Applied Graphene Materials Auditing - Case Study Example

AUDITING by Auditing Introduction Applied Graphene Materials is a company dealing in the manufacturing ofgrapheme products. Since its inception, the company has been a leading manufacturer and supplier of high quality graphene. Over the years, the company has strived to prepare graphene materials in various forms in order to gain a competitive edge in the market. Innovation has driven growth in the products and services of the company. From the 2014 financial statements and annual report of the company, it is evident that there are areas of heightened audit risk that require a lot of attention when auditing the company this year. In November 2013, the company was admitted to AIM and this helped it raise a capital of 11 million GBP. With this admission, the organization experienced massive growth and it managed to expand its operations. This paper will highlight three areas of heightened audit risk in the audit of the company this year and explain why these areas can be regarded to be of heightened audit risk. Moreover, the paper will focus on one of the identified areas and highlight five substantive audit procedures that can be conducted to reduce the audit risk. Part A: Areas of Heightened Audit Risk Revenue From the annual report of the company, one of the areas that requires heightened audit risk is revenue. There is a fall in the revenue of the company from an amount of 11, 410 pounds in 2013 to 4,014 pounds in 2014. The fall in revenues can be attributed to the supply of graphene in trial quantities to partners. Auditors need to conduct a close check and determine why there is a fall in revenues. Auditors should look into the financial statements of the company to verify whether the decline in the revenue can be attributed to a decline in the customer base. In addition, it is essential to investigate whether all revenues have been included in the financial report, or there are some revenues, which were excluded when reporting. Auditors should also investigate whether the appropriate reporting and accounting procedures were followed when preparing the financial report (Applied Graphene Materials 2015). Acceptance of the Organization’s Products Another are of heightened audit risk is acceptance of the products that the company manufactures. Being new in the market, the organization is at the early development stages and this implies that whether its products will succeed or not depends on the extent to which customers accept the products of the organization (Koratkar 2013). Auditors should investigate whether customers are ready to accept the products of the company; this will help in determining the extent to which sales of the company will increase. Whenever an organization introduces new products in the market, there is always uncertainty as there is no guarantee that the products will gain acceptability from the customers (Applied Graphene Materials 2015). While conducting an audit, it is necessary for the auditors to determine the appropriate strategies that the company can employ to ensure that its products are accepted in the market. Thus, the audit of this risk should focus on research to identify the best branding and marketing strategies that will help to increase sales of the products. Auditors should look for weaknesses in the marketing techniques used by the company and propose techniques that will drive revenues and sales up in the company. In addition, auditors should advise the management the production, branding, distribution and marketing strategies which should be retained and the approaches that should be scrapped off or improved (Chuprunov 2013). Operational Expenses The other area of heightened audit risk in the organization is operational expenses such as wages, social security, salaries, as well as pension costs. In 2013, the losses associated to these items were 171, 470 GBP, but this amount increased to 1, 115, 631 GBP in 2014. The auditors should assess whether the proper auditing procedures have been used to report the changes in salaries and wages of the company. It essential to ascertain whether the employees paid in the last year were genuine employees of the organization or ghost workers. Moreover, auditors should conduct an investigation to ensure that the correct procedures were followed when calculating the payroll. The presence of errors may contribute to improper calculations of payrolls, as a result of which some employees may be paid more than they deserve (Applied Graphene Materials 2015). Auditing for wages should also consider whether the correct rates were used when calculating the wages of the employees. Auditors have the responsibility to ensure that all the wages paid to the employees in the organization have been authorized and there is no unauthorized pay that was disbursed. While conducting the audit, it is appropriate for the auditors to ensure that man hours have been applied appropriately. Other items that warrant thorough auditing include pensions and social security. It is vital to verify if the employees enrolled in the pensions program are eligible for pension. Moreover, the auditors should ascertain whether the appropriate formulas and procedures have been followed in the calculation of pension (Rittenberg et al 2011). Part B Substantive audit procedures can be conducted to reduce the audit risk for while investigating the areas of heightened audit risk identified above. One of the areas of heightened audit risk that warrants investigation using substantive audit procedures is revenues. The first procedure that can be conducted on the financial statements include analytical