A Planning Materiality Base of Profit before tax A Planning Materiality percentage of 5 A Planning Materiality amount of $10,443,950 (5 x 208,879,000) A Clearly Trivial Threshold of $261,100 (2 5 x 10,443,950 rounded to the nearest 100) This information is particularly relevant for your completion of Task 6 Appendix B presents you with the same key matters noted during the audit of Penfolds Mining Group Ltd as stated in Appendix A (see task 5 above), but also now notes the judgements made by the audit partner relating to each audit matter, corrections to the financial statements that are suggested (if any) AND further, managements responses to the suggestions for amendments to the financial statements This task therefore requires you to carry errors found during the audit to the summary of audit differences The errors in recorded amounts and judgemental differences encountered during the audit for which the client has not made a correction will need to be summarised to evaluate the materiality of their aggregate effect on the financial statements and their effect they may have on the overall conclusion (audit opinion) To enable you to complete the audit process, you are provided with a summary of key issues identified during the course of the audit, related discussions with management and resulting conclusions (refer to Appendix B below) Required Consider each of the findings provided in the additional information (See Appendix B below) and prepare a summary of audit differences (SADs) and identify assess the overall impact of the unadjusted audit differences, assuming that the client has adjusted for the differences agreed with the auditor and NOT adjusted for the differences not agreed with the auditor (your assessment should show the impact of each difference on the current assets, non current assets, current liabilities, non current liabilities, and the profit loss for the year) You must explain your reason for each in the relevant white cells on the spreadsheet tab Task 6 Issue Matter Further Information Sales cut off The company sells iron ore pellets and other product on different terms and conditions, but predominantly on a FOB Shipping Point basis (see previous information) During the review of cut off procedures, we noted that the loading of a shipment of iron ore pellets commenced on 30 th December 2020 but was not completed until 1 st January 2021 due to delay caused by breakdowns of the conveyor belt The ship sailed on the first high tide on 2 nd January 2021 The operating revenue for this shipment had been recorded in the year ended 31 December 2020 The amount was $8,500,000 Auditors view In our view, this resulted in an overstatement of revenue from operations and an overstatement of trade receivables Our assessment is that the shipment had been sold under the usual arrangement of Free on Board (FOB) Shipping Point and that revenue should not be recognised until 2021 when loading was complete, and the ship had sailed Managements view Management disagrees with our conclusion They argue that the loading of the ship had largely been completed by 31 December when the conveyor belt broke and that when loading recommenced on 1 January this was only for 5 of the shipment They argued that the performance obligations for the shipment were predominantly complete by 31 December and therefore the revenue should be recorded in the year ended 31 December 2020 They therefore refuse to make an adjustment to the financial statements Sales cut off As stated in the information, in a limited amount of sales of iron ore product, the company is responsible for shipping the product to the customer and earns additional income over the price of the iron ore product The company regards this freight income as a separate performance obligation from the ore sale performance obligation and recognises the revenue over time rather than when the product is transferred to the ship During the review of sales operating revenue we noted that a particular shipment had been loaded and the ship had sailed on 2 December 2021 The sale of iron ore product for this shipment had been correctly recognised as revenue in 2020 However, there was a freight component of the contract amounting to $500,000 This has not been recorded as income in the year ended 31 December 2020 financial statements The ship had arrived at its final destination, but Chinese customs documentation had not been completed by the customer to enable unloading Upon review of the sale contract, it was noted that the performance obligation for the freight is met when the ship arrives at the destination Auditors view In our view the performance obligation of the freight income was complete when the ship had arrived at the final destination and therefore the income for the freight component should be recorded in the year ended 31 December 2020 In our view, because the income has not been recorded, this has resulted in an understatement of revenue from operations and an understatement of trade receivables Conversion of receivables denoted in foreign currency (USD) The company holds trade receivables denoted in a foreign currency US dollars During the audit, we noted that the company had used an exchange rate of 1 USD 1 982 AUD to convert a trade receivable of $1,500,000 to Australian dollars which was held at 31 December 2020 However, the correct exchange rate was 1 USD 1 298 AUD at 31 December 2020 Auditors view The correct exchange rate as required by AASB 121 has not been used to make the translation of the receivable This resulted in an overstatement of trade receivables by $1,026,000 and an overstatement of profit before income tax of $1,026,000 Valuation of inventory Raw materials and stores, ore stockpiles, work in progress and finished goods are stated at the lower of cost and net realizable value Estimates of net realizable value include