Auditing of Havelock Europa Plc - Essay Example

Auditing of Havselock Europa Plc March 31, Part A 1364 words Part B: 717 words Introduction Auditing entails ensuring the Havelock Europa Plc 2012 financial statement accounts are true and correct (Hooks, 2010). Some financial statement accounts are more vulnerable to fraud and error compared to the other remaining financial statement accounts. Internal control plays an important role in determining the extent of the audit procedures. The audit process reduces or eliminates errors or frauds in the presentation of the Havelock Europa Plc 2012 financial reports. Part A Cash In terms of frequency and materiality of the accounts, the £ 554,000 cash is the most vulnerable account (Johnson, 2005). The cashier can pocket the amounts paid by the customers. After pocketing the cash, the cahier does not record the sales and payments paid by the customer. In the busy store with long lines of customers paying for their purchases, the cashier may unintentionally punch the wrong sales amount. For example, the cashier records the wrong number of pieces paid or the wrong amount or the wrong product item (Ramsay, 2010). Revenues Some companies intentionally overstate the £ 100,778,000 net revenues (Tatiana, 2012). The overstatement will create a more favourable picture of the company. Consequently, the current and future investors are persuaded to invest more funds into the company. For example, the sales person may record sales transactions that were completed in January 2013 as sales completed during December 2012. When this happens, the sales amount for December 2012 is overstated and the sales for January 2013is understated. Second, the sales person may unintentionally forget to record some sales transactions completed during December 2012 (Singleton, 2010). When there is a long line of customers, human error often crops up. The audit will uncover the unrecorded 2012 sales transaction. An inventory count will also help determine whether an unrecorded sales transaction occurred during the period under audit. Third, the sales person may unintentionally record the wrong sales transaction amount (Elder, 2012). The $300sale for one customer was erroneously recorded as $30. In another situation, the sales person recorded another $250 sales transaction as $450. Fourth, the company did not return a third customer’s returning a defective product (Dauber, 2009). The return requires a debit to sales returns and a credit to either cash or the customer’s receivables account. The non-recording resulted to an overstatement of net revenue. Fifth, the company sales person forgot to record the required sales discounts given to early paying customers (Cascarino, 2012). The discounts and sales reductions will reduce the net revenue amount shown in the 2012 income statement. The non-recording of the discounts and sales reductions will overstate the net revenue figure shown in the company’s income statement. Sixth, the sales person may unintentionally record the sale of one item as the sale of another item (Johnston, 2012). For example, five pieces of store item no 1 priced at $ 50.00 is recorded as the sale of five pieces of store item no. 8 priced at £ 20.00. Consequently, the sale of store item no. 1 is understated. Next, the sale of store item no. 8 is overstated. Overall, the 2012 revenue is understated by £ 30.00 Inventory The 2012 £ 11,001,000 Inventory can be erroneously or fraudulently presented in the financial statements (Messier, 2011). The balance sheet records will present the sale of an inventory item in the income statement. However, a physical inventory count will show that the item is still within the store premises or the warehouse or storage area. When this happens, the inventory item and the total inventory end shown in the company’s 2012 balance sheet are understated. The sales person may record in its sales report that four pieces of store item no 1 had been sold. A physical inventory at the end of 2012 will uncover the sales person’s sale of store item no 45 had been erroneously recorded as the sale of store item no. 1. Consequently, the December 31, 2012 balance of store item no. 1 is understated. Consequently, the inventory audit will show that the December 31, 2012 balance of the store item no 8 is overstated (Moeller, 2009). The inventory account may include obsolete, damaged, expired or other non-saleable store stocks. The physical count will prod the auditor to recommend the removal of the obsolete, damages, expired or other non-saleable store stocks from the inventory balances (Thibodeau, 2012) Lastly, the inventory balance shown in the balance sheet may include store items that are not the property of the company. A physical inventory will show that certain store items listed in the inventory records are not within the premises of the store, with possibility of being stolen by store employees. Another possibility is the failure of the sales person to record the sale of such items. The physical inventory will show that the items were actually