Analysis: Accsys Technologies PLC - Case Study Example

Auditing Case Study: Accsys Technologies PL PART A 1. Property, plant and equipment (PPE) For a manufacturing firm, ‘property, plant and equipment’ (PPE) is a significant item in the total assets, hence its misrepresentation can cause a significant financial impact. For example, on 31 March 2014, the value of property, plant and equipment was €4,056,000 (Accsys Technologies PLC, 2014, p. 64). In addition, this is a high-risk area considering that the records of PPE are mostly taken once a year as opposed to other classes of assets. Property, plant and equipment is generally accounted for once, unlike other assets such as stock, thus any error would affect the financial statements permanently, or at least for a significant period of time. In addition, the turnover for PPE is much lower than current assets (such as stock which is held for sale), hence its audit is of significance. In considering inherent risk in relation to PPE, the auditor must carefully review all capital budgets and commitments, especially in an attempt to unravel incidences of fraud. During the year 2012, the group entered a sale and lease back agreement for land worth 1.7milllion (Accsys Technologies PLC, 2014, p. 15). This disclosure needs a closer investigation into the authenticity of the transactions, the accuracy of the valuations, authorization compliance among other control measures. This is because a transaction involving such a huge value could be a ground for material concealment and fraud. It also appears that in July 2013, TTL granted Medite rights to build and operate a plant. However, it is farther disclosed that the license agreement was conditional upon the approval of Medite's B.O.D, which presents this as an area of high audit risk because of the uncertainty that surrounds the agreement. Furthermore, an unforeseen outcome could lead to material financial loss or gain. Bearing in mind that the value of PPE is significant, it would be prudent for the entity to make adequate arrangements to ensure that such assets are sufficiently safeguarded, for example through insurance of assets and warranties, but unfortunately we do not observe any evidence of such safeguard measures (Hirst and Koonce, 1996). This puts the company at a very high risk of losing property of significant values with no possibility of recovery. In the financial director's financial review, it is indicated that the company incurred a finance expense of € 226,000 in 2013. The auditor must, therefore, make appropriate inquiry to find out if such purchase agreements, that pertains PPE, have been properly capitalized. 2. Taxation The issue of taxation has, in the recent past, led to the tumble of many companies as a result of scandals that involve huge amounts of money (Pummerer and Steller, 2013). Therefore, taxation is an area of high audit risk since tax-related fraud that goes undetected can lead to material damage. The corporate tax reporting is an important issue of high audit risk, since some companies are involved in serious scandal as a result of cover up that leads to payment of less tax than appropriate. The issue of corporate tax reporting is a complex to understand, hence presenting increased audit risk. Therefore, an investigation must be undertaken to confirm that the company has undertaken appropriate measures to ensure compliance and best practice. Since auditors are not experts in tax, their efforts to guarantee that the company is compliant present a high risk. Given that the company deferred taxation relating to trading losses brought forward is significant (2013: €866,000), the basis upon which it is recognised must be appropriately investigated because it presents a high audit risk (Accsys Technologies PLC, 2014, p. 65). In addition, in 2013, the company accrued a colossal amount of unrecognized deferred tax asset, amounting to €21,543,000 (Accsys Technologies PLC, 2014, p. 65). The unrecognised amount is based uncertain outcome, hence presenting a high audit risk. 3. Trade Payable Trade payables involve cut-off and completeness, which are usually areas of high risk. In addition, trade payables cover high-risk special transactions such as purchase transactions conditional on reservation of title, long-term balances, interest on liabilities in arrears, volumes and discounts from suppliers. Confirmation of these transactions is very important in order to collect evidence pertaining their accuracy, existence, unrecorded balances and collectability. For example, since the trade payables increased from €2,333,000 (2013) to €3,790,000 (2014), the auditor is charged with the responsibility of investigating the circumstances surrounding this increase, examine if all payables have been accounted for and accurately, check with the suppliers to confirm that they actually exist, and confirm if there is any balances that are not recorded (Accsys Technologies PLC, 2014, p. 66). Inaccurate cut-off may lead to significant losses due to irregularities such as window dressing, lading, and teeming. If the company does not have strong controls to guard against such irregularities, then the audit risk becomes extremely high. It is important to note that, since these transactions are frequent, regular, and involving significant amounts of resources, their misrepresentation can cause significant damage. Part B PPE 1. Completeness: The auditor will highly depend on the fixed asset register to confirm the completeness of PPE. However, the auditor must make sure that the register is truly independent by ensuring that the person maintaining it does not have any of the following responsibilities: a) The custodian of PPE b) Ordering the purchase of PPE c) Authorizing the disposal of PPE d) Keeping of readily realizable PPE e) Maintenance of the general ledger account The PPE register shows that plants and machinery are