Audit Process of Havelock Europa Plc - Assignment Example

Auditing Part A 054 words Part B: 778 words March 27, Introduction The audit process entails determining whether the Havelock Europa Plc financial reports are true or correct (Havelock Europa, 2013). Untrue and incorrect financial reports include erroneous financial statement amounts (Arens, 2011). Errors are unintentionally misstatements are due to human errors. On the other hand, fraudulent financial statements include figures that were intentionally inserted by one or more company employees, possibly conniving with the external auditors. The research delves on the five areas of heightened audit risk. Auditing must prioritize auditing financial accounts pegged as high inherent risks to lessen audit risks. Part A The research delves on five of the major areas of heightened audit risk of Havelock Europa Plc (Havelock Europa, 2013). The basis for including the accounts as heightened risk involves two factors. The two factors are internal control and inherent risk (Messier, 2011). Certain financial report accounts have higher probabilities of errors or frauds. The current research centres on five such financial report accounts. The accounts are sales, receivables, payables, cash, and inventory. Net Revenue (net sales) There is an audit risk that there is error or fraud in the £ 100,778 thousand Revenue amount during 2012. There is a probability that sales completed during January of 2013 were included in the 2012 sales figure. This can be fraudulently done in order to present a falsely higher sales figure, improving the company’s financial report image (Lyn, 2011). Similarly, there is a probability that uncompleted sales transactions were included in the 2012 financial reports (Dauber, 2009). The uncompleted sales amount includes customer’s promise to purchase the company’s products and services that were never completed. Another possibility is that products returned by customers were not recorded as sales revenue reductions (sales returns). Similarly, discounts given to customers who pay early or pay in case are not reflected as deductions from the gross revenue amounts. Further, sales allowances given to customers to satisfy their complaints concerning poor product and service quality may not be deduction from the gross revenue amount. Further, another possibility is recording a Revenue transaction when there is actually no sales transaction started, processed, or completed (Dauber, 2009). Likewise, there is a possibility that the sales amounts were erroneous recorded or fraudulently recorded. In addition, the financial reports may erroneously or fraudulently not include some realized (completed) sales or revenue transactions. Human error may cause the forgetfulness to record sales transactions. Lastly, the financial reports may include erroneous sales or revenue amounts, including the recording the actual £ 500 customer store purchase as £ 400, £ 50, or £ 100. Receivables There is an audit risk that the £ 20,153 thousand Trade and Other receivables amount is erroneous or fraudulent during 2012. There is a probability that receivables generated for account sales completed during 2013 could have been included in the receivables portion of the 2012 financial reports (Louwers, 2012). There is a high probability that act was fraudulently done show a higher than actual receivables amount, improving the company’s financial report image. Similarly, there is a strong probability that uncompleted receivables transactions were fraudulently or erroneous incorporated in the 2012 financial reports. Another probability is that receivables from account sales products that were returned by customers within 2012 were not removed from the receivables records, creating a receivables overstatement. Similarly, discounts and allowances granted to customers did not include a reduction in the corresponding receivables amount. Another possibility is the fraudulent or erroneous recording of a receivables amount from fake or fabricated account sales transactions. Further, the sales person could have erroneously or fraudulent recorded the wrong receivables amount, creating an erroneous or fraudulent receivables transaction. Payables (understatement) There is an audit risk that the £ 27,910 thousand trade and other payables amount are erroneous or fraudulent in 2012. There is a probability that purchases completed during January of 2013 were not included in the 2012 trade and other payables figure (Thibodeau, 2013). This can be fraudulently done in order to present a falsely lower payables figure to improve the company’s financial report image. Similarly, there is a probability that completed payables sales transactions were not included in the 2012 financial reports (Thibodeau, 2013). Another possibility is that products returned to the suppliers were not recorded as