Auditing Report on Perfect Pies Lmt - Essay Example

?Report on the audit of Perfect Pies Limited – Financial year ended March Perfect Pies Limited is regarded as one of the prominent when it comesto selling and marketing edibles. The company is involved in selling pies, pastries and pizzas. It holds a considerable market share and manages its operations through a well established supply chain. Perfect Pies Limited generates its turnover through selling its product under its own brand name and also by supplying to a giant and renowned super market chain. The financial outlook of the company is stable and it turnover, as compared to the previous financial year has increased by 8.37%, boosting the gross profit and net profit by 3.42% and 1% respectively. The company’s reserves have also increased during the current financial year which shows that its investors are considering the company lucrative and are planning to have a long term association with it. The company’s current ratio is also very much stable and presents the fact that the company is utilizing its resources prudently. We have been appointed as the statutory auditor of the company, for the financial year ended March 31, 2012, in order to express an opinion whether the financial statement of the company are free from any misstatement and represent a true and fair view of the affairs of the company. By analyzing the financial performance of the company in the prior year, and considering the asset base, the company has been classified as SME (small and medium sized entity). The audit methodology, risk coverage and materiality have all been considered and devised which are relevant for the audit of a SME. The materiality has been calculated by averaging out the profit of the current year and prior year and applying a haircut of 5% which is suitable for SMEs. After the completion of the interim audit, no such event was identified which could question that the financial statements of the company are materially misstated. But since in an interim review, the scope of the auditing procedures is limited, reasonable assurance over the financial statement assertion cannot be identified. During the course of the annual year audit, certain instances has been identified which requires immediate considerations. The issues have been identified in the balances of stocks, debtors and fixed asset. Due to uncontrollable circumstances, appropriate test of details could not be performed on the closing stock balance, whereas, the result of the test of details on debtor balance has also highlighted few grey areas. Certain discrepancy has also been observed in the carrying value of the non-current assets. Stocks The period from December to May is the busy season, during which our limited number of staff tries to cater a diverse and complex array of client, it becomes difficult sometimes to provide sufficient number of individual in an audit team to carry out the audit as planned. Due to the mentioned issue, the stock count of Perfect Pies Limited at its Wolverhampton site could not be performed. Audit procedure in such situation was only curtailed to management’s enquiry and placing reliance on the client provided schedule. During the visit to the Wolverhampton site, the audit team acquired the detailed report of the stock from the stock keeper and reconciled the total balance as of the report with the carrying value of the stock as reported in the financial statement. The previously mentioned audit procedure is quite successful to acquire comfort over the completeness and valuation of the stock balance. As per the applicable financial reporting framework, stock balance is valued at the lower of cost or net realizable value. Without actually assessing the physical condition of the stock it is not possible to identify he stock item over which the NRV testing should be performed. There’s also a chance that the stock item mentioned in the stock list might not be present at all, thus it is important to count the stock as either ‘tag to floor’ or ‘floor to tag’. Since all of the above procedure could not be performed could not be performed due to the lack of sufficient staff, the only possible audit procedure through which desired level of assurance can be obtained is by acquiring a management representation letter , on company’s letterhead. The management representation letter must mention the fact that the closing stock is accurately recorded in the financial statements. In addition, if from the review of the prior year working paper it comes to the notice that some items in the stock were provided due to being obsolete or damaged, the management representation letter must also explain this fact stating specifically the reason for the not making any such provision during the current financial year. In addition, assurance over the number of units of finished appearing in the closing stock can also be obtained through preparing reconciliation. The reconciliation can be prepared by adding the number of units in the opening stock, traced from the prior year audited financial statement of the company, with the units of finished goods produced during the year. From this total, the number of units sold during the current period should be subtracted; the balance will represent the number of units in the closing stock. This number of units should be matched with that appearing in the stock report. If any discrepancy is found adjustment should be made in order to ensure that closing balance in the stock is neither overstated nor understated. Stocks at Wolverhampton represents 12% of the total closing stock of Perfect Pies Limited, desired level of assurance has been obtained by performing test of details on the remaining 88% of the balance. Debtors The recorded value of debtors represents 32% of the total asset of the company. The carrying value of debtors during the current financial year has increased by 19.26% as compared to the previous financial year. The increase primarily pertains to the increase in trade debtors by ? 37,000 and also due to the disbursement of loan worth ? 100,000 to one of the related party of the company. In order to obtain desired level of assurance over the trade debtor’s balance, external confirmation was sent in order to confirm the debt owed to the company. The criteria for sending these confirmations was to send one to all debtors having balance of ? 