Contemporary Issues in Auditing - Carter and Corbin - Assignment Example

Engagement letter 15% Carter and Corbin Chartered Accountants November 15, 2008 The Board of Directors Rentokil Initial London Dear sir/ma'am: This letter is to confirm our arrangement for our audit of the financial statements of Rentokill -Initial Corporation for the year ended December 31, 2008 We will audit the Corporation's balance sheet as of December 31, 2008 and the related Income Statement, and Statement of Cash Flows for the year then ended. The financial statements are the responsibility of management. Our responsibility is to express an opinion on the financial statements based on our audit. We will conduct our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our that our audit will provide a reasonable basis for our opinion. Our audit procedures will include test of of documentary evidence supporting the transactions recorded in the transactions, tests of physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected customers, creditors, legal counsel, and banks. At the conclusion of our audit, we request certain written representations from you about the financial statements and other related matters. Your accounting department personnel will prepare the necessary necessary detailed trial balance and supporting schedules of your head office and all its subsidiaries. Our engagement is subject to the inherent risk that material errors, irregularities, or illegal acts, including fraud or defalcations, if they exists, will be detected. Our examination schedule will be as follows: Begin field work ...................................November 10, 2007 Completion of field work....................... February 20, 2008 Delivery of audit report......................... March 5, 2008 Our fees for this audit will be based on the time spent by various members of our audit staff at our regular rates, pus direct direct expenses. We will notify you immediately if any circumstances we encounter that could significantly affect our initial audit fee estimate f 8,000. In order to us to work as efficiently as possible, it is understood that your accounting staff will provide us with the prior year's trial balance on or before January 15, 2008, and also with the schedules and and account analysis described on the separate attachment. If these arrangements re in accordance with your understanding, please sign this letter in the space provided and return to a copy to us at your earliest convenience. Very truly yours, ----------------------------------- Carter and Corbin Chartered Accountants Accepted by: ____________________ Date Ethical Part cover 15% - The information that should be passed to the new auditors- clearance from previous auditor To the Stockholders, Rentokill Initial London November 28, 2007 Dear sir/maa'am: It is standard operating procedure that a new external auditor must contact your company's former external auditor. Thus, please send us recommendation letter addressed to your prior auditor, PricewaterhouseCoopers LLP, to contact us. This will result to a smooth turnover and to thresh out some issues that the prior auditor can help us better understand. Thus, please send us, your current external auditor, a letter addressed to your former external auditor arranging a meeting your former external auditor and your current external auditor, Carter and Corbin. Also, Rentokill Initial is a corporation. Currently, the company does not have any trust transactions. Reference: http://www.rentokil-initial.com/annualreport2006/_downloads/pdf/bd_sm/Directors_report.pdf Sincerely yours, Carter and Corbin Chartered Accountant Carter and Corbin Chartered Accountant Statement of Independence We, Carter and Corbin Chartered Accountants, are independent in the performance of professional services to justify departure from these rules. We are independent because we complied with the minimum auditing independence standard which states that: Independence will be impaired if: A: During the period of a professional engagement or at the time of expressing an opinion, a member or a member's firm: 1. Had or was committed to acquire any direct or material indirect financial interest in the enterprise under audit. 2. Was a trustee of any trust or executor or administrator of any estate if such such trust or estate had or was committed to acquire any direct or material indirect financial interest in the enterprise. 3. Had any joint, closely held business investment with the enterprise or with any officer, director, principal stockholders thereof that was material in relation to the members' net worth or to the net worth of the members' fir. 4. Had any loan or from the enterprise under audit or any officer, director, or principal stockholder of the enterprise. B. During the period covered by the financial statements, during the period of the professional engagement, or at the time of expressing an opinion, a member or a member's firm: 1. Was connected with the enterprise as a promoter, underwriter, voting trustee, a director or officer or in any capacity equivalent to that of a member of management or of an employee. 