International Audit and Assurance Report for GR8 Hols Ltd - Analysis

This report provides a detailed analysis of an international audit and assurance case study for GR8 Hols Ltd. It begins with an examination of the directors' decision to include a provision of £20,000, referencing FRS 102. The report then addresses business risks, including financial, operational, and compliance risks, and suggests mitigation strategies. It identifies and explains eight inherent risks associated with GR8 Hols Limited's financial statements, analyzing their impact on different financial statement areas. An analytical review, including trend analysis of income sources (caravan hire, tent hire, and pitch hire) from 2015 to 2019, highlights areas of concern. The report discusses the implications of a new accounting system and small staff numbers on audit responsibilities and procedures. It also addresses the potential impact of the new accounting system on internal controls.

Running head: INTERNATIONAL AUDIT AND ASSURANCE
International Audit and Assurance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Requirement (a)........................................................................................................2
Answer to Requirement (b)........................................................................................................2
Answer to Requirement (c)........................................................................................................4
Answer to Requirement (d)........................................................................................................7
Part (i).....................................................................................................................................7
Part (ii)...................................................................................................................................7
Answer to Requirement (e)........................................................................................................9
Answer to Requirement (f).......................................................................................................10
Part (i)...................................................................................................................................10
Part (ii).................................................................................................................................10
Part (iii)................................................................................................................................11
References................................................................................................................................12

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Answer to Requirement (a)
The provided situation states that the directors of GR8 Hols Limited has taken the
decision of including £20,000 as provision. As per FRS 102, Section 21 Provision and
Contingencies, Paragraph 21.4, a provision needs to be recognized when it is possible to
estimate the obligation reliably. Moreover, as per Paragraph 21.7 (b) of FRS 102, in case of
the generation of provision from a single obligation, the most likely outcome of provision
will be the best estimate of the required amount for settling the obligation (frc.org.uk, 2019).
Referencing these standards in the present case implies that the directors of GR8 Hols
Limited has reliably estimated the obligation of £20,000 by taking into consideration all the
relate aspects. In addition, the amount of provision is the best estimate of the directors of the
company for settling the obligation. Therefore, the reasoning of the directors of GR8 Hols
Limited is justified (Jones et al., 2013).
Answer to Requirement (b)
Dear Sabina,
The main objective of writing this mail is to address your concern regarding the role of
business risks in auditing. Business risk can be considered as the risk of not achieving the
strategic targets and objectives of a company. Business risks have exclusive relation with the
company and its stakeholders. These risks can be majorly diverse, but the largest risk faced
by GR8 Hols Limited is that it ceases to continue. Factors that contribute to the business
failure are included in this risk. Therefore, the identification of the business risks is of utmost
importance to the auditors (Griffiths, 2016). There are three main components of business
risk; they are financial risk, operational risk and compliance risk. There are two specific
reasons that contribute to the generation of business risks. First, significant circumstances that
restrict the ability of a company to achieve its objectives; and second, setting of inappropriate

3INTERNATIONAL AUDIT AND ASSURANCE
business objectives (Knechel & Salterio, 2016). Now, it requires to mention that the auditors
can avail key benefits by adopting business risk approach in auditing. They are as follows:
 Analysis of business risks provides the auditors with more useful information on the
audit client.
 This enables the auditors in acquiring more complete understanding of the client’s
business so that the fundamental issues of the business cannot be overlooked.
 This puts major emphasis on strategic focus of the business along with quality
management.
 Identification and analysis of business risk assist the auditors in the identification of
areas with high-risks that require high audit consideration.
 This leads to the elimination of under or over auditing (Hematfar & Hemmati, 2013).
Therefore, in the presence of all these reasons, it is important in auditing to put key
emphasis on the business risks of a business and the same is applicable for GR8 Hols
Limited.
It is advised to the management of GR8 Hols Limited to take into account the
following steps in order to mitigate the business risks. These are discussed below:
Avoidance – GR8 Hols Limited should step away from the business activities or specific
business projects that can create unwanted negative consequence on the business. It is
recommended to establish policies and procedures that will assist the company in foreseeing
and avoiding high-risk situations.
Acceptance – Every product and service of a company has finite chance to fail. When this
risk is at acceptable level, it is advised to accept the risk. There needs to be a warning system
for high risk products and services.

