Auditing of Mobile Streams - Case Study Example

Auditing of Mobile Streams Five Main Areas of Audit Risk Five Main Areas of Audit Risk Going concern Issue Mobile Streams is a UK based company that also operates in other countries. It is going through severe liquidity crisis. Similar to the previous year, no dividend will also be paid in 2013. Dividends not being paid in the last two years is a severe issue that proves that the company is going through liquidity crisis (Mobile Streams, 2013e). Such liquidity crisis may issue serious going concern issues. During the audit, we auditor has to assess the viability of the company being a going concern (IFAC, 2009a). The main reason of the liquidity crisis is the continuous blockage of the cash resources in Argentina due to new laws. 73% of the cash resources relating to year are still receivable. The company is unable to meet its liquidity requirements (Mobile Streams, 2013a). Liabilities to be settled within 6 months have increased by 40% (2013: 5,390; 2012: 3774). The fact that revenue has increased by 145% does not mitigate the risk of going concern as revenue is booked on an accrual basis (Mobile Streams, 2013b). The revenue as not been realized in the form of cash. Creditors and other stakeholders are interested in cash payments. A company is a going concern when profitability and liquidity, both are achieved. Risk of Revenue recognition There exists an inherent risk of over statement of revenue recognition. Mobile operated much of its business in foreign countries. The company is facing immense competition from the rivals, which may create problems in the form of price hike. There is a risk that in order to show its competitive position in the market, Mobile might be inflating its revenues. Normally, revenue is verified through the invoice verification. The balances at the year-end are then confirmed by the external confirmation sent to the customers (IFAC, 2009c). In this case, the confirmation might not be possible as the company’s customers are based in other countries, and they might not be interested in disclosing the financial position to other country’s auditor. Customers might not take interest in confirming the balances relating to previous years transactions as it is time consuming. When confirmations are not received, then auditors check the subsequent amounts received after the end of the year. This provides reasonable assurance that the debts were true in the balance sheet. In case of Mobile, this is also not possible because the cash is not coming from Argentina, which is the main customer nation of Mobile’s products. All these factors make it easy for mobile to overstate the revenue. Risk of currency Translation Mobile Streams, incorporated in UK has most of its business outside UK. This creates inherent risk of currency translation. The presentation currency of mobile is British Pounds; whereas, revenues come in Dollar. As Mobile has entered in to the business of capturing the individual consumers also, therefore, more transactions of smaller amounts have been added to the financial data. This increased risk of translation in this year. As Mobile Streams was previously dealing with the operators, therefore, the transactions must have been of the huge amount. The company’s accounting staff would have habitual of recording fewer transactions than the transactions incurred this year. This created control risk as the staff might not translate the currencies accordingly as per the accounting principles. Apart from this, Mobile Streams has been in a condition throughout the year to manipulate the translation of the currency. It might have halted the transactions of sales from being recorded and then booked the transactions on the day when the currency rate is high. This would have increased their revenues. This is the risk of material misstatement due to fraud. Audit risk is increased as the detection risk applies here (IFAC, 2009b). Auditors normally test sample transactions; such sample may not detect such misstatements. Risks related to Provisioning There is an inherent risk associated with the provisioning. Provision are an estimate and may be biased depending upon the intentions of the management. Especially in case of Mobile Streams, It is possible that the directors are manipulating the estimates since there is share option scheme introduced for the directors and senior management. Share based options are normally based on profits; if provisions are increased then the corresponding expense will also increase. There is a risk of infringement of rights of the intellectual property associated with Mobile (Mobile Streams, 2013d). The settlement of such cases will result in heavy financial losses, but still no provision is made. The fact that Directors are of the view, such case will not come up in the future should be assessed in depth as Board of Directors include 2 directors who do not have a single share (stake) in the company. This provision is also evident to occur as management has insured it (Mobile Streams, 2013e). Another provisioning issue is related to tax payment in Germany (Mobile Streams, 2013e). Mobile Streams has decided to keep it unchanged because there is no improvement in the case. It raises risk related to the severity of the dispute which in not letting the liability be settled. The reasonableness of the estimate has to be checked. Risks related to consolidation Mobile Streams has a number of subsidiaries, which are operating, in different countries. The consolidation process is a complex process that requires elimination of intra group transactions, recording the new acquisitions and de-recording the liquidations. Here in case of Mobile Streams, the subsidiary of Brazil has gone through liquidation (Mobile Streams, 2013b). Mobile Streams will have to include its financial results as a subsidiary as at the date of liquidation. Moreover, the policies of the Mobile group should be the same for the whole group. The selected policies should be applied accordingly on a consistent basis. Mobile Streams is facing problems from different subsidiaries. The company in Germany is going through litigation for tax. Company in Brazil has been liquidated. The company in Argentina is unable to send its cash to Mobile Streams. In such a situation, it is possible that the subsidiaries manipulate their financial results in order to better their position and group’s position also. Such manipulation will create a detection risk for the auditor if different auditors are appointed for different group subsidiaries. The risk related to provisioning discussed above is more severe for consolidation as there are provisions like Group tax, which require more judgment as compared to the estimation for a single company (Mobile Streams, 2013c). Procedures for Reducing the Risks related to Revenue Recognition Audit procedures other than the risk assessment procedures can be broken into two broad types: 1. Substantive analytical procedures 2. Detailed testing Substantive Analytical Procedures The analytical