Financial statements of Accsys Technologies PLC - Case Study Example

ACCSYS TECHNOLOGIES PLC by Accsys Technologies PLC Introduction Accsys Technologies PLC is a company that deals with chemical technology. Primarily, the activities of the company are focused on wood acetylation. Over the years, the company has been involved in the production of wood products such as Tricoya and Accoya. The manufacture of these wood elements is done with the use of the acetylation process adopted by the company. The products tend to have strong durability, as well as stability compared to other wood products manufactured by other companies. For several years, the company has been a leading manufacturer of the wood elements and its products have been sold in many parts of the world (ACCYS 2015). This paper will analyze the financial statements and annual reports of the company and identify three areas of heightened audit risk in the auditing of the company this year. In addition, the paper will explain the reasons for five substantive audit procedures in relation to the areas of heightened audit risk identified. Part A From the annual report of the company, it is evident that there are some areas that require heightened audit risk this year. One of the areas in the company that has heightened audit risk is the operating costs. There was an increase in the operating costs of the company by 11%. While the figure was 13.5 million pounds in 2013, it rose to 15 million pounds in 2014. This resulted from high costs of administration that the organization incurred during the year. Moreover, there were legal costs that resulted from the arbitration process related to the Diamond Wood. The cost of staff also increased by 9% and this was as a result of the increase in head count (ACCSYS TECHNOLGIES 2015). Operating costs is an area of heightened risk audit in this company since they determine whether the costs incurred by the company are being used to cover the relevant expenses. In addition, costs determine whether there is effective management of costs in the organization and ascertain whether there are activities that contribute to the wastage of the company’s resources. For Accsys Technologies PLC, operating costs represent an area of heightened risk since they keep on increasing and might affect the profitability of the company, as well as the initial business plan of the organization. With proper auditing of the costs such as staff costs, the management can make adjustments to the operations of the organization and ensure that the company is in the right track (ACCSYS TECHNOLGIES 2015). Another area of heightened audit risk in the audit of the company this year is tangible non-current assets of the company. These include property, plant and equipment owned and used by the company for production purposes. In the last financial year, there have been additions amounting to 0.6million GBP from the previous 0.3 million GBP. The increase in the tangible assets of the company can be associated with production activities within the organization, as well as expansion of the organization. It is essential for auditors to scrutinize this issue closely and determine whether the assets owned by the company are worth the amount invested during the previous year. In most cases, there is a tendency to over-value assets of a company and put a value that is higher than the correct value. As such, it is essential to investigate this issues and determine the accuracy of the reports (ACCSYS TECHNOLGIES 2015). Tangible non-current assets are areas of high risk in the audit of an organization’s accounts and they require a lot of monitoring, as well as appropriate internal controls to address any discrepancies. Assets should be accounted for by the person mandated to do so in the organization. Failing to do so may result to huge losses for the company. In the case of Accsys Technologies PLC, the purchase of new property, plant and equipment should be investigated to ascertain whether it was necessary to purchase the machinery for use in meaningful activities within the organization. The directors also identify certain areas of heightened risk audit that may affect the operations of the organization. From the director’s report, it is evident that intellectual property is an area of heightened risk audit that requires appropriate investigation from the auditors. The directors contend that there is a need for the company to protect its intellectual property rights through protecting the secrecy, confidentiality, as well as patents and trademarks owned by the company. Auditors should investigate whether the intellectual property of the organization is being used by unauthorized persons. Moreover, arrangements with the suppliers is a key area that requires a lot of risk analysis since failure to comply with the agreements may affect the operations of the organization adversely. Since the products of the company are widely sold in various parts of the world, there is a high risk as a result of the complex regulations and laws that are aimed at protecting Accsys intellectual property (Pandey and Dharni 2014). Part B From one of the areas identified above, there are substantive audit procedures that can be conducted in order to reduce the audit risk of non-current tangible assets in the company. The land, property, plant, and equipment of the company