Risk Assessment Process as One of the Most Important Activities the Business Needs to Keep in Touch - Case Study Example

Audit Risks Introduction James Cropper PLC is a manufacturer of specialist papers together with advanced materials that operates through three subsidiaries namely the Speciality Papers, Converting, and Technical Fibre Products. Throughout the three subsidiaries, the company is able to reach three different market segments. Through the Speciality Papers the company is bale to to offer to the market specialist paper and boards together with coloured paper made into different finishes, patterns and thicknesses. This helps it to deliver luxury packaging in creative print, fine art and archival products. The converting segment on the other hand offers picture mat boards printable boards and a selection of of laminated and coated papers. The Technical Fibre Products is in charge of non-woven materials used in different areas such as the engineering of composites thermal insulation, fire protection and other insulations. The areas of operation of the company comprise of Europe, United Kingdom, America, Asia, Africa and Australasia having been headquartered in the United Kingdom. Audit Risk Today’s business has been changing with a very tremendous speed. The business world has become constant in that it is changing constantly making it unpredictable, complex and very volatile. This has in turn changed the previous levels of risks increasing them to tremendous levels. The idea of risk now moves along with all business models, making it one of the very necessary evils. The regulators on the other hand have not been able to deliver any reprieve on the same. They have also complicated their regulations in an effort to control all of these changes in the business world. They have also increased their requirements for transparency from the businesses on how they carry out their businesses (PriceWaterHouse Coopers). For any business in operations one of the most important activities that the business needs to keep in touch properly is on the risk assessment process. This process is explained as the systematic process through which one is able to identify and evaluate events that could affect the achievements of the various business objectives both positively or negatively. Such activities could be both from the interior as well as the exterior meaning that this process should be done from both sides. While risk assessment is important, of more importance is the process through which one is able to extract their real value of the businesses. Employee Management The main challenge with poor administration of risks is the fact that they still pose a major challenge for business is so it the case for James cropper. One of the main audit risks that are evident in this organization includes the employee management. One of their previous key members of their management who was the organization’s CEO stepped down after 25 years of service. While stepping down is a noble decision, especially given different circumstances, this cannot be taken lightly. While still at the management of the organization, care should also be exercised when it comes to the management of the organization’s top leadership. While this company is a public listed company it chairmanship has revolved around the Cropper family. This exposes the company to ease of poor leadership given that the top leadership is more of a family thing (James Cropper PLC, 2014). The same case applies to the pension management that still falls under the people management. For an organization with such a wide employee base, they should never be made to feel like their benefits are at risk. The risk can be associated with the 6.3% assets growth which was also followed by a 9.1% liability increase. There is thus need to investigate what exactly is happening with the fund. Group structure and consolidation According to the ISA 315 the audit risks are associated with operational and financial reporting decisions and some of these are hard to quantify making the process become judgmental in nature. Sometime the risks are usually there but their misstatement is usually immaterial making them difficult for auditors to and determines when a risk is really leading to a material misstatement (Johnstone et.al). This is the same case with James Cropper’s financial statements. The company is having consolidated financial statement for the different projects that it is operating. There is need thus need to ensure that there various areas that the organization deals are well checked. More emphasis should be made on TPC that has £1,450,000 in profit as compared to £697,000 of the Speciality Papers and the £982,000 from Converting. Investigation also needs to be done on the various profit increases and decreases for the different subsidiaries with that of Speciality reducing from £1,430,000 to £697,000. Foreign Currency and Exchange Management The other major challenge is on the policy adopted in the application of the foreign currency. Since the company does a lot of foreign trade, there is a risk involved in the process of foreign currency conversion aspect. While most of their invoices are made in Euros, the fact that there will always be lags between the invoice date and the payment date cannot be ignored especially with the volatile exchange rates. This can be explained by the fact that the different currency indices fluctuating between 70% up to 150%. The $/£ is the most volatile currency pair varying from 90% to 130%. This means that the company is likely to experience some difference in terms of the foreign currency exchange rates, especially in situations where the customer pay for their supplies after a long period of time. The determination of the foreign currency policy to be applied is not only important but one that should have proper checks and balances always. The same case happens to the preparation of the financial statement and the determination of the exchange rate to be used for the same. Project (Product) Diversification The other major risk is with the diversification of the various activities that the organization carries out. The company has a wide range of activities through which it carries mainly done by their various units which even have financial statement for them. This makes it very difficult to audit many different activities that are all under the same operations of the company. with the various turnovers from different companies, the audit needs to investgate the reporting of the Technical Fibre Products £12.599million sales, £57.699 million and that of £13.707 million from Converting. Economic Condition The Michigan Association of certified Public Accountants on the other hand identified that with the changes in economic position, there are some audit risks that are likely to be experienced with the risk of material misstatement. Key