Stagecoach Company's Risk Areas - Case Study Example

Auditing Stagecoach Company is among the leading transport companies in the United Kingdom. The company is a quoted company and that means that it has to publish its financial reports on an annual basis. The reports are usually published so that the stakeholders of the company can use them. The stakeholders include the shareholders, government, and the employees of the company. In the preparation of the audited report, the auditor has to be aware of the risk areas that can be changed to make the financial statements of the company look more appealing to the stakeholders of the company (Emerson, 212).The risk areas include the following, 1. Overstating of revenues and the understating of expenses Revenues can be overstated so as to show that the company is doing well and that would attract new shareholders. The shareholders would be attracted by the increased revenues and that would imply that they would also get more dividends from the company because of the god performance of the company. The understating of expenses will mean that the profits of the company will increase and that will be appealing to the shareholders of the company (Kara and David, 178). The above facts will make the area of revenues and expenses more risky because the areas will have a direct effect on the shareholders decision concerning investment decisions. The auditor should carry out all the required procedures to ensure that the financial statements of the company reflect a true and fair view and the information will be useful for the shareholders and other company stakeholders. From the financial statements of the company, the operating income from sales has increased from 175.80 in 2011 to 197.40 in 2012. The increase in income is consistent with the increase in the previous years. However, that should not be the case because the margin of increase of tax is more than the other years, which are 33.30 in 2011 to 51.50 in 2012. That could imply that there is a probability that either the revenues were overcastted or the expenses understated and hence the area is a risky area. The company also has a reduced gross margin of 83.30 from 132.40 from 2011 and that could serve as an indicator for further investigations to ensure that there was no under stating of the expenses and the overstating of the incomes listed as other incomes. 2. Understating cost of sales The cost of sales can be understated to show an overstated profit. Cost of sales usually increases because of inefficiency in the company operations. Efficiency usually arises from the machinery that are been used, the company processes and the operations of the employees. The company should ensure that it purchases its raw products at the lowest price possible to keep costs at a low level. The level of efficiency in a company is usually hard to calculate. The efficiency of the machines is usually dependent on a number of factors that may include the age of the machine and the power supply available to the machine. In that case, the auditors should treat the area of the cost of sales as a risky area because if the amounts are understated, the investors are likely to get a loss because of wrong investment decisions. Most investors usually carry out an analysis such as ratio analysis that can be used to endure that the ratios are favorable for the investor. The change in the cost of sales as compared to the prior years as per the financial statements of Stagecoach Company is not consistent. The issue of inconsistent could act as a risky area that needs further investigations and the auditor should analyze that area. The cost of sales has increased to 2507.40 in 2012 from 2257.40 in 2011. However, the operating income of the company in 2012 is greater than that in 2011. 3. Current assets and liabilities The area of current assets and liabilities is a risky area because a company can overstate its current assets and understate the liabilities to make the financial position of a company to be more appealing to investors. That is not a good thing on the part of the investors because the company will make the financial position of the company to be more liquid of which that may not be the case that applies. The current assets and liabilities of a company are used in the measurement of the liquidity position of the company. Liquidity of a company determines the ability of a company to pay off its liabilities by the use of current assets that exist in the company. In auditing, the liquidity of a company has to be determining if the auditor has to determine the going concern ability of the company. Therefore, the area of assets and liabilities is a critical area that should be considered in the audit process. In the balance sheet of the company, the current assets have reduced from 658.60 in 2011 to 521.70 in 2012. The reduction in the current assets is a large amount and hence the area has to be investigated so as to endure that there were no entries that were made and were irregular. 4. Fixed assets In most cases, fixed assets are overstated to increase the cash position of a company. The fixed assets are overstated by doing different things that include, recording fictitious assets. There are some cases whereby a company can record an asset that does not exist in the company. That means that the auditor has to ensure that he physically sees the assets that have been recorded by the company. The other way that the fixed assets can be altered is by the management not applying a consistent depreciation policy. Depreciation usually reduces the fixed asset amount and that implies that the depreciation amount can be used to overstate the fixed assets amount. The other way that the fixed asset register can be altered is by the company overstating the purchase cost of the assets. That can be used to overstate the financial position of the company to attract more investors to the company. This will mostly attract investors who are after long-term gains as opposed to short-term dividends and returns. Therefore, the area of fixed assets is a risky area and the auditors should be keen with the area. The amount of fixed assets has increased to 961.6 from 924.30 in 2011. On normal occurrences, the fixed assets must reduce over the years as result of depreciation. Therefore, the increase in the amount has to be investigated to ensure that depreciation has been catered fro in the valuation of the assets. 