Auditing of Mobile Streams Plc - Essay Example

Table of Contents Audit Risks 2 Group Accounts 2 Foreign Currency 3 Intangible Assets 3 Provisions 4 Taxation 4 Intangible Assets: Increased Risks and Audit Procedures 5 Valuation 5 Impairment 6 References 8 Audit Risks The audit of the company Mobile Streams Plc. is followed by risks as the nature of the business tends to increase the risks. With the increased risk as per the operations of the company there are risks involved for the auditors where the auditors shall not be able to discover the material misstatements in the financial statements whether intentional or non-intentional (Philip & Michael, 2007). The risks involved in the audit of this company is analyzed and elaborated. The analysis of the management assertions to what the management imposes upon the financial statements of the company regarding the financial position and performance of the company is analyzed as well. The evaluation of the audit risks involved in the audit of the company is analyzed and thus explained their extent and effect. Along with the inherent risks of audit there are various other risks that are involved in the audit of a company. Auditors check for material misstatement in the financial statements and report accordingly. However there are risks involved in audit which are inherent risks as the management of the company is involved in the operations and recording of the transactions and thus provide assertions upon the financial statements of the company and thus the auditors are to check the assertions as well. The audit risks involved in the audit of Mobile Streams Plc. is elaborated below: Group Accounts The company is operating as a group and the financial statements prepared and presented are of the parent and of the group. The risk of disclosure of the related party disclosures along with the measurements of the holding percentages shall be a risky element in the financial statements. Mobile Streams Plc. undergoes complex, diverse and decentralized business operations as it is operating as a group and these characteristics increases the risk of material misstatements (C. WILLIAM & PHIL, 2013). Along with the management and disclosures of the complex accounting treatments there is a risk that accounting for the consolidation in the group shall not be properly accounted for as the local accounting treatments are different as to the level of adoption of financial reporting standards. The consolidation of the financial statements increases the risk as the financial information is obtained from different segments and then consolidated and the acquisition of information from wide source increases the risk of misstatement. Consolidating the accounts of parent and subsidiary is a complex accounting treatment and thus increases the audit risks as per the adoption of the accounting treatments by the group. The accounting of every segment of the company when consolidated will be increasing the audit risks. Audit risks increases, as the level of materiality is different for each of the subsidiaries and that of the groups as a whole for Mobile Streams Plc. (STEVEN, et al., 2008). With the involvement of complex transactions along with the disclosures of accounting treatments the risk of discovering material misstatements increases for the auditor. Foreign Currency The involvement of foreign currency in the group is common as the components of the group operate in different parts of globe and have different functional currency respectively. With the translation of the local currency in the reporting currency the risk of material misstatement increases for the auditors to discover. The currency translation risk is involved as in accordance with the appropriate exchange rates and the proper accounting treatments and guidelines provided by the International Accounting Standard Board is followed by Mobile Streams Plc. or not (SUSAN & DONALD, 2008). The risk of material misstatement increases when the currency translation is done as the foreign exchange rates are to be accessed and accounting for and thus manipulation can be done. The complexities involved in the translation of the currency increase the risk of misstatements whether intended or not and thus increases the risks for the auditor to discover the material misstatements in the financial statements. The accounting treatments followed are complex in terms of foreign currency along with the disclosures by the management and the involvement of the management decisions upon the adoption of the foreign currency rates increases the risk of misstatements and thus increases the audit risk for the auditors. Intangible Assets Mobile Streams Plc. recognizes large number if intangible assets, which are shown the consolidated statement of financial position of the company. Goodwill, though separately presented is also an intangible asset for the company. The realization of the intangible assets along with the measurements intangible assets (Irena & Philippe, 2002) is