Finance and Accounting of BMW Group - Case Study Example

Introduction

The BMW group has two major segments of operations. The financial statements have been consolidated. The products of the company include, BMW 2Series Gran Tourer, the new BMWX1and the new MINI Clubma which are the latest vehicles, others vehicles are also made. The company makes motorcycle which has a capacity of 400cc and above. The company falls in the automotive industry and as auditors we had to observe this. The BMW Group being subdivided into the Automotive and Motorcycles, Financial Services and Other Entities segments (the latter primarily comprising holding companies and Group financing companies).The audits will confirm all the aspects of noncurrent tangible assets such as property plant and equipment. The audit will verify the accuracy, completeness, rights and obligation, valuations and allocations, presentations and disclosure and classification. The audit will specifically audit the land and building.

The audit was “conducted our audit of the consolidated financial statements in accordance with German generally accepted standards for the audit of financial statements promulgated by the Institute of Public Auditors in Germany (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance”

There are many areas of risks that are present in the company. The disclosure that regards to contingencies may not sufficiently reveal the effects of the pending proceedings in this case. In addition, the financial results of the company and the subsidiary company might be manipulated to influence the market value of its shares before the sale transaction. Finally; the related party transactions with the subsidiary company may be misrepresented to improve the market. The auditor must scrutinize these risks to ascertain the probability of fraud.

According to our audit, it is evidenced that BMW company assets such a land and building are fully owned, in use, physically owned by the company, depreciated as per the given policy.

• Physical existence

The company land has been estimated to be 10Ha.The physical confirmation of the land could be seen. The hectare in the title deed can be confirmed viz as viz its physical presence. The land has been fenced by the company implying that it the company property. The fact that the company has been subdivided fully into subsections of the manufacturing may clearly indicate the physical presence of the land. Basically the land can be verified to be present. On the other hand, the buildings are structured in a way that they are visible. There are no underground buildings sand all the buildings are visible. The company has no other major plants or divisions but all its manufacturing processes are done in a single piece of land and buildings in it. Others are distribution points that are owned by distributors. The acquisition of the piece of the land can clearly be validated and was authorized by surveyors.

• Owned by the company

The noncurrent assets that are the building and the land are properly owned by the BMW. The audit was done by investigating the files those entries the title deed of the piece of land. The title deed was original and was confirmed from the ministry of land to be the original copy. The physical presence of the buildings on the land revealed that the land actually belonged to the company. The files of the buildings revealed the contractors that were tasked to build the buildings. The ownership of the design plans, expenditure receipts on the building under the name of BMW further more indicated that the buildings are owned by the company. The buildings have been tagged BMW and the logo of the company is manifested in each building of te company and this could further explain that the company fully owners the building. The fixed assets that have been recorded in the financial statements are fully owned by the company. There are no evidence of transfers of the company building and land in any document. The disclosure by the management revealed that there are plans of acquisition of these assets by any other company. In addition, there is no plan for partnership by the company with any other company. The date of the acquisition has been shown in the note 120 in the 2015 financial statements. In addition the sale agreements which led to the acquisition of the land prove beyond reasonable doubt that the company has no partnership and that the land and the building are assets of the company.

The statement by the board of directors which claim that “land and building of the company are fully owned by the company, there are no leases from other company. Furthermore the company is not in any partnership with another company whatsoever” shows that the company fully owns the assets. Based on the audit which has considered the materiality and proper documentation it is evidenced that the completeness of the documentation proves beyond the reasonable doubt that the company owns the land and the building.

• In use

There is a clear cut difference of the usage of the assets. The land has buildings in it and both the land and the buildings are owned by the company. They are actually in use. The land has the subsections of the manufacturing building in it. Packing; warehouse and testing tracks have been instituted within the piece of land. The company show room is within the buildings on the piece of land. The physical presence of the operations and buyers in the show room revealed that the company is on operation and that the assets are in use.

• Correctly valued(cost, net realizable value or revaluation)

Based on the financial statement, the buildings were valued at €900M.The building depreciates at the rate of 6% annually. Basically, the audit revealed that the building was correctly valued according to the accounting and state policies. The calculation from the year of incorporation reveals that the cost that is represented in the financial statement is the actual cost of the building. The depreciation rate in accordance with IAS 23 which reveals that the rate should be applied on an annual basis. Therefore, the building was correctly valued. On the other hand the land appreciated by 16%.The cost of the land is verifiable in the previous statements and the appreciation of the land has been consistent. The representation of the cost on the balance sheet has been done with accuracy. The summaries of the depreciation and appreciation calculation which is attached in the note 57 in the financial statements shows correct and accurate calculation.Basically,the summaries of the land and building depreciation schedule found in the statements was confirmed to be true. The opening balances of the land and building in these schedules were correct. There was no exaggeration and errors in the calculation. The original costs were verified and the depreciation cost was correctly eliminated from the building cost. The cost of the land has been valued at €200M.The land has appreciated by 16% to €232M.The appreciation value is significant and reliable in accordance to the state policy.