procedures performed at this level will include: · Product wise Revenue should be obtained. Once the break-up is arrived at, it would then be assessed on the basis of industry trend. Market demand of the products whose sales have increased would be assessed. Sales of those products should increase who were new to the market. Any obsolete product sold more in quantity would be inquired for with the management. In case a product being sold aggressively by Market Streams is exclusively built by it and is new to the industry, it is difficult to assess its market demand. Alternative procedure to verify this product sale would be to check the count of the Internet hits over the link of that product, the marketing material of that the product being printed and distributed. Such statistics will help to identify the interest of consumers in that product. · Monthly breakup of Sales will be helpful to assess the sales on the basis of the market trend as per timeline. The sales of the products will be checked through the dates when they were launched, dates when they ended and period in which it was sold most in the industry generally. · Customer wise break up could be used if it is compared with previous customer break ups. This will be helpful to assess the interest of the customer in products of Mobile Streams. Normally, significant customers buy on a similar pattern. Any new customers discovered from such break up will be investigated in more detail e.g. verifying the existence of its company through forms filed with London Stock Exchange, confirming the transactions with them through correspondence. Any customer who was significant in the previous year but has made lower level of purchases in this year will raise serious concerns about the products of Mobile Streams. Inquiries should be made to the management as to why this customer ended up purchasing from Mobile Streams. The product in which customer declined its purchases; its sales to other customers should also be verified. · Interest Calculation can be checked through applying the effective rate on the balance at which the rate is applied. This will provide a high level of assurance. Balance can be verified from the bank statement. Effective rate has two components; interbank rate and the surplus rate applied by the bank. Interbank rate can be verified from the website of Bank of England, and surplus rate can be verified from the Agreement with the bank. · The amount received from foreign sources should be checked analytically with the tax deducted at source by the bank against the foreign receipts. Such tax should be calculated in reverse to reach the revenue receipts from foreign sources. The revenue calculated by this calculation should be compared with the receipts as per ledger. In case of variation, the reasons should be inquired with the management. Similarly, this could also be verified if banks charge for cash remittances from foreign sources. Detailed Testing Procedures Procedure for Completeness of the revenue · Transactions reflected in the general ledger can be traced back to the source of the documents which include, invoice, Purchase order sent by the customer, delivery confirmation etc. · Cash received in the bank statement against the sale transactions could be verified from the bank statements. While performing this procedure, the bank reconciliations should also be inspected so that any cheque that is not received actually may come to the knowledge of the auditors. Sale could be manipulated by showing amount received in the ledger and then placing it into bank reconciliation. · Contracts with MNOs should be reviewed. This will assist in verifying the revenue recognized under license fee. This revenue could be verified by an external source as well such as download data from MNOs can be obtained. This will enhance the assurance in the evidence and verification. · Cut-off tests are also important in identifying the completeness of the revenue. No download transaction after June 30, 2013 should be entered in these books. Serially generated statements of invoices and download data should be checked. Billing beyond June 30, 2013 should be excluded from recording. Cut-off tests are helpful in determining the completeness because it helps to detect those transactions, which have been posted to the next accounting year, but they relate to current accounting year. · Confirmations should be sent to MNOs. The response to their confirmation should be reconciled with the accounts receivable balance and unearned income. Any transaction that is confirmed by the MNO should be reflected in the accounts. · The foreign currency translation of the revenue transactions should be verified. As per the policy of the company, the rate taken to translate the transaction should be the rate at the date of the transaction. It should be verified in the sample drawn that correct is taken. Moreover, it should also be checked that the transactions are not accumulated to be booked at the date when rate is high. The date of the transaction could be verified from inspecting the correspondence between the Mobile and customer, which indicates the date of completion/delivery of the service/content. The rates could be verified from Business journals and Currency exchange websites. Procedures for Classification of Revenue During such a high – risk audit, the professional skepticism should be practiced throughout the audit. Huge amounts being received in the bank statement should be checked and inquired for. It might be possible that Mobile Streams deposit the amount by themselves and show it as being the receipt against revenue receivable. This is the main reason that not only the receipts coming in the bank statement are checked; the amounts being out from the bank statement are also checked. Identical amounts being in and out from the bank statement should be checked. The management to show that it is received against sales may deposit such amounts. Consultancy fee charged from Mobile Streams should be corroborated accordingly. Nature of consultancy should be checked. Most important thing to verify is that the fees should be recognized on the Progress Completion basis. It might be possible that Mobile recorded the advance amount being received from the customer as revenue rather than recording it as a liability. List of References IFAC, 2009a. ISA 200 - Overall Objecives of Inedependent Auditor. [Online] Available at: [Accessed 15 March 2014]. IFAC, 2009b. ISA 505 - External Confirmations. [Online] Available at: [Accessed 15 March 2014]. IFAC, 2009c. ISA 570. [Online] Available at: [Accessed 15 March 2014]. Mobile Streams, 2013a. Chairman Statement. London: Mobile Streams. Mobile Streams, 2013b. Director report. London: Mobile Streams. Mobile Streams, 2013c. General information - Notes to Financial statements. London: Mobile Streams. Mobile Streams, 2013d. Investor Relations. [Online] Available at: [Accessed 15 March 2014]. Mobile Streams, 2013e. Provisions, Notes to the Financial Statements. London: Mobile Streams. Appendix Read More