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We are writing to inform you of the audit we may be carrying out on your company, Groundrock Ltd, we believe that the information we have been provided in order to complete the audit is quite useful in order to carry out the audit successfully. There are many factors that you were unaware of before, but in this letter you will find a reasonable explanation as to how we will operate.
Auditors are required to obtain and evaluate evidence concerning the financial statements, verify that financial information gives a true and fair view of the entity, express an opinion in the auditors report, deliver auditors report to the entity and distribute the annual report including financial statements and the auditors report to shareholders.
Auditors are used to verify of financial statements and they are primarily concerned with the availability of evidence attesting to the validity of the data being considered. Auditors obtain evidence to ascertain the validity and conformed to established accounting rules and customs of the accounting treatment of transactions and balances. Auditors believe that it is possible to reach a conclusion about the truth and fairness of the report taken as a whole by verifying the accounts that compromise the report.
There are several benefits for having a company's accounts audited. The simple and most obvious reason is human error which could result in the accounts being inaccurate and misleading. For Groundrock the directors wife completes the accounts, she is a part qualified accountant who is assisted by four accounts clerks in running the Sage and accounts office. From the information given in the case study it could be believed that the business is far more complex and needs the attention of more experienced professionals, in order to provide a true and fair view of their accounts. In order to be able to provide accounts that are error free they should be checked by the auditors for the simple reason that the accountant may not have the necessary skills and knowledge of how to investigate issues and solve them correctly.
Another important point to be considered is that the financial statements must meet the correct accounting regulations and comply with the Companies Act 2006 and the Financial Reporting Standards (FRS). It is vital that the audit is carried out in order to meet these requirements. The company's bank has recommended for the accounts to be audited, in order to maintain a good professional and working relationship with the bank it would be advisable for the accounts to be audited. After the audit the business will surely gain some valuable knowledge and skills from the audit. Not only do they check over the accounts, but they also suggest any changes which should be made to the business for improvements, and inform the business of any potential risks and suggestions of how to avoid or correctly deal with these risks. Given the current situation of the business it is currently in a large business overdraft and is relying on the bank for more future support, in order to gain this the company should work along the auditing team to achieve a good audit report. The report will be trusted on as the bank itself has recommended the auditors so it shows that the bank trusts the auditing team.
In order for the company to remain competitive and survive in the feasible future the accounts for the business must be believable by those who involved in or interested in the business. If accounts are audited by a good audit team, they are more believable by investors and shareholders. Auditing the accounts could have a particularly positive affect on customers especially currently when the business needs to gain customer confidence and interest.
Accounts may not disclose fraud which makes it difficult for owners to know about any hidden truths in the business, some information may be inadvertently or deliberately misleading causing the accounts to have an overestimated or underestimated profit figure. If Mary fails to disclose relevant information in the accounts, and later the accounts are not audited this error will remain until he next accounting period. If this is a hidden cost for example it will not have been accounted for and it may cause a positive cash flow to become negative, this will become a big threat for the business because it is currently having cash flow problems.
Acer and Co will charge substantially more for auditing your company's accounts as compared to simply preparing the accounts, this is because the auditing method will be a lot more time consuming and costly in relation to the life and wide geographical spread of Groundrock. In order for the Auditing to be complete the auditors will have to prepare an audit report fully detailed, giving a full explanation of the financial accounts which have been provided and giving an opinion on the financial statements reliability and reality. A team of auditors will have to work together as a team to gather all the relative information needed from different locations of the business, they will then have to come together and make the final detailed report.
Preparing the financial accounts of the business is a difficult task but trained professionals have junior assistants in certain departments delegating a job which makes it easier and simpler for jobs to get completed. Similarly when completing the audit Acer and Co will have to send a team of their best trained professionals to help complete the audit. An audit plan will have to be made so that each site of the business is observed and assessed for their work making sure that each worker and each site provide a true and fair view of the business. Auditors will have to start from the very beginning trying to see if explanations of figures in the accounts match the business in realty, this itself will be a challenging task for the auditors as all the ledgers in the business will have to be checked for accuracy and reliability. Accounts from previous years will also have to be checked to make sure that balances are correct, and because the accounts have never been audited in the past it will be a more difficult task for the auditors.