Basically, we used an expert from property consultation to verify the strength of the building and of the depreciation was done correctly. Most of the time the depreciation rates are usually high especially in the manufacturing factories. This is because of the heaviness and the machinery that are used during the construction process. Therefore there was need for the expert to ascertain the real depreciation rate of the company.

Basically, the urgency to check the list that has investment plans of the company was emphasized. The investment plans of the company unto the land and on the building were scrutinized. The work on investment was proceeding as scheduled; the vehicles and motorcycles were made as planned. Over 2million units of vehicles were made in 2015 and 2.5 million units of motorcycles were sold. The physical examination of the motorcycles that remained in addition to the sampled number of invoices revealed that the company actually is using the resources and that it is functional. The invoices counting were done through sampling. This was not very accurate approximation but it shows the close picture of the numbers. However, the computerized data was able to be recorded significantly.

The auditing working papers were compared with the previous year’s recordings. The working papers validated the revenues rise from €2.5B to €2.6B.The revenue that the company gets has been properly been documented and the notes and provisions have been given.

• Properly recorded and presented in the financial statements

For the financial data to make sense, then they should be properly be presented in accordance to the GAAPs and the IASs. The recording of the land and the building was done correctly, the figures were done correctly and thus this showed fair presentation of the financial statements. The assets were correctly classified as noncurrent assets and thus were recorded as in the group. Basically the presentation of the financial statements has observed the fully the outstanding policy of International Accounting Standards. The management has ensured that all the purchased land is classified to avoid misrepresentation of the assets. We were able to use qualified valuers who correctly valued the land and the building. The depreciation and appreciation rates were used significantly so as to ensure proper recording. The figures were recorded without the errors of omission or commission.

“Controls should exist over revaluation of fixed assets, such as selection of qualified valuer, and identification of fixed assets that have suffered impairment.

Cost or revalued amount of fixed assets and related accumulated depreciation has been properly summarized for disclosure in the financial statements. As auditors we purposed that the following aims be achieved;

• To record fixed assets in detail in fixed assets register.
  • To be a good control, documents should be kept and accessed by persons independent of those using and having custody of the fixed assets.
  • The register should be compared periodically with physical assets and vice versa.
  • Assets should have unique numbers affixed to them, the register containing the same number.
  • The register should contain all the details necessary to control the individual assets.
• Fixed assets should be reconciled at least annually to cost / valuation, accumulated depreciation and depreciation charge in the financial statements.
• Significant differences between the register and physical assets or between the register and general ledger entries would suggest high control risk and differences should be investigated by the company.
• Physical control over high value, especially movable assets, is particularly important, including stamping with the company name, restricting access and securing machines to desks.
• If a fixed assets register is not kept or the register is found to be subject to error, control risk will be increased and the auditor may have to extend substantive tests for details” Financial statements disclosures were done and prepared in accordance with International Financial Reporting Standards (IFRS) and IAS.

• Properlyauthorized for acquisition and disposal

The land and building have documentary evidence of the ownership. The acquisition of the land was done officially and the documents. The managers claim that “any financial transaction must be authorized by the accountant, internal auditors and managers for it to validate so as to meet the requirements. There are future plans to sell the land or the building. The board of directors claims that the company will give a half year notice of sale of any portion of the land or the building. The cost of acquisition of some part of the land that was board last year so as to extend the land was recorded properly documented. There are no plans for the disposal of the land or the equipment in the recent past. The disposal plans must be revealed in less than six months as stipulated by the management. The reasonableness of these disposal proceed is valid. This helps to safeguard the documentation and therefore avoid future losses.

The company has a scrap value of €32.The scrap value is reasonable. This is because it observes IAS 23 and the company policy. The company

• Depreciated as per the company policy and according to their revenue earnings capacity

The company has correctly depreciated the land and the building of the company. As mentioned, thee depreciation was properly recorder in the accounting and the costing records. The policy that was used for the depreciation was correctly used. The calculations were also correctly done as per the auditing standards. They were no material misstatements and errors in the calculation. The company policy on the depreciation is that the fair value of the depreciation will be represented in the financial statement. The depreciated building and the appreciated land were scrutinized and evaluated. The policy that was used to depreciate the building was good. The policy was appropriate because there is no more wear and tear due to less vibrating machinery that may weaken the structure. The accuracy of the rates can therefore be validated, because the machines have fewer vibrators and therefore the walls remain strong.

