Accsys Technologies Plc - Wood Production and Sale - Assignment Example

Accsys Technologies Plc - Wood Production and Sale Introduction Accsys Technologies Plc. is as United Kingdom based company with its headquarters in Windsor and whose foundation was in 2005. It is involvd in the business of solid wood production and sale. Its products are Accoya wood and Tricoya wood used in external application. This report seeks to study its 2013/2014 financial reports and identify some areas of heightened audit risk. In addition, it will suggest five substantive procedures to be used in one of the identified areas in order to reduce such risks into anacceptably low levels. PART A: IDENTIFIED AREAS OF HEIGHTENED AUDIT RISK Revenues The revenue cycle of an entity is an inherent risk, and auditors are required to assess this by performing the necessary tests to determine whether it is free of error of fraud. This inherent audit risk is related to the cutoff for some sales. It also stems from the management pressure to misstate revenues. It is, therefore, critical that auditors use the necessary tests of control and substantive procedures to give an assurance that revenues have been correctly recorded. The issues in revenue recognition start from the consignment sales refund and return rights, round-trip sales, gross sales as well as bill and hold transactions. The management overstates revenues so as to indicate that the company is performing well, thus encouraging investors and impressing the top level management. There are also cases where, human error causes the risk of revenue audit during the revenue recording where wrong amounts are recorded, or the recording is done at the wrong time. According to Colby (2012), financial statement fraud through revenues takes different forms among the timing differences and fictitious revenues. Through fictitious revenues, the concerned parties record sales that never occurred. They achieve this by manipulating or creating transactions that enhance an entity’s reported earnings. Revenues are typically fabricated through the creation of fake customers and sales. There are instances where the artificial sales involve legitimate customers through the creation of phony invoices or price or quantity increases. The audit procedures that an auditor develops in relation to revenue auditing and the assessment of their outcome calls for an understanding of how the organisation operates as well as its environment. Through the timing differences, financial statement fraud arises because revenues and/or expenses are recorded in the improper period. The revenues are recognised early before it is earned leading to an immediate increase in the entity's income using legitimate sales as opposed to cases of phony sales. Expenses are also wrongly recorded or recorded in the wrong period so as to increase revenues. There are instances where expenses are capitalised or recorded in the following period leading to their elimination from the income statement. As indicated in Appendix I, Accsys Technologies Plc.’s revenues increased in 2014 by 78.05% to €33,512,000 from €18,822,000 in 2013. Improper asset valuation Colby (2012, p. 4) argues that, the more assets an entity shows on its books, the healthier and better it looks to the financial statement information users, especially investors, creditors and lenders. It does this through assets that entities earn money and pay off debt. The inventory accounts receivable and non-current assets are the most often improperly valued assets, and this paper considered these assets a heightened audit risk area. The management of Accsys Technologies Plc. could have found inventory as an appealing place for them to commit financial statement fraud because inventory recording is typically very complex and is constantly being transferred. In addition, inventory is typically dispensed from various locations and having a large number of items. These scenarios make it easier for the management to make improper estimates for slow-moving or obsolete goods, to create fictitious inventory, to manipulate physical inventory counts, improper inventory capitalisation and failure to record the inventory purchased. As indicated in Appendix I, its invenstory increased by 24.55% in 2014 to €6,053,000 from €4,860,000 in 2013. Accounts receivable are usually falsified or manipulated in a similar manner as revenues and inventory. Therefore, this paper found that the management of Accsys Technologies Plc. could have had the incentive to create fictitious receivables or had failed to write off accounts receivable that had been proved bad debts as its trade and other receivables increased by 21.39% in 2014 to €4,477,000 from €3,688,000 in 2013 as Appendix I shows. Colby (2012, p. 5) posits that accounts receivable are prone to manipulation because of the fraudulent revenue schemes as the fraudster create fictitious accounts receivable when he is creating fictitious revenues. Related party transactions The third area identified by this paper as being of heightened audit risk is the transactions between Accsys Technologies Plc. and its related parties. The Public Company Accounting Oversight Board (2014) in its Auditing Standard No. 18, Financial Reporting Network (2014) and Gonzalez (2014) state that, related party transactions that include: unusual transactions; financial relationships, as well as transactions with its joint venture, subsidiaries and executives are critical areas that represent increased risks of financial statements' material misstatement. Therefore, this report considers the increase in the transaction on investment in joint ventures from €62,000 in 2013 to €340,000 in 2014 and as shown in Appendix I. This increase is material, and this report will be interested in assessing the management's assertions of occurrence and accuracy of this transaction. As noted by Colby (2010, p. 4), these related party transactions could be improper and arise due to sale and purchase transactions between undisclosed affiliates. Improper transactions also arise when liabilities are transferred to the related affiliates. PART B: PROPOSED SUBSTANTIVE PROCEDURES This report will gather sufficient and appropriate audit evidence on revenues. To do this, this report suggests using the following substantive procedures. Inspection of records and documents This report would inspect the documents and records that are involved in the revenue cycle. According to the International Standards on Auditing (2009, p. 6), inspection entails examining documents or records, both internal and external, in electronic form, paper form or any other media. It also involves the physical examination of some items such as assets. This report proposes first to understand Accsys Technologies Plc. and its