trade and other payables reductions (purchase returns). Similarly, discounts and allowances given by suppliers were not included as deductions from the total trade and other payables total amount. Human error may cause the forgetfulness to record certain trade and other payables transactions (Wilkins, 2011). Cash (theft) There is an audit risk that the cash and cash equivalent amount, £ 554 thousand is erroneous or fraudulent in 2012(Johnstone, 2012). There is a probability that cash collected from sales or revenues during January of 2013 were included in the 2012 cash and cash equivalents amount, to improve the company’s cash image. Similarly, there is a probability that uncompleted cash sales transactions were included in the 2012 financial reports (Johnstone, 2012). Another possibility is not recording cash transactions when collection was done during 2012. Likewise, there is a possibility that human error and fraudulent individuals contribute to the cash and cash equivalent amounts being erroneous or fraudulently recorded. For example, £ 100 cash collected from customers is fraudulently recorded as £ 10. Inventory (erroneous or fraudulent reporting) There is an audit risk that the £ 11,001 thousand inventory is erroneous or fraudulent in during (Ridley, 2012). There is probability that inventory sold in January 2013 is recorded as inventory sales in 2012, understating 2012 balance sheet inventory. There is a high probability that overstatement of inventory act was fraudulently done show a higher gross profit image in the company’s 2012 financial reports (Dauber, 2009). In the same manner, the inventory sold in 2013 is recorded as sold in January 2013, overstating 2012 inventory. Other possibilities include the non-recording of the customer’s returned inventories (purchases) during 2012, understating 2012 inventory end. Another possibility is the fraudulent or erroneous recording of a inventory amount from fake or fabricated sales or revenue transactions. Further, the sales person could have erroneously or fraudulent recorded the wrong inventory description, label, and amount, resulting to erroneous 2012 inventory balance report (Rittenberg, 2012). Internal control The board of directors has the primary responsibility to effective internal control procedures are in place (Cascarino, 2012). Internal control procedures reduce to permissible levels or eliminate errors and frauds within the organization. Consequently, the board of directors hires the external auditors. The board of directors, through the internal auditors and external auditors, focuses on ensuring errors and frauds are decreased to permissible levels or eliminated (Moeller, 2009). The board of directors, investors in the ompany, conducted an audit of the 2012 internal control procedures. The audit affirmed that the internal control procedures are effectively in place. Further, the board affirmed that it is satisfied that the internal controls are appropriate to reduce or eliminate errors and fraud during the year. Part B Revenue auditing Revenue auditing procedures will reduce or eliminate audit risks of Havelock Europa Plc (Havelock Europa, 2013). First, there are several steps to ensure risks of erroneous or fraudulent 2012 sales figures are reduced or eliminated (Johnstone, 2012). To determine whether the sales or revenue amounts included in the financial reports are correct or true, the auditor must trace the sales journal entries to copies of sales orders, sales, invoices, and shipping documents. Next, the auditor must trace the shipping documents to inventory records to determine the inventories were actually shipped to the customers. For huge amounts, the auditor can send a confirmation letter to the customers to affirm or negative whether the sales transactions are true or correct. To determine whether actual sales or revenues completed during 2012 are included in the financial reports, the auditor should trace the shipping documents or customer’s signed delivery acceptance receipts to sales invoices, sales journal, and receivables records for 2012 (Arens, 2011). This procedure will show whether the amounts indicated in the shipping documents are the same as the amounts recorded in the sales reports and revenue portion of the 2012 balance sheet. To determine whether the sales amounts are correctly recorded, the auditor must recompute the items enumerated in the shipping documents or sales invoices (Ridley, 2012). Next, the auditor must trace the amounts recorded on the sales journal to the sales invoices and original documents to ensure amount and description accuracy. Finally, the auditor must trace the amounts recorded in the sales reports and balance sheets to the shipping documents, sales price lists, and customer’s purchase order details. The procedure will ensure that the total amounts indicated in the sales reports are