The auditors will not only check trying to make sure the accounts are up to date and accurate giving their opinion saying whether or not they provide a true or fair view, they will also help further for the best interest of the company. "The primary objective of the audit is to produce a report of their opinion on the truth and fairness of financial statements so that any person reading them can have belief in them."(Q1 pg 4)
The secondary objective is to advise management of any defects in or problems with the accounting systems used and advise them of any improvements. They will also detect any areas of fraud, and try to prevent errors and fraud by the deterrent and moral effect of the audit. Furthermore the audit team will try and assist the company with any further accounting problems , difficulty with preparing financial accounts and warn them of any potential risks/threats to the business and suggests ways to avoid them or how to effectively deal with them. The audit is a lengthy and costly process for Acer and Co to carry out; trained professionals will be allocated in separate areas of the business, and due to demand for a well established auditing firm being high costs are likely to be higher for the better service that is provided.
(b) In order for an individual to make a good auditor it is important that he/she has the necessary personal attributes and skills.
Firstly the person must be totally independent in both attitude and mind, it is vital to be self-reliant and self motivated while interacting effectively with others. The auditor may not give unbiased opinions unless they are independent to all parties involved.
Auditors must be thoroughly trained and prove their competence before they can sign an audit report. Parliament has decided that only members of particular professional bodies can become auditors of limited companies. The professional bodies (the three institutes of Chartered Accountants and the Association of Chartered Certified Accountants) have developed competence in their members by using post qualifying education and difficult examinations. There are also other requirements before one can qualify for being a registered auditor.
Qualified Auditors are known for their honestly and carefulness. These qualified auditors will be supervised and inspected by professional bodies acting as their recognised supervisory bodies. Due to the difficult and variety of tasks auditors are completing they must perform their role making sure their report provides a true and fair view of the business, in order to help achieve this they must base decisions on objective.
It is necessary to behave professionally at all times, The auditor has various obligations to their employer (principal), to themselves, to the auditing profession and colleagues and to the audittee. At all times they should be fair, report exactly as they find without fear or favours. Also the auditors are always seen as a guest to the company so it is important that they are polite and do not distract others with their behaviour. Whilst being precise it is also important for the auditor to behave practically, expect to find human errors, it is not likely to find perfection.
Being versatile and observant will help the auditor achieve their target more easily. Openly communicating with others will help solve problems easily and give a better view of situations. Also at all times the auditor will have to be aware of what is happening in the surroundings , by doing this it shows they are persistent and focussed on achieving their objective.
It is important to have a positive attitude when dealing with customers, after the audit report is completed it should bring benefit to the business, otherwise they will have experienced the audit to be stressful and unhelpful. Being open minded and listening to others views and alternative ideas can improve the working of a team, an overall achieve a better result. The Auditor must be able to play role of team member and leader.
c) "Inherit Risk is risk which derives from the nature of the entity itself, its business and of its environment, or at the transaction level it is the susceptibility of the transactions to possible misstatement due to their nature or complexity." (Q2)
The current economic conditions and recession will cause risk to the business, the reduced demand levels and consumer confidence will affect the cash inflow within the business. Groundrock has struggled recently. "It has struggled due to extremely low demand". If the situations remain the same for the coming year it may become difficult for the business to survive as they already have a large bank overdraft which if secured with the directors personal assets, and the company assets so in time of further financial difficulty they do not have much security.
The companies operations are widespread and at any point it may be working at six sites, completing several different tasks, the company's work in progress being substantial .Monitoring the performance and accuracy of the jobs could be very difficult. There is a possibility of increased errors and incompleteness in financial statements.
Throughout the period of construction at the site hut, each site clerk maintains cash handling responsibility for miscellaneous site expenses. The cash float at each site may only be a material amount but cash is very desirous therefore liable to theft or misappropriation. The risk of fraud and misuse of the building materials at each site exists. This could result in omission of information and incompleteness of income in financial statements.
Due to the nature of the business the company runs a fleet of over 20 vehicles these have become old and are in need for repair or even replacement. For the near future the business is likely to have large expenditure, in order for the smooth run of tasks these assets of the business will definitely need replacing. Due to the financial statement of Groundrock not being previously checked there is a chance that the assets may have been over valued in the financial statements, resulting in providing an untrue view. The assets may not have been correctly depreciated in the accounts .When repairs and replacements take place it is important that the correct classification between capital and revenue expenditure is recorded in the financial statements.