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Control – There are situation where it is not possible to reduce the occurrence of high risk
associated incidents. Therefore, it is recommended to control them so that the causes of the
unwanted events can be detected before the occurrence of consequences.
Transference – This strategy is to transfer the risk burden on another party and this can be
done by purchasing insurance. This demands careful assessment of ongoing risks and
probabilities (van Buuren et al., 2014).
Answer to Requirement (c)
The following table shows eight inherent risks of GR8 Hols Limited associated with
its financial statements along with necessary explanations.
Risk Identified Nature of Risk Area of Financial
Statement Affected
Audit Concern
Lower rates of
caravans because
of the present
economic
difficulties in
United Kingdome
(UK)
Risk of material
misstatements
This risk can affect
the sales and
profitability areas of
the financial
statements.
Lower rates of
caravans contribute
to lower sales and
profitability.
Therefore, there is a
possibility that the
management of GR8
Hols Limited might
have overstated the
sales and
profitability of the
business (Ruhnke &
Schmidt, 2014).
The introduction of
highly advanced
computer-based
accounting system
requires properly
This can lead to
material
misstatements in the
financial statements.
This can affect the
income statement of
the company.
Due to lack of
proper training on
the new accounting
system, the
employees of GR8

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trained employees
to operate. Lack of
trained employees
poses a major risk.
Hols Limited can
make mistake while
processing the
financial
transactions which
can materially
misstate the income
statement.
Small number of
employees in the
areas of
administration,
booking and
accounts creates
inherent risks due
to the heavy
dependency on
manual works of
small number of
employees.
This can materially
misstate the
financial statements
of GR8 Hols
Limited.
This can negatively
affect the areas like
income statement,
cash flows statement
and balance sheet of
the firm.
Heavy dependency
on the manual works
of small number of
employees can
increase the
possibility of errors
in the financial
statements
(Hematfar &
Hemmati, 2013).
GR8 Hols Limited
has poor pay and
working conditions
which can
demotivate the
employees and this
poses a major risk.
Material
misstatements in the
financial statements
can be created.
This can create
impact on the
income statement
and balance sheet of
the company.
Demotivated
employees can
involve in theft of
funds and intentional
errors in the
accounting
transactions which
can affect the
financial statements
The offer to
purchase one site of
Campies Ltd can
lead to the
This can create
material
misstatements in the
financial statements
This can affect the
asset and liability
sides of the balance
sheet of the
The occurrence of
non-routine
transactions like this
can lead to the errors

6INTERNATIONAL AUDIT AND ASSURANCE
development of
inherent risk as this
would be a non-
routine transaction.
of GR8 Hols
Limited.
company. in the financial
statements due to
lack of knowledge
and required
expertise.
The management
of GR8 Hols
Limited has a close
relation with the
auditors that
creates inherent
risk.
Material
misstatements can
be created due to
laxity or
overconfidence of
the auditors.
This can negatively
affect the whole
financial statements
of the company.
Due to negligence,
the auditors might
not be able in
detecting the
material
misstatements in the
financial statements
(Zaiceanu, Hlaciuc
& Lucan, 2015).
GR8 Hols Limited
has complex
business structure
in the presence of
many stakeholders
and directors and
this will be more
complicated due to
the acquisition of
the site of Campies
Ltd.
This increases the
complexity in
recording and
reporting financial
transactions that can
lead to material
misstatements.
All portions of the
financial statements
can be affected by
this.
This increased
complexity can
create errors in the
financial statements.
GR8 Hols Limited
uses the same
accounting policies
for all the sites this
creates inherent
risk in the
company.
The same
accounting policies
may not be
applicable for all the
sites which can
create material
misstatement.
All parts of the
financial statements
can become affected
with this.
Utilization of
unsuited accounting
standards can lead to
wrong accounting
treatment which can
create material
misstatements (Dai
& Handley-

7INTERNATIONAL AUDIT AND ASSURANCE
Schachler, 2015).
Answer to Requirement (d)
Part (i)
According to the provided summary of financial information of GR8 Hols Limited,
the company has reported income from three sources; they are caravan hire, tent hire and
pitch hire. In auditing, analytical review includes the application of different techniques and
trend analysis is considered as one of them (Jans, Alles & Vasarhelyi, 2014). The following
table shows the trend analysis of the income and total sales of GR8 Hols Limited from 2015
to 2019.
It can be observed from the above table that the total sales of GR8 Hols Limited has
an increasing trend from 2015 to 2019. The increase in incomes from caravan hire and pitch
hire over the last four years is one of the major reasons for the increase in total sales.
However, the income from tent hire has decreased in the present year largely and this needs
to be considered as an area of concern in auditing. It is mentioned in the provided case that
the number of family tents is more than the number of caravans; that is 1540 family tents and
1020 caravans. Despite of more in number, the fall in sales needs special audit consideration.
However, the directors have mentioned the fact that the occupancy rates of caravans at site
were lower than those for tents because of the present economic difficulties in UK. Since,
there is a large fall in the reported income from tent hire, the auditors are required to

