Abbey Public Limited Company - Essay Example

ABBEY PUBLIC LIMITED COMPANY AREAS OF HEIGHTENED AUDIT RISK IN ABBEY PUBLIC LIMITED COMPANYPART A: THREE AREAS OF INCREASED AUDIT RISK Abbey Plc is a real estate developer company with operations spread across three countries. The company has operations in Ireland, Czech Republic and in the United Kingdom. The Company develops property and buildings, conducts plant hire and the renting of property as the primary income generating activities. The scope and nature of these activities is a matter that should attract skill, reasonable care and diligence in the course of the audit. Adequate audit evidence would be required in certain respects to validate the management assertions and the report given in the financial statements of improved economic activity. Matters to question include the application of accounting policies, the authorisation of major decisions, disclosure, the safeguarding of the shareholders’ interests and the verification of the actual state of affairs. The auditor is obliged to make an effort to establish the fairness and truthfulness involved in the reporting of the company affairs and not merely relies on the management explanations obtained. There is a high prevalence of inherent risk, detection risk and the risk of control that necessitates prudent and detailed approaches to auditing (Cascarino and Van Esch, 2013). The inventories of Abbey Public Limited Company are an area of increased audit risk. They comprise the Building Land and roads, the Work in Progress and the Raw materials. From the statement of financial position, a 33.44% increase in the inventories can be observed. The stocks are reported at 120.641 million Pounds in 2014 compared to the 90.408 million pounds reported in 2013. The implication is that inventories have tremendously grown over this reporting period. With relation to the Building Land and Roads, it must not be assumed that proper values have been reported. There is a risk that the proportion of plots sold in the case of estates could have been overstated. The auditor has an obligation to verify that the balance of building land and roads reported is the actual value by reconciling the balance against the proportion sold. The impairment of building land and roads being reported as an expense in the income statement is a question of proper adoption of reporting policies adopted. The auditor should verify the impairment charge of 0.162 million pounds by investigating the methods of making provisions for the impairment. The work in progress of the Company comprises the direct labour cost and the material cost. It is highly prevalent that the cost attributable to the direct labour and the material cost can be overstated if care is not exercised. The auditor has a duty to verify the allocation of direct labour cost and material cost between the finished inventory and the work in progress. Raw materials are said to be reported on a net invoice price. The compounding of the value of stock poses a significant risk. Ascertainment of the value attributable to the raw materials and other inventory components would be necessary (Chambers and Rand, 2011). The nature of the fixed assets that form the primary revenue generating activity for the group is an area of heightened audit risk. From the Chairman’s statement, the group house building operation completed 390 sales during the year. Of the 390 sales, 353 sales are attributable to the UK, 15 to the Czech Republic and 22 to Ireland. A number of issues surrounding the development of houses and the acquisition of plant require substantive verification. In this regard, the auditor has a duty to verify the physical existence of the buildings and plant across the three countries as reported. The acquisition, ownership and any charges born against these assets require ascertainment. The increase in the price of buildings in the United Kingdom should not be assumed. Rather, the actual increase in selling and cost prices of buildings should be established. The sale of the project in Shankil in Ireland would require investigation. The auditors should seek evidence of the authentication of the sale out, the valuation of the project and the actual proceeds generated from the sale out. The expansion of investment in new equipment and the rental income accruing from them requires verification. The auditor has a duty to determine whether the equipment was acquired and if it was acquired at the fair market prices to avoid any possibilities of fraud. Revaluation of these assets also requires investigation to ascertain that it was reasonably done (Chorafas, 2012). The trade receivables, payables and the cash and cash equivalent captions under the statement of financial position are areas that require a comprehensive audit approach. The tremendous increase in the trade receivables by 13.083 million pounds that translate to about 240.1% increment over the previous year requires investigation. The auditor should investigate the debt collection policies and make a debtor circularisation to ascertain the amounts recorded. The trade