A Planning Materiality Base of: Prot 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. 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 nancial statements that are suggested l{if any) AND further, management's responses to the suggestions for amendments to the nancial 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 identied during the course of the audit, related discussions with management and resulting conclusions (refer to Appendix B below). Required a. Consider each of the ndings 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 prot/loss for the year). You must explain your reason for each in the relevant white cells on the spreadsheet tab Task 6. b. Compare the net result with the materiality gure and assess the impact of the unadjusted differences on the audit opinion. You must explain your comparison and impact in the relevant white cell on the spreadsheet tab Task 6. c. Determine the type of audit opinion that should be prepared under Australian Auditing Standards I(Note, you do not prepare the audit report, just determine the type of audit opinion that should be prepared). Reference this section with the relevant Audit Standard. You must clearly explain the decision steps you have taken in order to reach the decision as to the type of audit opinion. It would be advisable to give an example of the type wording in the audit opinion that you are proposing. Appendix A 4. Valuation of inventory Summary of Key Matters Noted During the Audit of Penfolds Mining Group Ltd Raw materials and stores, ore stockpiles, work in progress and Because the valuation of ore stockpiles, work in progress and finished finished goods are stated at the lower of cost and net realizable goods are matters of significant judgement, we engaged external e. Estimates of net realizable value include a number of specialists to review the valuation of these inventories. Issue/Matter Further Information assumptions including commodity price expectations, foreign When reviewing the value ore stockpiled the external specialists 1. Sales cut-off exchange rates and costs to complete inventories to a saleable found that the quantity used in the company's calculation was product. With respect to stockpiled ore, the quantities on hand overstated and the quality of the ore stated in the company's assays The company sells iron ore pellets and other product on different During the review of cut-off procedures, we noted that the loading of are assessed primarily through surveys and assays. was also higher than revealed by the external specialists. One terms and conditions, but predominantly on a FOB Shipping a shipment of iron ore pellets commenced on 30" December 2020 separate ore stockpile that seemed to have come from a pit near to Point basis (see previous information) but was not completed until 1" January 2021 due to delay caused by the end of the ore seam was particularly low quality. The resulting breakdowns of the conveyor belt. The ship sailed on the first high tide calculations by the external specialists found that the value of ore on 2:d January 2021. The operating revenue for this shipment had stockpiles was overstated by an amount of $550,000 been recorded in the year ended 31 December 2020. The amount 5. Impairment of Cash Generating Unit (CGU) was $8,500,000. Accounting standards require the capitalised cost of cash The company's discounted cash flow model to determine the generating units to be reviewed for impairment to assess recoverable amount of each of the company's CGU was reviewed, 2. Sales cut-off whether the amount is fully recoverable from future cash flows. including: methodologies for management judgements; logic of the Management has prepared a discounted cash flow analysis discounted cash flow model; and mathematical accuracy. We also As stated in the information, in a limited amount of sales of iron During the review of sales/operating revenue we noted that a showing the present value of each of its CGUs. In preparing employed an independent expert to judgements made regarding: ore product, the company is responsible for shipping the product particular shipment had been loaded and the ship had sailed on 2 these analyses, judgement on a number of factors is required forecast operating and capital expenditure; future iron ore price to the customer and earns additional income over the price of December 2021. The sale of iron ore product for this shipment had including: iron ore final indexed prices; AUD/USD exchange estimates; AUD/USD exchange rates. We also reviewed the choice of the iron ore product. The company regards this freight income been correctly recognised as revenue in 2020. However, there was a rates; uncertainties around future operating and capital discount rate by assessing the cost of capital of the company and as a separate performance obligation from the ore sale freight component of the contract amounting to $500,000. This has expenditures; and the discount rate used. comparing the rate to market data and industry research. performance obligation and recognises the revenue over time not been recorded as income in the year ended 31 December 2020 rather than when the product is transferred to the ship. financial statements. The ship In performing the impairment test for one of its CGUs (CGU X), In reviewing the model used to assess impairment of CGU X we found b*co5.ocumentation had not been completed by the customer to management has prepared a discounted cash flow analysis that assumptions about the future cashflows are very aggressive and enable unloading. Upon review of the sale contract, it was noted that showing that the present value of the discounted cash flow is are unlikely to be achieved in the short to medium term due to a the performance obligation for the freight is met when the ship $30.5 million compared with the capital value of the CGU on the decline in demand for iron ore in the Chinese market. Accordingly, arrives at the destination. balance sheet of $30.37 million. Accordingly, management has the, the future cashflows from CGU X, according to our model, are deemed the CGU not to be impaired expected to be approximately $30.19 million. 