a complex accounting treatment where the measurement of the cost of the assets is up to the discretion of the management (Carlos, et al., 2003). The increase in the management discretion and decision power increases the risk of misstatement whether intentional or unintentional. Management shall be able to cover the misstatement in the financial statements as the preparation of the accounts is upon the management of the company and thus shall be increasing the audit risk of discovering material misstatement in the financial statement. Along with the cost of the intangible assets the amortization of the intangible assets is a risky area for the auditor as the amortization of the intangible assets is upon the discretion of the management (JENNIFER, 2004). Provisions Provisions, including those for legal claims, are recognized when the Mobile Streams Plc. follows the definition of the provision and thus has a present obligation whether legal or constructive which is due to the past events and the settlement of which shall result in the outflow of economic benefits the value of which can reliably be measured. The management of the provisions is created with estimation and probability that can be ascertained up to the discretion of the management. The management of the provisions of the company that it has displayed in the consolidated financial position as provisions for the doubtful debt is with the estimation and the forecast of the management regarding the market conditions so as to determine the current evaluation (Khaled, 2005). The estimation and the forecast are taken up with the analysis of the past conditions and thus the forecasting for the future. The audit risk increases as when the forecast is prepared as it is a complex treatment where various factors are considered so as to determine the discount factor and thus makes it risky for the auditor to discover material misstatements. Taxation The taxation rates applied to the group of companies are different as per the different tax rules upon the economies in which the segments operate. Taxation for Mobile Streams is complex and complicated as it operates at different locations and the prevailing tax rates are applies accordingly. The corporate tax includes current tax and deferred tax. The accounting policy of Mobile Streamers Plc. regarding deferred income tax is the liability method. The temporary difference between the tax base and the carrying amounts of the assets and liabilities is accounted as deferred tax asset or liability in the consolidated financial statements (Rick, 2013). With the level of control upon the deferred tax difference by the group as a whole then the deferred tax from the subsidiaries are not provided for. Deferred income tax is determined using tax rates known by the balance sheet date and that are expected to apply when the deferred income tax asset is realized or the deferred income tax liability is settled (Christine & Mark, 2002). The measurement of the deferred tax is done based upon the expected income tax rate that shall be applied to the group and thus the amount of deferred tax ascertain. The estimation of the deferred taxation increases the audit risk as with the great intervention of the management in ascertaining and calculation and thus can be misstated so as to window dress the financial statements of Mobile Streams Plc. Intangible Assets: Increased Risks and Audit Procedures The selected are for further analysis in accordance with the reasons of the increased audit risks along with audit procedures that should be followed so as to minimize the risk is elaborated. With five of the increasing audit risks areas identified in Mobile Streams Plc. the reasons and the analysis of the risks involved in that area along with the enhanced audit procedures that shall be followed are elaborated. Where the audit risk increases then the level of detail of audit procedures is raised and detailed audit procedures are applied so as to mitigate the audit risk or to bring the risk involved to an acceptable level thus no compromise over the quality of audit is made (MICHAEL, 2009). The acceptance of the samples shall be encouraged of those areas and while planning the audit so as to maximize the sample size and reduction of audit risks (Woodhead, 1997). Valuation The intangible assets of Mobile Streams Plc. include media platform development and software, media content, Appitalism, other intangibles and goodwill. The valuation of each of the intangible asset is done upon the ascertainment of the fair market value (Mark, et al., 2009). The implication of the guidance provided by the international accounting standards are to be followed in order to realize the values of each of the intangible assets and thus the techniques are not disclosed appropriately resulting in the increases audit risk (Winston & David, 2005). The valuation of each of the intangible asset shall be determined upon the prevailing market and thus provide a more appropriate value to the