Table of Contents Table of Contents.............................................................................................................................2 INTRODUCTION...........................................................................................................................1 PART A...........................................................................................................................................1 Critical evaluation of director’s reasoning for including a provision of 20000 pounds in the financial statements of GR8 Hols Limited..................................................................................1 PART B...........................................................................................................................................2 Content of an explanatory email to Sabrina in which all the concerns about firm’s interest in business risk will be critically addressed.....................................................................................2 PART C...........................................................................................................................................3 IdentificationofEIGHTinherentrisksassociatedwiththefinancialstatementsofthe organisation along with explanation of impact of each one of them...........................................3 PART D...........................................................................................................................................4 1. Explanation of any audit concerns which are related to the reported income figures for caravan, tent and pitch hire including occupancy rate.................................................................4 2. Explanation of other audit risks that are related to the EIGHT other areas of the reported financial information...................................................................................................................5 PART E............................................................................................................................................5 Effect of the introduction of new system on 1stFebruary 2019 should have upon firm’s approach.......................................................................................................................................5 PART F............................................................................................................................................6 1. Advice in assisting GR8 Hols Ltd in the possible purchase of the Campies Ltd site..............6 2. Advice in the employment of the sire accountant currently engaged by Campies Ltd as suggested by Reeves....................................................................................................................6 3. Advice to carry out future end of year non-current assets and inventory counts as requested by Reeves.....................................................................................................................................6 CONCLUSION................................................................................................................................7
INTRODUCTION International Audit can be defined as the process of analysing each and every element of final accounts of an organisation so that it could be determined that it is performing well or not. It is mainly focused by such entities that are operating business at international level. In order to assure that all the detailed data which is mentioned in financial statements is appropriate and accurate or not all the entities are required to follow guidelines of IAASB(International audit and assurance, 2020). International Auditing and Assurance Standards Board is a legal body that guides all the global entities to form all the final account in transparent and relevant manner. Present report is based upon GR8 Hols Limited which was founded in year 1992 by Mary and John Cougar. Now the entity is planning to expand the business in Scotland and North of England for which the directors asked an auditing firm to advice upon different key areas. The topics that are covered in this assignment are reasoning for including a provision, concern regarding firm’s interest in business risk, identification of EIGHT inherent risks associated with the financial statements, different audit concerns etc. Additionally, effect on the introduction of the new system along with advices with rationale upon different areas are also covered in this project. PART A Critical evaluation of director’s reasoning for including a provision of 20000 pounds in the financial statements of GR8 Hols Limited Leakage have been identified in the underground drainage pipes on the camp sides. The Directors of GR8 Hols Ltd have claimed that it is the mistake of contractors because if they had used large firm for drainage then this problem would not have taken place. The whole loss which will take place due this damage is not covered by insurance. In this situation another firm of contractors was contacted and they agreed with a sum of 120000 pounds and confirmed it in a formal report. In this situation the entity kept 20000 pounds in the final account as provision for the river authority claim. It is the highest amount of provision which is made by the company. The amount which is kept by the organisation is not appropriate as it is very low as compared to the total value of the damage which is 120000 pounds. The organisation should provide alternative amount so that appropriate claim to the local river authority could be provided. Director’s responsibility is to make sure that they are able to find the right solution for the 1