6. Event after balance date Early in January 2021 the board met to consider the investment | In reviewing the Board minutes for January 2021, we noted that there 3. Conversion of receivables denoted in foreign currency (USD) in the joint venture property market development business was a minute to the effect that: (Brizzy, Properties). In discussions with their joint venture In March the property development joint venture would The company holds trade receivables denoted in a foreign During the audit, we noted that the company had used an exchange partner in this property development business it was decided be dissolved; currency - US dollars. rate of 1 USD = 1.982 AUD to convert a trade receivable of $1,500,000 that in March 2021 a transaction would be entered into that b. The debt owing to Penfolds by the joint venture partner to Australian dollars which was held at 31 December 2020. However, would entail: dissolving the joint venture; Penfolds Mining the correct exchange rate was 1 USD = 1.298 AUD at 31 December would be forgiven; and Group would forgive a debt owed to them by the joint venture 2020. C. Penfolds would take full share of any remaining unsold partner; and Penfolds would take full share of any remaining unsold luxury apartments. luxury departments. The financial statements for the year ended 31 December 2020 do not include any information with respect to this matter.Appendix B Auditor's 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 Summary of Key Matters Noted During the Audit of Penfolds Mining Group Led, with overstatement of trade receivables by $1,026,000 and an overstatement of profit before income tax of $1,026,000. Auditor and Management Responses Management's view Management has agreed with our calculations and agreed to make Issue/Matter Further Information the necessary adjustments to the financial statements. 1. Sales cut-off 4. Valuation of inventory The company sells iron ore pellets and other product on different During the review of cut-off procedures, we noted that the loading of Raw materials and stores, are stockpiles, work in progress and | Because the valuation of the valuation of are stackpiles, work in terms and conditions, but predominantly on a FOB Shipping a shipment of iron ore pellets commented on 30" December 2020 finished goods are stated at the lower of cast and net realizable progress and finished goods are matters of significant judgement, we Point basis (see previous information) but was not till 1" January 2021 due to delay caused by value. Estimates of net realizable value include a number of | engaged external specialists to review the valuation of these breakdowns of the conveyor belt. The ship sailed on the first high assumptions including commodity price expectations, foreign | inventories. tide on 2" January 2021. The operating revenue for this shipment exchange rates and casts to complete inventories to a saleable When reviewing the value are stockpiled the external specialists had been recorded in the year ended 31 December 2020. The product. With respect to stockpiled ore, the quantities on hand found that the quantity used in the company's calculation was amount was SB, 500,000. are assessed primarily through surveys and assays. overstated and the quality of the are stated in the company's assays was also higher than revealed by d by the external specialists. One separate ore stockpile that seemed to have come from a pit near to Auditor's view In our view, this resulted in an overstatement of revenue from the end of the are seam was particularly low quality. The resulting operations and an overstatement of trade receivables. calculations by the external specialists found that the value of are Our assessment is that the shipment had been sold under the usual _stockpiles was overstated by an amount of $550,000. arrangement of Free on Board (FOB) Shipping Point and that revenue Auditor's view We reviewed the report by the external specialist employed by us in should not be recognised until 2021 when loading was complete, and accordance with auditing standards and therefore conclude that the the ship had sailed. value of inventory needs to be reduced by $550,000 on the balance sheet and the operating profit before income tax needs to be Management's view Management disagrees with our conclusion. They argue that the increased by $550,000. loading of the ship had largely been completed by 31 December when Management's view Management does not agree with the valuation of the external the conveyor belt broke and that when loading recommented on 1 specialist and do not agree to make adjustments to the financial January this was only for 5%% of the shipment. They argued that the statements. performance obligations for the shipment were 'predominantly 5. Impairment of Cash Generating Unit (CGU) complete' by 31 December and therefore the revenue should be Accounting standards require the capitalised cost of cash | The company's discounted cash flow model to determine the recorded in the year ended 31 December 2020. They therefore generating units to be reviewed for impairment to assess recoverable amount of each of the company's CGU was reviewed, refuse to make an