Audit Risks of a Company - Assignment Example

TITLE: 353963 - Auditing Assignment Dated: April 7, 2009 Six significant audit risks as associated with the statement of the financial position as shown in favour of the company till February 28, 2009 and its comparison with the results of June 30, 2008 are as under : No.1. Major Risk The company has not provided a complete list of the current assets in terms of audit accounts .Cash and cash equivalents are drawn as on hypothetical basis. For example cash and cash equivalents for the period ending on June 30, 2008 is 130 and the same has been reflected as 100. The calculations have been calculated for a period of eight months and the figures drawn are approximately 2/3 of the previous figures for the whole year. The calculations drawn on the pattern lacks genuineness and does not represent the real data therefore the calculations based on such type of data leads to misrepresentation for the whole data in favour of the company. The figures as illustrated in the list of current assert are also having similar type of cooked data and therefore lack credibility. No. 2. Major Risk A decrease in good will for the period ending on February 28, 2009 from the figure of 200 to 170 is a risk as associated with the financial statement in favour of the company. The overall asserts have been increased from the level of 1820 and reached to the level of 1900 and the trend needs to be reflected in the same pattern in case of the good will of the company from the previous level of 200 as on June 30 , 2008 and reached on the negative side on February 28, 2009. The company has performed its business during the reporting period and all other parameters have been increased therefore the figures relating to the good will are a risk for the overall audit performance of the company. These figures need to be reflected in its proper format. No.3 Medium risk. The inventories as recorded on February 28, 2009 are at the level of 480 from the figures of 480 as on June 30, 2008. The figures for property plant and equipment for the corresponding period are 730 from 720 during the same reporting period. These figures have not been properly reflected in the financial statement as reported on February 28, 2009. The list of inventories and the list of machinery and equipment are belonging to the same category of the asserts and therefore needs to be reflected with proper care and authentication. The accounts of the company are based on the corresponding data for each figure and category. Their representation in the financial statements with confirmation reflects the financial position of the company for a specific time period. The net present value of the assets and the equipment needs to be drawn on the basis of current value with the subtraction of the depreciation from the same figures. The data as recorded in the financial statement is a risk for the overall accounts of the company. These need to be drawn on the basis of actual and verified figures for making the statements as true reflective of the company's financial health in a specific time period. No.4 Medium risk The current liabilities are based on a set of subheads with their requisite data. The bank overdraft for the period February 28, 2009 has been shown as 110 and the same was 60 at the date of June 30, 2008. An increase of 50 in a single head has increased the liability of the company approximately 100% more than the previous figures. The mode of over drawing from the banks is a risk associated with the company as bank borrowing will increase the net financial liabilities for the company with high interest rates and low returns in terms of net earnings in the reporting period. The trend needs to be reversed for making the company in a profitable mode with lowering the financial burdens as drawn from the banks. No. 5 Medium risk Trade payables have considerably been increased as from the level of 340 as on June 30, 2008 and reached at the level of 350 as on February 28, 2009. The trade payables are reflecting that more financial liabilities are pending by the company to the clients in the market. The figures as reflected on June 30, 2008 have not witnessed any progress rather observed a negative trend during the eight months of the reporting period. The position is reflective of the state of affairs as on negative side and is a big risk for the company to deal with the phenomenon. As the company is running with huge trade payables in the market is lacking confidence of the venders and other business associates and such type of figures may not be represented in the financial statement of the company. No. 6 Minor risk. The level of borrowings have been reflected as 400 for both the periods that is June 30, 2008 and February 28, 2009 which shows that the company has not taken any solid step to reduce the level of borrowings therefore the company has not made any progress in its operations as through the execution of the business. The risk needs to be addressed through the adoption of a genuine strategy to reduce the financial burdens as in the shape of borrowings from the market. B. Identify and support two audit strengths. Must be discussed as a strength and not as an audit risk assessed as low risk . The two most important audit strengths as reflected in the financial statement of the company are (1) a clear cut list of current assets and non current assets as drawn in favour of the company and (2) the bifurcation in current liabilities and non current liabilities in favour of the company. A list of the current assets is reflecting the strength of the company in the shape of assets which are tangible in nature and have the potential to strengthen the overall financial position of the company. Similarly, the non current assets are showing the potential assets which are contributing to consolidate the financial position of company. The bifurcation of liabilities into its classification as current liabilities and non current liabilities will enable the company to formulate its strategy to lay off the current liabilities on priority basis and may like to defer the non current liabilities for the time being. These steps will help in improving the overall financial health of the company and to make effective strategies for the formulation of a comprehensive program so as to make the company a viable and sustainable with the implementation of strategy relating to the settlement of the current liabilities as through effective plan. The liabilities both current and noncurrent are a permanent feature of the companies, however, the company may like to draw a logical plan for the elimination of both current and noncurrent liabilities from its financial statements. C. With reference to your answer to A and B discuss if the overall audit planning risk level is extreme, high, medium or low. The overall audit planing risk as adopted by the company is medium in nature as the risks associated with the financial statement are ranging from high to medium to low and also having two clear cut strengths as associated with the financial statement of the company. The risks as pertaining to good will and liabilities of the company are in a state which can easily be amended with a slight care and redrafting of the financial statement as on the basis of genuine data and information. The pending liabilities and the bank borrowings are the two grey areas in the financial reporting mechanism and actual financial accounts of the company. The ban borrowings can be reduced with the introduction of a deferred payment mechanism for the venders and down payments from the customers these two steps will strengthen the financial position of the company and these funds can be utilized for the clearance of the deferred payments and bank loans in a shortest possible time of one year. The arrangement will automatically result in the improvement of financial accounts of the company. Similarly the nature of good will as reflected in the financial statement will also improve and finally the risks will be of medium nature and can easily be avoided with the adoption of a well focused strategy for the improvement of financial status with high profits and better prospects for each major stake holder of the company in a shortest period of one year. The financial risks are of temporary in nature and can easily be removed with a directional and viable approach with main focus on reducing the bank borrowings, clearance of current and non current borrowings and to improve the good will of the company in the market and in the business circles of the company. These steps will reduce the audit risks from the current medium to low and even without risks in the financial reports of the company. D. With reference to your answer to C, identify a quantitative dollar amount for planning materiality and support this with a discussion of more than one of the commonly used bases. The company needs to amend its financial reporting mechanism with the level of current assets as 1000 with major emphasis on cash and cash ebullience as these two segments are providing a fiscal space for the company to execute its operations and plans with financial liberty and independence. The strengthened cash and cash equivalents are the liquid assets in favour of the company. These assets can be utilized for the purchase of any other item or services as required for the company for making a commendable job for the improvement of financial and policy issues of the company. The assets need to be directed for improving the image of the company within a given time frame. These steps will provide an opportunity for the executives to formulate and review the policies of the company as to make maximum profits with the utilization of optimum resources. These resources are both of tangible and non tangible nature for example, good will of the company. A genuine reporting pattern with a focused approach for improving the image of the company is an asset for the company with enhanced level of output and delivery. The financial statements of the company are the mirrors which are providing essential data and input for reviewing the progress within a specific time period. These financial statements are also necessary for making reviews and evaluations of the companies as to determine the level of financial health and trends in a particular time period. Read More