Auditing of Stanley Limited - Essay Example

Case Study for Auditing Table of Contents Part A 3 Part B 7 References 13 Part A Financial ments are such ments that every organisation prepares on a regular basis to have a check on the income and expenditure of the organisation. These financial statements depict the economical or monetary presentations of a particular organisation. The financial statements are very much helpful for the organisations as they represent the monetary or economic situation of an organisation at a given period. They also measure different financial facets and can be implemented in both inner and outer requirements of an organisation1. The three aspects of this year’s audit of the financial statements, which might be regarded as high risk for Stanley Limited, include the distribution costs and the retained profit or loss from the viewpoint of income statements. From the perspective of financial presentation statement or balance sheet, the high risk aspect includes the trade payables as a part of current liabilities. From the viewpoint of the income statements, the significant aspect of distribution costs might be regarded as one of the high risk factors of this year’s audit of the financial statements of Stanley Limited. Fundamentally, the distribution costs which is also known as distribution expenses of any organisation are regarded as the expenses which are associated with the transfer of a product or commodity from the place of manufacturing to the ultimate position of the customers. Moreover, distribution costs or expenses also imply those expenses which are directly involved in order to transfer the commodities or the products from the warehouse to a person2. It has been identified that the distribution costs or expenses of Stanley Limited was increasing year after year and were becoming very much expensive as compared with other expenses i.e. administrative expenses and others. The main reason for considering the distribution expenses as a high risk factor is because the distribution costs or expenses directly affects upon the operating profit or loss of Stanley Limited. The distribution expenses of Stanley Limited in the year 2011 were very much expensive as compared with the other three years and thus the operating profit was quite low. The main reasons for the increased distribution expenses of Stanley Limited can be due to its various expenses such as carriage on sales, selling expenses, salaries, travelling expenses and commission of the salesman among others. All these significant factors might constitute the distribution expenses as high risk factor for Stanley Limited3 In terms of the statements of the financial position or the balance sheet, the aspect of trade payables might be an important risk factor for Stanley Limited. Fundamentally, trade payables are regarded as a part of a liability and form of credit which is owed to suppliers, lenders or vendors for the purchase of any commodity or product. These trade payables can be both long- term and short-term depending upon their payment structures4. It has been recognised that the trade payables have increased substantially year after year and was very much expensive as compared with the other three years. This implies that Stanley Limited possessed more credit or debt which can be one of the major risk factors for the company. In the year 2010, the trade payables were higher than the trade receivables of Stanley Limited. In this connection, the current assets and current liabilities of Stanley Limited amounted to £5,888,000 and £4,464,000 respectively. The current ratio i.e. current assets divided by current liabilities of Stanley Limited stands at 1.32 which signifies that the company possess £1.32 at their disposal in terms of assets that can be transformed into cash in the short-term. Though the current ratio is a positive one but still there lays a risk factor regarding trade payables because Stanley Limited incurs new debts continuously and thus new accounts payable are generated constantly. It is obvious to the fact that constantly generating trade payables lead towards insolvency of a particular company or an organisation. From the viewpoint of the income statements, the aspect of retained profit or loss of Stanley Limited might be regarded as a significant risk factor. Generally, retained earnings perform the function of increment and decrease in response to certain affairs that had an important effect upon income. It has been identified that the particular company’s overall net income had a direct impact upon the retained earnings. It can be stated that the net income of a company will affect to raise the retained earnings and the net loss would effect to diminish the retained earnings. Moreover, retained earnings depicts the company’s total net income or loss which has been executed from the first day of the financial year up to the date of the balance sheet5 In the year 2011, Stanley Limited performed a minimum or least retained profit in comparison to other years except at a loss during the year 2010. The main reasons for the minimum retained profit of Stanley Limited in the year 2011 may be due to low turnover or excessive expenditures made that include distribution expenses, cost of sales, managerial expenses and other finance costs among others. The other major reason for considering retained profit or loss as a risk factor for Stanley Limited is that especially in the year 2011, the company possessed a low or minimum retained profit, which might be a critical concern for the company. As the retained profit is very low, the company would have to bear certain extra and additional business operation expenditures from other sources apart the retained profit. This particular factor might significantly affect the financial performance as well as can be regarded as one of the high risk factors. Thus, collectively, it can be stated that the various aspects such as the distribution expenses or costs, trade payables or expenses and the retained profit among others might be regarded as high risk factors of the 2011 audit of the financial statements of Stanley Limited. Part B The conception of auditing is regarded as an organised as well as efficient procedure of purposely attaining and assessing various confirmations regarding the declarations or the confirmations towards financial functions that are executed in a particular organisation or firm performed by the interested users6. The main purposes of auditing in an organisation include the recognition of any fraud, the finding of technological errors or mistakes and the recognition of the errors of principle. It has been identified that the main task of an auditor in the procedure of auditing is to determine the financial performance of an organisation in the form of preparing financial statements7. The different audit procedures relating to the financial statements include different aspects such as notification, planning, opening meeting, fieldwork, communication, report drafting, management response, closing meeting, report distribution and follow up. These different phases of audit procedures can be used