StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Audit for Real Good Food Plc - Case Study Example

Cite this document
Summary
It not only serves retailers but has its name engraved in wholesale and exports as well. The company has a number of brands that engage their operations in the production and distribution of a wide variety of food…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.7% of users find it useful
Audit for Real Good Food Plc
Read Text Preview

Extract of sample "Audit for Real Good Food Plc"

Audit for Real Good Food Plc. Table of Contents Introduction 3 Materiality and Risk Assessment 3 Areas of Heightened Risk 4 Revenue 4 Trade and Other Receivables 5 Trade and Other Payables 6 B: Substantive Audit Procedures 7 Analytical Procedures 7 Occurrence 7 Cut-off 8 Confirmation 8 Completeness/Classification 9 Conclusion 9 Appendix: Trend Analysis 10 References 11 Introduction The Real Good Food Company plc is a pioneer in the food business. It not only serves retailers but has its name engraved in wholesale and exports as well. The company has a number of brands that engage their operations in the production and distribution of a wide variety of food items including jams, baking materials etc. Owing to the size of the company, the audit of its accounts is of paramount importance to the shareholders. This paper would identify 3 risk areas for the audit of Real Good Food Plc and would suggest 5 substantive audit procedures on one of the risk areas identified. Materiality and Risk Assessment A common method to identify the areas of potential risk in the financial statements is to perform analytical procedures. ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment (Redrafted) requires the use of risk-based approach by auditors (Pine, 2015). It requires them to identify any material misstatements by assessing the levels of risk associated with the different figures that appear on the face of financial statements. When the term ‘material’ appears it automatically directs toward the omissions or misstatements that may impact the economic decision of the users of company’s annual statements (Henriques, 2010). The decision on the materiality level depends upon the auditor’s professional judgment and perception about the company’s record (Knapp & Bender, 1998). However, professional skepticism remains at the heart of auditing and calls for a microscopic and skeptical analysis of statements to identify any risk areas and report them accordingly (Hay, Knechel & Willekens, 2014). In general, the materiality levels are set at approximately ½%-1% of Revenue, 1-2% of total assets and 5%-10% of profits, however the materiality level differs in every case (AccountancySage, 2014). For our case, we will assume the materiality thresholds as described above. Areas of Heightened Risk The risk-based approach, when applied to Real Good Food Plc., identifies the following risky areas for auditing purposes: Revenue The financial statements of Real Good Food plc show the following record: 2014 2013 Revenue 272,567 265,754 Cost of Sales (239,187) (228,469) Gross Profit 33,389 37,285 The auditor must expect that sales and gross margin would move in the same direction and with the same pace. However, the analysis reveals an altered reality with revenue increasing by 2.56% in 2014 and gross margin showing a decrease of 10.45% in 2014. In addition, the segmented data as appeared in Note 4 shows: 2014 Napier Garrett Renshaw R&W Haydens RGFE Total £’000s £’000s £’000s £’000s £’000s £’000s £’000s Total Revenue 172,089 31,803 43,495 10,440 27,255 481 285,563 The Key strategic priorities provide the revenue expectations for 2013/14 (p. 17) as: 2013/14 Napier Garrett Renshaw R&W Haydens RGFE £’m £’m £’m £’m £’m £’m Total Revenue 162.3 30.4 42.9 9.1 27.3 0.5 On a closer look, we find a higher actual figure for all the segments which further makes it questionable for the audit risk assessment purposes. Since both the change in sales and Gross margin and the comparison of expected and actual result show remarkable improvement in revenue, there is a risk that fictitious sales is recorded to beat the competition in the market and meet expectations of the shareholders. Hence, this area is potentially risky and requires closer attention during the audit process. Trade and Other Receivables The financial statements of Real Good Food plc show the following record: 2014 2013 Trade and Other Receivables 34,260 30,213 Provision for impairment of receivables (50) (105) On the other hand, Note 22 Trade and Other receivables shows that “The Group recognised a credit of £45k (2013 – credit of £2k) for impairment of its trade receivables during the period, to reflect debts significantly past their due dates” with loss being accounted for in the operating profit for the year. Keeping an eye on the increasing Trade and other receivables, a decline of allowance-to-receivables ratio is questionable by 42% decline in 2014. If the receivables are increasing with an increase in impairment of trade receivable from £2k to £45k in a year, the provision for impairment should not reduce with as high a percentage as 48%. Hence, the trade and receivables remain a potentially risky audit area. It appears that the provision for impairment of receivables is understated. Trade and Other Payables The financial statements of Real Good Food plc show the following record: 2014 2013 Trade and Other Payables (Due within a year) 29,820 21,282 Trade and Other Payables (Due after a year) 191 __ Cash and Cash Equivalent 8,568 7,134 Short Term Borrowings 31,221 23,032 From the above information, it should be noted that the increase in cash and cash equivalents is just 20% compared to the increase in payables (within one year) of 40% in 2014. The company seems to rely on taking more loans as is apparent by the short term borrowing level being increased by 35.5% in 2014. These trends show a probable liquidity issue that the company is, or might face. Hence, it is of paramount importance to the audit of Real Good Food plc. as it may end up with ‘going concern’ issues in the worst case scenario. The payables due within a year are material if the thresholds, as described above, are applied. These are approximately 11% of sales and 18% of total assets. B: Substantive Audit Procedures Analytical Procedures Analytical procedures are concerned with the study of relationships, trends and unusual dispersions measured in the data for a number of years (Whittington, 