The Audit of Accys Technologies Company - Essay Example

AUDITING PART A Introduction Accys Technologies Company is a chemical technology company that specialises in the production of Accoya wood and Tricoya wood elements. Accys group consist of the holding company and four owned subsidiaries. The four branches are Titan wood limited, Titan wood technology B.V, Titan Wood B.V and Titan Wood Inc. These subsidiaries focus on different geographical areas. Revenue for the year 31st March 2014 amounted to 33.512m €.The group Profits for the year ended 31st March 2014 amounted to 7.759m € (Accsys-Annual-Report-and-Accounts, 2014). Audit risk It is the risk that an auditor will give an unqualified opinion because of failure to detect a material misstatement that may occur due to errors or fraud. Fraud refers to intentional miscalculations in the financial records. An unqualified opinion concludes that the financial reports are of true and fair view of the actual state of the ground. Audit risk is made up of inherent, control and detection risks. Inherent risk is more likely to occur where transactions are of a complex nature or in situations where financial estimates are through judgment. This type of risk is the worst case as all controls have failed. Control risk is the probability of a material misstatement occurs in management assertion about a group of transactions or accounts. The risk of detection entails the severity and the procedures carried out by the auditor will not detect material errors that have occurred in the accounting records. Since the financial statement cannot be as a whole, the auditor has to identify areas of heightened financial risks (Earley and Phillips, 2008). Areas of Heightened Audit Risk In ACCYS Technologies Limited In the audit of Accys, technologies limited certain areas were found to be of heightened material risks. The identified areas are as identified below. Cash and cash equivalents Cash and cash equivalents form a heightened area of risk. Cash at hand can easily be lost in fraud related activities as it is a liquid asset. The material misstatement of cash and cash equivalent increases the amount of assets in the company that would hinder the auditor from giving the actual state of the company. The amount of cash balance is € 15.2m a decrease from the previous year’s balance of € 20.5m. The auditor should use analytical tests to determine whether the expenditures attributed to cash are true. Some compliance tests include: the comparison of previous years balances and significant changes in amounts and deviations from the trends. Accounts opened and closed throughout the year should be investigated. Computations of quick current ratio should be taken and compared to other previous years. Lack of consistency in these ratios may indicate a material misstatement in the cash and cash equivalent account (Accsys_Annual-Report-and-Accounts, 2014). The inventory The inventory includes all the goods held by Accys Technologies for the purpose of sale. The stock is as an asset in the balance sheet. The group total inventory balance as at 31st March 2014 is €6.1m while at the 31st March 2013 the balance is € 4.9m. The management attributes this increase to the growth of the business; however the auditor should take analytical procedures to make sure that the difference does not come from a difference in valuation methods that are. Internal controls related to purchasing, suppliers and materials, producing and shipping of products and even cost accounts. The analytical methods use may include the physical examination of the stated goods (Accsys_Annual-Report-and-Accounts, 2014). Debtors and creditors Trade receivables of a company are in the balance sheet as assets to the company. Any material misstatement of the debtors account would overstate or understate the company’s balance sheet balance. It makes it hard to make a reasonable conclusion from the current asset ratio and liquidity ratios. The auditor carries out audit tests to determine the existence and the exact value owed to the company. Accys technologies company has a debtors account amounting to 122.253m € which is an increase from that of 31st March 2014. Analytical procedure for this account test whether the controls put in place are working. Debtor account of Accys Technologies may be at risk in terms of the accounting balances and manipulation in the financial statements. Creditors account of Accys Technologies represents a total amount of 3.740m € an increase from the previous year’s 3.697 €. The accounts payable should be checked to ensure invoices are in the journal unpaid invoices are stored in a file separate from those of paid invoices. The effectiveness of this control in Accys technologies will determine if any material misstatements are. Any material misstatements may results in a change in the company’s liquidity ratio and the current ratio for the worse (Accsys_Annual-Report-and-Accounts, 2014). PART B Substantive Procedures for Test of Cash and Cash Equivalents The audit of Accys Technologies Limited has shown a certain degree of heightened risk in the cash and cash equivalents accounts. The auditors have confirmed that the cash account and bank balances need to be audited to make sure they reflect a true and fair view of the company. The group cash and bank deposits of €15.2m at the end of the period 31st March 2014. The end of the year 2013 had €20.5m attributed to it. It shows that there is a decrease in the amount of cash and bank balance. The company has attributed the decrease to other reasons; however there is need to test for any material misstatements that might have occurred in the accounting records. Cash and cash equivalents have been on a downward trend from the year 2012. The previous year’s audit reports should be checked to affirm that no misstatements were present (Earley and Phillips, 2008). Information on relevance to the cash and cash equivalents account The following information has been disclosed in the financial statement of Accys technologies limited in relation to the use of cash and cash equivalents. There is € 3.6m cash outflow from operating activities before changes in working capital. There is further expenditure €0.5m in respect to capitalised development costs. The 0.6m cost has been used in the purchase of fixed assets while €1.2m has been used in investment in Tricoya technologies limited (Accsys_Annual-Report-and-Accounts, 2014). Detailed substantive procedures Following the above disclosures in the financial statements of Accys technologies. Analytical procedures should be carried out to determine that they are an accurate reflection of the state of the company. Analytical procedures are tests of details and include tests of completeness, rights and obligation. Substantive Procedure test Include test for the following Completeness It is a test of whether the cash and cash equivalents are included in the balance sheet. There should be no unrecorded entries. Cash balances should be reconciled to records ensuring that sales cut off has been done. The supporting documents are for accuracy. They include the delivery note, invoice) to the sales journals (Accsys_Annual-Report-and-Accounts, 2014). Existence It ensures that cash exists at the given date. Existence is through cash counts Rights and obligations These tests that affirm that the company has rights to the cash. The entity should have legal and ownership title for ownership. Cut-offs Cut-offs should be as they ensure that the cash and cash equivalent pertain to the particular period that the financial statements are prepared for. Bank statements of Accys technology should be with the bank. The auditor sends a letter of confirmation to the bank asking for disclosure the amount held in the bank. The auditor might also have to check the bank reconciliation statements for accuracy (Arens, Elder, Beasley, and Jenkins 2005). Conclusion The financial statements of Accys technologies limited were assessed, and areas of heightened risks identified. Substantive methods to deal with this were identified and discussed. Cash and cash equivalent is as an area of increased financial risk and is discussed in detail. References List Accsys Technologies PLC. (2014). Accsys_Annual-Report-and-Accounts. Accessed< www.accsysplc.com>. Watson, A., Shrives P., and Marston, C. (2002). Voluntary disclosure of accounting ratios in the UK. The British Accounting Review, 34(4), 289-313. Arens, A. A., Elder, R. J., Beasley, M. S., and Jenkins, G. J. (2005). Auditing and Assurance Services: An Integrated Approach. Pearson/Prentice Hall. Earley, C. E., and Phillips, F. (2008). Assessing audit and business risks at Toy Central Corporation. Issues in Accounting Education, 23(2), 299-307. Read More