2. Was a trustee for a pension or profit -sharing trust of the enterprise. However, the above criteria are not all inclusive. Further, "The independence of an external auditor is vital to enable the auditor to perform his functions properly. In the private sector, the auditor's basic role is to certify annually, in a report to members, whether or not the accounts of an organization give a 'true and fair' view of the state of that organization and whether the accounts comply with United Kingdom GAAP-- Generally Accepted Accounting Practice. If the accounts are to be relied upon, it is essential that they should be true and fair and this, is more likely to be the case if someone independent of the organization has vetted and certified them" (Hollingsworth, and White 1999, 91). Independence is a compulsory requirement which auditors must have without exception. Complying with the above independence requirement, the company can now perform the audit with spotless competence, integrity and objectivity. Sincerely, Carter and Corbin Chartered Accountants. Audit Planning Memo 50% - What does the company do - Where is the business- uk What is the focus Rentokil is engaged in the pest control business. Rentokil Initial currently has under its fold more than seventy thousand employees in more than forty countries. It is a multinational company. The company focuses its scarce resource on different sectors or industry. Its main aim is to deliver a wide variety of clients. Their customers come from the pest control, package delivery catering, cleaning, washroom solutions and textile demands. The company is offering its shares of stocks to interested new investors in the London Stock Exchange. Currently, each Rentokill share price is 91 as of April 11, 2008 U.K. time. In terms of audit program, the external auditor must do two things. First he or she must assess the effectiveness of the client's internal control structure. The auditor must determine of the clients internal control system is in place in the areas of revenue (sales and collection) cycle, acquisition (purchasing and payments) cycle, conversion (production cycle), investing cycle, payroll check cycle, financing cycle. In terms of sales and collection cycle, the processing of sales transactions includes delving into the substantive audit of the receiving an customer's order, approval of the customer's credit, shipment of merchandise to the audit client's customers, preparation of the audit client's sales invoices, recording of sales transaction into the books of original entry or journal book, recording of accounts receivable (usually from sales transactions), billing, and the handling and recording of the cash received from accounts receivable customers as well as cash paying sales transactions. The external auditor will obtain a copy of the audit client's organisational chart. the organisational chart will show the line and staff officers and men of each department. The auditor then will test the effectiveness of the internal control implemented by the company to determine if the current internal is strong enough to deter errors or frauds in the preparation of the balance sheet, income statement and statement of cash flows. The auditor will start the auditing of assets liabilities and capital as well as the revenue and expense accounts with the aim of determining the existence or occurrence, completeness, rights and obligations, valuation or allocation, and presentation and disclosure. In terms of audit program for assets accounts, the auditor will determine if the material assets enumerated in the assets portion of the balance is owned by the audit client. A very good example is the auditor's cash counting if the cash amount listed in the balance sheet is actually in the audit client's drawer or deposited in the audit client's bank. The auditor will also determine if the audit client owns the material assets enumerated in the balance sheet. for example, the auditor will ask for a land title or deed of sale or other legal documents proving that the audit clients is the rightful owner of the asset as of the balance sheet date. The auditor will also determine if the audit client has completely recorded all material business transactions that had occurred on or before the last day of the business transaction year. Normally, a year ends on December 31. Also, the external auditor determines if the company had properly valued the assets, liabilities, capital, revenues, and expenses in the journal book. International accounting standards are the bases for determining whether a business transaction should be recorded using the historical cost method. International accounting standards also state that some business transactions should be recorded using the fair market value method. In terms of merchandise inventory, the ending inventory should be recorded in terms of historical cost method. In terms of buildings bought, the historical cost and the corresponding accumulated depreciation accounts of the building seller is disregarded. The building bought should be recorded by the audit client in terms of the fair market value of the asset bought at the time of the purchase. The external auditor will also get a random sample of material asset transactions. Next, the auditor will test for the accuracy of the accounting personnel's recording of the sales, purchases, transfer of goods and services, payments received from customers, payments made to suppliers, To start the audit program, the auditor requests that the trial balance, pre -audited income statement, balance sheet and statement of cash flows will be furnished us, Carter and Corbin Chartered Accountants. - How many subsidiaries does the company have The company website,http://www.rentokil.com/ states that it has several subsidiaries in the Americas, Asia /Pacific, Europe and Middle East & Africa. In the Americas the subsidiaries are found in the Barbados, Canada, Guadaloupe, Guyana, Jamaica, Martinique, Trinidad, and United States. In the Asia /Pacific