Financial Statement of Real Good Food Plc - Assignment Example

Auditing assignment: Real Good Food PLC Task Introduction The financial ment is an official document that contains the financial information about the company. Traditionally, the financial statement comprises four accounts. That is, the income statements, the statement of financial position, the statement of cash flow and the statement of changes in shareholder equity. In addition, the four accounts are accompanied by other notes such the auditor’s report, the director’s report, etc. On that note, the assignment presents analyses of the financial statement of Real Good Food PLC with respect to the audit risk and substantive audit procedures as presented below. Part A Real Good Food PLC is a heavily diversified company that manufactures and distributes a variety of products like sugar, baking ingredients, dairy products, jam and sweet bakery products (Real Good Food PLC 2015). As it stands, the company owns the largest sugar distribution network in the United Kingdom. Real Good Food plc participates in various market sectors such as the wholesale, retail, manufacturing, food service and export. The company’s production and distribution activities are operated under six business divisions (Napier Brown, Real Good Food Europe, Renshaw, Garrett Ingredients, R&W Scott and Hayden Bakery) that supplies products to a greater part of the Eurozone (Annual Report: Real Good Food PLC 2014, pp. 1-3). The consumption of sugar worldwide has increased by more than 20% in the last ten years translating to an increase from around 140 million tonnes to 170 million tonnes currently consumed on an annual basis. The Eurozone consumption statistics show consumption rate of 16.5 million tonnes. The increase in sugar consumption rate presents a growth opportunity for Real Good Food PLC. However, it is feared that some major political factors may create a favourable situation for the exploitation of the opportunity. The whole world is getting sensitized to the health effects of sugar. Most nations, specifically in the west, seek to implement trade policies and health regulations that will set the standard of sugar contents in the manufactured products (Annual Report: Real Good Food PLC 2014, pp. 10). In addition, the production is affected by adverse weather conditions that have seen the global sugar production rate reduce. The prices of sugar are on the rise due to the reduction in the supply but increased demand. The economic performance, as measured by the market capitalization, of the sugar producing companies has declined due to the decrease in the stock prices. Fortunately, the sugar prices in the European markets have not been affected as it has been in other parts of the world. The reason is the European market is protected. Therefore, despite the challenges, Real Good Food is hopeful to continue experiencing growth in revenues and profit in the future (Annual Report: Real Good Food PLC 2014, pp. 10). Regarding the preparation of financial statement, such information should be audited. Auditing is, therefore, the process conducted to verify whether the contents of the financial statement are free of error, omission, commission or material misstatement. Many a times the financial statement of large companies are manipulated to create a false picture of the company’s healthy financial performance. In most cases, it is difficult to identify a misstatement when analysing the financial statements. The situation is referred to as an audit risk. That is, the probability that the auditor will not detect material misstatement (s) when assessing the financial information (Rittenberg, Johnstone & Gramling 2012, pp. 2). Based on the financial statement, it is the director’s responsibility to ensure that the financial statement is prepared in compliance with the relevant laws and regulations. The financial statement of the Real Good Food PLC has been prepared on the basis of the rules set by applicable law and the International Finance and Reporting Standards (Annual Report: Real Good Food PLC 2014, pp. 30). The financial statement of the Real Good Food PLC was audited by Keith Newman for and on behalf of the Crow Clark Whitehill LLP. Based on the auditor’s report, the financial statement of Real Good Food PLC is free from error(s) or material misstatement (Annual Report: Real Good Food PLC 2014, pp. 34). However, the auditor should note that the following areas of the financial statement are of heightened audit risk: an increase in payroll costs, increase in salary per employee and a decline in the production workforce. The number of production employees decreased by 3.19% in 2014 as compared to 2013. However, the total payroll costs increased by 9.59% in 2014. The situation needs a further analysis to determine what led to the more than proportionate increase in payroll cost as compared to the number of production employees. The basic argument is that as the number of employees increase, the payroll costs should also increase but, at almost equal rate. However, the analysis shows that the payroll costs increased by a larger margin than the number of production employees. Further analysis should be conducted to uncover the reason behind the variation (Annual Report: Real Good Food PLC 2014, pp. 53). Second, the payroll costs increased by 9.59%, whereas, the revenue generation rate increased only by 2.56%. The services provided by the employees are partly, behind the revenue generation. An increase in the human capital injection in the production process increases the productivity level, thus revenue. From a different perspective, an increase in the payroll cost leads to an increase in the productivity level. Cost management is a concept that demands an effective implementation. The minimization of production costs (payroll costs) influences the company’s level of productivity. That is, the higher the cost, the lower the profitability level. Auditors are encouraged to conduct further analysis to determine the reason behind the more than proportionate increase in payroll costs as compared to the increase in revenue. The auditor should conduct further analysis to uncover the reason behind the more than proportionate increase in payroll costs compared to the increase in the productivity level (Annual Report: Real Good Food PLC 2014, pp. 53). See Appendix 1 Part B Like mentioned above, audit risk is the chance that