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investigate the actual reasons for this change in the presence of adequate audit evidences
(Kogan et al., 2014).
Part (ii)
1. Lower rates of caravans at sites as compared to the same of tents because of the
present economic difficulties is an area of concern and decrease in income from tent
reflects this condition. Even in the presence of this large decrease in income, GR8
Hols Limited has been able in reporting increase in total sales. This whole situation
indicates towards the presence of material misstatements in the financial statements
due to the overstatement in total sales or understatements in expenses. Therefore, this
is an area of concern that needs further audit investigation (Appelbaum, Kogan &
Vasarhelyi, 2018).
2. It can be seen that a new advanced computer-based accounting system has been
introduced and implemented in GR8 Hols Limited that requires trained employees to
operate. This is an area of concern which requires the auditors of the company to
investigate the operational efficiency of the newly implemented accounting system. In
this way, the auditors would be able to assess whether there has been any error caused
by the inappropriate operation of the system.
3. In GR8 Hols Limited, a small number of employees are responsible for carrying out
the work in the departments of administration, booking and accounts. Therefore, there
is large human involvement in the accounting process along with the involvement of
judgements. This increases the possibility of the presence of international or
unintentional errors in different parts of accounting records. Therefore, this is an area
of concern and the auditors require to investigate into this matter (Albertini, 2013).
4. The application of same accounting policies involve the application of same
accounting judgements, rules and conditions in different condition. The same

9INTERNATIONAL AUDIT AND ASSURANCE
accounting policies might not be applicable for all the sites of the company.
Therefore, this can lead to errors in the financial and accounting records of the
company that is an area of concern. This requires special audit consideration along
with further investigation.
Answer to Requirement (e)
The introduction of the new accounting system would lead to the increase in the
responsibility of the auditors of GR8 Hols Limited because it would be required to carry out
certain additional audit procedures on the newly implemented system. Since this accounting
system is in the central part of the business of GR8 Hols Limited, it is subject to extensive
audit for ensuring that the required controls are in place. In GR8 Hols Limited, one major
concern with the new accounting system is that the implementation process may damage the
internal control of the company leaving it vulnerable. Therefore, the auditors need to
explicitly check that the internal controls are in place (Shin, Lee & Park, 2013). The
complication increases due to the real time nature of the new accounting system’s
transactions and thus, the audit procedures need to be adaptive for tackling the difference
while the auditors must be sensitive to them. Moreover, the auditors are required to check all
sub-processes for ensuring that there is adequate control and functioning. More generally, the
auditing process must include evaluation of access control, user ID assessment, evaluation of
configuration, change management, privacy and interfaces. The auditors require to become
familiar with the new accounting system with the aim to audit it. This commences with the
Data Base Management System (DBMS) underlying the accounting system along with the
evaluation of operating system and network. The auditors need to check the roles in order to
make sure that the users are assigned with the correct roles and appropriate permission. It is
required to check the interfaces between the accounting system and other system for
validating the data (Chang et al., 2014).

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The above discussion shows that the roles and responsibilities of the auditors of GR8
Hols Limited increase due to the introduction of new accounting system which requires more
effort and carrying out more audit procedures. In this situation, the audit fees should be
increased instead of decreased. Thus, the expectation of Sabina is not reasonable.
Answer to Requirement (f)
Part (i)
The management of GR8 Hols Limited has asked the audit firm to undertake the
valuation of the site of Campies Ltd. Therefore, the audit firm should proceed by acquiring
information on the deal and the firm must obtain the monthly or quarterly reports from the
management of GR8 Hols Limited in order to get help in the valuation process. After that, the
audit firm needs to undertake the required due diligence in the presence of other functions
such as accounting, finance, human resources and legal departments with the aim to establish
open communication with different department of the other company. After that, the audit
firm is required to undertake the valuation of the target site by taking into consideration all
the necessary aspects. It is required to mention that all these steps are required for undertake
by the auditors for providing the management of GR8 Hols Limited with high-quality
assurance on the on the valuation and financial statements of the targeted site (Xie, Yi &
Zhang, 2013).
Part (ii)
There can be the development of self-review, familiarity or self-interest threat of audit
independence in case the member of the audit team has recently served as an employee,
Director or Officer of the audit client. This would lead to the situation where a member of the
audit team has to evaluate the financial statements’ elements that had been prepared by the
same member with the client. The same situation would occur in case of the auditors of GR8

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Hols Limited after the acquisition of the site and appointing the accountant of Campies Ltd
would lead to the development of self-review, familiarity or self-interest threat of audit
independence. For this reason, the audit firm needs to reject the offer to employ the site
accountant currently engaged by Campies Ltd (Tepalagul & Lin, 2015).
Part (iii)
As per the provided situation, the management of GR8 Hols Limited has requested the
audit firm to carry out the non-current assets and inventory counts at the Taithness site at the
normal audit fees due to their campaign of reduction in overhead expenses. Carryout the
count of non-current assets and inventory is added role and responsibility of the audit firm
that requires additional time and effort of the auditors; and therefore, GR8 Hols Limited must
increase the audit fees (Kikhia, 2015). Thus, the audit firm should proceed with rejecting this
request of GR8 Hols Limited.