depreciated at rates between 5% and 20%, office equipment depreciated at rates between 20 % and 50%, while leasehold land is depreciated over the life of the lease (Accsys Technologies PLC, 2014, p. 50). In arriving at PPE carrying value at the close of the financial year, the auditor must confirm that the correct opening value has been used, all new PPE purchased during the period added, all deposals netted, and the foreign current translation gain or loss added or subtracted respectively. A proper investigation must be carried out to ensure that these policies are adhered to. The auditor must demand for appropriate documentation to confirm that all purchases and disposals and accurate and complete. The auditor must also inspect all the assets physically to make sure that what is recorded in the book is actually what exists physically. It is also very important to confirm the depreciated carried forward from the previous year-end, the accuracy of charge for the year, subtraction of depreciation for the disposed items of PPE, and also ensure that foreign currency translation gain or losses has been accounted for in arriving at the correct carrying value. The relevant documentation that shows how assets were purchased is very essential in ensuring that the correct initial cost has been recorded (Samaha and Hegazy, 2010). 2. Existence: The auditor should confirm the existence of each PPE by carrying out a physical inspection, especially by taking plant numbers. However, since items of PPE are usually very mobile valuable, portable and numerous, the auditor may face some challenges undertaking physical inspection. For example, records state that the company contemplates engaging Solvay in constructing a plant either in Freiburg, Germany, or Arnhem, the Netherlands, which are many miles away from the company's headquarters. For this reason, it is very difficult for the auditor to have a guarantee that the values of the items of PPE recorded are actually what exist at the end of a particular financial year. This, therefore, confirms the need to make sure that the auditors inspects the fixed asset register, as explained above. 3. Valuation: It is the responsibility of the auditor to examine the reasonableness and appropriateness of a company's depreciation policy. In this case, the auditor will integrate their audit plans and audit strategies in the entity's accounting policies. According to the company's financial statements, "property, plant and equipment is stated at cost less accumulated depreciation and any impairment charged" (Accsys Technologies PLC, 2014, p. 50). This policy is compliant with US GAAP. However, the auditor must examine that the cost incorporates the following, among others: shipping costs, purchase prices, legal fees and real estate commissions, and other costs associated to preparing and acquiring PPE for use. As shown in Appendix I, the company has over valued the depreciation provision for the disposal of plant and machinery (35%>20%), which is an audit risk as it leads to misrepresentation of financial report. This also shows that the entity is not strictly adhering to its depreciation policy, which is a cause for alarm. Accsys Technologies PLC, 2014, p. 66). 4. Capital vs. revenue: In order to detect any anomaly, the auditor can compare revenue and capital in order to obtain evidence of the actual amount recorded in the financial statements. This can involve performance of different analytical procedures, including: i) establish an expectation ratio, ii) establish the extent of departure from the expectation, which can be acceptable without farther examination, iii) compare the entity's computed ratio's with the expected, iv) examine and assess material ratio departure from the expectation. In undertaking these analytical tests, for example, it would be expected that huge capital investment in PPE would lead to an equivalent increase in repair and maintenance expenditure. Therefore, additions of the €3 million PPE in 2013 would mean that the expectation of repair and maintenance expenditure in 2013 would be relatively high. 5. Rights and obligations: The auditor will carefully review to confirm if the group has the rights and obligations to the PPE purchased and those recorded at the year end. For example, it will be imperative to verify the title to buildings and land, through the scrutiny of certificates and title deeds. In this respect, special attention must be paid to leases agreements, such as that involving Arnhem land (Accsys Technologies PLC, 2014, p. 15). In addition, disclosures of any cash transactions involving PPE must be sufficient and in compliance with the group's accounting policy, accounting standards, and legislation. Bibliography Accsys Technologies PLC, 2014. Annual Report & Financial statements 2014. Dublin City University. Hirst, D. E. and Koonce, L., 1996. Audit analytical procedures: A field investigation. Contemporary Accounting Research, 13(2), 457. Retrieved from http://search.proquest.com/docview/194216902?accountid=45049 Pummerer, E. and Steller, M., 2013. Taxes and Audit Quality. Available at SSRN 2399045. Samaha, K. and Hegazy, M., 2010. An empirical investigation of the use of ISA 520 "analytical procedures" among big 4 versus non-big 4 audit firms in Egypt. Managerial Auditing Journal, 25(9), pp. 882-911. doi: http://dx.doi.org/10.1108/02686901011080053 Wilson, A. C. and Colbert, J. L., 1991. The audit strategy: Analytical procedures as substantive tests. The National Public Accountant, 36(5), p. 38. Retrieved from http://search.proquest.com/docview/232310178?accountid=45049 APPENDIX I €'000' €'000' €'000' €'000' Land and building Plant and machinery Office equipment TOTAL Disposal 1672 20 1692 Depreciation provision 0 7 7 Percentage 0 35% Depreciation Policy 0 (freehold) 5% - 20% 20% - 50% Under provision/ Over provision/Normal Normal Over provision N/A Read More