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mistakes that are made by the enterprise. The provision of 20000 pounds very beneficial as it can help to deal with all the uncertainties that are faced by the entity. There is no materiality in level of provision so it will not be recorded. PART B Content of an explanatory email to Sabrina in which all the concerns about firm’s interest in business risk will be critically addressed Business risks are the set of various types of negative situations that may take place in future. These are linked with audit risks as all of them will leave impact upon position of company and its internal records which will create the issue of audit risk. It is very important for auditors to understand the business risk as it is essential for them to make sure that they are prepared to deal with all the unfavourable situations which may take place in future. According tointernational standard on auditing 315business risks result from significant conditions, circumstances and events of business operations. While planning to conduct the auditing process systematically it is very important for all the businesses to analyse the business risks as it is very important to make accurate reports. Business risk identification is a part of audit process as it is required to formulate the auditing records.There are various types of business risks that are associated with GR8 Hols Limited. One of them is related with recruitment policy because the entity is not having skilled employees and it is one of the biggest risks. There are various other risks that are associated with the organisation all of them could be understood with the help of following discussion: Recruitment policy:It is one of the main business risks which may result in lower profits and bad market image in the market. As the company have planned to recruit small number of permanent staffs for the sites but in order to execute all the planned activities properly it is not possible to perform them with small number of individuals. The number of temporary workers is more than 200 and if they leave job suddenly then it will be a huge risk for the business. Mitigation:In order to mitigate this risk, the enterprise is required to hire more permanent staff members reduce the number of temporary one. It will help to deal with all the difficult situations that could be faced by the organisation in future (Denisov, Khachaturyan and 2
Umnova, 2018). The auditors will have to analyse the final reports after the mitigation so that performance of business could be analysed. Advanced accounting system:The accounting system which is being replaced by the company recently is very advanced and improved. The staff members who are currently working within the entity are not able to work with it as they are not having experience of working on this software. They need proper training to work on this or an experienced individual is required to be hired who is having knowledge of working on it. If appropriate steps will not be taken by the organisation then it will impact the whole organisation negatively. Mitigation:In order to mitigate this risk appropriate training for old staff or new accountants having knowledge of advanced software should be recruited. The auditors will be obligated to use the new accounting systems with proper training which will help them to generate accurate reports. Waste in the local river:In the may month of year 2019 sewage waste of one of the sites of the organisation was leaked in the river which resulted in water contamination. It may result in legal actions for the entity because it is harming water of the river. Mitigation:In order to mitigate this risk, the enterprise should make arrangements to handle the leakage which is created by it(Farooq and De Villiers, 2019). The expenses which will take place after taking the step of mitigation of this risk the auditor will be obligated to analyse their impact upon the reports. All the above described risks should be taken in to consideration by the directors of GR8 Hols Ltd as it can help to reduce the possibility of them. On the other hand, the steps to mitigate them should also be taken as it will help to avoid their negative impact upon the business processes. PART C IdentificationofEIGHTinherentrisksassociatedwiththefinancialstatementsofthe organisation along with explanation of impact of each one of them All the EIGHT risks that are associated with the financial statements of the organisation along with their impact upon the business could be understood with the help of following table: Name of risk Nature of risk Area of financial statement Audit concern 3