the audit while analysing the company’s financial statement, will fail to identify errors or material misstatement. On that note, substantive audit procedures are processes conducted to minimise the audit risk to an acceptably low level. The five substantive audit procedures are as follows: analytical procedures, a test of completeness, an examination of the occurrence, cut off tests, and disclosures. First, the auditor is encouraged to conduct a series analytical procedure to verify the existence of the payroll costs and other variables. During the analytical procedure, the auditor will be required to do the following: first, compare the actual payroll costs with the budgeted payroll costs. The estimated payroll costs would act as a tool that sets the payroll expenditure limit. The auditor will be required to analyse the causes of variance if any, and the justification of the variances. Second, the auditors are expected to review the payroll costs per functional department. The process will require analysis of the number of employees per department, their salary and wage rate. Last, the auditors should verify the validity of the job title of all the employees in every department. The procedure will help the auditor study the trend in the changes in payroll costs and uncover the actual causes. Therefore, the information will help verify the accuracy of the payment information contained in the financial statement (Gray 2007, pp. 361-368). Second, the next substantial audit procedure is the test of completeness. The tests are conducted to assess whether all the relevant information regarding the payroll is taken into account when determining the payroll costs. During the procedure, the auditors are expected to conduct the following: first, consult the human resource manager concerning the factors taken into account when determining the basic salaries and wages of the employees. The auditors are expected to request a sample of the payroll form to facilitate the analysis. Second, the auditors should assess whether all the employees and included in the payment information. Third, they should confirm if the payroll costs are for the whole period under consideration (monthly, quarterly or yearly). The substantive procedure will ensure that all variables relevant to the determination of payroll costs are identified and taken into account, thus, help minimise the audit risk (Rittenberg, Johnstone & Gramling 2011, pp. 415-419). Third, the auditors are required to conduct tests to verify the occurrence of the variables to payroll cost. The tests seek to prove whether the factors that led to the payroll costs took place. During the process, the auditors are expected to conduct the following: first, verify whether the number of employees indicated in the payment is accurate by conducting a head count. Second, the auditors should check the information pertaining to the identification of the every employee. They are required to check the ID number, job description, the seniority, and the social security number. Third, the auditors should confirm with the employees if the indicated number of hours worked is accurate. The tests will ensure the absence of duplication of costs and workers, thus, reduce the audit risk (Thompson & Ward 1993, pp. 2-10). Fourth, the auditors are required to conduct cut off tests. The test is done to ensure that all the details pertaining to the payroll within a particular period are taken and included in the relevant account before the end of the financial period. During the procedure, the auditors are expected to perform the following: first, the auditors should verify whether all the hours worked are included in the relevant account before the end of the year. Second, they should confirm whether the accrual payments are treated as is required and are recorded in the period of occurrence. Third, the auditors should review the financial statements and journal entries to see if there are any suspicious adjustment and request for an explanation. Last, the auditors should conduct fresh calculation of the payroll costs pertaining to the period (Thompson & Ward 1993, pp. 2-10). Last, the final substantive audit test is about the disclosure. Disclosure is the presentation of the material information relevant to a particular account. Before, the information disclosure, classification and description of the information are conducted. Rules governing the extent of disclosure may be contained in the disclosure requirement set by company act or by accounting standards. During the procedure, auditors are required to perform the following: first, review the stand of both the company Act and accounting standards regarding the extent of disclosure. Second, review the disclosure policies adopted by the company. Last, evaluate the level of compliance with the relevant disclosure policies. The procedure ensures that all relevant information are accurately disclosed (Hirst & Koonce 1996, pp. 1-6). List of References Annual report: Real Good Food 2014, viewed 16 April 2015, http://realgoodfoodplc.com/reports-and-accounts Gray, I. 2007, The audit process: principles, practice and cases, Thomson Learning, London. Hirst, D.E. & Koonce, L. 1996, "Audit analytical procedures: A field investigation", Contemporary Accounting Research, vol. 13, no. 2, pp. 457. Real Good Food PLC 2015, viewed 16 April 2015, http://www.proactiveinvestors.co.uk/LON:RGD/index Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. 2011, Auditing, South-Western, Mason, Ohio. Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. 2012, Auditing: a business risk approach, South-Western Cengage Learning, [Melbourne, Vic.]. Thompson, J.H. & Ward, B.H. 1993, "Statistical risk control strategies used to evaluate substantive audit tests", Managerial Auditing Journal, vol. 8, no. 4, pp. 3. Appendix 1 2014 2013 change % change Revenue 272,600 265,800 6,800 2.56 Profit -700 4,800 -5,500 Total assets 163,600 148,700 14,900 10.02 Net assets 20,300 22,000 -1,700 -7.73 Aggregate payroll costs 2,014 2,013 change % change Wages, salaries & fees 26,127 23,913 2,214 9.26 Social security costs 2,530 2,289 241 10.53 Other pennsion costs 1,429 1,224 205 16.75 Cost of options issued to staff 0 28 Total 30,086 27,454 2,632 9.59 Employee category 2,014 2,013 Change % change Production 728 752 -24 -3.19 Selling and distribution 138 110 28 25.45 Directors & administration 81 77 4 5.19 Total 947 939 8 0.85 Read More