Going Concern & Financial Reporting Audit

This assignment delves into the crucial concept of the 'going concern' assumption within financial reporting and its implications for auditing. It explores the relationship between revenue-expense matching practices and the likelihood of a going concern audit opinion being issued, particularly in cases of financial distress. The analysis also investigates the influence of auditor fees and independence on going concern reporting decisions. The assignment incorporates relevant research studies and real-world examples, such as the case of Home Retail Group Plc, to illustrate these concepts.

Audit and Assurance
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TABLE OF CONTENTS
INTRODUCTION................................................................................................................................3
1. Critically evaluating the risk based approach to external audit in the context of Home Retail
Group Plc ........................................................................................................................................3
2. Identifying the aspects which reflect that company was facing going concern problem during
the period of 2013-2015...................................................................................................................4
3. Identifying the qualitative information which external auditor needs to consider during
auditing ...........................................................................................................................................4
4. Discussing the factors which might influence the opinion of external auditor ..........................5
CONCLUSION....................................................................................................................................6
References............................................................................................................................................7
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INTRODUCTION
Audit is the process of official investigation of financial statements which is conducted by
the external auditor. In this, by making systematic examination and verification of accounting
records, auditor is able to present the fair view of company's financial position and performance.
This project is based on Home Retail Group Plc which is one of the leading retailers who offers
home and general products of different brands. This group comprises of three divisions namely
Argos, home-base and financial services. The present report will discuss various types of risk and
aspects which are highly associated with the auditing aspect.
1. Critically evaluating the risk based approach to external audit in the context of Home Retail
Group Plc
Material misstatement is one of the main risks which are usually faced by the external
auditor during the investigation. This risk occurs when there is a difference between the actual
figure and the amount which is reported in the financial statements. In this, external auditor can
present its solution only when they make thorough analysis of financial aspects (Louwers and et.al.,
2013). For instance: When business organization is facing problem of ineffective control and
financial management then, it prefers to make manipulation in the financial statements. Moreover,
stakeholders such as investors, lenders, supplier etc. prefer to invest money in the firm whose
financial position is sound (Wang and et.al., 2013). In this context, external auditor of Home Retail
Group Plc also faces issues in relation to the aspects of material misstatement which takes place in
the financial statements.
Auditor witnesses several difficulties in presenting the fair and realistic view of the
company's financial position in the case of material misstatement such as audit, control and inherent
risk. Thus, in order to cope up with such risk, several strategies had been employed by Home Retail
Group Plc. Primarily; retail group had developed process to delegate the authority which ensures
smooth functioning of the business operations and functions (Messier Jr, 2016). In addition to this,
tactics are also developed by Home Retail Group Plc for the effectual management of risk such as
internal control, insurance and foreign currency hedging etc. (Arens and et.al., 2015). Along with
this, review of consolidate data or financial statements has also been made by the firm for providing
the information regarding the financial position and performance of the firm.
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2. Identifying the aspects which reflect that company was facing going concern problem during the
period of 2013-2015
Principle of going concern shows that business organization has the ability to operate their
business operations and functions for the long span of time more effectively. Hence, it may be
served as an assumption according to which financial statements are prepared for one or less than
one year (What is going concern principle?, 2013). By analyzing the annual report of Home Retail
Group Plc it has been identified that it follows going concern basis for drafting the financial
statement. On the basis of this aspect, statements are prepared by the company on quarterly and
annual basis. Further, by taking into account the financial plan of group in relation to the liquidity,
solvency, cash position and other aspects auditors give advice to Home Retail Group Plc for
adopting the going concern basis (Hayes, Wallage and Gortemaker, 2014). Being an auditor, it has
been identified that company was not facing problems due to adoption of going concern principle.
In this regard, by evaluating the profit pattern, key ratios and financial structure Home Retail
Group Plc can determine the extent to which company is facing problem. From the ratio analysis, it
has been identified that during the accounting period of 2013-2015 both gross and net profitability
aspect of the firm shows increasing trend. Along with this, return on assets also inclined from 1.28
to 1.67 during the financial year 2013-2015. Further, ROCE of Home Retail Group Plc has also
increased from 1.99 to 2.66 at the end of the financial year 2015. Further, current and quick ratio
presents that business unit has enough amount of fund for meeting its current obligations (DeFond
and Zhang, 2014). In this, repayment capability of the firm is also good. Thus, it can be stated that
strategies and tactics which are employed by the retail group is highly sound.
3. Identifying the qualitative information which external auditor needs to consider during auditing
Being an auditor, there are several qualitative aspects in relation to financial statements
which needs to be considered during the analysis. It includes understandability, relevancy, reliability
and comparability (Qualitative characteristics of financial statements, 2016). In auditing, it is the
responsibility of the auditor of Home Retail Group Plc to present all information in an
understandable manner with the notes (Yang and Jia, 2013). For instance: Annual report of the
company clearly presents the information about the dividend made by them in 2014-2015. Along
with this, auditor also assesses the investment project of the firm. Through this, investors and other
stakeholders can analyze the growth and profitability aspect of the business organization.
Further, auditor also needs to make in-depth analysis of each and every financial aspect of
Home Retail Group Plc in against to the evidence. Through this, auditors can present the financial,
liquidity and solvency aspect of the firm. In this regard, profit, financial structure and assets are the
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main elements which are considered by an auditor for giving suggestion about the existence of the
organization (Furnham and Gunter, 2015). Moreover, profit and financial structure is one of the
main aspects which have high level of influence on growth and success of firm. In addition to this,
auditor will follow accounting policies and rules which are introduced by IFRS during the
investigation of books of accounts. In this, auditor can also evaluate the financials of the firm in
relation to the previous years (Seyam and Brickman, 2016). Through this, he can mention
appropriate aspect in the audit report about the firm's profitability and survival. Further, auditor’s
report also provides information about legal and regulatory practices of the business unit
(Ratzinger-Sakel, 2013). Hence, by focusing on all above aspects auditor can present the realistic
view about the performance of the firm.