a number of assumptions including commodity price expectations, foreign exchange rates and costs to complete inventories to a saleable product With respect to stockpiled ore, the quantities on hand are assessed primarily through surveys and assays Because the valuation of the valuation of ore stockpiles, work in progress and finished goods are matters of significant judgement, we engaged external specialists to review the valuation of these inventories When reviewing the value ore stockpiled the external specialists found that the quantity used in the companys calculation was overstated and the quality of the ore stated in the companys assays was also higher than revealed by the external specialists One separate ore stockpile that seemed to have come from a pit near to the end of the ore seam was particularly low quality The resulting calculations by the external specialists found that the value of ore stockpiles was overstated by an amount of $550,000 Auditors view We reviewed the report by the external specialist employed by us in accordance with auditing standards and therefore conclude that the value of inventory needs to be reduced by $550,000 on the balance sheet and the operating profit before income tax needs to be increased by $550,000 Impairment of Cash Generating Unit (CGU) Accounting standards require the capitalised cost of cash generating units to be reviewed for impairment to assess whether the amount is fully recoverable from future cash flows Management has prepared a discounted cash flow analysis showing the present value of each of its CGUs In preparing these analyses, judgement on a number of factors is required including iron ore final indexed prices AUD USD exchange rates uncertainties around future operating and capital expenditures and the discount rate used In performing the impairment test for one of its CGUs (CGU X), management has prepared a discounted cash flow analysis showing that the present value of the discounted cash flow is $30 5 million compared with the capital value of the CGU on the balance sheet of $30 37 million Accordingly, management has deemed the CGU not to be impaired The companys discounted cash flow model to determine the recoverable amount of each of the companys CGU was reviewed, including methodologies for management judgements logic of the discounted cashflow model and mathematical accuracy We also employed an independent expert to judgements made regarding forecast operating and capital expenditure future iron ore price estimates AUD USD exchange rates We also reviewed the choice of discount rate by assessing the cost of capital of the company and comparing the rate to market data and industry research In reviewing the model used to assess impairment of CGU X we found that assumptions about the future cashflows are very aggressive and are unlikely to be achieved in the short to medium term due to a decline in demand for iron ore in the Chinese market Accordingly, the, the future cashflows from CGU X, according to our model, are expected to be approximately $30 19 million Auditors view We believe that an impairment charge of $180,000 should be recorded in the financial statements for CGU X Event after balance date Early in January 2021 the board met to consider the investment in the joint venture property market development business (Brizzy Properties) In discussions with their joint venture partner in this property development business it was decided that in March 2021 a transaction would be entered into that would entail dissolving the joint venture Penfolds Mining Group would forgive a debt owed to them by the joint venture partner and Penfolds would take full share of any remaining unsold luxury apartments In reviewing the Board minutes for January 2021, we noted that there was a minute to the effect that In March the property development joint venture would be dissolved The debt owing to Penfolds by the joint venture partner would be forgiven and Penfolds would take full share of any remaining unsold luxury departments The financial statements for the year ended 31 December 2020 do not include any information with respect to this matter No Matter CA NCA CL NCL Profit (Loss) Notes $000 Dr (CR) 000 Dr (CR) 000 Dr (CR) 000 Dr (CR) 000 Dr (CR) (explain conclusions for each) 1 Sales cut off 2 Sales cut off 3 Conversion of receivables 4 Valuation of inventory 5 Impairment of CGU 6 Event after balance date Net Impact 0 0 0 0 0 Compared with Materiality

Question

A Planning Materiality Base of  Profit before tax A Planning Materiality percentage of  5  A Planning Materiality amount of  $10,443,950 (5  x 208,879,000) A Clearly Trivial Threshold of   $261,100 (2 5  x 10,443,950 rounded to the nearest 100) This information is particularly relevant for your completion of Task 6  Appendix B presents you with the same key matters noted during the audit of Penfolds Mining Group Ltd as stated in Appendix A (see task 5 above), but also now notes the judgements made by the audit partner relating to each audit matter, corrections to the financial statements that are suggested (if any) AND further, managements responses to the suggestions for amendments to the financial statements  This task therefore requires you to carry errors found during the audit to the summary of audit differences  The errors in recorded amounts and judgemental differences encountered during the audit for which the client has not made a correction will need to be summarised to evaluate the materiality of their aggregate effect on the financial statements and their effect they may have on the overall conclusion (audit opinion)  To enable you to complete the audit process, you are provided with a summary of key issues identified during the course of the audit, related discussions with management and resulting conclusions (refer to Appendix B below)  Required Consider