environment, its subsidiaries are located in Australia, Brunei, China, Fiji, Hong Kong, India, Indonesia, Malaysia, Japan, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. In Europe, its subsidiaries are found in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Republic of Ireland, Spain, Sweden, Switzerland, and our very own United Kingdom. In the Middle East and Africa, subsidiaries of Rentokil can be found in Kenya, South Africa and Tanzania. This list of country locations will definitely answer the question "how many subsidiaries does Rentokil have" As an audit procedure, the company is required to submit an organization chart and the list of subsidiaries. - Who are the main competitors The main competitors mentioned in the website http://finance.yahoo.com/q/cos=RTOKY.PK includes The Dais Service Group PLC, Derichebourg and IS A/S. The auditors will use the company prepared financial statements in order to gather industry data on pest control from the internet, Rentokil itself, and other secondary and primary sources to determine the reasonableness of the financial statement assertions of Rentokil. - What is the business environment the website http://www.uk.rentokil.com/services-and-solutions/service-solutions/mouse-radar.php states that Rentokil is in the mouse pest control business. Its current marketing strategy is kill mice in a humne way. The company's new product, the Mouse RADAR, is mousetrap that traps a mouse entering its box traps. It suffocates them by releasing carbon dioxide quickly. there is no pesticide ingredient in the product. This new product is a great hit that continues to be a number one choice of grocery and supermarket mouse pesticide customers. In fact, this new Rentokil product won the SEEDA award in 2003 and has been highly recommended by the United Kingdom business community because it does not pollute the environment with pesticides and other hazardous chemicals. In terms of auditing, the external auditor, Carter and Corbin Chartered Accountants, will substantively test the financial statement assertions indicated in the balance sheet, income statement and statement of cash flows in terms of existence or occurrence, completeness, rights and obligations, valuation or allocation, and presentation and disclosure. In terms of stock market prices, "Rat catcher to washroom services firm Rentokil Initial yesterday brushed aside a 27% fall in interim profits, as it reassured investors that the group was on track to deliver growth next year. The firm reported pre-tax profits from continuing operations of pounds 65.3m for the six months to June 30, against pounds 89.4m last year.("Rentokil Tries to Kill" 2007, 31) " The above quote shows that Rentokil is not a very profitable business endeavor as of the present. Rentokil is now going through rough business times. It has gone through a major restructuring in the past two years. the company's restructuring includes the disposal of 1.1 billion pouns of surplus business setups. This has been brought about to curtail or decrease the impact of losses and to revitalize the company's business operations. The company's only recourse to bounce to its former profitable self was to take a major overhaul of the company's assets, liabilities and capital. Of course, the sales, cost of sales, operating expenses and other income and expense items have been automatically transferred to the balance sheet stockholders' equity account. In retrospect, the company had generated huge profits during the year 2005. Specifically, the company generated its highest sales on October of the same year, 2005. Its chief executive officer, Doug Flynn announced that the company's outlook for the year 2008 had remained unchanged. This means that the next year could be more painful there seems to be no light of profitability in the near future. However, Rentokil stated that the main sales revenue drivers had been its parcel delivery serrvice business City Lin. It had enlarged the acquisition of Target Express last November, 2007. Mike Murphy of Panmure Gordon announced that "either the management team is good at making economic predictions or it is supremely confident in its own abilities despite the economic scenario," he said "Rentokil Tries to Kill" 2007, 31). Related Party 15% - Identify risks - complexity of the rules may lead to error, directors desire secrecy. The link http://www.rentokil-initial.com/annualreport2006/_downloads/pdf/bd_sm/Directors_report.pdf states on page 2 that there is NO material indebtedness owed to or by the company to any employee or any other person considered to be a related party". Related party transactions refers to the client entity and any other party with which the client may deal where one party has the ability to influence the other to the extent that one party to the transaction may not pursue its won separate interests. Examples of related party transactions included transactions, such as sales and purchase, between the company and its officers, managers, board of directors, subsidiary company, parent company branch, and members of the immediate families of the business owners. The parent company can dictate to the subsidiary company to lower their selling price. This would surely benefit the parent company. However, it would lower the sales and the corresponding profits of the company. Another good example is when the president of the company buys products sold by the company. The president could influence the accounting person or the sales person to record the sales at a lower price (even at cost) so that the president