Auditing of Mobile Stream Plc - Case Study Example

Auditing of Mobile Stream Plc By Finance and Accounting of Table of Contents Table of Contents 2 Introduction 3 Currency devaluation relative to the decline of income 3 Trade and Receivables 5 Company Liabilities 5 Substantive audit procedures of Trade receivables/sales 6 Sale Completeness 6 Sales Cuff procedure 7 Sales Returns 7 Revenue Recognition 8 Bill and Hold transactions 10 As seen in the financial statements, Mobile Stream Plc has a considerable amount billed holding inventory. In this case the auditor needs to determine that 10 The ownership risks have passed to the purchaser 10 The purchaser has predetermined commitment to purchase the goods 10 There is a preset to-do list for delivering the goods and the delivery date is reasonable 10 The goods are separable from the customer’s normal inventory and cannot be applied to fill other orders. 10 The inventory is complete and ready for shipment and the details of the bill and hold transactions should be confirmed with the client (BIRD, 2001). 10 The copies of all paperwork that confirms the transactions should be retained. 10 List of references 11 Introduction Auditing is a process of investigating flaws in an organization. This is done in the internal controls relative to finance, purchasing, ordering and sales among many others. This essay seeks to examine three primary areas of audit flaws in the Mobile Streams Plc. The financial statements for the period ended 30 June 2014 will be used. The three primary areas of risk to be examined in this essay include the significant decline in revenue through currency devaluation, mobile internet services and receivables. Currency devaluation relative to the decline of income As a point of departure, 90% of the company’s operations are based overseas and particularly in Argentina. With the new policy implemented by the Argentinean government on the intercompany fund transfer of funds, the company’s 91% of the revenues remained held. This policy is attributed to the currency devaluation and is not a good idea for the company. This creates a loophole for flaws. For instance, in the big devaluation on the peso against the British pound in 2014 at almost 67.6% opens a big gap of financial audit since not all the financial statement items will be subjected to this currency devaluation and recorded properly. This will indicate flaws in the income. For instance, the income decreased by 50% due to the peso devaluation. The auditor should trail this aspect to ensure that all the gross profit decease of 29% and revenue of 19% is genuine. This is a loophole for a mischievous activity and the fact that, the aspect of currency devaluation exists; a lot of money might be swindled. From the financial report, the revenue of the Argentina division rose by 16% (AR$379 M, TO AR$440M), however when reported in British pounds, the revenue indicates a downward trend from 49m pounds to 40.5M pounds. As indicated earlier the science that supports foreign currency fluctuations is tricky and can be used as a loophole to swindle money. This big difference should be investigated through and audit trail as follows. The process of audit trail on the currency devaluation relative to the income of Mobile Streams Plc is a cumbersome due to the numerous financial aspects that need to be understood. For instance, the rate of conversion from the Argentinean dollar to the British pound should be well monitored and recorded (DELL & WILSON, 2008). The auditor is required to monitor the duration of change; however, the rates at the occurrence of each transaction should be recorded in the financial statement. For reporting purposes, the rates should be indicated at the notes section. From the financial statements of Mobile Stream Plc, the conversion rates at different time of the years are not recorded and this leaves room for questions over the reason as to why they are not indicated, yet they are the reason for the income decline. The fact that, the Argentinean subsidiary forms 91% of the total income of the company, it is prudent for all the factors, which include currency rates, and conversion is included for easy comprehension. In the process of trail, the auditor should examine and countercheck the exchange rates at the time of the primary transactions and documents. For instance, the exchange differences on translating foreign operations valued at (1,347) should be trailed to the primary transactions to ensure that this negative sum is true. It is imperative to note that, the negative value poses greater suspicion that needs to be proved otherwise. Consider the following excerpt of the total income and the attributed exchange differences, which the auditor trails to ascertain their authenticity. The reason for this audit trail sub-process is to ensure that the conversion rates used in converting the income from this subsidiary are the same as the ones used in the financial statements (CASTENHOLZ, 2007). Trade and Receivables The other aspect of audit risk is attributed to trade and other receivables. As indicated in the statement of financial position, there is a big change from the figures for 2013. For instance, in 2013, the figure of trade and other receivables stood at 8.42 Million while in 2014 the figure stood at 6.494 million. This is a big disparity need to be trailed to ascertain the authenticity of the suspected figures. The auditor takes an audit trail in this case is from the primary transactions. This can be trailed from the invoices, refunds and credit notes among others. These documents will help making a follow up on the authenticity of the figures recorded in the financial statements. Any difference noted will be used as a point of reference for numerous flaws (DELL & WILSON, 2008). Company Liabilities The other area of audit risk in the Mobile Stream Plc is the company’s liabilities, which can be understated due to non-recognition of the litigation provisions. This will give a wrong picture of the company’s liability position of the investors and management. This implies that the liabilities should be reported with full recognition of the litigation provision to ensure that, the appropriate recognition approach and measurement base is applied and all the requisite information is fully disclosed in the notes section of the financial statement. Substantive audit procedures of Trade receivables/sales Sale Completeness The other audit process on this aspect involves completeness