The auditors were keen to scrutinize the areas of Heightened Audit Risk: The financial statements and other reports should be were analyzed in order to highlight the areas of heightened audit risk of BMW company. The areas identified are discussed below:

Trade payables. The payable should be confirmed by the auditors through the count of the invoices and the payment receipts that are available. The accuracy and the completeness of the information will be revealed when there are several invoices collected. Ordinarily, trade and other payables proper recording and exact presentation is required in order to fulfill many of audit risk assertions such as completeness, existence, cut-off, valuation and allocation (Puncel, 2007).

Property, plant & equipment There is need for the auditor for the affirmation of the property of the company. This can be done by examining the title deeds and land registry certificates to ensure true ownership towards the company. The auditor will physically inspect the asset to ascertain the production and costs related activities..There has been decreasing in the value from €1200M to €1100 M of the plant assets a propelling reason to audit the company.ISA 16 requires that appropriate depreciation be used to value the assets.The company vehicles, buildings and machinery are physically seen.

Revenue. Auditor also must analyze the revenue recognition procedures, as when and how much of revenue to be recognized is complicated. Auditor should compare cash flows from operations with revenue and if there is a disagreement in both he/she should be skeptical and analyze inventories and receivables for any potential inflation. Auditor should identify and assess internal controls for credit authorization, accuracy and classification of revenue.

In detection of fraud, the auditor will use audit procedures to find material misstatements in the financial statements either due to fraud or error. Normally, the omission of important audit procedures results in undetected material misstatement. The detection risk is reduced by escalating the number of sampled transactions for detailed testing by the auditor. Inherent risks occur due to error or omission as a result of factors other than the failure of controls.In the area of control, the firms should have enough internal controls to prevent and detect the cases of fraud and error. Ordinarily, the control risk is will be high if the auditors have inadequate internal controls to prevent and detect fraud and error in the company’s financial statements. There will be substantive audit procedures that will be carried out by the company to reduce the audit risks .They areas discussed below;

• Observe fixed assets: The auditors should check all the presence of the fixed assets in the firm. The physical fixed assets should be the ones that are documented in the balance sheet. This is to avoid the omission and ensure that appropriate standards are set to avoid “ghost fixed assets” The allocation of the price and funds should be done within the jurisdiction of the accounting principles. There should be accuracy in the calculation of the depreciation according to the accounting standards so as that a true and a fair value of the statement are prepared.
• Confirm accounts payable: The accounts payable confirmed by the auditors through the count of the invoices and the payment receipts that are available. The accuracy of the information was revealed when there are several invoices collected. The net debt of the company at 31 December was substantially reduced to €0.3m (2012: €2.4m).The Group has the support of the committed revolving credit facility which is available until 30 April 2016. The amount of the facility is currently €5.0m and this reduces by £0.5m on 30 June and 30 September each year. There were term loans and finance leases supporting specific capital investments which amounted to €0.5m at 31 December 2013.There has been the reduction of the trade payables from € 23,321M to €15,969 M. All the payables should be put into the considerations by the auditor.
• Bank confirmation: There is need for completeness in the bank confirmation. The auditor compared the bank at the balance sheet and the one in the bank statement to ensure that they are the same. The accountants could lie with the management to “cook book” out of their self interest to create a perception that the business is doing well instead in the real sense it might be going down to its knees.
• Examine accounts payable supporting documents: The Company should have the invoices that were written to the customers requesting them to pay the debts to the company. The auditors also checked the goods received note (GRN) to ascertain that the goods were actually received and that they are to be paid for.

Report

To: BMW company

From: XYZ Auditors

Date: 2/5/2015

The accompanying balance sheet as at December 31, 2015 was audited in addition to other related income and cash flows of the same year. The statements were the responsibility of the BMW company management. We were able to express our opinion based on the audit.

The audit was done in accordance to the IAS and the GAAPs while considering the German standards which require that an audit is planned and performed at a reasonable assurance to ascertain if the financial statement is free from material misstatement and errors of omission and commission.

In our audit opinion, we conclude that the financial statements truly and fairly represented the land and the building. The following key elements were observed.

• The buildings were depreciated by 6% which is compliance with the German generally accepted principles. The rate reflects the normal rates in the construction industry and therefore it will reflect a fair depreciation.
• The land appreciated greatly by 16%.The appreciation rate is accepted because the land is in the urban set up and the demand for the land is high.

The results of our audit noted that the company assets especially land and the building. The company monitors the assets through physical observation to ascertain their physical presence. The company has kept has kept proper documentation of the acquisition of the property and has correctly valued and presented. The areas of risks reveal that the company has a fair presentation of the statements.

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Auditor

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