environment well in order to know how it operates and the mode in which its revenue transactions are handled and managed. Through documents and records inspection, this report appreciates that it might get audited evidence whose reliability is of varying degrees depending on their nature as well as source. Inquiries and external confirmations In an attempt to reduce the audit risk to acceptable low levels; this report proposes to use inquiries with a view to gathering the relevant information from knowledgeable persons in Accsys Technologies Plc. and those outside the company. The targeted persons will be both those with financial or working in the financial and accounts departments, and non-financial ones in order to obtain both formal and informal feedback on which to base the decision. However, these inquiries might also not be sufficient enough to detect any material misstatements, and other procedures will be relied upon to corroborate it (International Auditing and Assurance Standards Board, 2012, p. 888-889). Through external confirmations, this report will ask external parties, especially debtors, to give their representations on. This procedure will be used because the report will highly be interested in confirming management's assertions about the account balances of sales and their elements. In addition, this approach will be useful in requesting confirmations about the agreement terms and transactions. This report will sample out some sales, especially those that are abnormally high in the last months of the Accsys Technologies Plc.'s trading period and send circulars to the respective debtors requesting for their confirmation that they purchased the stated amount of goods from Accsys Technologies Plc. at the specified date. Recalculation The Certified Public Accountants Association of UK (CPAUK) (2015) states that recalculation involves the checking of the accuracy of mathematics as contained in the documents or records. This report proposes to recalculate some of the recorded sales amounts by the use of information technology, where an electronic file will be obtained from Accsys Technologies Plc. and the accuracy of the file's summary done through the use of CAATs (Rittenberg et al., 2011, p. 344). Reperformance The Certified Public Accountants Association of UK (2015) and the International Standards on Auditing (2009, p. 7), This substantive test will go a long way in giving audit evidence in regard to the correctness of the account balances, revenue transactions, as well as other related accounts that Accsys Technologies Plc. undertook in the year 2014. This report will perform an independent execution of procedures and/or controls as were originally done by Accsys Technologies Plc. Analytical procedures Analytical procedures consist of financial information evaluations based on plausible relationships among financial and non-financial data (Certified Public Accountants Association of UK, 2015). Borrowing from this, this report will evaluate Accsys Technologies Plc.'s financial data and non-financial data to assess their relationship. This relationship will be established based on the assumption that it is reasonable and would continue on condition that there are no known conditions to the contrary. Through analytical procedures, this report will be able to obtain evidence regarding a huge increase in total revenues in 2014 to €33, 512,000 from €18,822,000 in 2013 as shown in Appendix I. In addition and as noted by the International Auditing and Assurance Standards Board (2012, p. 890), this report will be able to audit the unusual investment in a joint venture of €340,000. Through these tests, the management’s assertions regarding classification and understandability, completeness, accuracy and valuation, and cutoff will also be tested (Public Company Accounting Oversight Board, 2014, pp. 24-25). The recorded amounts will be compared against compared to the expectations of this report given the plausible relationship and anomalous individual items within account balances identified. Trend analysis and ratio analysis will be conducted for financial information for comparable prior periods, and the relationship of financial and non-financial information established. References Certified Public Accountants Association of UK, 2015. Audit Evidence - CPAUK. Available at: HYPERLINK " http://www.acpa.org.uk/ [Accessed 18 April 2015]. Colby, E., 2012. Financial statement fraud, Part 3. [Online] CGA Available at: HYPERLINK "https://www.cga-pdnet.org/Non_VerifiableProducts/ArticlePublication/FinStatFraud/FinStatFraud_p3.pdf" https://www.cga-pdnet.org/Non_VerifiableProducts/ArticlePublication/FinStatFraud/FinStatFraud_p3.pdf [Accessed 16 April 2015]. Financial Reporting Network, 2014. PCAOB Auditing Standard Addresses Related Parties, Significant Unusual Transactions, and a Company’s Financial Relationships and Transactions with Its Executive Officers. [Online] Available at: HYPERLINK "http://www.kpmg-institutes.com/institutes/financial-reporting-network/articles/2014/06/pcaob-auditing-standard-addresses-related-parties.html" http://www.kpmg-institutes.com/institutes/financial-reporting-network/articles/2014/06/pcaob-auditing-standard-addresses-related-parties.html [Accessed 16 April 2015]. Gonzalez, A., 2014. PCAOB Adopts Auditing Standard No. 18: Crony Disclosures. [Online] Available at: HYPERLINK "http://goingconcern.com/post/pcaob-adopts-auditing-standard-no-18-crony-disclosures" http://goingconcern.com/post/pcaob-adopts-auditing-standard-no-18-crony-disclosures [Accessed 16 April 2015]. International Auditing and Assurance Standards Board, 2012. International Standard on Auditing (ISA) 315 (Revised), Identifying, and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. London: International Auditing and Assurance Standards Board International Auditing and Assurance Standards Board. Public Company Accounting Oversight Board, 2014. Staff Audit Practice Alert No. 12: Matters related to auditing revenue in an audit of financial statements. Washington, DC: Public Company Accounting Oversight Board Public Company Accounting Oversight Board. The International Standards on Auditing, 2009. International Standards on Auditing (500). London: International Federation of Accountants (IFAC) International Federation of Accountants (IFAC). Appendices Appendix I Quantitative analysis Quantitaive analysis 2013 2014 Change Percentage change 000' 000' Revenues 18,822 33,512 14,690 78.05% Cost of sales 15,474 25,753 10,279 66.43% Gross profit 3,348 7,759 4,411 131.75% Operating costs 13,548 14,973 1,425 10.52% Operating incomes -10,200 -7,214 2,986 -29.27% Investment in joint venture 62 340 278 448.39% Inventories 4,860 6,053 1,193 24.55% Trade and other receivables 3,688 4,477 789 21.39% Read More