Analysis of the Activities of the Sanctuary Group Plc - Essay Example

SANTUARY GROUP PLC. INTRODUCTION: Sanctuary Group plc is engaged in the business of developing of music intellectual property rights. The Company is hectically engaged in the business divisions. The business division meeting is also composed of Recorded Product and Artist Services. Recorded Product includes independent recorded music catalogues that covers all musical genres, as well as catalogues of music audio-visual products. And, artist Services has incorporated three of the Company's core businesses namely Artist Management, Merchandising and finally Live Agency. And, these businesses are offering essential services to an artist at all stages of his or her career. Furthermore, Artist Management has been representing over 40 acts and operates as a music management company. The Company's subsidiary, Bravado International Group Limited, operates as a merchandising company that specializes in exploiting intellectual property rights for more than 100 artists and brands. Live Agency even represents over two hundred twenty acts for live performance. Also, its business is carried out by the Company's subsidiary, Helter Skelter Agency Limited. This company operates as a booking agency. The following paragraphs will explain how audit strategy is related to the fairness of the financial statements of the. 1 Critically evaluate the risk- related approach to external audit with particular reference to the audit of the sanctuary group plc. An audit(Pickett, 2006) is defined as the evaluation of an organization, process, system, project or product. In accounting, an audit is the independent assessment of the fairness where a company's financial statements are presented by its mangers or board of directors. It is done by competent, independent and objective person or persons, known as auditors or certified public accountants, who then issue a report on the results of the audit(Whittington, 1995). And, the audits are performed to determine the validity and reliability of financial information. Also, it provides an assessment of a company or a business' system of internal control. The accounting and related recording systems must adhere to generally accepted standards set by governing bodies that regulate how businesses should presented in terms of balance sheet, income statement and statement of cash flows. The audit should be based on random sampling and it should not be an assurance that financial statements are error free. Auditing also provides assurance for third parties or external financial statement users that such statements present 'fairly' a company's financial condition and results of operations. Further, effective risk management(Frame, 2003) will not happen overnight. Managers who want to enable their organizations to be better at managing risk must recognize that the road to effective risk management is definitely long, twisting, and occasionally hazardous. Beginning the journey is not as difficult. It may be even be triggered by a one-page directive issued by the chief operating officer of the organization following a small disaster, exhorting the organization to implement good risk management practices. But after the uninitiated, when the confetti has settled and the cheerers have been thrown away, the journey toward effective risk management is an uphill battle. In some way, what happens at this point is typical of many high-sounding corporate decisions. When light shines on the initiative, everyone scrambles to support it. When the senior managers turn their attention to other issues, the initiative begins to lose momentum, and without active support from top management, it falters. It may even hang on for a while until it dies and is buried. The risk related approach to external audit in the audit of Santuary Group Plc is based on control risk, audit risk and inherent risk. Audit risk is used to describe what is usually applied when in case of an audit of the financial statements of an entity. The first objective of the audit of the balance sheet, income statement and statement of cash flows is to express an opinion as determine if the financial statements present fairly the financial position and results of operations of the entity. Audit risk is also described as the risk of the auditor giving an erroneous opinion on the financial statements. Clearly, it is described as the risk that the auditor will state that the balance sheet, income statement and statement of cash flows present fairly the financial position of the entity, when in fact they do not. Furthermore, one of the components of audit risk is Inherent risk. Inherent risk can be described as the measure of auditor's assessment that there would not be material misstatements in the financial statement before taking into account the effectiveness of internal controls. If the auditor decides that there is a high possibility of misstatement of the financial statements. If internal controls are ignored, the auditor would therefore conclude that the inherent risk is higher than normal. Internal controls are often ignored in setting inherent risk because they are included separately in the audit risk model as control risk. This part of auditing often is found in the area of professional judgment on the part of an auditor. For clarity, some of the accounts that have low inherent risks are fixed assets because they are easy to observe. Another obvious example is the purchase and sale of securities traded in the stock market where the daily fluctuating market prices can be openly watched with transparency. Also, another part of audit risk is control risk(Arens, 1997). Control risk in layman's term is the measure of the auditor's assessment of the probability that misstatements that will clearly exceed the tolerable level can not be prevented or detected by the client's internal control system. This assessment includes an assessment of whether a client's internal controls are effective for preventing or detecting misstatements and the auditor's intention to make that assessment at a level below the maximum one hundred percent as a portion of the audit plan. Lastly, another component of audit risk is acceptable audit risk. Acceptable audit risk can be indicated as a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified or clean opinion had been issued. If the auditor decides to lower audit risk, that means that the auditor wants to be more certain that the financial statements are not materially misstated. The product of both inherent risk and control risk is described as the Risk of Material misstatement. It is clearly allowable to make a combined assessment of inherent and control risk, has been termed Risk of Material Misstatement. Give examples of how you might collect evidence and assess the degree of inherent risk in the 2005 audit of the company and