affected Lackof information of Credit HighTradingand Balance sheet In appropriate information of credit will result in inaccurate profits or losses. It will also result in issues at the time of audit because such account cannot be audited properly. Improper management of Inventory LowTradingand Balance sheet Wrong interpretation will affect the accuracy of currentassetsoftheentity.Whenthe information of inventory is not right then it may resultinmaterialerrorsofthefinancial statements. Inaccurate Interest rate ModerateProfitandloss account When accurate interest rate is not applied then it willresultinwrongprofitsandinaccurate equities. Wrong interest rates will create audit issuesbecauseauditorswillnotbeableto determine actual profits or losses for the year (Haji and Anifowose, 2016). Lower Liquidity LowBalance sheetInappropriateinformationofcashandcash equivalent will result in lower liquidity for the organisation. When the information of all the liquid assets will not be accurate then it may result in bad reviews of auditors for the company (Knechel and Salterio, 2016). Inaccurate detailsof Liabilities ModerateBalance sheetWhen accurate information of liabilities will not be recorded then it will create the problem of unmatched assets and liabilities. If both the sides of balance sheet are not matching then it is considered that the recorded information is being forged or biased. Improper detailsof Equities HighBalance sheetThe information of equities is required to be accurate as it provides details about share of shareholders.Wrong interpretationof data of 4
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equities will result in in-transparent details. Assetsthat are depreciated HighProfit&loss accountand balance sheet The amount of depreciation is required to be calculated on the basis of predetermined method whether it is SLM or DBM. If the calculation of it is not accurate then it will result in wrong profits and wrong value in balance sheet(Lenn, 2018). Unrecovered Bad debts HighProfit&loss accountand balance sheet These are mainly related to the value of debtors when one of them is not able to pay the due amount then it should be deducted as bad debts. If it is not recorded in the books then it may resultinauditconcernssuch asmaterialistic information. PART D 1. Explanation of any audit concerns which are related to the reported income figures for caravan, tent and pitch hire including occupancy rate From the appendix it has been determined that audited amount for caravan hire from year 2015 to 2018 are 585, 606, 660, 719 respectively. The draft for year 2019 is around 926 which is a very huge amount. From the past few years, the hiring value is continuously increasing but the difference between 2018 and 2019 is very high therefore it may result in audit concerns such as inappropriate interpretation of information. The value of tent hires for the years 2015 to 2018 are 191, 238, 249 and 280 and the drafted amount for 2019 is 206. It shows that since past four years the value was increasing but in year 2019 it is decreased. It may result in audit concern because the provided information could be considered as biased because it is not possible that in one year the value could be decreased and break the trend. Lastly, the values of Pitch Hire for years 2015, 2016, 2017 and 2018 are 108, 124, 132 and 144. For year 2019 the draft amount is 150 which is appropriate. By analysing the appendix, it has been determined that it will not result in audit concerns because it is following the trend of last four years (Lessambo, 2018). 5
Note: All the figures in above discussion are taken from the appendix. 2. Explanation of other audit risks that are related to the EIGHT other areas of the reported financial information There are various inherent risks that are associated with the financial statements of GR8 Hols Limited. All of them are credit, liquidity, inventory, liabilities, equities, interest rates, bad debts and assets that are depreciated. All of them are focused by the entity so that possibility of audit risks that may take place due to them could be reduced. There are several other areas that may also create audit concerns for the organisation. One of them is repair and maintenance. If the management is not able to record accurate amount of it or they are recording the unnecessary information of it in financial statements then it will result in audit concern. For example, if the value of repair is 400 pounds and 600 pounds are recorded in the books without any proof then auditor will declare the statements in accurate. Another area of risk that may result in audit concern is insurance of assets. Insurance premium is paid on yearly, half yearly, quarterly or monthly basis. If the value of it which is recorded in the books is not accurate then it will result in material misstatement of final account that may also result in strict action of auditor(Mock, Ragothaman and Srivastava, 2018). PART E Effect of the introduction of new system on 1stFebruary 2019 should have upon firm’s approach GR8 Hols Limited planned to replace its old accounting system with a new and advanced version from 1stFebruary 2019. It will be used on parallel basis with the old one in three months period. It is highly advanced, tailor made and designed for the organisation. According to the director Sabina is an improved and highly advanced version of the old accounting system. It will handle the transactions in more quick manner. The level of reliability of it is very high and by using it the organisation will be able to keep detailed information of all the transactions that will be made by it in upcoming period. This new system will be beneficial for the organisation and also leave positive impact upon the approach of the company as the difficult tasks could be performed easily with the help of it. Issues and concerns:The main concern which is required to be focused by Sabina as a director is lack of knowledge to the old staff regarding use of it. In order to take proper advantage of it the organisation is required to hire some experienced employees so that they can 6