adjustment to the financial statements. whether the amount is fully recoverable from future cash flows. including: methodologies for management judgements; logic of the 2. Sales cut-off Management has prepared a discounted cash flow analysis | discounted cashflow, model; and mathematical accuracy. We also As stated in the information, in a limited amount of sales of iran During the review of sales/operating revenue we noted that a showing the present value of each of its OGUs. In preparing these employed an independent expert to judgements made regarding: are product, the company is responsible for shipping the product particular shipment had been loaded and the ship had sailed on 2 analyses, judgement on a number of factors is required | forecast operating and capital expenditure; future iron are price to the customer and earns additional income over the price of December 2021. The sale of iron ore product for this shipment had including: iron ore final indexed prices; AUD/USD exchange | estimates; AUD/USD exchange rates. We also reviewed the choice of the iron ore product. The company regards this freight income been correctly recognised as revenue in 2020. However, there was a rates; uncertainties around future operating and capital discount rate by assessing the cost of capital of the company and as a separate performance obligation from the are sale freight component of the contract amounting to $500,000. This has expenditures; and the discount rate used. comparing the rate to market data and industry research performance obligation and recognises the revenue over time not been recorded as income in the year ended 31 December 2020 ather than when the product is transferred to the ship. financial statements. The ship had arrived at its final destination, but In performing the impairment test for one of its CGUs (CGU X), In reviewing the model used to assess impairment of CGU X we found Chinese customs documentation had not been completed by the management has prepared a discounted cash flow analysis that assumptions about the future cashflows are very aggressive and customer to enable unloading. Upon review of the sale contract, it showing that the present value of the discounted cash flow is are unlikely to be achieved in the short to medium term due to a was noted that the performance obligation for the freight is met $30.5 million compared with the capital value of the CGU on the decline in demand for iron ore in the Chinese market. Accordingly, when the ship arrives at the destination. balance sheet of $30.37 million. Accordingly, management has the, the future cashflows from CGU X, according to our model, are deemed the CGU not to be impaired. expected to be approximately $30.19 million. Auditor's view We believe that an impairment charge of $180,000 should be recorded in the financial statements for CGU X. Management's view Management disagrees with our assessment stating that since it is Auditor's view In our view the performance obligation of the freight income was initiating a strong sales drive into other overseas markets, it is complete when the ship had arrived at the final destination and confident of achieving the future cash flow targets. therefore the income for the freight component should be recorded 6. Event after balance date in the year ended 31 December 2020. In our view, because the Early in January 2021 the board met to consider the investment In reviewing the Board minutes for January 2021, we noted that there income has not been recorded, this has resulted in an in the joint venture property market development business was a minute to the effect that: understatement of revenue from operations and an understatement (Brizzy Properties). In discussions with their joint venture In March the property development joint venture would of trade receivables. partner in this property development business it was decided be dissolved; Management's view Management disagrees with our conclusion. They argue that the that in March 2021 a transaction would be entered into that b. The debt owing to Penfolds by the joint venture partner generally accepted practice in the industry is that a freight would entail: dissolving the joint venture; Benfolds Mining would be forgiven; and performance obligation is complete when the ship arrives at the Group would forgive a debt owed to them by the joint venture C. Penfolds would take full share of any remaining unsold destination AND unloading has commenced. They therefore refuse partner; and Penfolds would take full share of any remaining luxury departments. to make an adjustment to the financial statements unsold luxury apartments. 3. Conversion of receivables denoted in foreign currency (USD) The financial statements for the year ended 31 December 2020 da The company holds trade receivables denoted in a foreign During the audit, we noted that the company had used an exchange not include any information with respect to this matter currency - US dollars. rate of 1 USD = 1.982 AUD to convert a trade receivable of $1,500,000 a Australian dollars which was held at 31 December 2020. However, Auditor's view This matter falls within the req arements of AASB 110. It is a material the correct exchange rate was 1 USD = 1.298 AUD at 31 December matter but because the condition relating to it did not exist at balance 2020. date, it is a non-adjusting event. It does however re quire to financials statements to be adjusted by way of note, clearly disclosing the event and the nature of the transaction that will be conducted in March tivat 2021. Management's view Management agrees with the treatment suggested and have to Sett djusted the financial statements accordingly