by showing the

amount and their balances sums outstanding, the

represent the real economic unpaid interest and the

value of the debt. protection they hold.

 Completeness  Observe the controls

Whether all debt commitments carried out by the client 's

that were to be reported have employees

been reported.
Equity
1) Share  Valuation  If the share issue is in the

Capital Share capital balances should context of non-cash

be valued in compliance with transactions, ensure that

relevant accounting principles. the customer has correctly

 Present and Disclosure met the applicable

Sufficient information about accounting principle

share capital should be before tracking the share

properly disclosed in issue.

accordance with applicable  Disclose information such

accounting standards. as number of shares

 Completeness authorized, class of share

All share capital transfers that capital and adjustments

 were to be reported should made to comprehensive

have been reported. income.

 Reconcile the approved

share capital with the

General Ledger

Conclusion

The audit report is a written letter of advice from the auditor about whether or not the

company's financial accounts reflect the accurate and equal status of its assets and

liabilities. It plays an essential function for firms such as insurers, creditors or other

financial entities to require the company's financial statements before taking a decision to

lend money to the company. The view of the auditor is of utmost importance for the

shareholders to take their investment decisions. The Auditor 's view stresses the

credibility of the financial statements.

Appendix
The key Audit matters of Nitro Software Limited.

Bibliography

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reporting-standards-implementation-key-audit-matters (Accessed: 9 October 2020)

Clements, J (2019) The Importance of an audit System to Companies. Available at:

https://smallbusiness.chron.com/importance-audit-system-companies-14705.html (Accessed 9
October 2020)

Riley, J. (2011) How is the Current Ratio Calculated and Interpreted. Available at:
https://www.tutor2u.net/business/blog/qa-how-is-the-current-ratio-calculated-and-interpreted
(Accessed 8 October 2020)

Tyre, D. (2019) Debt to Equity Ratio. Available at: https://blog.hubspot.com/sales/debt-equity-

ratio (Accessed: 8 October 2020)
Appendix

1) https://accountinguide.com/audit-revenue/

Risk assaertions
2)