Holmes Institute HA3032: Developing an Audit Program for Vmoto Ltd

This report presents a comprehensive audit program developed for Vmoto Ltd, a leading electric vehicle company. It begins with an overview of Vmoto Ltd, its key business risks, and an analysis of four key financial ratios, including gross margin and return on equity. The report then identifies and explains material account balances from the company's financial statements, such as cash, receivables, and inventory, along with relevant assertions like accuracy and completeness. Detailed audit work steps are provided for each material account balance, including a sampling plan. The report also discusses the differences between tests of controls, substantive tests of transactions, and substantive tests of balances, and the conditions under which an auditor undertakes substantive audit procedures. Finally, it explores the relationship of assertions to account balances and the selection of the most effective combination of audit procedures, providing a practical framework for auditing Vmoto Ltd's financial statements.

Developing an Audit
Program
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Contents
INTRODUCTION...............................................................................................................1
TASK 1...............................................................................................................................1
Overview of company.....................................................................................................1
Key business risks.........................................................................................................2
Four key ratios and brief explanation.............................................................................2
Material Accounts...........................................................................................................3
Ten different material account balances........................................................................4
Explanation of selected assertion relevant to material account balance.......................5
Comprehensive set of audit work steps for each material account balance.................7
Sampling plan for each material account.......................................................................7
CONCLUSION...................................................................................................................7
REFERENCES..................................................................................................................8
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INTRODUCTION
In the present era, the concept of auditing is increasing as each and every firm
wants to detect the error and frauds at the right time lowering their impact on the overall
performance of business (Austin and Carpenter, Cantore, 2017). This help an
organisation to get more advance loan from bank because the audited statement is
more faithful and reliable. In order to conduct an audit program there is need of proper
and accurate plan which gives detailed information regarding conducting an audit and it
guide the auditor to maintain an ethics within company. The audit program might be
determined as the plan of action of the auditor specifying the tasks to be performed, the
audit tests to be performed and the processes to be accompanied, the persons
responsible for performing the work as well as the time under which the work to be
performed. In this assignment Vmoto Ltd has been selected that support to better
understand the concept of audit program.
In this report, difference between tests of controls, substantive tests of
transactions and substantive tests of balances, condition for auditor to undertake
substantive audit procedures, relation of assertions to accounts balance, selection of
most accurate and effective combination of audit procedure is discussed.
TASK 1
Overview of company.
The company Vmoto Ltd is one of the leading electric vehicle manufacturing and
distributing company all over the world. The company was established in 29 October
2001 and have its operation in Australia, America and New Zealand and the middle east
(About Vmoto Limited, 2019). The company have a mission to become the largest
electric vehicle product distributor and also to deliver EV solution to its user at
international level. Vmoto Limited manufactures, markets and distributes motorcycles,
scooters and all-terrain vehicles. The company is dealing in consumer discretionary
sector within leisure product industry and recreational vehicles sub industry. The
company have a strategy to sell the high value and margin two wheeler electric product
such as delivery scooter, police vehicle, food motorcycle etc. at international level which
support them to gain the well positioned and become a global topmost two-wheel
electrical vehicle provider and electric vehicle solution supplier. In recent financial year
2018 the company sell around 10875 as a whole in which 10081 of electric vehicles are
sold in international market.
Key business risks.
In the present there can be number of business risk that can be faced by the
electric vehicle manufacture company such as the introduction of rapidly developing
digital technologies, increased regulatory stress and worldwide financial instability are
important considerations. It is observed that the key business risk to Vmoto Ltd is
related with cost because battery innovation is costly and the use of batteries in electric
vehicles must be sufficient to enable them to carry the vehicles practical for most driver,
they must be constructed using costly equipment, most of which are difficult to procure.