2013). Since, revenues are material and one of the most valuable items on the financial statements; they need to be audited carefully. While auditing Real Good Food Plc., there is a need to establish expectations to check the trends against them. These expectations can be the use of forecasting based on past or historical data. There are many ways of doing this including the moving average and weighted average forecasting tools (Rittenberg, Johnstone & Gramling, 2012). Another important measure is the use of financial ratios and studying the trends in those ratios. If the ratio, for instance gross profit margin is materially different from the expectations or industry averages, the revenues can be over / understated. Occurrence To ensure that the revenues recorded actually exist, there is a need to assure the occurrence of the sales recorded (Rittenberg, Johnstone & Gramling, 2012). For the purpose, the auditor will require a sample of sales invoices, customer orders and sales journal. The auditor can: Compare the sales mentioned on the financial statements to customer orders and delivery notes The number of products delivered and invoiced can be compared at different dates Sales journals can be reviewed to identify duplication of sale records. Identify any fictitious sales by checking sales invoice, delivery notes and financial records as provided Cut-off The audit procedures must include checking the cut-off period for revenues. These reveal if the recorded transactions occurred in the period mentioned. Usually the issue arises with the transactions made in the start of a new accounting period or end of the current period. The audit procedures may involve: Taking a sample of sales invoices generated and comparing them back to the customer orders and delivery notes for date confirmations. The sales order may mention the date of delivery which can confirm the correctness of the record Compares sales journal entries with the dispatching department records to further confirm the cut-off period Confirmation Confirmation through enquiry is valuable external audit evidence. Using this auditor may send enquiries to the major customers for confirmation on the delivery of certain quantity of products at a specified date at a specified rate. However, this procedure should be used in agreement with the management to avoid any undue influence on their relationship with the major customers. For confirmation the auditor may use: Positive enquiry i.e. the customer must respond to complete the procedure. The response, forms the source of evidence and if the customer fails to respond, the audit procedure will be redundant. It is more time consuming and may call for another procedure in case of customers’ ignorance. The auditor must keep ensure the receipt of cash from the customer after the period ends to ensure that the revenues were generated and correctly recorded. However, the auditor must be sensitive to the details and ensure that the cash receipts belong to the previously recorded sales and do not represent a subsequent sale. Hence, negative enquiry can also be used which entails to a response from customer only when he disagrees with the amount, date or any particulars mentioned thereof. In negative enquiry case, the irresponsiveness of the customer can confirm his acceptance of the provided information as true and accurate. Completeness/Classification There is a need to identify if the sales recorded represent real sales agreement and is not an enquiry or a proposed quotation with no real value. For the purpose, the sale records need to be verified with the customer orders and invoices generated. Moreover, in order to detect and prevent fraudulent activities, the completeness must be checked. The inventory in the warehouse should match the records to ensure the promised products and revenues recorded have already been dispatched. The sales invoices should be checked using proper sampling method to ensure all sales have been recorded in the sales journal. Conclusion In conclusion, we can say that Real Good Food plc, like any other business, is exposed to risks due to the agency relationship that exists. The company should opt for the safest alternative to keep its records clear from material misstatements and to hold the management accountable for any discrepancies that are found. Appendix: Trend Analysis Previous Year’s Comparison Results Revenue Growth 272567/265754=2.56%inc Cost of sales Growth 239187/228469=4.69%inc Gross Profit Growth 33389/37285=10.45% dec Trade & other Receivables 13.4% Increase Trade & other Payables 40.1% Increase Cash and Cash Equivalent 20% Increase Short Term Borrowings 35.5% Increase References Pine, B. (2015). A risk-based approach to auditing financialstatements. 1st ed. [ebook] Student Accountant, pp.42-43. Available at: http://www.accaglobal.com/content/dam/acca/global/PDF-students/2012s/sa_feb08_pine.pdf [Accessed 26 Mar. 2015]. Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2012). Auditing: A business risk approach. Melbourne, Vic.: South-Western Cengage Learning. Real Good Food plc. (2014). Annual report and Financial Statements 2014 [online], Real Good Food plc. [Accessed 26 March 2015] Henriques, A. (2010). Corporate Impact: Measuring and Managing Your Social Footprint. London: Earthscan. Knapp, C. L., & Matthew Bender (Firm). (1998). Commercial damages: A guide to remedies in business litigation. New York, N.Y: M. Bender. Hay, D., Knechel, W. R., & Willekens, M. (2014). The Routledge companion to auditing. AccountancySage, (2014). ISA 320 Materiality in Planning and Performing an Audit - Accountancy sage. [online] Accountancy sage. Available at: http://accountancysage.com/isa-320-materiality-planning-performing-audit/ [Accessed 27 Mar. 2015]. Whittington, R. (2013). Wiley CPA examination review 2014. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Auditing Case Study Example | Topics and Well Written Essays - 1500 words - 1, n.d.)
Auditing Case Study Example | Topics and Well Written Essays - 1500 words - 1. https://studentshare.org/finance-accounting/1866142-auditing
(Auditing Case Study Example | Topics and Well Written Essays - 1500 Words - 1)
Auditing Case Study Example | Topics and Well Written Essays - 1500 Words - 1. https://studentshare.org/finance-accounting/1866142-auditing.
“Auditing Case Study Example | Topics and Well Written Essays - 1500 Words - 1”. https://studentshare.org/finance-accounting/1866142-auditing.
  • Cited: 0 times