procedures. Auditors should provide a comparison of the revenue balances in the annual report with the balances in the previous years. When conducting the analytical procedures, it is also essential to carry out some tests such as trend analysis and comparison of the financial ratios. Using analytical procedures, auditors should also check for the presence of information that seems challenging, as well as information that seems to be unusual in the financial reports. Auditors should enquire why there were changes in the revenue amounts of the organization and investigate the reasons why the revenues declined. It is essential to ascertain whether the person dealing with revenues is honest in his or her reporting of the revenue amounts. Auditors can also use predictive procedures that are analytical in order to determine whether the revenues recorded in the financial statements of the company are accurate and up-to-date (Flood 2015). The second substantive procedure that can be applied in auditing the revenues of the company is evaluating the completeness of the financial statements. This includes assessing the contracts that the organization has with customers in order to ensure that no revenue has been left out in the financial statements. Test controls are useful in evaluating the completeness of the revenues. This procedure should also focus on an assessment of whether the organization has adhered to the acceptable ethical standards, as well as appropriate controls. The auditor should conduct a thorough investigation to understand the person in the organization who is mandated to approve, as well as accept credit sales in the organization. In addition, it will be essential to assess the separation of duties in the company and ascertain whose responsibility it is to record sales, deposit cash belonging to the company and collect cash from distributors (Bagshaw 2013). Analysis of sales transactions can be regarded as another substantive procedure that can be carried out by auditors. Assessing the transactions helps to determine the commissions that ought to have been paid to the sales staff. Analyzing the sales transactions is essential in allowing the auditor to conduct an analysis of the market. Such an analysis is useful in determining whether the sales revenues are a reflection of the market for the products that the company sells. Through evaluation of sales transactions, it becomes possible to determine whether all the revenues in the revenue cycle have been recorded in accordance with the standards of financial reporting (Gelinas et al 2014). Reading the general ledger of the company is another substantive audit procedure that can be done while conducting auditing for the revenues of the organization. The general ledge can be scanned with the use of software or manually. This procedure is essential since it gives auditors an opportunity to correct errors in the ledger. It is crucial to conduct an assessment of the journal entries in order to verify whether they match with the sales receipts received by the organization. The account balances in the ledger ought to be reasonable and reflect the activities involving revenues within the organization. Evidence obtained from reading the ledger helps the auditor to reduce the level of material misstatement that might have been encountered in the financial statements of the company (Loughran 2010). The fifth substantive procedure that can be conducted to reduce the audit risk when assessing revenues is test of balances. This involves collecting all the documents that have recorded transactions, which relate to revenues. The auditor should confirm account balances and inspect the documents that support revenue transactions within the organization. In addition, it is essential to test the mechanical accuracy of balances and verify the assertions in the financial statements (Hay et al 2015). Conclusion It is worth noting that there are some anomalies in the financial statements of the company. Some of the areas of heightened audit risk include revenues, entry into new markets, as well as salaries, wages, pensions, and social security which have increased in 2014 compared to 2013. There are several substantive tests that can be conducted to reduce the audit risk for revenues. One of the tests is reading the ledger balances and assessing whether there is consistency. An evaluation of the completeness of financial statements can also be regarded as another substantive test that can be conducted. Analytical procedures are also instrumental in reducing the level of audit risk when conducting auditing for revenues. Reference List Applied Graphene Materials 2015, Annual and Financial Statements 2014. London, Cengage Learning. Bagshaw, K 2013, Audit and assurance essentials for professional accountancy exams. West Sussex, John Wiley and Sons. Chuprunov, M 2013, Auditing and GRC automation in SAP. Berlin, Springer. Flood, J M 2015, Wiley practitioners guide to GAAS 2015: Covering all SASs, SSAEs, SSARSs, PCAOB auditing standards, and interpretations. New Jersey, Wiley. Gelinas, U, Dull, R, and Wheeler, P 2014, Accounting Information Systems. London, Cengage Learning. Hay, D, Knechel, R and Wilekens, M 2014, The Routledge Companion to Auditing. London, Routledge. Knapp, M C 2013, Contemporary auditing: Real issues and cases. Australia, South-Western Cengage Learning. Koratkar, N A 2013, Graphene in composite materials: Synthesis, characterization and applications. Lancaster, DEStech Publocations, Inc. Loughran, M 2010, Auditing For Dummies. Hoboken, John Wiley & Sons. Rittenberg, L E, Johnstone, K M, & Gramling, A A 2011, Auditing. Mason, Ohio, South-Western. Read More