4. Discussing the factors which might influence the opinion of external auditor
There are several factors which might influence the opinion of external auditor to the large
extent. Self-interest, familiarity etc. are the main factors which affects views of external auditors in
relation to organizational performance. Self interest factor refers to the desire of auditor in making
manipulation or modifications in the actual results (Gallizo and Saladrigues, 2016). For instance:
Due to the desire of earning high auditors also prefer to take bribe from the business organization.
In this way, greed is one of the main factors which compel personnel or auditor to present report
according to the willingness of Home Retail Group Plc. Besides this, if external auditor has familiar
type of relationship with the director or chief executive officer then, views and opinions of the
auditor will be affected in the negative direction (Kim and Lee, 2016). Moreover, due to such
relationship, professional auditors are ready to make compromise with the objectivity, integrity and
fundamental principles of accounting.
Looking at the report of the independent auditors of Home Retail Group plc, it can be said
that it is presented in fair and true aspects of the company affairs at 28 February 2015. Further,
auditors also claimed that profit and cash flow statement which is investigated by them stated the
organizational performance. In addition to this, auditor reported that all the financial statements are
prepared by them according to the guidelines of IFRS and European Union laws. Further, they have
also followed Companies Act 2006 and Article 4 of the IAS regulation at the time of final accounts.
Independent auditors makes consolidated balance sheet at 28 February 2015 (Annual report of
Home Retail Group Plc, n.d.). Along with this, income and cash flow statement as well as statement
of changes in equity is analyzed by the auditor for presenting the realistic view of company's
position in front of the stakeholders such as investors, government, suppliers, lenders etc. (Shvyreva
and Kruglyak, 2016). Hence, by following all the above mentioned aspects it can be stated that
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external auditor presented the reliable information about company’s financial performance by
employing the standard rules and regulations.
CONCLUSION
From the above report, it has been concluded that auditing is the best tool which in turn
provides appropriate information to stakeholders about the company's financial aspects. Besides
this, it can be inferred that Home Retail Group Plc needs to employ going concern basis
consistently which helps them in preparing financial statements in the best possible way. It can be
revealed from the report that auditor of the business organization is required to analyze the
qualitative factors during the investigation of final accounts. Through this, auditors have become
able to provide realistic view of the financial position of the firm. It can be stated that external
auditor has offered realistic opinion which was free from any biasness to the large extent.
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REFERENCES
Books and Journals
Arens, A.A. and et.al., 2015. Auditing: The Art and Science of Assurance Engagements. Pearson
Canada.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and
Economics. 58(2). pp.275-326.
Furnham, A. and Gunter, B., 2015. Corporate Assessment (Routledge Revivals): Auditing a
Company's Personality. Routledge.
Gallizo, J.L. and Saladrigues, R., 2016. An analysis of determinants of going concern audit opinion:
Evidence from Spain stock exchange. Intangible Capital. 12(1). pp.1-16.
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Kim, H.W. and Lee, S., 2016. Does Revenue-Expense Matching Relate To Going-Concern Audit
Opinion Conditional On Firm’s Financial Distress?. Journal of Applied Business Research
(JABR). 32(3). pp.947-966.
Louwers, T.J. And et.al., 2013. Auditing and assurance services. New York, NY:
McGraw-Hill/Irwin.
Messier Jr, W., 2016. Auditing & assurance services: A systematic approach. McGraw-Hill Higher
Education.
Ratzinger-Sakel, N.V., 2013. Auditor Fees and Auditor Independence-Evidence from Going
Concern Reporting Decisions in Germany. Auditing: A Journal of Practice & Theory. 32(4).
pp.129-168.
Seyam, A.A. and Brickman, S., 2016. The going concern assumptions and presentation on financial
statements. The Business & Management Review. 7(3). pp.241.
Seyam, A.A. and Brickman, S., 2016. The new requirements relating to going concern evaluation
and disclosure provide a critical improvement to the financial statements taken as a whole.
International Journal of Business and Economic Development. pp.15.
Shvyreva, O.I. and Kruglyak, Z.I., 2016. Problems of Professional Judgment Application in
Evaluating the Company’s Going Concern. Indian Journal of Science and Technology.
9(14). pp.34-35.
Wang, C. and et.al., 2013. Privacy-preserving public auditing for secure cloud storage. IEEE
Transactions on computers. 62(2). pp.362-375.
Yang, K. and Jia, X., 2013. An efficient and secure dynamic auditing protocol for data storage in
cloud computing. IEEE Transactions on Parallel and Distributed Systems. 24(9). pp.1717-
1726.
Online
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Annual report of Home Retail Group Plc. n.d. [Online]. Available through:
<https://www.homeretailgroup.com/media/269233/home_retail_group_plc_annual_report_a
nd_financial_statements_2015.pdf>. [Accessed on 27th July, 2016].
Qualitative characteristics of financial statements. 2016. [Online]. Available through:
<http://www.accountingtools.com/questions-and-answers/what-are-the-qualitative-
characteristics-of-financial-statem.html >. [Accessed on 27th July, 2016].
What is going concern principle?. 2013. [Online]. Available through: <http://accounting-
simplified.com/financial-accounting/accounting-concepts-and-principles/going-
concern.html>. [Accessed on 27th July, 2016].
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