Audit Risk Relating to the Audit of the Financial Statements Accsys Plc - Case Study Example

Audit risk relating to the audit of the financial ments Accsy’s Plc Five areas of heightened audit risk Goodwill Goodwill is one of the major audit risk areas associated with the auditing of the financial statements of Accsy’s Plc. This is because, the consolidated financial statements of the group reports the net assets with the goodwill of the company as one of the component forming the net assets (37). While goodwill is an intangible asset for a business that needs to be incorporated within the assets of a business, the danger associated with good will as a business asset is that it is a highly volatile asset, which a business cannot even quantify accurately (). This is because, the goodwill of a business is highly dependent on the performance of the business, meaning that it can fluctuate drastically on the event of a poor business performance, even within a single day event (). In this respect therefore, the incorporation of goodwill as a component of the net assets, which has been valued as a monetary value raises two major fundamental risk concerns. First, the accuracy of the amount of goodwill that has been quantified in monetary value by the Accsy’s Plc is in doubt, since goodwill is quantified through estimation, rather than accurate computation. Secondly, Accsy’s Plc is a group consisting of different subsidiaries. The major audit risk concern that arises from this scenario is the question of how the goodwill of different subsidiaries forming the group has been quantified, to arrive at the single monetary value attributed to the goodwill of the Accsy’s Plc. The combination of the goodwill of different subsidiaries into one consolidate value may involve high errors, resulting to underestimation or overestimation of the overall value of goodwill, thus becomes a major area of heightened audit risk Carrying value of the tangible assets of Arnhem plant The carrying value of the tangible assets of Arnhem plant is another major area of heightened audit risk, considering that the values of the tangible assets of the plants, such as the property, plant and equipment are dependent on the future profitable sales of Accoya (37). This becomes a major area for concern for the auditing procedures, considering the fact that the future profitability of a business is not guaranteed (). In this respect, it is most suitable to expresses the value of the tangible assets of a business either in terms of the historical value or in terms of the fair value depending on the existing market conditions, as opposed to pitching the value of the assets upon a future occurrence which is uncertain (). This is because, pitching the tangible assets of the Arnhem plant on the future profitability of Accoya has the risk of resulting to the impairment of the value of this assets and thus rendering their value in doubt, should Accoya fail to remain competitive in the future, and thus register low profitability than predicted (37). Therefore, considering the fact that the auditors are not ankle to quantify the future profitability of Accoya with certainty, the actual value of the tangible assets as reported in the financial statement of Accsy’s Plc still remains in doubt, until a future date. Book value vs. Fair value of some business combinations assets The consolidated financial statements of the Accsy’s Plc comprises of a duo system of reporting in terms of the asset values, where the assets of the group are reported in their fair value amounts, but some of the assets that were involved in the business combinations in 2006, when the different subsidiaries merged under one group were reported in their book values (38). Despite the fact that the difference arising between the fair value and the book value of such assets was carried and reported under the merge reserve, the major risk concern for the auditing practice is that such assets have hence forth been undervalued (). This is because, the book value reports the value of assets in terms of their historical value when they were purchased, and such assets may have changed their values over time, making the application of the fair value for all assets a necessity (). In this respect, the balance sheet value of assets as reported under the consolidated financial statements may be undervalued or overvalued, since some of the assets in the balance sheet carry their historical, rather than their current estimated market value (). Exceptional items The Exceptional items as reported under the financial statements of Accsy’s Plc also pose another auditing risk. This because, the exceptional items included in the financial statements carries the activities that fall outside the ordinary activities of the Accsy’s Plc (38). Thus, such transactions and financial items have been disclosed separately, to enhance the ease of understanding of the financial statements by the reader. While this intention could be noble, the problem is that the separate disclosure of such transactions and items serves to affect the values of the financial statement as reported, considering that such transactions are disclosed separately from the normal financial statements transactions (). The risk involved under this separate disclosure is the verification of the true value of the transactions, and the consequent effects such transactions have on the overall financial statements reporting. The exceptional items as repor6ed under the Accsy’s Plc financial statements include restructuring costs of the group, costs of integration and implementation of acquisitions and impairment losses or their reversal (38). All these items have a significant bearing on the total values reported in the financial statement, and thus require the attention of the auditors, to verify the impact of their elimination in the normal financial statements reporting. Diverse currencies The other major risk that is associated with the auditing of the financial statements of Accsy’s Plc is the risk of application of different currencies by the subsidiaries in their transactions, depending on the markets that such subsidiaries operate, while the consolidated financial statements of the group reported in Euros (40). This issue raises a