correct and true. To determine whether the sales or revenue figures are properly recorded, the auditor must examine the supporting sales documents in order to ensure that the sold items recorded are the same items that the customers received (Messier, 2011). For huge amounts, the auditor and send a confirmation letter to the customers requesting them to affirm or negate the financial reports’ sales item classifications. To determine whether the sales and revenue figures are properly recorded in the financial reports, the auditor must foot (sum) the sales records for mathematical accuracy. Next, the auditor should trace whether the sales and revenue amounts recorded in the general journal, general ledger, and income statement are the same. The recomputation of the amounts shown in the sales invoices, customers’ purchase order, customer delivery receipts, and other shipping documents will ensure the financial reports’ sales (revenue) totals are correct and true (Arens, 2011). To determine whether sales amounts are properly recorded, the auditor can observe the actual sales transactions (Louwers, Auditing and Assurance Service with ACL, 2012). The auditor can observe how many items were sold in one hour, one 12 hour period, one day, or in one week. Based on the observations, the auditor has an estimated on whether the company’s reported sales are true or correct. When the auditor observes that the two days’ sales amount is only £ 500, the auditor should doubt the company’s financial report stating the average two day sales amount is £ 5,000. The auditor should also determine whether internal controls are effectively in place (Thibodeau, 2013). The internal controls will deter or reduce the possibility of erroneous or fraudulent sales transactions cropping up. For example, the auditor’s observing the store’s clerk counting whether the number of items punched by the cashier is the same will lead to lesser incidents of erroneous punching of cashier’s sales machine. Next, the auditor’s observing that the store security guards inspect the customers’ bags and cashier’s receipts will reduce erroneous punching of the wrong item quantities and amounts (Louwers, 2012). To determine whether the sales amounts shown in the balance sheet is correct or true, the auditor can conduct a physical inventory of stores (Thibodeau, 2013). The inventory will show how many items of one product type was removed from the stores, indicating the customers had taken ownership of the removed items displayed in each store. For example, the inventory count shows that there were 20 lbs of rice that left the store premises. The auditor will then compare whether the 20 lbs of the product description that left the store premises are the same as the number of pounds of the same store description indicated in the sales report. If there is a difference, the auditor must immediately conduct a more detailed audit to find materiality of the effect of such discrepancy on the financial reports are correctly true. The auditor must report all audit findings to the proper management authorities for immediate action. Conclusion The audit process focuses on deciding whether the Havelock Europa Plc financial reports are true or correct. Since sales (revenues) have inherently high audit risks, the audit must prioritize its procedures to ensuring the risks are reduced or eliminated. Since the receivables and inventory accounts have similarly high inherent risks, the audit must include these areas in the audit program. The audit of trade and other payables account as well as trade and other receivables should be prioritized as cash-related accounts are classified as having the highest inherent risks. Evidently, the auditing program must prioritise auditing the financial report amounts pegged classified as having high inherent risks to reduce audit risks. References: Arens, A. 2011, Auditing and Assurance Service,. Prentice Hall, London. Cascarino, R. 2012, Auditors Guide to IT Auditing, J. Wiley & Sons, London. Dauber, N. 2009, Wiley Complete Guide to Auditing Standards, J. Wiley & Sons, London. Havelock Europa, 2013. Annual Report, [online] Available at : www.havelockeuropa.com/…wp- content/uploads/2012/... [Accessed 27 March 2014]. Johnstone, K. 2012,. Auditing, Cenage Learning, London. Louwers, T. 2012, Auditing and Assurance Service with ACL, McGrawHill, London. Lyn, F. 2011, Understanding Financial Statements, Prentice Hall, New York Messier, W. 2011, Auditing and Assurance Services, Cengage Learning, London. Moeller, R. 2009, Brinks Modern Internal Auditing, J. Wiley & Sons, London. Ridley, J. 2012, Cutting Edge Internal Auditing, Cengage Learning, London. Rittenberg, L. 2012, Auditing, Cengage Learning, London. Thibodeau, J. 2013, Auditing and Accounting Cases, McGrawHill, London. Wilkins, P. 2011, Performance Auditing, Elgar Press, London. Read More