specific intangible asset (Norhana, et al., 2010). The risks involved in valuation of the intangible can be mitigated to the minimum level as Mobile Streams Plc. has much limited intangible assets. The valuation of each of the asset shall be recalculated and compared with the recognized value. The analytical procedure shall be detailed and all of the intangible assets should be re-measured. The cost of all of the intangible assets should be recalculated which will be done by selecting the data from the primary sources such as bills and receipts so as to determine the amount that has been spent upon the asset (Philip & Carl, 2007). Other costs that should be included in the cost of the intangible assets along with the liabilities raised should be accumulated (Benjamin, et al., 2003). With the cost of the intangible assets realized and recalculated the results is compared with the costs of the intangible assets realized by Mobile Streams Plc. and thus the valuation of each of the intangible assets is cross checked. Impairment The impairment of the intangible assets of Mobile Streams Plc. is accounted for in the financial statements of the company when valuating the intangible assets of the company. All the evidences of the impairment tests shall be gathered along with the costs and thus recalculation of the valuation of the intangible assets should be done (RANDALL & DAVID, 2002). The impairment tests upon the intangible assets are up to the discretion of the management and thus the impairment test is applied accordingly (Suntharee, 2010). The impairment of the intangible asset shall be verified with evidences along with the information from the primary sources shall be taken as in evidences for the impairment. Outside expert shall be hired in order to evaluate the valuation and impairment of the intangible assets that Mobile Streamers Plc. has shown and presented in books as it forms and represent an integral part of business appraisal (Baruch & Juergen, 2004). Meetings with the management should be held where the criteria for the impairment tests of the intangible assets shall be ascertained. The review of the board meetings minutes shall be providing much of the useful evidence so as to ascertain the criteria for the impairment of the intangible assets. With the policies for the impairment test of the intangible assets ascertained the policy shall then be checked and compared with the guidance provided by the accounting standards and shall therefore be reevaluated so as to affirm the company is following its prescribed policy and the management of the company is applying the impairment tests as per the company policies. With the evaluation of the company policy along with the recalculation of the impairment the audit risk in this area is mitigated. BIBLIOGRAPHY References Baruch, L. & Juergen, H. D., 2004. The dominance of intangible assets: consequences for enterprise management and corporate reporting. Measuring Business Excellence, 8(1), pp. 6-17. Benjamin, P. F., Robin, F. & William, D. S., 2003. Valuing Intangible Assets. The CPA Journal, 1(1), pp. 1-13. C. WILLIAM, T. & PHIL, D. W., 2013. Clarifying the standard for group audits Impact of new standard on individual engagements will depend on the manner in which the practitioner has performed group audits in the past.. Journal of Accountancy, 3(1), pp. 22-32. Carlos, S. C., Cecilio, M. M. & Alexandre, B. Q., 2003. The measurement of intangible assets in public sector using scaling techniques. Journal of Intellectual Capital, 4(2), pp. 249-275. Christine, C. B. & Mark, P. B., 2002. The Deferred Tax Asset Valuation Allowance and Earnings Quality. Review of Accounting and Finance, 1(1), pp. 72-87. Irena, R. & Philippe, L., 2002. FiMIAM: financial method of intangible assets measurement. Journal of Intellectual Capital, 3(3), pp. 323-336. JENNIFER, M. M., 2004. Amortization of Certain Intangible Assets. 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L. & DAVID, T. M., 2002. Asset Impairment and Disposal. Journal of Accountancy , 3(1), pp. 10-15. Rick, C. L., 2013. The Association between Deferred Tax Assets and Liabilities and Future Tax Payments. The Accounting Review, 88(4), pp. 1357-1383. STEVEN, M. G., DOUGLAS, F. P., JONATHAN, T. L. & WILLIAM, F. M. J., 2008. Component Materiality for Group Audits. Journal of Accountancy, 12(1), pp. 43-53. Suntharee, L., 2010. Fair value accounting and intangible assets: Goodwill impairment and managerial choice. ournal of Financial Regulation and Compliance, 18(2), pp. 120-130. SUSAN, M. S. & DONALD, L. K., 2008. Currency Translation Adjustments. Journa of Accountancy, 7(1), pp. 1-8. Winston, C. C. K. & David, S., 2005. Power and international accounting standard setting: Evidence from segment reporting and intangible assets projects. Accounting, Auditing & Accountability Journal, 18(1), pp. 74-99. Woodhead, A., 1997. The other audit risk: the impact of false rejection on audit planning. 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