major auditing concern for the auditing procedures, considering that the different subsidiaries report the value f the transactions depending on the rate of exchange prevailing at the time of the transaction, which may keep varying with each single passing day, meaning that the overall reporting of the financial transactions as well as the assets could be impaired (). The only way to overcome the challenge of the impairment of the values of the transactions and the financial assets arising from the foreign exchange issue is having all the transactions and the assets reported according to the exchange rates of the day when the financial statement reporting is done (). However, achieving this for the Accsy’s Plc, since the consolidated financial statements are able to report the value of the monetary assets in terms of the exchange rate prevailing when the balance sheet is prepared, while the non-monetary assets which are reported in historical costs do not have their values converted to the current exchange rate, thus remaining as per the historical rate (40). This may in turn impair he true value of the assets reported in the consolidate balance sheet of the Accsy’s Plc, and thus becomes a major area of heightened audit risk (). Part B The reasons for the detailed audit procedures to reduce audit risk of Goodwill to an acceptably low level The financial reporting for goodwill as a component of the net asset for a business is a major audit risk aspect, considering that goodwill is an intangible asset, which is owned by the business, but is not held by the business, but rather by the business stakeholders such as the customers and the suppliers (). Therefore, in the case of Accsy’s Plc, there is a great concern regarding the value of the goodwill reported in the consolidated balance sheet of the group. In this case, the accuracy of the monetary value that has been dedicated to goodwill as part of the Accsy’s Plc net assets is a question that the auditors cannot be able to answer, considering that the auditors may not be able to accurately assess the monetary value of goodwill, since it is not a tangible asset, and its value is determined through estimates. Further, each of the subsidiaries of Accsy’s Plc has its own performance rating in the index of the stakeholders who are the holders of the goodwill as an asset of the business (). Thus, the procedure and the formula of consolidating the different goodwill from the different subsidiaries to arrive at the single monetary value of the group is an area of high audit risk for the auditors to consider, since the goodwill reported may be inaccurate, thus inflating or understating the net assets of the Accsy’s Plc. Therefore, to mitigate the major audit risk associated with goodwill reporting in the financial statements of Accsy’s Plc, the detailed audit procedures to be carried out in attempting to reduce the audit risk will take two phases. The first phase will be the categorization of the goodwill of the different subsidiaries of the Accsy’s Plc as the assets of each entity in their two different forms of goodwill. The goodwill of a business or an organization is categorized in form of either personal good will or the commercial goodwill (Gallant, 2013:n.p.). Thus, the personal goodwill attaches on the shareholders or the management of the business, based on the reputation, the personal client relationships or the skills possessed, and this form of goodwill walks out of the business together with the management or the shareholders whom the reputation is associated with (Gallant, 2013:n.p.). On the hand, commercial goodwill refers to the reputation and other components of competitiveness that are associated with the business as an entity and can be transferred with the business to the new owner, such as the strategic location of the business and the brands of the business (Gallant, 2013:n.p.). Through separating the goodwill of each subsidiary of Accsy’s Plc into these two forms, the auditing procedure will then proceed to quantify the commercial goodwill only for each of the subsidiaries, while leaving out the personal goodwill associated with each subsidiary. In doing this, it will be possible to lower the audit risk significantly, since the only goodwill that will be quantified to form the total goodwill value of the Accsy’s Plc as expressed in monetary terms will be the goodwill associated with the business entities only, which is a lower risk factor, compared to the personal goodwill, which an exit the business anytime (). The auditing procedure will then proceed to a further detailed evaluation of the goodwill of each of the subsidiary of the Accsy’s Plc group, through further subdividing and categorizing the goodwill into its different components, such as the brand and the brand name, the nature of customer relationship for each subsidiary, the location and he workforce for each individual subsidiary (). After the procedure, the auditing procedure will then delve deeper into the goodwill components by dissecting each of the components of the goodwill for each subsidiary, such as the customer lists, the customer contracts, the technology, skills level and the efficiency of business processes for the different subsidiaries (). The deeper scrutiny will finalize with evaluating the copyright and the licensing agreements for each subsidiary, as well as the contractual periods for each of such agreements, as the basis of understanding the nature of the relationship between the subsidiary businesses and their clients, and the nature of the continuity of the relationship in the future (). Through undertaking these deeper and detailed auditing procedures, it will become easy to understand the contribution of each of the subsidiaries to the overall goodwill of the Accsy’s Plc. Further, the dissection and scrutiny of each of the component of the goodwill for each subsidiary will enable the formulation of a complete list of goodwill component for each subsidiary and the relevant corresponding estimated value (). This way, the final value of the goodwill that will be arrived at as he overall goodwill for the Accsy’s Plc will be more credible and reliable, and thus the associated high level of audit risk for good will be significantly reduced. Read More