Areas of Heightened Audit Risk in Mobile Streams Plc - Case Study Example

AREAS OF HEIGHTENED AUDIT RISK IN MOBILE STREAMS PLC Areas of Heightened Audit Risk in Mobile Streams Plc. PART A Three Areas of Heightened Audit Risk Mobile Streams Plc is a group that majors in mobile content and mobile internet services with operations spread across different countries. The current poor financial performance of the company for the year ended 30th June 2014 has been an outcome of many factors. These factors range from the adverse devaluation of the Pose currency of Argentina against the Pound that is the groups reporting currency to changes in the accounting regulatory framework on the application of accounting policies. Consistency in the application of the accounting policies as applied by the group, therefore, becomes a compromise in the changing accounting environment (Collings, 2011). The assumptions and estimates of values in the making of financial statements for both the parent company and the subsidiaries is a matter of concern. The adoption of different accounting policies for different members of the group further compromises the comparability of the performance of the subsidiaries and affects the consolidation of the Group Financial Statements. There is a great prevalence of making errors and material misstatements in the various translations that are of a quantitative and qualitative nature (Albrecht, 2012). The audit of Mobile streams Plc is a matter that requires care, skill and diligence (Gray and Manson, 2008). There is a list of issues that may affect the accuracy and reliability of the information reported to the shareholders. In the prevailing conditions of poor economic performance by Streams Mobile Plc, the auditor is not only obliged to verify the truthfulness and fairness of the information reported but also to establish the possible reasons for such outcomes. Failure to make this passionate effort may be detrimental to the shareholders of Mobile Streams Plc. It is thus my opinion that further investigations on a number of issues ought to have been conducted by the company auditors to improve the reliability of the information presented to the shareholders. The question as to the completeness and accuracy of the disclosure in relation to the items of financial statements can be raised in the context of this particular audit. The areas perceived to have a higher magnitude of audit risk are discussed in the proceeding paragraphs. The revenues and the costs incurred to generate them as reported in the financial statements of Mobile Streams Plc require further investigation. According to the chairman’s statement and the strategic report, the groups’ revenues for the year were 48.6 million pounds compared to the 53.9 million pounds reported in 2013. The reason for the decline in revenues according to these reports was the devaluation of Argentinian Peso against the British Pound of about 67% in the same financial year. It appears questionable that an increase of 16% in the revenues accruing from the subsidiary in Argentina was reported while the same revenues are given as a reason for the decline in the Groups earnings. The auditor should investigate the actual effect of devaluation on both group funds and those accruing from Argentina. As per the chairperson’s statement and the strategic report, the decline in-group revenues translated to a 9.8% decrease that does not match the decline represented in the consolidated income statement of 9.94%. Going by the disclosure requirements, it would have been more prudent to report the revenues realised from all the subsidiaries before the consolidation. The categorisation of revenues into the mobile operator sales, the mobile internet sales and revenues accruing from consultations and technical services are particularly important for this company. Unfortunately, no concern has been taken to disclose these important particulars under the notes to the financial statements caption. Critically analysing the cost of sales reported in 2014 against the ones declared for 2013 and the revenues generated from both cases, there is no proportionate relationship between the revenues and the costs. The cost of sales reported for the current year ought to have produced a higher as opposed to the reported earnings. The auditor is obliged to carry out investigations that would reveal the actual cause of the decline in sales and the increase in the cost of sales. Overreliance on the management assertions may result to a material misrepresentation of revenues (Gupta, 2009). Trade receivables and payables, as reported in the Group statement of financial statements, require investigations. The auditor should mainly verify the computations of the values indicated for the current year and trace them to the vouchers and ledger accounts (Page, 2010). The values of receivables and payables accrued and the prepayments made during the previous and current year pose a significant risk of error and fraud if reasonable care is not exercised in the audit. The value of receivables should be thoroughly checked against that of sales and revenues to ensure that the actual values are reported. The receivables for the various subsidiaries and their contributions ought to be established. The payables should be traced to the purchase values and all the invoices and cash payments for all the subsidiaries. The reporting procedures and valuation of the goodwill for Mobile Streams Plc reveals a high possibility of audit risk. The impairment of goodwill, as reported for year 2013-2014, requires investigation. The accounting policies