among them and which also could affect James Cropper PLC include the misstatement of fair value measurement where these are reported at above their value market value. Where a large organization like this is involved, there is an increased detection risk. This refers to a situation whereby the auditors applies due diligence in the process of their activities, but then in the process of their auditing procedures, they may fail to detect correctly the various issues raised more so in areas such as the intercompany sales associated with the groups. The reduction from £4.764 to £4,307 thus needs to be checked if it was understated or that wa the exact position. B) Dealing with the risks Proper Risk Classification leading to proper action While determining the extent of a risk, Johnstone et. al explains that there are some factors that makes a risk significant. Key among the factors includes the possibility of the risk having been a fraud. When a risk is established to have been in one way or the other associated with some sort of fraud, the risk automatically becomes material as this is what the auditors seek to establish. Where the auditors establish the possibility of fraud the same should be investigated further to determine if at all the same was really fraud intended or not. Where it is established that fraud occurred, then that becomes fraud and requires immediate action. The other major concern is with the economic significance if the risk. In any organization, there can be many ways through which the organization can be able to deal with the risks. One of the methods is through the absorption of the minor risks that the company faces. However, this should only be limited to, the risks that have the least of the potential financial loss associated with them. This means that special care should be accorded to risks that bear significant economic, accounting or other developmental attention seeking risks. Such risks should thus not be avoided at all as they pose risks to the whole business. Proper Audit preparation The other way to deal with audit risk includes proper preparation of the audit risk. This means having the audit prepare well in advance to ensure that the team has all the required materials, people and resources to ensure that they are able to undertake an audit that follows the requirement of the International Standards on Auditing set standards. The auditors will also be required to under a proper background check of the organization to ascertain the exact nature of operations that the various projects undertake. This will help the, to establish what exactly they will require to properly carry out a completed and up to the standards requirements on the same. In-depth and quality checks The other way dealing with the audit risk is through ensuring that there are properly checked to avoid the detection risk. This is mainly covered through taking enough samples to ensure that all the areas of operations are covered. In statistic there are different measures that can be done first to determine the exact number of samples that should be taken to ensure that there is a representation of all the populations involved. This will thus allow for the auditors to ensure that they undertake the required tests to all the areas that are possible to be tested thus reducing the risk of not detecting. More care should also be taken to ensure those areas that have been predetermined to be more risky that more tests are done onto them. Ensuring International standards in record keeping The other step that should be taken to ensure that the risks are avoided from non-detection would include requiring the books of accounts are kept using the required international standards thus ensuring easy testing of the data. This will also ensure that there is uniformity amongst the various units that constitute to make the whole organization. For example, there are different projects that the firm is following. To enable easy access of such accounting data would require that the financial systems are all done in the same ways, thus easing the testing of the same. This is because with the set policies being standards, the testing of the procedures will also be standards ensuring that there is ease in planning and execution of the testing procedure. Scientific sampling To deal with the sampling errors that may lead to non-detection, one would be required to apply scientific sampling procedures. This starts from the determination of the sample size to ensure that the correct sample size is determined. The other step is on the determination of the exact samples to be tested. This is actually the other crucial stage since the sample that one chooses is taken to be a representative of the whole population. An error in the choice of the sample choice could mean misrepresentation of the results. The sampling procedure, thus should not be easy to know which samples should be picked to avoid the accountants from manipulating the auditors. The testing should then be done in an objective manner rather than the error finding mission exhibited by some auditors. In-depth checks on the foreign currency operations and the organizational activities check Checks for uniformity and conformity with the foreign currency procedures should also be carried out to determine if the business is following the policies of the organization as specified. This is to avoid the misappropriation and mismanagement of the receivables and payables with an aim to benefit the suppliers and customers at the expense of the business. The auditors should also ensure that they have information regarding the function of the various activities carried out by the business. With a proper understanding of some of the processes and procedures, it becomes easy for them to test since they are aware of what exactly is expected of them and thus are able to detect issues more easily. This thus calls for a diversified audit team where the operations of the business are diversified as is the case with this business. While audit risk is broad and more so relevant in any organization, the risk increases as the business becomes bigger, older and complex. This is the case with this kind of business where the organization is so wide and diverse. This risk however if well covered can still be mitigated and thus its impact reduced significantly. References List 1. PriceWaterHouse Coopers A practical guide to risk assessment 2. James Cropper plc (2013) Annual Report and Accounts 2013 3. Karla M. Johnstone, Audrey A. Gramling and Larry E. Rittenberg Auditing A Risk-Based Approach To Conducting A Quality Audit 9th Edition. 4. International Standards on Auditing. ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment. 5. The Michigan Asscociation of certified Public Accountants Audit Risk Areas Affected By The Economic Crisis. Available at http://www.michcpa.org/content/25105.aspx Read More