of sales. The auditor exercises this procedure to ensure that sales particularly the online based are done in completeness to ensure that exact sales values are recorded and can be ascertained by check of the documents. In the case of Mobile Stream Plc, it is seen that much concentration is given on the physical goods and physical channels of supply. All the transactions, which include ordering, selling on online platform should be considered for audit. The trail on the sales to be done to the primary transactions, which involves issuance of receipts (DELL & WILSON, 2008). This will help in ascertaining the authenticity of the transactions recorded in the financial statements. With well-authenticated sales transactions then the records in the financial statements will give a fair value of the organization’s financial position. This is the primary essence of the completeness of the financial statements. The invoices should be checked that, appropriate accounting has been done. The following financial analytical procedure should be applied The auditor selects a random sample of primary documents relative to shipping and then document the items chosen The auditor trails the content on the documents relative to the sales invoices and establish that the content are correctly reflected on the invoice The auditor establishes that the sum of sales relative to the invoice records is correctly calculated and approved The auditor trails the sum total of sales reflected on the invoice to correct recording in the sales journal The auditor establishes that correct accounting treatment relative to the sales transactions has been applied. Sales Cuff procedure The audit procedure involves cut off on sales helps to ascertain the information on sales. This procedure is more authentic. The auditor performs various sales ratios to ensure that the sales value in the primary transactions match with the values of sales recorded in the financial statements. In addition, the auditor undertakes the following audit trails in line with this procedure Comparison of the daily revenues recorded for the durations shortly prior to and after year end for unusual variations Comparison of sale credits for returns succeeding the year-end with sales credits relative to monthly records during the year. This will help in establishing the abnormal increase, which may indicate conditional sales or extraordinary concessions to the clients. Comparisons of monthly cash receipts of the year relative to the cash receipts to the succeeding year to establish if the receipts ensuing to the year end are abnormally low comparative to the collection account in the audit months. In essence, these procedures are designed in such a manner that they help in detecting the overstatements of revenues. Sales Returns The element of sales returns on products should be checked based on contractual basis or existing practice and this should be established as to whether the revenue exists or is cognizable according to SFAS No. 48. To ascertain completeness, a sample of a random shipping document should be chosen and the information relative to the sale traced to determine details of the relevant invoice (BIRD, 2001). Revenue Recognition Revenues in any organization represent a sensitive item of fraud and needs a thorough audit trail to ensure that all the expected income from all the sources is recorded correctly. For instance, the aspect of a sale whose earning process is complete should be checked to ensure appropriate rescheduling (BIRD, 2001). The following are practical considerations in this process of revenues incompleteness. When there is no clear evidence of ultimate understanding between the parties to the transaction When there is no occurrence of delivery of the goods or services in consideration When the price is not fixed or determinable When collectability is not reasonably assured When an auditor considers the following example of the consolidated income statement, various areas such as the cost of sales are considered to ensure that the exact sales made are recorded. For instance, the audit trail on the cost of selling, marketing and administrative for the year 2013 appear to be higher than 2012. This is one of the loopholes of fund misappropriation (PORTER, HATHERLY & SIMON, 2008). The costs should be substantiated. In addition, the risk areas the auditor follows in the income statement include the finance and tax expense, which the auditor should establish that they are real and not faked. The risk areas in this case include misstatement of the profits before tax, total cost of sales and the total cost of the expenditure. An example of a sale situation involves sale and delivery of a portion of machinery, which has not been installed and yet the installation service is the seller’s responsibility. This sale is incomplete and the auditor needs to examine the circumstances that lead to this. In essence, a fraud is detected through small procedural exemptions. Similarly, the auditor needs to ascertain requisite contract terms, which include acceptance terms, delivery and payment mode. Additionally, the auditor should ensure that the client and the customer do not have any side contractual agreements besides that of the organization (PORTER, HATHERLY & SIMON, 2008). Bill and Hold transactions As seen in the financial statements, Mobile Stream Plc has a considerable amount billed holding inventory. In this case the auditor needs to determine that The ownership risks have passed to the purchaser The purchaser has predetermined commitment to purchase the goods There is a preset to-do list for delivering the goods and the delivery date is reasonable The goods are separable from the customer’s normal inventory and cannot be applied to fill other orders. The inventory is complete and ready for shipment and the details of the bill and hold transactions should be confirmed with the client (BIRD, 2001). The copies of all paperwork that confirms the transactions should be retained. List of references BIRD, P. A. (2001). A casebook on auditing procedures. London, Institute of Chartered Accountants in England and Wales, General Educational Trust. CASTENHOLZ, W. B. (2007). Auditing procedures. Chicago, La Salle extension University. DELL, H. C., & WILSON, J. R. M. (2008). Auditing procedures. Toronto, Canadian Institute of Chartered Accountants. PORTER, B., HATHERLY, D. J., & SIMON, J. (2008). Principles of external auditing. Chichester, England, John Wiley. Read More