Audit risk
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The likelihood of an auditor expressing an inaccurate view on financial statements is
called as audit risk (Lim, 2018). Audit risk is a risk of auditor providing on financial
statements an inaccurate or insufficient opinion. Following are cases of erroneous audit
opinions, as follows:
 Issue an unqualified audit-report when there is reasonable justification for a
qualification,
 Issue of a qualified audit-opinion unless no requirement of qualification,
 Failure to highlight an important issue in audit report,
 Expressing an opinion on 8a corporation's financial statements if no opinion can
be reasonably provided because of major limitation with respect of scope in audit
performance
Four key ratios and brief explanation
Profitability Ratios 2016 2017 2018
Gross Margin % 17.6 10.3 13.1
Return on Equity % -50.1 -48.46 -6.51
Interpretation: The profitability ratios are the financial measure that are used to
figure out the actual earning ability of company and also ascertain the financial position
and strength by comparing the revenue with several expenses and make sure the
optimum utilisation of different resources. From the above table gross margin of Vmoto
Ltd has shown a high fluctuation such as in year 2016 it was 17.6% which reduces to
10.3 in 2017 and 13.1 in 2018. The return on equity of company remain in negative for
the respective year because they are not able to make enough profit which can be
delivered to subsequent shareholder. In year 2018 the return on equity was
-6.51 which shows that company have started making some profit but it was not
sufficient at the moment (Annual Report Vmoto Ltd, 2017). For year 2017 it was (48.46)
and in year 2016 it was (50.1) this means the condition was adverse for Vmoto Ltd and
company is continue to attain losses for its entire operation.
Efficiency ratio 2016 2017 2018
Asset Turnover Ratio 1.05 0.62 0.94
Interpretation: Efficiency ratios are being used by evaluating how well a
company uses its funds to produce income to evaluate business efficiency. These
proportions work with the business's functional element like how many moments the
firm transforms its receivable amount into money, the capacity of the business to
produce profit through the use of resources, and how well the business manages
inventory size. From the above table it has been observed that assets turnover ratio
which was 1.05 in year 2016 which shows that company is able to generate enough
sales from their assets. This ratio decreases to 0.62 in year 2017 and company
management keeps on increasing the sales due to which there is a slightly movement in
the assets turnover ratio 2018 to 0.94 (Annual Report Vmoto Ltd, 2018).
Liquidity/Financial
Health 2016 2017 2018
Current Ratio 1.96 1.79 1.85
Interpretation: The liquidity ratio assesses the capacity of the company to pay
its quick-term responsibilities, i.e. current liabilities or any other unwanted expenses
(McEwen, Griffiths and Schultz, Shafritz, 2018). It demonstrates the degree of cash
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flow, that is the total quantity of their assets that can be transformed rapidly into money
to pay their commitments when they are actually due. This ratio not only measure the
total of cash the company holds but also determine the actual time current assets can
be transferred into cash. There are different types such as current ratio, quick ratio, acid
test ratio etc. In the Vmoto Ltd the current ratio for the year 2016 was 1.96 which means
company is easily able to convert its assets into cash whenever it is required and there
is good cash flow throughout the year. In year 2017 it was the proportion of current
assets decreases to 1.79 that shows there is some issues within company liquidity.
Then again company start working on its cash flow and make provision so that easily
their current assets are converted into cash because in year 2018 the percentage of
current ratio was 1.85.
Material Accounts
In the accounting world, the material accounts are considering to be important as
in case if the information are missing to these material and it have a greater impact on
the decision making of the user of financial statements. All those items are considered
to be material in case if they have a major influence upon the described profit of
company. For example, raw materials, parts, sub-components and equipment of
manufacturing. In principle, everything absorbed can be categorized as material during
the manufacturing phase.
In the preparing and submission of a financial document, financial accounting
methodologies often address the conception of materiality. While financial reporting
structures can address materiality in distinct ways. According to ISA 320 materiality in
performing and planning an audit programme it helps to Addresses the problem of the
strategy to determining materiality by explaining that materiality relies on the magnitude
and type of an object or on a mixture of both regarded in the context of the specific
conditions in which it occurs. It also establishes advice on the use of appropriate
benchmarks, like classifications of recorded revenue or of totally appropriate
classifications of operations, transactions or disclosures, which should be supported by
the practice of competent judgment in reaching the appropriate level of materiality. For
instance, it tends during the audit that current financial results are going to differ
significantly from the expected financial results that are originally used to assess
materiality for the financial statement itself and the auditor is responsible to review that
materiality.
Ten different material account balances
In accounting term, material account balance is defined as the size of recorded
account balance in the financial statement of the company during a financial year. From
the balance sheet of Vmoto Ltd for the consecutive three years some of the material
accounts in the assets and liabilities are as follows:
Assets: These are the resources that are controlled and owned by the
companies with the intention that it helps to generate required cash flow in
nearby future (Gaol and Berliana, 2019). There are the possibilities of
misstatement in these account which may impact the entire financial performance
of Vmoto Ltd.