for the purpose of planning, documenting and organising the overall procedure of auditing. Moreover, these significant phases of audit overall manage as well as develop the audit report to a certain extent8. In relation with the retained profit or loss area of Stanley Limited, one of the phases of the auditing procedure i.e. the notification is regarded as the primary aspect of the audit process. In this phase, there will be a notification regarding the conduct of an upcoming audit. The nature of the procedure of notification is viewed as the initial or the beginning procedure of auditing. In this phase, the responsible audit team starts to plan the audit. The various purposes of this phase of auditing include recognising a particular issue or concern through broad range of sources. In this regard, the audit team identifies the various issues that are relating with the retained profit or loss area of Stanley Limited8. The other purpose of the notification aspect of auditing is to identify the staff and conduct a team meeting. After the formation of the audit team, the team recognises the type of audit i.e. either a monetary or economical audit type or performance audit type. This decision is executed in this initial stage of notification procedure of auditing8. After the completion of the first procedure i.e. notification, the next procedure is planning. The nature of the planning procedure is that after reconsidering the valuable information concerning with the retained profit or loss, an auditor plans to conduct a review and draft an audit plan along with scheduling an opening meeting. The main purpose of this auditing procedure of planning is to identify the crucial and main risks along with raising risk awareness relating with the retained profit or loss of Stanley Limited8. The next auditing procedure is opening meeting which is immediately followed by planning. This particular procedure includes senior management and other managerial workforce that might be involved in the audit process. The nature of this auditing procedure of opening meeting is to review the different fields such as the retained profit or loss that are mainly concerned by Stanley Limited. The purpose of this training procedure of opening meeting lie in the fact that in this procedure the overall scope of the audit is analytically discussed and the time frame is also determined regarding the completion of the audit procedure8. The other procedure of auditing is the conception of fieldwork. After the successful conduct of the opening meeting, an auditor confirms the audit plan and starts fieldwork. The nature of this auditing procedure is to conduct fieldwork which generally consists of having conversations with the workforce and reviewing the procedure manuals. The objective of conducting fieldwork is to generate awareness among the staff or workforce that the auditor will be scheduling meetings with them8. After the audit procedure of fieldwork, the procedure of communication relating with auditing comes into action. The nature and the purpose of this auditing procedure of communication is to keep informing to the management team of an organisation such as Stanley Limited in order to discuss the different issues relating with the company’s retained profit or loss along with tracing out the possible solutions in response towards the issues of retained profit or loss of Stanley Limited9. The next auditing procedure after fieldwork is report drafting. The auditor will prepare a report after the completion of fieldwork. The report comprises various aspects such as the distribution record, scope of the audit, conclusion, outcomes and recommendations and the follow up date. The main purpose of report drafting is due to the fact that the management should carefully read the report in order to make sure that the report does not contain any mistakes or errors. If there lays any mistake or error then it would be sorted out before the preparation and delivery of final report9. After the auditing procedure of report drafting, the next stage involves management response. The response from the management would be requested once the report is finally prepared. The main purpose of this auditing procedure of management response is that the response comprises various elements such as the action plan regarding the issue of the retained profit or loss of Stanley Limited and the expected completion date of the auditing procedure among others9. The next auditing procedure is closing meeting. The main purpose of this procedure of closing meeting is to converse the whole audit report and to review the management responses. As a result, this particular purpose generates an opportunity to discuss regarding the scope of the audit along with any other relating issues apart from the issue of the retained profit or loss of Stanley Limited9. After the auditing procedure of closing meeting, the next immediate auditing procedure is report distribution. The main purpose of this auditing procedure is to distribute the report to the senior management team of an organisation such as Stanley Limited as well as the managerial staff. The report distribution is very much essential in an auditing procedure because it generates feedback which can ultimately enhance and raise the prospective of the audit procedure9. The follow up auditing procedure is the final auditing procedure next to the procedure of report distribution. The follow up reviews are generally performed and occur after the anticipated conclusion date of the audit procedure. The main purpose of this auditing procedure of follow up is to authenticate that proper corrective actions have been executed in the audit procedure10. In this connection, the top management team of an organisation such as Stanley Limited would be in a position to identify that the issue relating with the retained profit or loss of Stanley Limited is resolved and no such further corrective actions are required10 Therefore, these are the various detailed practices relating to the financial statements along with the features and the various purposes of the auditing procedures. References Bhattacharya, A. K. Essentials of Financial Accounting: 2nd Edition. PHI Learning Pvt. Ltd., India, 2011. Botha, H & Boon J. A. ‘The Information Audit: Principles and Guidelines’. Libri, Vol. 53, pp.23-38. Brumfield, C. A., Elliott, R. K & Jacobson, P. D. ‘Business Risk and the Audit Process’, Relationship of Review Procedures to Audit Risk, , 1983, (accessed 10 March 2012). Cornell University. ‘University Audit Office’, Definition of Internal Audit, , 2007, (accessed 10 March 2012). Dicksee, L. R. Auditing: A Practical Manual for Auditors. Ayer Publishing, New York, 1976. Fridson, M. S & Alvarez, F. Financial Statement Analysis: a Practitioner’s Guide. John Willey & Sons, US, 2011. Gowthorpe, C. Business Accounting and Finance for Non-Specialists. Cengage Learning EMEA, US, 2005. Libby, R. Financial Accounting. Tata McGraw-Hill Education, US, 2009. Loughran, M. Financial Accounting for Dummies. John Willey & Sons, US, 2011. Raffa, P. C. ‘Handout 3’, Auditing, , 2003, (accessed 10 March 2012). Read More