Knowledge of Business File for Kale Computers Plc - Essay Example

Kale Computers Plc is a public limited company with its shares available in the market for sale and purchase by the general public.

            The company follows (assumption) international accounting standards (IAS) and the international financial reporting system (IFRS) for accounting and presenting its financial statements. In addition, since the company operates in the UK, all the relevant UK laws and regulations are applicable for its operations, financial statements development, and reporting along with disclosure requirements.

Objectives and Strategies and Business Risks

The company is facing stiff competition in the perfect competition market in which it operates. This has caused the company to reduce its selling price to remain competitive in the marketplace. This cost-cutting has adversely affected the sales revenue growth rate and hence, the profitability. This is a prominent business risk that the company has been unable to satisfactorily deal with; as a result, the company has to bear a loss in 2005.

            In addition, another glaring risk is the ownership structure of the firm and the demise of the majority shareholder Mr. Kale. This might lead to a power struggle in the company which ultimately results in loss of productivity and negative politics.

Internal Controls

Internal controls in an organization consist of five key elements:

• Control environment
• Risk assessment process
• Control activities
• Information and communication
• Monitoring

Together these five areas can be used to gather insightful information about the company’s internal control environment and its effectiveness in preventing, detecting, or mitigating risks to the company.

Control Environment

            The control environment refers to the overall organization structure and values system. The commitment of top management is mandatory, and the control environment study assures top management’s philosophy and operating styles. These are reflected in the company’s policies, strategies, and operating procedures. The auditor should conduct detailed interviews with top management and should study the company documentation to gather information about the control environment of the company; as top management is ultimately responsible for implementing and operating the corporate governance structure for the company. Studying the control environment to identify management’s operating style provides information on how to proceed with the audit.

Risk Assessment Process

To evaluate the reliability of financial and operational procedures and statements, the auditor must identify and verify the risk assessment process that is undertaken by an organization. This is achieved by determining the company-wide objectives for risk assessment and controls and identifying the organization’s risk appetite. In addition, an auditor needs to verify the process of risk assessment in the organization and whether it is followed up properly once key risks are identified. The risk assessment should be carried out to add value to the processes of the organization. Auditors need to comment on the effectiveness and appropriateness of the risk assessment and management process of Kale Computers. Interviewing, observations and documents are some of the sources that can be used.

Control Activities

Control activities provide information about the organization’s policies and procedures that are developed to implement management’s vision, strategy, and long-term goals. An auditor needs to understand the control activities and review them to identify if there are material weaknesses in the control activities. Some of the control activities include business continuity planning, applications and systems, physical controls, and information access. Auditors should develop appropriate programs and checklists to effectively identify and evaluate the control activities within the scope of the audit. This also includes a detailed analysis of the information systems of the company.

Information and Communication

An auditor must gain information about the information systems in place at the company. This might include the financial statement generation system, transaction management system, and other finance-related applications at Kale Computers. In addition, if the company has an intranet or a website, it should be analyzed to identify if the information is suitably provided, appropriately protected, and secured with a certain degree of reliability and confidentiality. This information can be obtained from relevant information technology/ systems functions in Kale Computers.

Monitoring

Monitoring is concerned with the evaluation of adequacy and effectiveness of the company’s internal monitoring and supervision system. In addition, it assesses the effectiveness of corrective actions taken to resolve the identified risks. Auditors should focus on internal audit reports of Kale Computers to identify the nature and materiality of identified risks and compliance with internal auditors’ recommendations. In addition, interviews and discussions with relevant personnel from management including process owners may provide useful information about the effectiveness of the monitoring system in the company.

The above areas provide significant information about Kale Computer and its operations. If conducted appropriately, the auditors will be able to make an informed decision about the state of the company’s systems and procedures concerning the financial system’s correctness, reliability, and completeness at Kale Computers.