Internal Audit / Accounting - Essay Example

Internal Audit Accounting Capital investment decisions encompass two aspects of long-range profitability: first, estimating the future net increases in cash inflows or net savings in cash outlays which will result from the investment; and second, calculating the total cash outlays required to effect the investment. The main risks for GenCo is that its main supplier, the State Coal Company, has a monopoly over coal supply in the country and that the State Power will retain the balance of shares. According to the agreement the prices will be fixed for the next two years, but a power sales contract for the output of the plant is available for three years. If the State Coal Company decides to raise the price in two years it will cause a definite risk for Global Power as the profit may fall significantly. The risk is that the price are escalated to a defined formula, which means that even if economic situation in the country is changed significantly there is a risk that the defined formula will not satisfy the need of Global Power in three years. But, it will not have possibility to buy at another supplier. Another risks are unstable economic and political situation in the Eastern European countries. Low level of GDP and high inflation rate are the main risks for Global Power. It should be noted that for auditor it would be difficult to estimate long-term risk of investment because economic instability has a great impact on the industry in general. It is stipulated that opportunities arise under a government privatization program expected that in three years the electricity market is to be in place, but the auditor should assess the possible risk of this market change occurred in three years. The auditor of the company should pay a special attention to the period of expected surplus, and the rate of return during this period, and after it. The internal audit for Global Power is seen as a cost effective way of providing reliable information in a consistent way using a mix of techniques for risk assessment. The objectives of the auditor before financial close: to evaluate the situation and make calculations which will help the investor to make a decision about the project, taking into account possible risks, and calculate the sum of investment with the minimal risks. NPV can lead to the expected maximization of wealth. Hindsight, that is knowledge about the actual outcome of past events, may suggest different advice from that given by the NPV appraisal rule, because the latter is based only upon estimates of the future. The main task of pre closure is to estimate possible risks and calculate the expected returns of the project. For Global Power it is very important to estimate the sum of investment in order to receive the highest possible income with the low risk of investments. The auditor has to estimate annual net cash flows based on three economic states: boom, normal and depressed condition, and the probability of occurrence of each state. The main disadvantage is that most of the cash flows are annuities. In this very case sensitivity approach can be used by the auditor. The outlay requires to undertake the project, its life, the annual cash inflows and outflows it will generate, the scrap value it will have, and even current rate of discount to reduce the cash flows to present value. In addition, it can also help to direct attention to those particular estimates which require a special forecasting effort on account of their effect on the decision's sensitivity. The aim of the post closure phase differs from the previous one as the main investment decisions have been made on the basis of the pre close appraisal. The auditor can estimate a particular risk for the company on the basis of financial decision stipulated in the agreement, and possible decision to avoid bankruptcy. The auditor will have possibility to assess the financial data of GenCo, taking into account the investment made, and outline the annual revenue of the project. The difference of two phases is that the first one is aimed to estimate possible risks and find the appropriate investment decisions (or reject the proposal as inefficient), and the post acquisition phase is aimed to estimate risks on the basis of exact financial activity and show the average expected income for a financial year. The internal audit for Global Power is seen as a cost effective way of providing reliable information in a consistent way using a mix of techniques for risk assessment. The net returns on the investment, expressed as the future expected net cash inflows. These may be actual cash flows, or cash savings. These are the operating cash flows associated with the investment over the period of its useful life. They are calculated after deducting operating cash expenditure and taxation. Since there may be year-to-year variation in the profile of these net cash flows, and since their periodic pattern is largely guesswork, they are the most difficult cash flows to quantify. Another tool used by an auditor is the net amount of the investment required, expressed as the total cash outlay needed to support the project during its entire life. These consist of initial investment outlays required to establish the project, and the subsequent investment outlays which are envisaged at the outset, and are distinguishable from operating cash outlays. Thus, initial investment outlays may compromise expenditure on equipment, installation costs, manpower training, working capital etc. Subsequent investment outlays may include 'second stage' developments, plant extensions etc. The analysis of a capital project is in terms of net cash costs to the firm, so that where tax credits are allowable, these credits must be deducted from the total cash costs to obtain the relevant cash outlay. In case the audit will be carried out after the project has reached financial close the techniques used by an auditor will be different. On the one hand the amount of investment would be stipulated and the auditor can calculate the rate of return on investment, expressed as a percentage. It will help to determine the lowest acceptable rate of return on investment influenced by a number of factors, among which are the firm's rate of return on its investment opportunities and the cost of capital to the Global Power. It should be noted that this technique can be used before the acquisition, but after it the auditor would have a possibility to compare financial results reflect the increase wealth position. The auditor can calculate risk assessment per year. Although later analyses will be needed to establish the links between resources and strategic capability, some initial considerations can be made while drawing up the resource audit. The audit needs to be comprehensive, but it is helpful to identify the resources which are critical in underpinning the organisation's distinctive capabilities - in contrast to those which are necessary, but which are not the basis of the organisation's distinctiveness. On the one hand it's a good idea to engage an auditor to work a part of the project team, because he/she can help to estimate potential risks for both parties, and help to find the appropriate solution which will benefit both of them. On the other hand, it can reduce the level of objectivity. After the acquisition it is helpful to have an independent internal auditor doing the work. References 1. Berry, A. Jarvis, R. Accounting in the Business Context. 2.edn., Chapman & Hall, London. 1994. Read More