The company's accountant is only a part-qualified chartered accountant and uses a Sage Book Keeping and Accounts Package to prepare the company's annual accounts. Risk of errors or omission in financial statements could occur, either overstating or understating profits. Also the computer software that the company is using may be out of date , technology is always improving but if the accountant is part qualified she may not be aware of the changes. There is risk of material misstatement, and incomplete financial accounts.
(d) Audit staff will collect evidence for the audit report by five different methods these are observation, inspection, enquiry, computation and confirmation.
Observation : the staff will have to see for themselves how work is carried out In the company and how staff deals with accounting for the business expenses, this is the best possible way of confirmation especially when dealing with internal controls.
Inspection: documents, accounting records and tangible assets will have to be inspected by the auditors. This is to make sure that books do not include any over/under estimation or omission of entries.
Enquiry : it is important that the audit staff communicate well and ask questions in an appropriate manor so they receive relative and informative feedback. The reliability of the evidence depends on the qualification and integrity of its source.
Computation :additions calculations and reconciliations. This is important task to make sure any small or large calculating errors don not effect the accounts.
Confirmations : required to make sure that transactions have actually been made and the entries in the accounts are correct. It is better to use external sources rather than internal as there is higher risk of fraud. Confirmation from external sources is likely to be believable, eg a statement from a supplier can help confirm entries in the purchase ledger.
These are tests to obtain audit evidence about the effective operation of the control environment, in particular the operation of control procedures.
Observation: at Groundrock ltd the auditor can see how the staff within the business communicate on different levels, for example the company's work in progress is substantial, do all the sites control activities and operations in a similar way? Individual time sheets could be kept for each worker in order to maintain a record of their hours worked on site. This could work out cost effective as they have a more effective record on the workers hours worked and wages which could drive down costs and help avoid errors.
Inspection : the work carried out at Groundrock should be of the same standard at all the sites, is all information being recorded accurately in all the business accounts, and does the work get checked at the day end by a manager.? Site clerks have a cash float for miscellaneous expenses, these could be checked to maintain and avoid and misstatements or dubious activity.
Enquiry: all books should be checked making sure that all information on Groundrock's deliveries is recorded carefully, it should then be checked against supplier invoices and bank statements to make sure that all the figures match , avoiding any chances of deliberate mesenteries or omissions.
Computation: checking of all numerical workings will help provide evidence of control procedures, if the figures match and are accurate showing some small errors it can be predicted that accounts are checked regularly and updated.
Confirmation : carefully checking the ledgers against Groundrock's cashbook and bank statements will help maintain a correct and accurate record of the transactions made. But more importantly if auditors check all the above evidence procedures it will show the management styles and controls of different areas of the business. Those areas which contain less errors or which are error free are more likely to be managed well, resulting in more up to date and accurate accounts.
Auditors can look through internal control evaluation questionnaires and evaluate the strength of the evidence. Those areas highlighted to have a weakness could be further tested to help achieve a more accurate opinion on the operation control to help advise them of changes which could be made for improvement.
These are detailed tests of transactions and balances and are designed to detect material misstatements in financial statements.
There are two types of substantive testing which include analytical procedures and other substantive procedures which is tests on details of transactions and balances and reviews of managers meeting minutes and enquiries.
Auditors are likely to check all information on transactions for example any assets that Groundrock purchases must be checked. The auditor will have to check the copy invoice, the relevant authorisation and all necessary entries made in the books. The accounting treatment needs to be necessary for the item, and the auditor needs to be convinced that the price paid was reasonable. If for any reason the auditor believes that the asset has been under or over valued they will further investigate the matter and possibly ask staff questions if they have doubts. This is necessary for the audit because the auditors need to be certain that all entries made are error and fraud free.
(e) Materiality "if the inclusion or exclusion of information would mislead the users of a financial statement, then that information is material ".(Q3)
Materiality is a matter of judgement it could be a difficult mater but is given great importance. When evaluating if financial statements are given a true and fair view auditors should assess the materiality of uncorrected errors. Including non material items as material could result in a net profit being a net loss. Materiality has quantitative aspects relating to the nature of the error or misstatement detected, regardless of its financial value. It also has quantitative estimates being material purely because of is size in relation to others.
We believe that the above information will have been of interest to you, if you have any further queries do not hesitate to contact us.
Acer and CO