training the existing ones about the way in which it is used. Without hiring experienced individuals, it will be impossible to take advantage of the new, improved and advanced accounting system(Simnett, Carson and Vanstraelen, 2016). PART F 1. Advice in assisting GR8 Hols Ltd in the possible purchase of the Campies Ltd site GR8 Hols Ltd was approached by the director of Campies Ltd to buy its sites that it is willing to sell. It has been advised to Sabina that the sites should be bought as it will help to expand the business in local area and reduce the competition. If the sites of the entity will be purchased then there will a large area which will be covered by GR8 Hols to perform all its operational activities. The decision of purchasing it will result positively for the entity as it will provide it a large platform to operate business activities(Soh and Martinov‐Bennie, 2018). It is suggested to the auditors to have detailed information of code of ethics for professional accountants. It will help to respond to all the issues that could eb faced by them while recording information of new machine purchased by the enterprise. 2. Advice in the employment of the accountant currently engaged by Campies Ltd as suggested by Reeves Reeves suggested that the accountant who is currently working in Campies Ltd should be employed by GR8 Hols Limited as he is having experience of working at sites and having detailed information about the camp sites. Sabina is suggested that the accountant of the organisation should be employed by her as the experience of working and past experience of accountant will be beneficial for the organisation. It will reduce the load of the enterprise to hire a new individual who can handle all the details of new sites that will be bought by it. 3. Advice to carry out future end of year non-current assets and inventory counts as requested by Reeves The last request that are made by Reeves was related to the carry out no-current assets and inventory’s count so that the goal of firm of reducing the overhead expenses should be reduced. Sabina is advised that these non-current assets and inventory should not be counted because it will increase the work load of staff members and may also result in lower productivity of them. As Campies Ltd’s sites will be bought by GR8 Hols Limited so the employees who are currently working within the entity will have more responsibilities. In case of counting the inventory and 7
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non-current assets their work load will be at a higher level which may affect the work quality of them. It is the main reason for providing this advice to Sabina (Barr-Pulliam, Brown-Liburd and Sanderson, 2017). CONCLUSION From the above project report it has been concluded that audit and assurance are two main elements that are required to be focused by all the organisations so that they can perform all the operation properly. In order to determine the audit concerns that may take place in future all the companies are required to analyse the business risks such as recruitment policy, unexperienced staff etc. There are various inherent risks that should also be focused by organisations to determine audit related difficulties that may take place in future. Some of them are credit, liquidity, assets, liabilities, equities, insurance, etc. While taking any decision for betterment of business in future it is very important for all the organisations to make sure that they are analysing each and every factor properly. 8
REFERENCES Books and Journals: Barr-Pulliam, D., Brown-Liburd, H. L. and Sanderson, K. A., 2017. The Effects of the Internal Control Opinion and Use of Audit Data Analytics on Perceptions of Audit Quality, Assurance, and Auditor Negligence.Assurance, and Auditor Negligence (August17. 2017). Denisov, I. V., Khachaturyan, M. V. and Umnova, M. G., 2018. Corporate social responsibility inRussiancompanies:Introductionofsocialauditasassuranceof quality.Calitatea.19(164). pp.63-73. Farooq, M. B. and De Villiers, C., 2019. Sustainability assurance: Who are the assurance providers and what do they do?. InChallenges in Managing Sustainable Business(pp. 137-154). Palgrave Macmillan, Cham. Haji, A. A. and Anifowose, M., 2016. Audit committee and integrated reporting practice: does internal assurance matter?.Managerial Auditing Journal. Knechel, W. R. and Salterio, S. E., 2016.Auditing: Assurance and risk. Taylor & Francis. Lenn,M.P.,2018.Internationallinkagesandqualityassurance:ashiftingparadigm. InInternational Developments in Assuring Quality in Higher Education(pp. 127-133). Routledge. Lessambo, F. I., 2018. The International Auditing and Assurance Standards Board. InAuditing, Assurance Services, and Forensics(pp. 35-39). Palgrave Macmillan, Cham. Mock, T. J., Ragothaman, S. C. and Srivastava, R. P., 2018. Using Evidential Reasoning Technology to Enhance the Audit Quality Assurance Inspection Process.Journal of Emerging Technologies in Accounting. 15(1). pp.29-43. Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and assurance research: Trends, methodological issues, and opportunities.Auditing: A Journal of Practice & Theory. 35(3). pp.1-32. Soh, D. S. and Martinov‐Bennie, N., 2018. Factors associated with internal audit's involvement in environmental and social assurance and consulting.International Journal of Auditing. 22(3). pp.404-421. Online Internationalauditandassurance.2020.[Online].Availablethrough: <https://www.iaasb.org/> 9
APPENDIX 10
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