payables have also increased substantially from the 25.577 million pounds reported in 2013 to 33.643 million pounds in 2014. These values should be traced to the nominal ledgers and the journals to ascertain their accuracy and completeness. The classification of the cash and cash equivalents requires verification. The cash in hand and at the bank should be confirmed to exist and appropriate disclosures made (Duckert, 2011). PART B: SUBSTANTIVE AUDIT PROCEDURES FOR INVENTORIES Building Land and Roads- the auditor should perform the following procedures concerning building land and roads (Gramling, Rittenberg and Johnstone, 2012): The auditor should ascertain the balances of building land and roads costs brought forward from the previous year to ensure that they are correctly recorded. All contract accounts should be investigated, and the costs of any new accounts established. The auditor is obliged to inspect the physical existence of all the building land and roads. All supporting documentation on the acquisition, ownership and any charges against the building land and roads should be obtained. Such documentation would include the property deeds, land registry forms, minute books, legal documentation of land conveyance, and the cashbook and bank statement records supporting recorded transactions (Chorafas, 2008). To verify the unsold proportion of land, the auditor would require the sampling technique for the sites across the three countries. Ascertainment of the proper valuation of the unsold land and the apportionment of land to sold plots is required. All relevant costs in relation to the construction of roads should be done. The auditor should gather evidence of the reported costs from the contract agreements, the direct material costs incurred and the labour cost systems. Work in Progress- the following procedures are appropriate for the audit of work in progress (Henderson, 2008). The auditor has a duty to establish whether profits in relation to buildings are only taken on completion. It is necessary to determine how the labour and material costs of the unsold property are recognised and compare them against the direct labour costs and material costs for the work in progress. The auditor should review the requirements of the International Accounting Standard 11 and evaluate whether the policy adopted by the company in recognition of profits is permissible. The auditor should verify the Companys records of valuation of work in progress. The reports of independent assessments and detailed costing records for construction work in progress should be matched to the job costing records. The calculation of any impairment of work in progress and the net realisable value should be traced from the valuation reports. Any reductions of work in progress should be supported by available documentation and proper calculations. Raw Materials- the following substantive audit procedures are necessary for reducing the audit risk involving raw materials for this company (Knechel, 2009). Costs attributable to the raw materials are a function of the quality and quantity of the materials purchased. The auditor should ascertain the valuation of the cost of raw materials from the cost invoices received from the vendors. The quality and quantity of raw materials should be checked against the costs. Emphasis should be laid on the investigation of the costs of the raw materials for the UK following the management’s claim of increased prices. Overstating of costs may occur if the actual increase in prices is not established (Knechel, 2009). The physical existence of the raw materials should be inspected against the delivery notes and the construction accounts. The ordering mechanisms and the determination of the economic order and lead quantities should be evaluated to determine the possibilities of over-ordering (Pickett, 2010). Care should be exercised in evaluating the net realisable value of the raw materials. The existence of any damaged materials should be ascertained through physical confirmation. The assistance of independent valuation should be sought to confirm the accuracy of the reported Net Realisable Value of the raw materials (Pickett, 2008). References Cascarino, R. and Van Esch, S. (2013). Internal auditing. 2nd ed. Lansdowne, South Africa: Juta. Chambers, A. and Rand, G. (2011). The Operational Auditing Handbook. Hoboken [N.J.]: John Wiley & Sons. Chorafas, D. (2008). Risk management technology in financial services. Burlington, MA: Butterworth-Heinemann. Chorafas, D. (2012). Operational risk control with Basel II. 2nd ed. Amsterdam: Elsevier Butterworth-Heinemann. Duckert, G. (2011). Practical enterprise risk management. Hoboken, N.J.: Wiley. Gramling, A., Rittenberg, L. and Johnstone, K. (2012). Auditing. [Mason, Ohio]: South-Western/Cengage Learning. Henderson, P. (2008). Top auditing issues for 2009. Chicago, Ill.: CCH. Knechel, W. (2009). Auditing. Mason, OH: Thomson/South-Western. Pickett, K. (2008). Auditing the risk management process. Hoboken, N.J.: Wiley. Pickett, K. (2010). Audit planning. 2nd ed. Hoboken, N.J.: Wiley. Read More