applicable to the calculation of the impairment of goodwill should be thoroughly investigated, and computations made in that respect. The disposal of the subsidiary, as reported in the financial statements, requires investigation. The auditor should satisfy himself of the substantial reasons for the disposal, the proper authorisation through a resolution by the shareholders, the valuation and proceeds accruing from such disposal. Evidence should be sought from the minute books and the sale agreements to ensure that the transactions were done at an arms length and were not detrimental to the shareholders (Pathak, 2008). PART B Substantive Procedures to Reduce the Audit Risk of Sales and Receivables From the discussion in A above, the audit risk involved in the sales and receivables can be reduced by proper application of substantive procedures in the audit approach for the Mobile Streams Plc. In particular, the auditor should carry out the following procedures: i) The auditor should confirm the occurrence of sales and the receipt of revenues as reported in the financial statements. To accomplish this, the auditor should ensure that all receipts of cash and revenues events have been recorded and mainly pertain to Mobile Streams Plc. The question of increased revenues in Argentina by a 16% should be thoroughly investigated. The auditor should primarily establish the impact of the devaluation of the Argentinian currency on the funds and the relationship between this increment and the general decline in group revenues. The actual values concerning foreign currency translations and rates should be obtained and not merely relying on the management assertions on such transactions. All relevant records of sales from Argentina and other subsidiaries should be obtained and verified against the information disclosed (Rittenberg, Johnstone and Gramling, 2012). ii) The auditor should conduct substantive procedures that ascertain the completeness of transactions relating to sales and receivables. In particular, the auditor should confirm that the values of sales and revenues received and those receivable as recorded in the nominal ledger accounts and the day books conform to the values reported in the financial statements. Reasonable care should be put into an account to ensure that all transactions of this nature have been recorded and that no omissions are made (Singleton and Bologna, 2012). iii) Substantive procedures that test the accuracy of the transactions relating to sales and receivables for Mobile Streams Plc should be undertaken. The auditor should particularly ensure that all amounts of revenue recorded and transactions of cash received truthfully relate to the reporting entity. These values should be tested to ensure that they are appropriately recorded (Wittsiepe, 2008). iv) Cut-off procedures should be undertaken to ensure that data reported in relation to sales and receivables recorded relate to the current period. The brought forward balances emanating from the previous years and the accruals and prepayments made truthfully relate to the prevailing period. The auditor should ensure that the sales for all the subsidiaries and the receivables accruing from them have been adequately disclosed (Albrecht, 2012). v) The auditor should ascertain that proper classification of all cash receipts and revenue transactions into the proper accounts have been done (Collings, 2011). In particular, there should be separations between the revenues accruing from mobile internet sales, mobile operator sales and those arising from the consultation and technical services. The values disclosed in these particular accounts should be traced to the nominal ledgers and journals to ensure that accuracy and completeness are guaranteed. All contract agreements on commission receivable and the methods of calculation should be ascertained. The revenues accruing from the mobile internet sales should be sampled into registers of downloads and traced through the nominal ledger accounts with the amounts received being verified from the cash receipts. A reconciliation of the amounts indicated from downloads and the total cash received should be made. vi) The auditors of Mobile Streams Plc should apply caution when auditing the values of accrued and deferred income. Contract agreements in this regard should be reviewed, the cash received traced and confirmed from the cash book and bank statements and computations made to ascertain the accuracy of calculations made. Samples of both the accrued and deferred income should be taken, and proper tests made with values of any amounts received after the year-end verified. Debtors’ circularisation should be considered essential to obtain sufficient evidence on the values recorded in the statements (Gupta, 2009). References Albrecht, W. (2012). Fraud examination. Mason, OH: South-Western, Cengage Learning. Collings, S. (2011). Interpretation and application of international standards on auditing. Chichester, UK: Wiley. Gray, I. and Manson, S. (2008). The audit process. London: Thomson. Gupta, K. (2009). Contemporary Auditing. 2nd ed.New Delhi: Tata McGraw-Hill. Page, S. (2010). Achieving 100% compliance of policies and procedures. Mansfield, Ohio: Book Masters. Pathak, J. (2008). Information technology auditing. Berlin: Springer. Rittenberg, L., Johnstone, K. and Gramling, A. (2012). Auditing. [Melbourne, Vic.]: South-Western Cengage Learning. Singleton, T. and Bologna, J. (2012). Fraud auditing and forensic accounting. 2nd ed. Hoboken, N.J.: Wiley. Wittsiepe, R. (2008). IFRS for small and medium-sized enterprises. Wiesbaden: Gabler. Read More