each of the findings provided in the additional information (See Appendix B below) and prepare a summary of audit differences (SADs) and identify assess the overall impact of the unadjusted audit differences, assuming that the client has adjusted for the differences agreed with the auditor and NOT adjusted for the differences not agreed with the auditor (your assessment should show the impact of each difference on the current assets, non current assets, current liabilities, non current liabilities, and the profit loss for the year)  You must explain your reason for each in the relevant white cells on the spreadsheet tab Task 6  Issue Matter Further Information Sales cut off The company sells iron ore pellets and other product on different terms and conditions, but predominantly on a FOB Shipping Point basis (see previous information) During the review of cut off procedures, we noted that the loading of a shipment of iron ore pellets commenced on 30 th December 2020 but was not completed until 1 st January 2021 due to delay caused by breakdowns of the conveyor belt  The ship sailed on the first high tide on 2 nd January 2021  The operating revenue for this shipment had been recorded in the year ended 31 December 2020  The amount was $8,500,000  Auditors view In our view, this resulted in an overstatement of revenue from operations and an overstatement of trade receivables  Our assessment is that the shipment had been sold under the usual arrangement of Free on Board (FOB) Shipping Point and that revenue should not be recognised until 2021 when loading was complete, and the ship had sailed  Managements view Management disagrees with our conclusion  They argue that the loading of the ship had largely been completed by 31 December when the conveyor belt broke and that when loading recommenced on 1 January this was only for 5  of the shipment  They argued that the performance obligations for the shipment were predominantly complete by 31 December and therefore the revenue should be recorded in the year ended 31 December 2020  They therefore refuse to make an adjustment to the financial statements  Sales cut off As stated in the information, in a limited amount of sales of iron ore product, the company is responsible for shipping the product to the customer and earns additional income over the price of the iron ore product  The company regards this freight income as a separate performance obligation from the ore sale performance obligation and recognises the revenue over time rather than when the product is transferred to the ship  During the review of sales operating revenue we noted that a particular shipment had been loaded and the ship had sailed on 2 December 2021  The sale of iron ore product for this shipment had been correctly recognised as revenue in 2020  However, there was a freight component of the contract amounting to $500,000  This has not been recorded as income in the year ended 31 December 2020 financial statements  The ship had arrived at its final destination, but Chinese customs documentation had not been completed by the customer to enable unloading  Upon review of the sale contract, it was noted that the performance obligation for the freight is met when the ship arrives at the destination  Auditors view In our view the performance obligation of the freight income was complete when the ship had arrived at the final destination and therefore the income for the freight component should be recorded in the year ended 31 December 2020  In our view, because the income has not been recorded, this has resulted in an understatement of revenue from operations and an understatement of trade receivables  Conversion of receivables denoted in foreign currency (USD) The company holds trade receivables denoted in a foreign currency US dollars  During the audit, we noted that the company had used an exchange rate of 1 USD   1 982 AUD to convert a trade receivable of $1,500,000 to Australian dollars which was held at 31 December 2020  However, the correct exchange rate was 1 USD   1 298 AUD at 31 December 2020  Auditors view The correct exchange rate as required by AASB 121 has not been used to make the translation of the receivable  This resulted in an overstatement of trade receivables by $1,026,000 and an overstatement of profit before income tax of $1,026,000  Valuation of inventory Raw materials and stores, ore stockpiles, work in progress and finished goods are stated at the lower of cost and net realizable value  Estimates of net realizable value include a number of assumptions including commodity price expectations, foreign exchange rates and costs to complete inventories to a saleable product  With respect to stockpiled ore, the quantities on hand are assessed primarily through surveys and assays  Because the valuation of the valuation of ore stockpiles, work in progress and finished goods are matters of significant judgement, we engaged external specialists to review the valuation of these inventories  When reviewing the value ore stockpiled the external specialists found that the quantity used in the companys calculation was overstated and the quality of the ore stated in the companys assays was also higher than revealed by the external specialists  One separate ore stockpile that seemed to have come from a pit near to the end of the ore seam was particularly low quality  The resulting calculations by the external specialists found that the value of ore stockpiles was overstated by an amount of $550,000  Auditors view We reviewed the report by the external specialist employed by us in accordance with auditing standards and therefore conclude that the value of inventory needs to be reduced by $550,000 on the balance sheet and the operating profit before income tax needs to be increased by $550,000  Impairment of Cash Generating Unit (CGU) Accounting standards require