sold and the sale of the items was not recorded in the books. When this happens, the inventory balances of the items are overstated. Similarly, the balance sheet’s December 31, 2012 inventory balance is overstated because of the unreported sales. Liabilities The 2012 £ 38,468,000 Liabilities can be either erroneously or fraudulently reported in the balance sheet. The liabilities include the accountabilities (payables) of the company. The infamous Enron case is a good example (Niskanen, 2007). The management, accounting department line and staff employees, and the external auditors, Arthur Andersen, were charged for not including a significantly amount of Enron’s liabilities from the Enron Balance sheet. Consequently, the stockholders’ equity figures were overstated. The overstatement created an illegally more favourable financial picture of Enron than what was the true or correct amount. Consequently, many current and future investors were persuaded to invest more funds into the company. After the discovery of the fraud, Enron’s true financial worth was uncovered. Further, the company may fraudulently record some account purchases (payables or liabilities) that were completed in December 2012 as illegal purchases completed in January, 2013. Consequently, the company’s liabilities portion of the balance sheet is understated. The understatement generates an overstatement of the company’s stockholders’ equity section of the balance sheet (Elder, 2012). Furthermore, the accounting clerk forgot to record a delivery of store items that arrived on December 31, 2012, which were purchased on account (payables). The forgotten recording of the purchases will result to an understatement of the balance sheet’s liabilities portion. Consequently, the understatement will automatically generate an overstatement of the same stockholders’ equity figure (Hooks, 2010). Receivables The main business of the company is store sales. The total store sales (revenues) amount includes both sales generated from cash paying customers. Sales can also be generated from account customers. Account customers are those who receive the goods but promise to pay the total purchase amount in the future. The future may include next day, next week, next month, or on several months’ installments. Consequently, there is a high probability that the balance sheet presentation of the trade and other receivables amount may either be erroneously or fraudulently reported (Moeller, 2009). As human beings, some store personnel may generate erroneous 2012 trade and other receivable balances, affecting the trueness or correctness of the £20,153,000 trade and other receivables amount. For example, the sales personnel forget to record the account sales of customers. Consequently, the balance sheet’s 2012 trade and other receivables balance will be understated. In other cases, the sales person may erroneously record the sale of one item as the sale of another item. For example, the store personnel recorded the sale of store item no. 32 as the sale of store item no. 65 trade receivables. Consequently, company’s December 31, 2012 balance sheet information, trade and other receivables, include an understatement of store item no 32 receivables. Similarly, the company’s December 31, 2012 balance sheet information, trade and other receivables, include an overstatement of store item no 65 trade receivables (Messier, 2011). Further, the store employee steals the amount paid by the receivable customers (Dauber, 2009). After pocketing the customers’ cash payment of his or her receivables amount, the collection officers writes off the receivable amount by debiting doubtful accounts expense and crediting the customer’s receivables amount. The auditor’s sending a letter to the customer to determine the veracity of the customer’s bankruptcy can uncover the employees’ fraudulent writing off the amounts stolen from the paying customers. Finally, the receivables account may include amounts that are not collectible (Elder, 2012). Some customers abscond or disappear from sight to avoid payment. Other customers file for bankruptcy. Consequently, the company will not be able to collect the trade and other receivables amount. To present true and correct financial reports, the company must automatically write off the uncollectible trade and other receivables amounts. Part B: Audit procedure: Trade Receivables To determine if receivables not pocketed and the receivables amount is written off, the auditor must review the current internal control on the write of receivables (Moeller, 2009). To prevent his illegal and unauthorized write off, there must be segregation of duties. One person must authorize the write off of the receivables account. Another person does the actual write off of the receivables account. To determine that all receivables are properly recorded, in terms of the correct amount and the correct time period, one person must approve the customer’s receivables amount for each sale. Another person will record the receivables amount in the receivables