Auditing Functions Coursework Writing Assignment (Coursework Sample)

Title: ACC7070 Auditing & Assurance Services
Name of the course:
Institution affiliation:
Question 1 GreenBrown Ltd.
(a) Accuracy of the Audit procedure to ensure the summary of the property, plant and equipment is established.
Before undertaking the audit of property, plant and equipment (PPE), the Auditor has managed to procure the Audit Report for the previous year which has highlighted numerous wrong entries in regards to PPE. The Auditor must first establish how these errors had occur and if they have been repeated again in this audit year's financial report.
In order to do this well, the Auditor will call for a pre Audit meeting with the senior management. During this meeting, he will query how internal controls related to PPE are working. He will also invite the management to volunteer towards the identification of any risks inherent. e.g. for control procedures, entities objectives and strategies, incentive policies, query how the firm had set up its depreciations policy, etc. During this meeting, the Auditor will take notes to identify areas which need further sampling or stringent audit procedure. He will further make physical observation and inspection of the company's offices and production facilities to verify the details of the meeting.
Reviewing the Financial Statement, the Auditor will establish what constitute Property, Plant and Equipment. PPEs normally are high-value assets used to generate goods and services but are not meant for sale in the normal course of business. PPE are of high values especially for the manufacturing companies. Further their turnovers are much slower than those of current assets. In monetary terms, PPE values are much higher per unit item. To identify them, they are recorded only once in the Financial statements.
In order to ensure that the Audit procedure take care of all PPE, the Auditor will undertake the following.
Control over expenditure incurred on PPE acquired. He will review the capital budgeting of the firm to evaluate the effectiveness of their controls and compare actual expenses against budgeted figures. He will check to ensure capital expenditure are not above authorized amounts and also distinguish between capital and revenue expenses in regards to a specific asset.
Accounting and usage controls. The Auditor will check the ownership document for each category of capital expenditure. He will check to ensure that the fixed assets have been procured using the laid down procedure for asset acquisition and disposal.
Information controls. The Auditor will confirm what information are available regarding calculation and allocation of depreciation, recording disposal and retirement of assets, insurance cover, controls on repairs and maintenance and the establishment of useful life of assets.
Safeguarding of assets. The controls should be in place to guard against loss and damage of any asset. The Audit should be keen to assess the mechanism set to make good any such incidences, for example by securing adequate insurance covers against such damages, and are in place. Further additional controls assigning the responsible of certain assets to traceable employees and clear statement of the consequences and liability for any such mischievous actions on assets, must be verified.
Once these are established, the audit may suggest to the management or articulate in his Audit Report weaknesses noted and the propose strengthening of weaknesses to ensure that these loopholes are sealed.
(b) Audit procedure to ensure all items of a capital expenditure are included in addition for the years and no revenue expenditure has been capitalised
Here the Auditor will categorise all Capital expenses (at the beginning of the year, additions during the year, disposal during the year and depreciation charges) to compute the end year capital expenses. Further he will classify all revenue expenses and list them down.
Generally, capital expenses are those that used to acquire fixed assets, making additional acquisition of the existing fixed assets, increasing earning capacity of the business, reducing the cost of production and acquiring a benefit of a long-term nature of valuable right. Some expenses, though of revenue nature, used in creating an asset or adding its value for achieving higher productivity, can also be termed as capital expenses. These include materials and wages used in the installation of a new plant, transport expenses used in the transportation of the new equipment from the port to its factory location and also legal fees charged for the transfer for industrial land/premises.
The Auditor will check the Fixed Assets value at the beginning of the accounting year. He will then check for any additions to the Fixed Asset during the year under audit. Additional assets are those that have been acquired by the entity during the current accounting period. These new assets acquisitions/ additions are normally recorded in the Assets register. The Auditor will verify that those assets are available and that they have been procured in accordance with the procurement procedures set. Since they are new, the auditor will verify their value at acquisition time. He can do this by making a quick check reference on assets of similar nature in the market from a reputable stockist to confirm that they were acquired at the prevailing market prices. Once he has established the ex-factory price, he may investigate other expenses build up to transport, install and test the machinery in their new locations. This exercise will enable the Audit come up with the actual value of the asset. Once these are determined, and since asset acquisition are normally a well planned activity, normally discussed, sanction and authorised by the top management, he may request from the management to confirm that the new assets were actually required to increase productivity and or replace retired asset. Further he will check that they are recorded in the Balance sheet and Profit & Loss Accounts.
Revenue Expenses include expenditure whose rewards will be reaped within a year or less. They are used to keep organisation operating, purchases and movement costs. They include such expenses like cost of raw materials, salaries and wages, advertisements, power and electricity, rent, insurances, interest on borrowing, repairs and renewals of fixed assets, etc.
The Auditor will duly check that the Capital Expenses nd categorises as such and that the Revenue Expenses are also recorded properly. All capital expense will be noted under the sub title capital expenses and all Revenue Expenses will be recorded under the Revenue Expenses of the Profit and Loss Accounts and also those they are counter recorded in their respective capital Accounts and Revenue Accounts respectively.
(c) Audit procedure to ensure the depreciation rates are calculated appropriately
Depreciation is defined as a measure of the wearing out, consumption or exhaustion of value of an asset arising out of usage, time lag, obsolesce and technological changes.
Depreciation is used to keep the capital intact, ascertain the fixed assets cost accurately, and charge initial cost against earnings generated by a fixed asset and to prepare a true and fair statement in regards to the Fixed Assets.
The Auditors meeting with the management will establish their policy towards depreciation of assets. From the previous Audit Report, it is apparent that the depreciation charges for each category of assets are low. The Auditor will test check the calculation of depreciation and the total depreciation arrived. He will then compared this value to that of the previous two years. Here he could check his depreciation for the years ended June 2015 with the last two years and get percentage change. In assessing the depreciation charges applied, he will consider the useful life of each asset under evaluation. Here he could perform different depreciation rates for different components within an asset, depending on their estimated usefulness.
Reviewing the depreciation method used for an asset valuation at the end of each year will confirm if the charge are equivalent to useful life of the mentioned Fixed Asset. Any change in depreciation method must be investigated and treated as a change in accounting valuation.
In case assets are under construction, they must not be depreciated until such time that they have been correctly values and put into service.
The residual value of each asset is also important in the establishment of the depreciation
The Auditor must establish that the depreciation values are correctly recorded in the Profit and Loss Accounts and also in the Balance Sheet.
Each of the depreciation values must be correctly set and used for the valuation of the different categories of the assets. Straight line method is used where the value of the asset is determined less the salvage value then the remaining value is divided by the useful period during which the asset will be utilised in productive activities.
In case where the depreciation rates are low, a generally acceptable depreciation rates issued by major accounting bodies can be recommended for usage.

WEAKNESS

IMPROVEMENT

1

Taking stock procedure. Stock taking should be taken under a strict supervision. In this case, even the supervisor was present in the stock take exercise. Therefore, there was no body to supervise the entire activity

To improve the system of stock take, a supervisor is required to coordinate and control the stock taking events. He should not participate in stock take but do sampling and verification exercise to confirm an airtight process is followed. he supervisor should have been engaged in checking that the entries are going on well and also undertake sampling to confirm accuracy of the stock entries from the staff, especially for high value stocks

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