CHECK THESE SAMPLES OF Audit for Real Good Food Plc

Auditing Process of Aerospace Lighting Inc

Auditing Table of Contents Table of Contents 2 Introduction 3 Client Business Risks 3 Auditor's Business Risk 6 Audit Risks 7 1.... nherent Risk: 8 2.... ontrol Risk: 9 References 11 Introduction Various important and critical relationships are created through audit process which involves many parties....
8 Pages (2000 words) Case Study

Information System Auditing and Financial Auditing

According to the text, the emergence of new Auditing techniques is essential in the assessment.... Due to the advancement of technology, accounting of various businesses was also automated; along with this is the need to change the Auditing techniques.... The main objective of this paper is to distinguish the relationship between information system Auditing and financial Auditing.... According to Hall (2004), "financial Auditing is a form of independent attestation (or verification) performed by an expert who expresses an opinion about the fairness of a company's financial statements" (p....
1 Pages (250 words) Essay

Advanced Auditing: Social and Environmental Audits

ccording to George Clark "What is now coming to be called Social Auditing is similar in many ways to Financial Auditing except that it is about everything else that an organisation does apart from handling money.... n the context of the increasing emphasis on protection of environment, environmental accounting and Auditing have assumed special importance in recent years....
12 Pages (3000 words) Essay

Contemporary Auditing

An Auditing service will help in investigating the objectives proposed by the organisation with the intention to help its clients, individual professionals with the intention of offering the best information, which will help the decision makers to decide easily.... An Auditing service also helps in investigating and evaluating with evidence the Contemporary Auditing.... Contemporary Auditing....
2 Pages (500 words) Essay

Auditing - Types of Sampling Ways

he statistical sampling is based upon the Auditing/Auditors Table of Contents Question 3 Question 2 5 Question 3 6 References 7 Question The prime motive of the auditor is to cover conformity with the client's objective of maximization of profit, performance evaluation and developing working standards.... Question 2In the process of performing Auditing procedures, the population needs to be well defined for its true and perfect representation which will help in providing effective decision to the client's reliability and internal control of daily transactions....
2 Pages (500 words) Essay

Internal Auditing

The present case study under the title "Internal Auditing" dwells on the concept of Auditing.... Preventing control in internal Auditing is essential because it is the first barrier that protects the organization from risks that are detrimental to its performance, growth and financial stand.... In this internal Auditing measure, internal auditors are useful when testing risky processes and procedures.... orrective control in internal Auditing assists in correcting irregularities and errors that have been spotted within the organization's financial data and operations....
2 Pages (500 words) Case Study

Objectives of Management Auditing

Management Auditing, as the name suggests, is all about detailed assessment encircling the entire operations, policies and procedures undertaken by an organization.... Management Auditing is significant to entrenching the worldwide established standards and This leads to the development of targeted objectives and standards, and the actual standards and objectives are compared to identify the potential gaps and flaws in the system (pickett, 2005).... anagement Auditing is applied at the core and structure of an organization with its basic emphasis on comprehensively examining the structure, functionalities and governing bodies, departments, division heads and all the major operations of an organization....
11 Pages (2750 words) Essay

The Role of Auditing and Assurance

he work of Auditing should be conducted by independent professionals who demonstrate a high level of integrity.... Records contained in journals, vouchers and other official documents used for business transactions are used for the purpose of ascertaining whether the recorded transactions are consistent with....
12 Pages (3000 words) Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us