5. understating of taxes Taxes can be understated to cut on the amount of tax payable by the company. If the tax payable is understated, the profit after tax of a company becomes overstated. If an investor makes investment decision based n the overstated profits, the investor will land in trouble because the returns will not be as expected. The auditors involved should ensure that the taxes charged by the company are in line with the gains of the company. The auditor should also check the VAT claimable with comparison to VAT payable to ensure that the proper returns. The payroll of the company should also be analyzed to ensure that the proper PAYE amount is paid by the company. Most companies usually find ways of evading tax and the auditor should be able to pinpoint such areas to endure that the financial statements give a true and fairs view. The company indicated a tax of 51.50, which has increased from 33.30 in 2011. The tax area acts as a risky area because over the years from the year 2008, the change in taxes has not been consistent. That would imply that there are some things on taxation that are not working as expected. The area is therefore risky and should be properly investigated. Part B. This section will cover the fixed asset area. The section will discuss the audit procedures that should be carried out to ensure that the amount stated in the balance sheet is true and they reflect the actual state of the company. The auditor should carry out the following procedures to ensure that the fixed assets are properly audited (Boutell, 135). a) Authorization The auditor should ensure that all the amounts that have been recorded in books of the company are authorized. Authorization in a company usually comes from the board of directors. The directors have to authorize the purchase of the assets. The auditor can prove authorization by checking at the minutes to the board meetings. The authorization should be included in the minutes. The auditor should ensure that the number of units authorized is equal to the number of units that were actually purchased. The directors can also recommend a certain supplier and such information can be used to affirm authorization. This audit procedure will ensure that the risk of a company recording assets that do not exist is reduced and the company cannot overstate the assets amount. b) Existence An auditor should also ensure that the assets that have been recorded actually exist. The existence procedure can be carried out by observation. The auditor can demand to physically see the assets that have been recorded to affirm that the quantity recorded is accurate and there is no under r overstating of the assets. The auditor can also confirm that the assets that exist are the actual assets that were authorized by the directors for purchase. That will ensure that the procurement officer of the company does not engage in malpractices that may be done for his or her own benefit (Khin, 34). c) Valuation Valuation is a critical aspect in accounting. The values that are recorded are usually influential and very necessary in the making of decisions by all the stakeholders that are involved. In the case of fixed assets, the government can use the valuation amount to decide on the amount of deduction to be made. The shareholders usually depend on the financial position of a company before making a financial decision. The financial position is usually influenced by the fixed assets and hence the values should be accurate (Kara, 56). The auditor can ensure that valuation is done accurately by comparing the record value with the market value. The difference if any should be a considerable amount and should not be subject to critic. The auditor should also check the invoicing details of the company. The auditor should compare the local purchase order with the invoice and the cheque that was written. That will ensure that all the figures recorded are accurate and they agree. That will act as an indicator that there was no manipulation of figures. Valuation will also be determined by the depreciation technique used by the company. The company should apply consistent depreciation techniques. The advantage of using a consistent depreciation policy is to endure that it is easy for the accounts to be comparable. There should be a clear-cut policy on depreciation that should be applied and the auditor should ensure that there are no irregularities in the recording and valuation. The auditor should be able to concentrate on the area because that is the source of all manipulation. A risky area should be properly analyzed (Bettie, et al, 134). d) Recording The auditor should ensure that there is proper recording. Recording in this case will include the recording of any disposals, acquisitions, and depreciations. Any asset that is written off should also be recorded. The auditor in this case can endure that all the disposals done were authorized by the directors that can be counter checked by looking at the board minutes. The auditor should also ensure that there was proper valuation of the assets that were disposed by the company. That will ensure that there was no disposal that was made in an attempt to favor a particular person. The acquisitions made should also be authorized by the concerned persons (Campbell, 15). Conclusion Auditing is a process that is carried out to ensure that a true and fair view of financial statements is displayed. That can only be done by the management of a company preparing financial statements that have to be analyzed by the auditors who have to state if the financial statements portray a true and fair view. The auditor should also analyses the risk areas of a company. The auditor should also offer advice to the management and offer suggestions on how company can increase unit’s internal control. Therefore, auditing is a critical part in a business, the auditors concerned should be honest in all the procedures carried out, and there should be no malpractices involved (Rauch, 1120). Work cited Beddie, Lesley and Beddie, Raeburn. Introduction to Computer Integrated Business. Prentice, 1989. Print Bedingfield, James P., and Stevan R. Holmberg. A proposal for the integration of accounting into economics' curricula. The Journal of Economic Education 7, (2) (spring): 134-6. Boutell, W.S. Accounting for Anyone .Prentice, 1982. Print. Brock, H.R. and Palmer, C.E. Accounting: Principles and Applications, 6th ed. McGraw, 1990.Print. Campbell, Terry. Principles of Accounting .Harborage, 1989. Print. Emerson, J.C. Careers in Public Accounting .Professional Services Review. 1988. Print. Floyd Norris. Loophole Lets Bank Rewrite The Calendar. New York Times, March 7, Late Edition (east Coast).1999. Print. Kara Cannel and David Reilly. Foreign Affair: Is End Near For 'U.S. Only' Accounting? Wall Street Journal, June 21, Eastern Edition. Khan, Nandi. No 'cherry-picking' of accounting standards. The Business Times Singapore, August 28, 2007. Rauch, James E. Business and social networks in international trade. Journal of Economic Literature 39, (4) (Dec.): 1177-203.2001. Print. Read More