Audit of Abbey Public Limited Company - Case Study Example

AUDIT OF ABBEY PUBLIC LIMITED COMPANY AUDIT OF ABBEY PUBLIC LIMITED COMPANY PART A According to the information given, Abbey Public Limited is a real estate developer company with networks in three countries. There are business operations in the United Kingdom, Ireland and the Czech Republic. The core activities carried out by the company are the development of property and buildings, renting of property and plant hire. The inadequacy of the information raises a question of the possible audit risks prevalent in this company (Adelopo, 2012). Audit risk is a function of the inherent risk, the control risk and detection risk. The complex nature of the operations of Abbey Public Limited Company involves transactions that would require estimations, assumptions and significant amounts of money (Chambers and Rand, 2011). The inventories of Abbey Public Limited Company are an area of heightened audit risk. The components of Company inventories are the Building Land and roads, the Work in Progress and the Raw materials. From the financial statements, a 33.44% increase in the stocks has been reported. The stocks are reported at 120,641,000 Pounds in 2014 compared to the 90,408,000 pounds reported in 2013. The indication is that inventories have tremendously grown over the 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 financial reporting policies. The auditor should verify the impairment charge of 162,000 pounds by investigating the methods used in making provisions for the impairment charge (Knapp, 2012). The work in progress of the Company comprises the material cost and the direct labour cost. It is prevalent that the cost attributable to the direct work 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 components of inventory is significantly necessary (Knapp, 2013). The companys system of internal control question is weak. It, therefore, follows that the prevalence of control risk is high for the company (Gramling, Rittenberg and Johnstone, 2012). Power to authorize transactions appears to have been entirely conferred to the management. An internal audit department’s importance in such a setting cannot be undermined. The absence of the internal audit function and the objection by the board for its establishment raise eyebrows for hidden mischief.. The weakness in internal control mechanisms creates the risk that material errors and fraud may not be detected both by the auditors and other interested parties. The payment of benefits in kind to three executive directors namely Gallagher, Kennedy and Fraquelli need to be investigated. More separation of authority and responsibilities is required. Compulsory leaves for the management and key employees and unexpected audits are essential for safeguarding the shareholders funds (Knapp, 2012). The trade payables, the cash and cash equivalent and the receivables’ captions as presented in the financial statements of Abbey Plc are an area that requires substantive audit procedures. The significant increase in the trade receivables by 13,083,000 pounds equivalent to a 240.1% increment over the previous year requires investigation. The auditor should investigate the debt collection policies and make debtor circularisation to ascertain that the amounts recorded in financial statements are correct. There has been a material increase in trade payables. The numbers increased from the 25,577,000 pounds reported in 2013 to 33,643,000 pounds in 2014. The increase in trade payables should be traced to the nominal ledgers 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 with all appropriate disclosures made (Knechel, 2011). PART B Several substantive procedures should be carried out in the audit of inventories of Abbey Plc. Functional systems aim at detecting material misstatements in financial reporting at all levels (Knechel, 2011). The International Standards on Auditing 500 provides this requirement. In relation to the review of Building and roads, the following substantive procedures ought to have been carried out: Audit of Buildings and roads The auditor should obtain a summary of these inventories as shown on the balance sheet. The casting and balances brought forward from the previous year should be thoroughly checked. The auditor should obtain schedules of additions of these inventories in all the subsidiaries across the United Kingdom, Ireland and the Czech Republic. The capital expenditure in the acquisition of these stocks should be tested for authorisation. All vouchers, receipts, and payment documents should be crosschecked against the information provided in the profit and loss account. The labour costs incurred in constructing the buildings should be investigated to ensure that they are adequately accounted for. The accounting procedures used in acquiring and valuation of the buildings and roads should be checked against the provisions of accounting standards to ensure proper compliance. The impairment of buildings and roads and the provision for depreciation against them should be recomputed to verify the figures reported in the balance sheet. The auditor should check the independence of valuation of buildings and roads and confirm the disclosure requirements for these inventories. It is of great importance that the auditor confirms the existence of buildings and roads by performing a physical count of the buildings in the three countries and reconciles the assets register with the financial statements. The auditor should seek the relevant legal documentation to support the acquisition and ownership of roads and buildings. Land registration certificates, conveyance documentation, minutes of the directors and contract agreements should be explicitly checked against the information reported in the financial statements. All contract costs, tendering processes, costs of direct building materials and labour costs should be investigated (ORegan, 2013). Audit of Work in progress The auditor should perform the following substantive procedures: Ensure that the requirements of International Accounting Standards concerning constructions are fully complied with. In particular, the auditor should review the revenue recognition principle on the realisation of profits on the completion of buildings. The income anticipation as applied by the company may have a significant effect on the reported profits. Detailed costing records for both direct, indirect costs and overhead costs should be reviewed for the valuation of work in progress. The auditor should access the services of an independent surveyor and compare the cost established by the engineer against the written down value of work in progress. All asset movements and, in particular, the reduction of the work in progress should be tracked (Pickett, 2011). The auditor should obtain a clear analysis of the activities of the construction in –progress by appropriation or project method for the current period. Balances in the current period, transfers and dispositions and additions should be verified. The auditor should ensure that additions to the capital work-in-progress for the period under audit are purely capital charges and represent the physical property to be constructed. Audit of Raw Materials (Russell, 2008): The auditor should conduct a physical inspection of the raw materials and to satisfy him on the validity of the valuation made on the balance sheet about the raw materials. The details of the suppliers, the invoices received, the quantity and the quality of the raw materials supplied should be properly analysed. The auditor should investigate the net realisable value of the raw materials at their present conditions at the reporting date (Russell, 2008). The auditor should ascertain that proper valuation methods for the raw materials are adopted as required by the accounting policies and procedures adopted in financial reporting. They should ensure that the raw material figures are not misrepresented. A physical verification of the construction materials unused in the period under review should be carried out. References Adelopo, I. (2012). Auditor independence. Farnham, Surrey, England: Gower. Arter, D. (2008). Quality audits for improved performance. Milwaukee, Wis.: ASQ Quality Press. Chambers, A. and Rand, G. (2011). The Operational Auditing Handbook. Hoboken [N.J.]: John Wiley & Sons. Gramling, A., Rittenberg, L. and Johnstone, K. (2012). Auditing. [Mason, Ohio]: South-Western/Cengage Learning. Knapp, M. (2012). Study guide for contemporary auditing by Knapp, Michael c, ISBN 9781133187899. [S.l.]: Academic Internet Publish. Knapp, M. (2013). Contemporary Auditing. Australia: South-Western Cengage Learning. Knechel, W. (2011). Auditing. Mason, OH: Thomson/South-Western. ORegan, D. (2013). Auditors dictionary. Hoboken, N.J.: Wiley. Pickett, K. (2011). The essential guide to internal auditing. Chichester, West Sussex: Wiley. Pickett, K. (2013). The internal auditing handbook. Hoboken, N.J.: Wiley. Rittenberg, L., Johnstone, K. and Gramling, A. (2012). Auditing. [Melbourne, Vic.]: South-Western Cengage Learning. Russell, J. (2008). The process auditing techniques guide. Milwaukee: ASQ Quality Press. Read More