Particular 2016 ($) 2017 ($) 2018 ($)
Cash and cash equiva- 43,61,855 31,72,792 41,93,790
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lents
Trade and other receiv-
ables 28,77,295 13,85,118 20,98,447
Inventories 69,87,827 27,80,782 56,38,169
Property, plant and
equipment 76,26,947 78,14,943 85,56,335
Intangible Assets 40,92,773 5,95,533 4,46,650
Liabilities: It is defined as the legal obligation or any financial debts that occurs
during the entire functioning of different business operation.
Particular 2016 ($) 2017 ($) 2018 ($)
Trade and other payables 56,87,070 38,67,726 61,49,449
Loans and borrowings 21,07,943 19,66,878 12,35,890
Current tax liabilities 11,529 0 0
Deferred tax liabilities 4,89,860 0 0
Other liabilities 10,00,000 0 0
Explanation of selected assertion relevant to material account balance.
In accounting, the financial statement assertions are defined as the claims which
are created by the management of company and are related with annual reports. These
assertions develop a theoretical ground which support the external auditors to form an
accurate audit procedure. In general, management makes implicit or specific allegations
in the preparation of financial statements concerning the identification, evaluation and
submission of investments, liabilities, earnings, equity, expenditures and disclosures in
accordance with the relevant financial reporting structure. From the annual report of
Vmoto number of material accounts balance have been determined that might impact
the financial report. There relevant assertion are as follows:
Assets:
Items Relevant Assertion Explanation
Cash and cash equivalents Accuracy Transactions were correctly
registered at their
corresponding quantities and
there were no issues with
their closing balances.
Trade and other receivables Completeness This latterly means that each
trade transaction which are
needed to be recorded have
been completely recognised
with the financial statement of
Vmoto Ltd.
Inventories Classification Transactions were
categorized and reasonably
submitted in the financial
accounts. As each and every
stock that was part of raw
material, goods in transit and
finished goods was reported
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correctly.
Property, plant and
equipment
Occurrence This defines that each
transaction recognised in the
annual report have happen
and is already a part of
Vmoto Ltd.
Intangible Assets Cut-off All the transaction related to
the intangible assets has
been recognised
Liabilities
Items Relevant Assertion Explanation
Trade and other payables Valuation The entire balance of trade
and other payables for Vmoto
have been appropriately
valued and balanced.
Loans and borrowings Rights & Obligations This assertion simply defines
that liabilities identified in the
accounts constitute Vmoto
Ltd obligation that are
needed to be transfer within
future period.
Current tax liabilities Existence It shows that the liability
balance exit at the end of
year such as in year 2016 the
balance was $11,529 which
write off in the consecutive
year.
Deferred tax liabilities Existence This assertion helps to define
that the balance of liability
was recorded at the end of
period. From the annual
report the balance in year
2016 was $4,89,860.
Other liabilities Existence It indicates that at the closure
of accounting year, the
liability balance departure,
such as in year 2016, the
balance was $10,00,000.
Comprehensive set of audit work steps for each material account balance.
Assets:
Items
Cash and cash equivalents  At first step while auditing cash and
cash equivalents auditor should list out
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the in or out sources of cash within
entity like cash sales, cash expenses,
contra entries in bank statements.
 Then check each authorization level
which is established by entity to
control and manage cash transactions.
 Analyze any cash receipt or payment
which is illegal in statute eyes.
 Auditor should emphasize on small but
highly frequent cash transactions
since most of the auditors ignores
such kind of transactions.
Trade and other receivables  At first step list out company's major
debtors or trade receivables.
 Then assess their payment cycle and
credit period.
 Analyses year end transactions in
respect of trade receivables to find out
any trade debtor which may be
bankrupt or lead to an bed debt
amount.
Inventories  Here at first step auditor should
conduct physical verification of
inventories.
 Auditor can also conduct any sudden
check to ensure proper recording of
inventories.
 Thoroughly check inventory register.
Property, plant and equipment  Examine valid documents of purchase
of property, plant and equipment.
 Conduct physical verification of
company's property, plant and
equipment.