10,000 or more as at March 31, 2012. In addition to the above mentioned procedure, 25 other debtors were also shortlisted from the total debtor listings. As of the replies received up to 8th May 2012, the result of the audit procedure performed is as follows. Status Amount in ? 000 No. Percentage of value of a/c's circularized Agreed 109 18 29% Reconciled 140 14 37% Disagreed 31 1 8% No reply 95 15 25% Total circularized 375 48 100% In the replies categorized as agreed and reconciled, there is no risk of material misstatement.. Although, in order to obtain reasonable assurance over reconciled replies. For those confirmations which are categorized as disagreed balance, the company’s policy relating to ‘damage of good in transit’ must be checked in order to ensure whether the customer was right on his stance. If the debtor is on the right, the amount of ? 3,000 should be excluded from the receivable. For the balance against which no replies were received, alternative auditing procedure should be performed such as contacting the debtors through e-mail or telephone. Ensuring subsequent cash receipt and shipping documents can also prove to be effective alternative auditing procedure. Related party relations often raise a greater chance for collusion or manipulation by the management of the company. Bartleby is the associate of Perfect Pies Limited, a related party, with which it entered into a related party transaction. In order to the audit procedure performed during the course of the audit, certain additional procedure needs to be performed in order to obtain desired level of assurance. These procedures include inquiring management about the underlying rationale of the transaction and whether it has been properly authorized by the executives of the company. The disbursement of loan amounting to ? 100,000 is outside the entity’s normal course of business which can be regarded as fraud risk factor. In order to obtain the desired level of assurance, it is recommended that it must be ensured that the company has disclosed the related party transaction accurately and appropriately according to the applicable financial reporting framework. In addition, it is important to evaluate the documentation and correspondence in relation to the sanctioning and disbursement of the loan facility. Written representation from the management should also be obtained in this respect. If the audit team is not provided with sufficient and appropriate audit evidence in this regard, the audit report should be qualified in this regard. Fixed Asset The revaluation of the fixed asset, during the course of the business, was conducted which resulted in revaluation surplus of ? 20000. The fact that the revaluation was carried on by one of the director of the company, regard some immediate attention as the relation between the company and the director is of a related party. The revaluation could be inaccurate and the only purpose was to indulge in ‘window dressing’ in which the assets of the company are purposefully inflated in order to portray strengthen financial position. To obtain desired level of assurance, it is recommended that the audit team acquired the services of the independent surveyor and conduct the valuation of land and building. If any discrepancy is found between the valuations conducted by the management and that done by the independent surveyor, appropriate adjustment should be made in the accounts of the financial statement. As per the given information ? 75,000, termed as the capital commitment, has been included in the closing balance of non-current asset which does not fulfill the criteria of capitalization as per International Accounting Standard “IAS 16 – Property Plant and equipment”. The carrying value of the plant is thus overstated in the annual report which should be rectified. Conclusion During the course of the review, no such incidents have come to knowledge which can render the financial statements as materially misstated. It is of prime importance that a meeting should be conducted with those charged with governance and certain issues, which are mentioned previously and require their immediate attention, must be discussed. If the audit team is unable to get desired level of assurance on the related party transaction, the audit report should be qualified highlighting the transaction. The report need not to be qualified on the basis of fixed assets and debtors, however, an emphasis of matter paragraph can be include in the audit report of the revaluation of land and building is found to be unauthentic. References [1] International Federation of Accountants, ISA 500 – Audit Evidence, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [2] International Federation of Accountants, ISA 501 – Audit Evidence – Specific Consideration for selected items, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [3] International Federation of Accountants, ISA 505 – External Confirmations, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [4] International Federation of Accountants, ISA 320 – Materiality in Planning and performing an audit, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [5] International Federation of Accountants, ISA 300 – Planning an audit of financial statements, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [6] International Federation of Accountants, ISA 300 – Planning an audit of financial statements, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [7] International Federation of Accountants, ISA 315 – Identifying and understanding the risk of material misstatement through understanding the entity and its environment, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [8] International Federation of Accountants, ISA 520 – Analytical Procedures, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [9] International Federation of Accountants, ISA 570 – Going Concern, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA [10] International Federation of Accountants, ISA 560 – Subsequent Event, Handbook of International Quality Control Auditing, Review, Other Assurance and related services Pronouncements, IFAC Foundation Publication Department, New York, USA Read More