can save money. However, this would be plain violation of the company that all sales should be made at a pre -arranged mark -up or selling price. The company would lose money on such related party transactions. For, there are more probabilities of irregularities in terms of purchase price, sales price, receivables collection and payables payments in related party transactions. And, "Fraud, which has no definition in UK law, generally involves the theft of assets coupled to a falsification of the books of account. Furthermore, it is important to distinguish between employee and senior management fraud. There is some agreement that responsibility for the former may be reasonably delegated to management control systems. The fundamental operational issues for external auditors arise in the context of senior management fraud and deliberate mis-statement(Power 1997, 23)". This quote definitely shows that the external auditor's task is gargantuan. However, external auditors can easily comply with their huge responsibility to reduce or even stop fraudulent transactions that could be found in related party transactions. Works Cited Behn, Bruce K., Steven E. Kaplan, and Kip R. Krumwiede. 2001. Further Evidence on the Auditor's Going-Concern Report: The Influence of Management Plans. Auditing: A Journal of Practice & Theory 20, no. 1: 13. Birdzell, Luther E. 1996. SAS 79: Reporting on Uncertainties. Journal of Accountancy 181, no. 2: 57+. Cooper, David J., Teresa Rose, Royston Greenwood, and Bob Hinings. 2000. "5 History and Contingency in International Accounting Firms". In Globalization of Services: Some Implications for Theory and Practice, ed. Aharoni, Yair and Lilach Nachum:93-121. London: Routledge. Elifoglu, I. Hilmi. 2002. Navigating the "Information Super Highway": How Accountants Can Help Clients Assess and Control the Risks of Internet-Based E-Commerce. Review of Business 23, no. 1: 67+. Gibson, Kim M., and James S. Gerson. 1998. Talking with the Auditor: New Management Representation Rules Give Some Options and Also Aim for Consistency. Journal of Accountancy 185, no. 3: 63+. Hoitash, Rani, Alexander Kogan, and Miklos A. Vasarhelyi. 2006. Peer-Based Approach for Analytical Procedures. Auditing: A Journal of Practice & Theory 25, no. 2: 53+. Hollingsworth, Kathryn, and Fidelma White. 1999. Audit, Accountability, and Government. Oxford: Clarendon Press. Hunton, James E., Tanya Benford, Vicky Arnold, and Steve G. Sutton. 2000. The Impact of Electronic Commerce Assurance on Financial Analysts' Earnings Forecasts and Stock Price Estimates. Auditing: A Journal of Practice & Theory : 5. IT and the Audit. 2001. Journal of Accountancy 192, no. 3: 41. Johnson, Eric N., Jane Baird, Paul Caster, William N. Dilla, Christine E. Earley, and Timothy J. Louwers. 2003. Challenges to Audit Education for the 21st Century: A Survey of Curricula, Course Content, and Delivery Methods The 2000-2001 Auditing Section Education Committee American Accounting Association. Issues in Accounting Education 18, no. 3: 241+. Klug, Francesca, Keir Starmer, and Stuart Weir. 1996. The Three Pillars of Liberty: Political Rights and Freedoms in the United Kingdom. New York: Routledge. Krishnamoorthy, Ganesh. 2002. A Multistage Approach to External Auditors' Evaluation of the Internal Audit Function. Auditing: A Journal of Practice & Theory 21, no. 1: 95+. http://www.questia.com/PM.qsta=o&d=5000734295. Krishnan, Jayanthi, Heibatollah Sami, and Yinqi Zhang. 2005. Does the Provision of Nonaudit Services Affect Investor Perceptions of Auditor Independence. Auditing: A Journal of Practice & Theory 24, no. 2: 111+. Leitch, Robert A., and Yining Chen. 2003. The Effectiveness of Expectation Models in Recognizing Error Patterns and Generating and Eliminating Hypotheses While Conducting Analytical Procedures. Auditing: A Journal of Practice & Theory 22, no. 2: 147+. http://www.questia.com/PM.qsta=o&d=5002446683. Martin, Roger D., Jay S. Rich, and T. Jeffrey Wilks. 2006. Auditing Fair Value Measurements: A Synthesis of Relevant Research. Accounting Horizons 20, no. 3: 287+ O'Donnell, Ed, and Joseph J. Schultz. 2003. The Influence of Business-Process-Focused Audit Support Software on Analytical Procedures Judgments. Auditing: A Journal of Practice & Theory 22, no. 2: 265+. Pollitt, Christopher, Xavier Girr, Jeremy Lonsdale, Robert Mul, Hilkka Summa, and Marit Waerness. 1999. Performance or Compliance Performance Audit and Public Management in Five Countries. Oxford: Oxford University Press. Power, Michael. 1997. The Audit Society: Rituals of Verification. Oxford: Oxford University Press. Rentokil Tries to Kill off Concern about Its Sharp Slide in Profits. 2007. Western Mail (Cardiff, Wales), August 24, 31. Rezaee, Zabihollah, Ahmad Sharbatoghlie, Rick Elam, and Peter L. Mcmickle. 2002. Continuous Auditing: Building Automated Auditing Capability. Auditing: A Journal of Practice & Theory 21, no. 1: 147+. Swanger, Susan L., and Eugene G. Jr. Chewning. 2001. The Effect of Internal Audit Outsourcing on Financial Analysts' Perceptions of External Auditor Independence. Auditing: A Journal of Practice & Theory 20, no. 2: 115. Tuttle, Brad, Maribeth Coller, and R. David Plumlee. 2002. The Effect of Misstatements on Decisions of Financial Statement Users: An Experimental Investigation of Auditor Materiality Thresholds. Auditing: A Journal of Practice & Theory 21, no. 1: 11+. www.rentokil.com www.initial.com www.entokil-initial.com http:finance.yahoo.com/qd=t&s=rtoky.pk http://www.rentokil-initial.com/annualreport2006/_downloads/pdf/bd_sm/Directors_report.pdf Read More