factors affecting the company's control environment. According to the official website of Sanctuary Group PLC, http://www.hemscott.com/companies/company-summary.docompanyId=1227 that Turnover for the year 2006 is 133,180,000 for the year 2006. However, Pre tax profit for the year 2006 was pegged at a loss of 69.62. Earnings per share is a loss of -69,000,000. People could also state that The Sanctuary Group worships at the altar church popular music. The Sanctuary Group also provides many products and services related to music and musicians. The company's Recorded Product division consists of more than twenty record labels that together proudly displays a catalogue of audio and video recordings by various artists in many types of popular genres including Slipknot, Kiss and Nirvana. Further, the division produces CDs, DVDs, music downloads, and ringtones. Surprisingly, the company's Artist Services division in involved in the merchandising, live agency and global artist management. Based on the above data, the audit should focus more time and effort on high risk items. The high risk items of Sanctuary Group Plc include the audio and video recording of various artists. Therefore, the there should be regular physical inventory counts of this high risk assets. The physical inventory must then be compared with the book records in order in order to determine if losses, errors in recording the books or thefts have actually taken place. After this has been done, then shortage or theft will be charged or paid by the person responsibility for the safekeeping of the video and audio recordings. Another asset that is a high audit risk is cash. Since cash can easily be stolen, then strict internal control procedures must be put into place. One such internal control policy is to assign one person as keeper or cashier of the cash. Then, another person will be assigned to record in the books the sales for the day. Third another person, usually the manager, will be assigned to approve or disapprove all cash and other asset assignments. 2.In the context of SAS 600/ISA 700 Auditors reports on Financial Statements, examine the specific factors that may have led to the opinion expressed by the auditor Baker Tilly and how they may have come to their final decisions. SAS 600 states how the auditor will word his or her audit reports based on criteria approved by the accounting standard council. The findings of the financial reporting review panel based on the audit report of tenth larges auditing firms in the world, Baker Tilly, states that Baker Tilly did not agree with Sanctuary Group Plc's accounting procedure in the treatment of prior period adjustments. Because of this, Baker Tilly issued an adverse opinion for Santuary Group Plc's not complying with what is stated in Financial Reporting Standard 18 entitled Accounting Policies. Therefore, the Financial Reporting Review Panel made its own audit findings and came up with the working party that would study the accounting procedures in Sanctuary Group Plc. The Financial Reporting Review Panel was assisted by one of the top auditors in the world KPMG Audit Plc. The panel came out with three findings. First, the prior year adjustments disclosed in the year 2005 annual financial statements that pertain to revenue recognition and capitalization of costs were actually rectifications of fundamental errors in the 2004 accounts and not actually connected to changes in accounting policy. Second, the Sanctuary Group's equity shareholding in Rough Trade Records Limited is equal to the investment in an associate and must not be accounted for as an equity investment and not really consolidated. In 2005, The Sanctuary Group office members saying that this has been in error. Also, This basic error of recording of has been corrected through the implementation prior period adjustments. Lastly, the United Kingdom General Accepted Accounting Principle were properly used for just recording purposes. 3. Using any other information that you have obtained , discuss the factors that may impact upon the audit approach of the company for 2006 (This may include the interim unaudited report for march 2006 and the independent auditors' report for September 2006, if available by march 2007) Based on what the panel came out with three findings above, the factors that may impact upon the audit approach of the company for 2006 that error in recording business attractions are errors in the financial statements. Another factor is the implementation of prior period adjustments to correct the errors. If these factors are not set in their right places, then the balance sheet, income statement and the statement of cash flows will be in error in the financial statements. First, the prior year adjustments disclosed in the year 2005 annual financial statements that pertain revenue recognition and capitalization of costs were actually rectifications of fundamental errors in the 2004 accounts and not actually connected to changes in accounting policy. Second, the Sanctuary Group's equity shareholding in Rough Trade Records Limited is equal to the investment in an associate and must not be accounted for as an equity investment and not really consolidated. In 2005, The Sanctuary Group office members saying that this has been in error. Also, This basic error of recording of has since The findings above state that United Kingdom General Accepted Accounting Principle were properly used for just recording purposes. CONCLUSION: Sanctuary Group plc is has been engaged in the business of developing of music intellectual property rights. The Company is hectically engaged in the business divisions. The business division meeting is also composed of Recorded Product and Artist Services. ItsRecorded Product includes independent recorded music catalogues that covers all musical genres, as well as catalogues of music audio-visual products. And, The Artist Services has incorporated Artist Management, Merchandising and finally Live Agency. The findings of Baker Tilly is based on the audit findings of Baker Tilly, the prior period adjustments violated generally accepted accounting principles. Therefore should be rectified. Corrections means applying generally accepted accounting principles in the preparation of the balance sheet, income statement, statement of cash flows. REFERENCES: Pickett, K., Audit Planning -A risk Based Approach, J. Wiley & Sons, London, 2006. http://www.hoovers.com/sanctuary-group/--ID__120910--/free-co-factsheet.xhtmlcm_ven=PAID&cm_cat=INK&cm_pla=CO1&cm_ite=sanctuary-group http://www.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeIII/sas600.pdf Arens A., Loebbecke J., Auditing an Integrated Approach, Prentice Hall, London, 1997 Whittington R., Pany K., Principles of Auditing, Irwin, London, 1995 Frame, D., Managing Risk in Organizations: A Guide for Managers, Jossey-Bass, US, 2003 Read More