the capitalised cost of cash generating units to be reviewed for impairment to assess whether the amount is fully recoverable from future cash flows  Management has prepared a discounted cash flow analysis showing the present value of each of its CGUs  In preparing these analyses, judgement on a number of factors is required including  iron ore final indexed prices  AUD USD exchange rates  uncertainties around future operating and capital expenditures  and the discount rate used  In performing the impairment test for one of its CGUs (CGU X), management has prepared a discounted cash flow analysis showing that the present value of the discounted cash flow is $30 5 million compared with the capital value of the CGU on the balance sheet of $30 37 million  Accordingly, management has deemed the CGU not to be impaired  The companys discounted cash flow model to determine the recoverable amount of each of the companys CGU was reviewed, including  methodologies for management judgements  logic of the discounted cashflow model  and mathematical accuracy  We also employed an independent expert to judgements made regarding  forecast operating and capital expenditure  future iron ore price estimates  AUD USD exchange rates  We also reviewed the choice of discount rate by assessing the cost of capital of the company and comparing the rate to market data and industry research  In reviewing the model used to assess impairment of CGU X we found that assumptions about the future cashflows are very aggressive and are unlikely to be achieved in the short to medium term due to a decline in demand for iron ore in the Chinese market  Accordingly, the, the future cashflows from CGU X, according to our model, are expected to be approximately $30 19 million  Auditors view We believe that an impairment charge of $180,000 should be recorded in the financial statements for CGU X  Event after balance date Early in January 2021 the board met to consider the investment in the joint venture property market development business (Brizzy Properties)  In discussions with their joint venture partner in this property development business it was decided that in March 2021 a transaction would be entered into that would entail  dissolving the joint venture  Penfolds Mining Group would forgive a debt owed to them by the joint venture partner  and Penfolds would take full share of any remaining unsold luxury apartments  In reviewing the Board minutes for January 2021, we noted that there was a minute to the effect that  In March the property development joint venture would be dissolved  The debt owing to Penfolds by the joint venture partner would be forgiven  and Penfolds would take full share of any remaining unsold luxury departments  The financial statements for the year ended 31 December 2020 do not include any information with respect to this matter  No  Matter CA NCA CL NCL Profit (Loss) Notes $000 Dr (CR) 000 Dr (CR) 000 Dr (CR) 000 Dr (CR) 000 Dr (CR) (explain conclusions for each) 1 Sales cut off 2 Sales cut off 3 Conversion of receivables 4 Valuation of inventory 5 Impairment of CGU 6 Event after balance date Net Impact 0 0 0 0 0 Compared with Materiality

Accepted Answer

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Issue/Matter	Further Information
Sales cut-off
The company sells iron ore pellets and other product on different terms and conditions, but predominantly on a FOB Shipping Point basis (see previous information)	During the review of cut-off procedures, we noted that the loading of a shipment of iron ore pellets commenced on 30^thDecember 2020 but was not completed until 1^st January 2021 due to delay caused by breakdowns of the conveyor belt. The ship sailed on the first high tide on 2^nd January 2021. The operating revenue for this shipment had been recorded in the year ended 31 December 2020. The amount was $8,500,000.
Auditors view	In our view, this resulted in an overstatement of revenue from operations and an overstatement of trade receivables. Our assessment is that the shipment had been sold under the usual arrangement of Free on Board (FOB) Shipping Point and that revenue should not be recognised until 2021 when loading was complete, and the ship had sailed.
Managements view	Management disagrees with our conclusion. They argue that the loading of the ship had largely been completed by 31 December when the conveyor belt broke and that when loading recommenced on 1 January this was only for 5% of the shipment. They argued that the performance obligations for the shipment were predominantly complete by 31 December and therefore the revenue should be recorded in the year ended 31 December 2020. They therefore refuse to make an adjustment to the financial statements.
Sales cut-off
As stated in the information, in a limited amount of sales of iron ore product, the company is responsible for shipping the product to the customer and earns additional income over the price of the iron ore product. The company regards this freight income as a separate performance obligation from the ore sale performance obligation and recognises the revenue over time rather than when the product is transferred to the ship.	During the review of sales/operating revenue we noted that a particular shipment had been loaded and the ship had sailed on 2 December 2021. The sale of iron ore product for this shipment had been correctly recognised as revenue in 2020. However, there was a freight component of the contract amounting to $500,000. This has not been recorded as income in the year ended 31 December 2020 financial statements. The ship had arrived at its final destination, but Chinese customs documentation had not been completed by the customer to enable unloading. Upon review of the sale contract, it was noted that the performance obligation for the freight is met when the ship arrives at the destination.