 Examine that such items are properly
recorded.
Intangible Assets  Examine legal and valid documents
related to intangible assets like
copyright, patent, trademark etc.
thereafter check amortization entry in
account.
 In case of goodwill evaluate figure
reported by company to ensure that
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amount stated in balance sheet is
valid.
Liabilities:
Items
Trade and other payables  Summaries all the trade-payable of
company.
 Analyze year-end changes in trade-
payable accounts.
 Any inter-company trade-payable
should be focused more.
Loans and borrowings  Check whether paper work done by
company at the time of taking loan is
proper and complete.
 Ensure that secured assets against
any loan is properly valued.
 Ensure that not interest amount on
loans are overdue.
Current tax liabilities  Analyze whether any major tax
liabilities which are not reported by
company.
 Ensure proper recording of tax
liabilities.
Deferred tax liabilities  Examine that tax liabilities are
properly deferred or not.
 Ensure compliance of taxes
regarding deferred tax.
Other liabilities  Analyze the main source of any
other major liabilities.
 Evaluate whether liabilities are
properly reported.
Sampling plan for each material account
Assets:
Items
Cash and cash equivalents Here for sampling auditor should take sample
of cash transaction which are large in value
or frequent in nature (Tang and Liu, 2015).
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Trade and other receivables While taking sample of trade receivables
auditor should consider only yearend
transaction in trade receivable account and
trade-receivable showing large balance.
Inventories In inventories only those inventory items are
considered which are frequently moving.
Property, plant and equipment Here generally sample plan is not required
due to limited number.
Intangible Assets In this area also no sampling plan is required
as these are also limited in number.
Liabilities:
Items
Trade and other payables At the time of taking sample of trade payable
auditor should consider only yearend
transaction in trade-payable account and
trade-payable showing large balance.
Loans and borrowings Only major amount of loans and borrowings
should be taken while preparing sampling
plan.
Current tax liabilities Here normally auditor not adopt sampling
plan, however current tax-liabilities with high
amount could be taken as sample.
Deferred tax liabilities In this area no sampling plan is required.
Other liabilities Other major amount of liabilities should be
considered for sampling plan.
CONCLUSION
Form the entire report, it has been founded that, internal auditor and his related
audit team must begin by explaining the goals, objectives and responsibilities of the
audit when designing an audit system. The main aim for preparing the audit for
determining general materiality is to use it to define efficiency of materiality which is
required, for instance, to assist accountants plan their audit processes and an obviously
insignificant limit for accumulating mistakes. Accounting ratios are essential as they
enable the administrators in their day-to-day financial decision. They also assist them in
assessing the company's performance and making any modifications considered
necessary.
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REFERENCES
Books and Journals:
Austin, A. A. and Carpenter, T., 2018. Game On: Making Audit Firm Communication
More Engaging to Improve Auditors’ Fraud Actions during Evidence
Evaluation. Available at SSRN 2951396.
Cantore, N., 2017. Factors affecting the adoption of energy efficiency in the
manufacturing sector of developing countries. Energy Efficiency. 10(3). pp.743-
752.
Gaol, L. and Berliana, M., 2019. Time Budget Pressure, Auditor Locus Of Control And
Audit Quality Reduction Behavior. Auditor Locus Of Control And Audit Quality
Reduction Behavior (August 20, 2019).
Lim, D., 2018. Quality assurance in higher education: A study of developing countries: A
study of developing countries. Routledge.
McEwen, L. A., Griffiths, J. and Schultz, K., 2015. Developing and successfully
implementing a competency-based portfolio assessment system in a
postgraduate family medicine residency program. Academic Medicine. 90(11).
pp.1515-1526.
Shafritz, J., 2018. The dictionary of public policy and administration. Routledge.
Tang, C. and Liu, J., 2015. Selecting a trusted cloud service provider for your SaaS
program. Computers & Security. 50. pp.60-73.
Online
About Vmoto Limited. 2019. [Online] Available Through:
< http://www.vmoto.com/>
Annual Report Vmoto Ltd. 2017. [Online] Available Through:
<http://www.vmoto.com/assets/uploads/20180517/2018051712333861064>.
Annual Report Vmoto Ltd. 2018. [Online] Available Through:
< http://www.vmoto.com/assets/uploads/20190411/2019041114411803034.pdf>.
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