book (Messier, 2011). Further, the audit process of the receivables amount must include several strategies. One of the strategies is testing if the internal controls to prevent erroneous or fraudulent receivables amounts are included or excluded in the balance sheet. Next, the audit process requires instituting the substantive tests of the receivables transactions. Third, the audit process requires the analytical procedures be implemented on the receivables-related transactions. The transactions include cash collections of the receivables account, recorded of trade and other receivables accounts, recording or non-recording of sales discount and sales allowances (which reduce the trade receivables balances. Further, the audit of receivables must include test of details of the receivables-related transactions (Johnson, 2005). Next, the audit of the receivables account includes determining if the supporting documents affirm or negate the recorded receivables transactions, vouching. Next, the auditor must instruct the accountant to send monthly receivables statements to the customers. In turn, the customers will affirm or negate the amounts shown in the receivables statements. For the top 20 percent of the receivables (in terms of amount), the auditor can send positive confirmation and wait for the customers to affirm or negate the receivables amount. For lesser amounts, the auditor can send to a random sample of the receivables customers a negative confirmation letter requesting the letter recipients to only reply if the amounts shown in the receivables statements are wrong (Ramsay, 2010). Further, the auditor must check whether receivables amount represent goods or store items actually received by the receivables customers. To accomplish this, the auditor must check the supporting documents that include the bill of lading, customer signing the receiving report that he or she received the store goods or store items. Next, the auditor must check the supporting documents of the recorded receivables amount to determine if the store goods or items recorded in the sales report represent the correct store items or goods received by the customers (Hooks, 2010). Further, the auditor should trace the recorded receivables sales to the supporting documents determine if the receivables amounts are included in the 2012 time period or 2013 time period. The auditor must trace the shipping documents, customers’ purchase order, and customer’s receiving report to the journal entries to determine whether all receivables sales transactions are properly recorded and included in the balance sheet trades and other receivables amount (Johnson, 2005). Next, the auditor must trace the duplicate sales invoices to the journal entries determine if the proper store items or goods are correctly in the correct time period and correct amount (Niskanen, 2007). The auditor must compare the dates of the bill of lading, customers’ receiving report, customer’s purchase orders, and sales journal to determine whether the receivables amount is recorded in the correct time period, 2012 or 2013 (Dauber, 2009). Further, the auditor must trace the duplicate sales invoice to the sales journal to ensure accuracy of the recording of sales presented in the balance sheet trade and other receivables amount. Next, the auditor must account for the sequence of receivables documents, including shipping documents and sales invoices to ensure all receivables sales transactions are recorded and included in the store’s 2012 balance sheet’s trade and other receivables total amount (Niskanen, 2007). Conclusion Auditing includes determining whether the amounts shown in the Havelock Europa Plc 2012 financial reports are true and correct. Five financial report accounts that are more prone to fraud or error are discussed. The audit of the receivables account entails several strategies, including performing substantive tests and tests of details of receivables-related transactions. Clearly, the audit procedure reduces or eliminates errors or frauds shown in the Havelock Europa Plc 2012 financial reports. References: Cascarino, R. 2010. Auditors Guide to IT Auditing. Wiley & Sons Press, London. Dauber, N. 2009. Wiley Complete Guide to Auditing Standards. Wiley & Sons Press, London. Elder, R. 2012. Auditing and Assurance Services. Prentice Hall, London. Hooks, K. 2010. Auditing & Assurance Services. Wiley & Sons, London. Johnson, R. 2005. Modern Auditing. Wiley & Sons, London. Johnston, K. 2012. Auditiing. Cengage Learning, London. Messier, W. 2011. Auditing and Assurance Services. Cengage Learning, London. Moeller, R. 2009. Brinks Modern Internal Auditing. Wiley & Sons, London. Niskanen, W. 2007. After Enron: Lessons for Public Policy. Rowman & Littlefield, London. Ramsay, R. 2010. Auditing & Assurance Services. McGrawHill Press, London. Singleton, T. 2010. Fraud Auditing and Forensic Accounting. Wiley & Sons, London. Tatiana, N. 2012. Accounting and Auditing Research. Wiley & Sons, London. Thibodeau, J. 2012. Auditing. McGrawHill , London. Read More