depreciated as can be seen from the increase in the amount of depreciation. In 2013, the depreciation amount was GBP 1950 million while this amount increased to GBP 2024 in 2014. The objective of conducting audit to ensure that there is accuracy and completeness of the reports. Completeness means that the cash equivalents, as well as cash in the company’s balance sheet should be included in the financial statements of the organization. Audit for tangible assets also aims at ensuring that the items exist as recorded in the financial statements of the company and they are valued appropriately. The five procedures that can be conducted on this item include completeness test, existence, valuation, as well as rights and obligations and capital vs. revenue (Kagermann 2008). Completeness involves inspecting the asset register of the company to verify whether the included assets do exist. The auditor should check a sample of the company’s assets and verify whether they are complete as discussed in the report. In addition, there is a need to conduct an audit and verify whether the assets have been repaired and ascertain the maintenance costs incurred during such repairs (Weygandt et al 2010). An auditor should also check the depreciation policy employed by the company and assess whether it has been applied appropriately. For example, it is essential to investigate whether the depreciation in the property, plant and equipment was computed properly (Collings 2011). Another crucial procedure that can be conducted while auditing the tangible assets is the test of existence. In this case, an auditor should select several assets from the register of the company and conduct a physical examination to verify whether they exist. For example, the auditor should investigate whether the new assets purchased by the company replaced the old assets (Whittington 2015). In addition, it is essential to look at the list of disposed assets to make sure that the old assets have been included in this list. Valuation can also be regarded as another crucial procedure. While valuing the assets, the auditor should check the cost of new assets that Accsys Technologies PLC purchased and review the purchase documents. Valuation should also focus on comparison of the depreciation policy used in the previous years. Moreover, there is need to evaluate the losses, as well as gains that the company has made from the disposal of old assets (Johnstone et al 2015). After evaluating the assets of the company, the auditor should calculate the charges on depreciation of the asset for the entire financial year and make a comparison between the depreciation charges with the previous year. When it comes to assets that have already been revalued, it is vital to calculate the depreciation again to make sure that it aligns with the new value. Moreover, all similar assets whose valuation has been conducted at the same time should be revalued (PWC 2014). The other substantive procedure that can be conducted on tangible assets is rights and obligations. This involves inspecting the documents that show the ownership of the company assets. For example, the auditor can verify title deeds to ensure that land is registered under the company’s name. Purchase agreements and registration documents for vehicles should be assessed as well. Auditing for tangible assets also calls for a review of capital vs. revenue items in the balance sheet of the company. It is essential to investigate whether the capital invested has yielded sufficient revenue from the sales of the company products (Kan 2013). Conclusion In conclusion, it is worth noting that Accsys Technologies PLC is an organization that deals with the manufacture of wood products. The organization has portrayed significant improvements in the recent past; the revenues of the company have increased. However, there are certain anomalies in the financial reports of the company that warrant an audit. One of the anomalies can be seen from tangible assets of the company, whose figures have risen from the previous years. Auditors can conduct substantive procedures to address any discrepancies in the tangible assets of the company. References List ACCSYS 2015, A Chemical Technology Company. [Online]. Accessed 15 Apr. 2015. Available at: http://www.accsysplc.com/ ACCSYS TECHNOLGIES 2015, Accsys Technologies PLC Annual Report and Financial Statements 2014. London, Accsys Technologies PLC. Collings, S 2011, Interpretation and application of international standards on auditing. Chichester, Wiley. Johnstone, K, Gramling, A and Rittenberg, L 2015, Auditing: A Risk Based-Approach to Conducting a Quality Audit (with ACL CD). London, Cengage Learning. Kagermann, H 2008, Internal audit handbook: Management with the SAP-Audit Roadmap. Berlin, Springer. Kan, E 2013, Audit and Assurance - Principles and Practices in Singapore (3rd Edition). New York, CCH Asia Pte Ltd. PWC 2014), Auditing Cash and Cash Equivalents. [Online]. Accessed 15 Apr. 2015. Available at: http://wenku.baidu.com/view/76431b1810a6f524ccbf85ac.html Pandey, N and Dharni, K 2014, Intellectual Property Rights. London, PHI Learning Pvt. Ltd. Weygandt, J J, Kimmel, P D & Kieso, D E (2010). Financial accounting: IFRS. Hoboken, N.J, Wiley. Whittington, R O 2015, Wiley CPAexcel Exam Review 2015 Study Guide (January): Auditing and Attestation. London, John Wiley and Sons. Read More