Auditors view	In our view the performance obligation of the freight income was complete when the ship had arrived at the final destination and therefore the income for the freight component should be recorded in the year ended 31 December 2020. In our view, because the income has not been recorded, this has resulted in an understatement of revenue from operations and an understatement of trade receivables.
Conversion of receivables denoted in foreign currency (USD)
The company holds trade receivables denoted in a foreign currency US dollars.	During the audit, we noted that the company had used an exchange rate of 1 USD = 1.982 AUD to convert a trade receivable of $1,500,000 to Australian dollars which was held at 31 December 2020. However, the correct exchange rate was 1 USD = 1.298 AUD at 31 December 2020.
Auditors view	The correct exchange rate as required by AASB 121 has not been used to make the translation of the receivable. This resulted in an overstatement of trade receivables by $1,026,000 and an overstatement of profit before income tax of $1,026,000.
Valuation of inventory
Raw materials and stores, ore stockpiles, work in progress and finished goods are stated at the lower of cost and net realizable value. Estimates of net realizable value include a number of assumptions including commodity price expectations, foreign exchange rates and costs to complete inventories to a saleable product. With respect to stockpiled ore, the quantities on hand are assessed primarily through surveys and assays.	Because the valuation of the valuation of ore stockpiles, work in progress and finished goods are matters of significant judgement, we engaged external specialists to review the valuation of these inventories. When reviewing the value ore stockpiled the external specialists found that the quantity used in the companys calculation was overstated and the quality of the ore stated in the companys assays was also higher than revealed by the external specialists. One separate ore stockpile that seemed to have come from a pit near to the end of the ore seam was particularly low quality. The resulting calculations by the external specialists found that the value of ore stockpiles was overstated by an amount of $550,000.
Auditors view	We reviewed the report by the external specialist employed by us in accordance with auditing standards and therefore conclude that the value of inventory needs to be reduced by $550,000 on the balance sheet and the operating profit before income tax needs to be increased by $550,000.
Impairment of Cash Generating Unit (CGU)
Accounting standards require the capitalised cost of cash generating units to be reviewed for impairment to assess whether the amount is fully recoverable from future cash flows. Management has prepared a discounted cash flow analysis showing the present value of each of its CGUs. In preparing these analyses, judgement on a number of factors is required including: iron ore final indexed prices; AUD/USD exchange rates; uncertainties around future operating and capital expenditures; and the discount rate used. In performing the impairment test for one of its CGUs (CGU X), management has prepared a discounted cash flow analysis showing that the present value of the discounted cash flow is $30.5 million compared with the capital value of the CGU on the balance sheet of $30.37 million. Accordingly, management has deemed the CGU not to be impaired.	The companys discounted cash flow model to determine the recoverable amount of each of the companys CGU was reviewed, including: methodologies for management judgements; logic of the discounted cashflow model; and mathematical accuracy. We also employed an independent expert to judgements made regarding: forecast operating and capital expenditure; future iron ore price estimates; AUD/USD exchange rates. We also reviewed the choice of discount rate by assessing the cost of capital of the company and comparing the rate to market data and industry research. In reviewing the model used to assess impairment of CGU X we found that assumptions about the future cashflows are very aggressive and are unlikely to be achieved in the short to medium term due to a decline in demand for iron ore in the Chinese market. Accordingly, the, the future cashflows from CGU X, according to our model, are expected to be approximately $30.19 million.
Auditors view	We believe that an impairment charge of $180,000 should be recorded in the financial statements for CGU X.
Event after balance date
Early in January 2021 the board met to consider the investment in the joint venture property market development business (Brizzy Properties). In discussions with their joint venture partner in this property development business it was decided that in March 2021 a transaction would be entered into that would entail: dissolving the joint venture; Penfolds Mining Group would forgive a debt owed to them by the joint venture partner; and Penfolds would take full share of any remaining unsold luxury apartments.	In reviewing the Board minutes for January 2021, we noted that there was a minute to the effect that: In March the property development joint venture would be dissolved; The debt owing to Penfolds by the joint venture partner would be forgiven; and Penfolds would take full share of any remaining unsold luxury departments. The financial statements for the year ended 31 December 2020 do not include any information with respect to this matter.

Question

A Planning Materiality Base of: Profit before tax A Planning Materiality percentage of: 5% A Planning Materiality amount of: $10,443,950 (5% x 208,879,000) A Clearly

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