Analysis of audit risk areas Real Good food company Plc (Term Paper Sample)

FINANCE AND ACCOUNTING Name Course code Instructor Institution City/State Date Analysis of audit risk areas Real Good food company Plc Contents TOC \o "1-3" \h \z \u Introduction: PAGEREF _Toc383976015 \h 3Company analysis.......................................................................................................................3Part A – Areas of Heightened Audit Risk: PAGEREF _Toc383976016 \h 3Part B – Substantive audit procedures PAGEREF _Toc383976017 \h 6Conclusion: PAGEREF _Toc383976018 \h 8References: PAGEREF _Toc383976019 \h 9 The analysis of audit risk areas of Real Good food company Plc Introduction: The Real Good food company plc is a diversified food business, serving a number of market sectors. This includes manufacturing, wholesale, food service and export industry. The company is a major distributor of sugar in the UK.It also manufactures a wide range of baking ingredients, jams and sweet baking products. Its portfolio of brands includes; Whitworths Sugar, Renshow and R & W Scotts CITATION Rea14 \l 1033 (Realgoodfood, 2014). Company analysis The financial statements indicate some anomalies requiring further investigation. The management has also used estimates and judgments of which particular items are recorded in the statement. Most of these estimates are under or over estimated and thus there is need for investigation CITATION Rea14 \l 1033 (Realgoodfood, 2014).The estimated future cash flows for impairment calculations presented in the notes, are based on management’s estimates of future margins which are based on plans and best estimates of the productivity of the income generating units in their current condition. CITATION Dou13 \l 1033 (Hawks, 2013) In addition, the mortality rates and the discount rate used to calculate the present value have some degree of assumptions and estimates. "For example, if the mortality rate assumption changed, a one year increase in longevity would increase the liability by 4%. Changes to the discount rate of 0.5% would result in a change in the scheme liabilities of 7.0% and a 0.5% movement in the rate of inflation would change the liabilities of the scheme by 2.0%. A 10% change in the assumption of the real discount rate would change the finance expense by approximately £0.07 million" CITATION Rea14 \l 1033 (Realgoodfood, 2014). The company is also affected by some ethical issues during the audit. The audit that is supposed to be independent is compromised by self-interest and self-review of the auditor. This affects the presentation of a true and fair value of the company. The company has experienced fluctuations in rates. The main risks that the company suffers are interest rate risk and liquidity risk. The company has also some currency exposure as regards to its sugar trade. However, the majority of this risk is often offset through buying and selling sugar using like currencies CITATION Rea14 \l 1033 (Realgoodfood, 2014).The Company has a challenge as a going concern. This is because the directors have a rational prospect that the company has sufficient resources to remain operational for the foreseeable future. Therefore basic accounting principles as a going concern are used CITATION Ano144 \l 1033 (Anonymous, 2014). Part A – Areas of Audit Risk: The independent auditors must scrutinize and analyze the financial statements and other to emphasize the areas of heightened audit risk of real food company plc. * Revenue. The revenues in the real good food company are generated through a number of operational segments which raises the potential risk areas in the company. The inventories, sales, receivables and receipt internal controls of the company need to be congruent with all the revenue cycle and transactions required to be completed. They should also correspond with general ledger CITATION Rea14 \l 1033 (Realgoodfood, 2014). * Operating segments. Operating segments is adopted by the company and cost and revenues are related to the segments or operations they relate to physical inspection of such diversified operation will be hard to perform and therefore auditor will be required to perform compliance and substantive tests along with sampling techniques in order to highlight or detect any potential risk CITATION Dou13 \l 1033 (Hawks, 2013). * Raw material. Currency fluctuation along with revenues and expense recognition in several different currencies will increase the inherent risk due to control system. The auditor is required to perform detailed analytical procedures along with assertions tests which will test the accuracy, classification, timing and matching with inventory and payables of such transactions CITATION LPu07 \l 1033 (Puncel, 2007). Detailed tests of financial assertions Completeness: The auditor must check the following: Purchase orders → delivery notes/goods received note → invoice → NL a/c → profit and loss account → financial statements → Cash→ bank statements. Occurrence: The auditors always look for the occurrence of the transactions Financial statements → NL a/c → invoice → profit and loss a/c → delivery notes → Orders. The company audit areas containing audit risk are evidenced in the company. The sales revenue is recognized on an estimate basis. The estimate may be biased and not based on realistic assumptions regarding the sales price of the products of the company. The company may also incur the risks in the material misstatement. Ordinarily, the examination of the company can be overstated due to poor examination. This leads to unnecessary expenditure revealed in the income statement CITATION Ano144 \l 1033 (Anonymous, 2014). In the area of detection, the auditor will use audit procedures in detection of material misstatements in the financial statements either due to fraud or error. Ordinarily, omission of vital audit procedures results in undetected material misstatement. The detection risk is reduced by raising 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 CITATION Del13 \l 1033 (Delloitte, 2013). Normally, the audit risk is the product of various risks encountered in the performance of the audit. The auditor has to evaluate the risk level that pertains to each component of audit risk. This is important in keeping the overall audit risk below the tolerable level CITATION Ano144 \l 1033 (Anonymous, 2014)The detection risk of the company of the company audit was allowed to be 30% while the inherent and the control risks were high at the company. Each of the risk was 60%.This means that the overall audit risk was: CITATION Rea14 \l 1033 (Realgoodfood, 2014). Risk Causes NO. Inherent misstatement 4 control Internal control system 3 Detection Procedures 3 Total 10 CITATION Rea14 \l 1033 (Realgoodfood, 2014). Audit Risk   =   Inhere. Risk   x   Ctrl Risk   x   Detect Risk = 0.4 x 0.3 x 0.3 =3.6% .this means that the average risk that was allowed in the audit was low and that the audit towards the company was reliable. Part B: Substantive audit procedures To be able to reduce the control, inherent and detection risk the following substantive audit procedures would be used to reduce audit risk: CITATION Dou13 \l 1033 (Hawks, 2013). * Bank Confirmations: One of the major auditors assertion test is completeness. There should be the presence of bank statements to affirm that the cash in the bank matched with the one written in the balance sheet. Ordinarily, the auditors will obtain the final version of the balance sheet and confirm the amount of cash in the bank. They would then research the cash ledger and identify where that cash is located. (Hawks, 2013)The amount will then be compared to the bank statement to ensure that there is similarity. In this case the bank balance in the statement is similar to the one the managers claim to have in the bank statement. There is need to put the bank statement in the appendix for the company so as not to depend on managers story. Fraud can also be created by the managers who may work in liaison with the accountants to bring fraud upon the company (Delloitte, 2013). * Accounts receivable confirmation: There is need to confirm the accounts receivable because it might settle fraudulent activities that are making the company to encounter losses. The managers in the company allege that the net debt has risen by about £6.2 million during the year. This was mainly motivated by the raise in capital expenditure and the strategic investment in the Stalling borough Sugar Hub (Realgoodfood, 2014). Close observation in the balance sheet should reveal the same value so as to avoid fraud. Therefore, there is need for analysis for the accounts receivable. * Match purchasing records to inventory on hand or sold: The real food Company should ...