Havelock Europa plc Auditing - Case Study Example

Havelock Europa plc Auditing Part A: THREE areas of heightened audit risk relating to the audit of Havelock Europa plc I. Total assets The change in the total assets of Havelock Europa plc has been drastic, indicating a certain unusual trend. The change in total asset value between 2009 and 2010 for the company was: [(67.84-65.43)/67.84] x 100 =3.5% Change in total assets between 2010 and 2011: [(65.43-55.93)/65.43] x 100 =14.52% Change in total assets between 2011 and 2012: [(55.93-49.60)/55.93] x 100 =11.32% Change in total assets between 2012 and 2013: [(49.60-41.09)/ 49.60] x 100 =17.16% Total assets become an area of heightened audit risk for the company, owing to the fact: i) The assets value of the total assets has declined in the five year period from an initial value of 67.84 million GBP in 2009 to 41.09 million GBP in 2013 (Worldscope Annual Financial Overview, 2015:n.p.). ii) There has been an unusual rate of decline in the total value of assets between the earlier years and the most recent years, with the value of total assets declining only by 3.5% between 2009 and 2010, and then declining by 17.16% between 2012 and 2013 (Worldscope Annual Financial Overview, 2015:n.p.). This drastic change signifies an unusual occurrence causing the decline in the value of the total assets of the company, requiring that auditing should keenly focus on this area. II. Internal control This is one of the areas of Havelock Europa plc that is under high risk. Internal control in the Havelock Europa plc is the responsibility of the board of directors of the company, who are responsible for designing both financial and non-financial internal control measures that manages areas of risk associated with the business of the company (Havelock Europa Plc, 2013:43). However, the major aspect that makes the internal control a high risk audit area is because; the executive directorship of the company is provided as a position of full time concentration, requiring that the company has external directors who are not fully committed to the company, so they may have time to assess the company’s operations from an external perspective. The problem is that the Remuneration Committee of Havelock Europa plc has allowed the external directorship position to be held by internal executive directors, provided this does not impact on their duties adversely (Havelock Europa Plc, 2013:47). Such a provision compromises the internal control of the company, since the external directorship is meant to be held by outsiders who do not engage in the day-to-day running of the company, so they may be able to monitor the internal controls applied by the executive directors of the company. Since the external directorship of the company is now held by executive directors, the integrity of the internal control monitoring system is compromised, since the executive directors remain the formulators and also monitors of the internal controls without being monitored externally, presenting opportunities for misapplication of internal controls. III. Personnel expenses under Employee Remuneration This is an area of high audit risk that requires keen auditing procedures. The personnel expenses under employee remuneration becomes an area of high auditing risk, most especially due to the inclusion of an item referred to as Redundancies among the personal remuneration expenses of the company’s employee (Havelock Europa Plc, 2013:65). The employee reduction structure for Havelock Europa plc between the year 2012 and 2013 was as follows: Direct employees reduction: 2012 (236) - 2013 (229) =7 Indirect Employees reduction: 2012 (413) – 2013 (367) = 46 The personal expense item of the employee remuneration requires to be audited keenly because; i) The number of employees of the company (both direct and indirect) reduced by a total of 53 employees ii) The amount of redundancies payment to the employees increased from 245,000 GBP paid in 2012 to 271,000 GBP paid in 2013, an increase of 26,000 GBP in redundancies payment. Part B: FIVE substantive audit procedures you would carry out in attempting to reduce audit risk for Total assets The five substantive audit procedures that would be undertaken in attempting to reduce the audit risk associated with the total assets of the company include: 1. Cost Assessing whether the value of the balance carried down for land and building, plant and equipment, fixtures and motor vehicles of the company are the same as the balance brought forward for the same assets in the opening balance of the next financial period for all the five years. This procedure would help to determine if there has been a distortion or alteration on the value of the assets as transferred during the close of one financial period to the opening of the next period. 2. Depreciation method The audit procedure will entail monitoring the depreciation method that has been applied for plant and equipment, fixtures and motor vehicles of the company. This is meant to determine whether the same method of depreciation has been applied consistently throughout the five year period running 2009-2010. A change in the method of accounting for depreciation can result in the overall change of the total value of assets, through the new depreciation method either increasing or decreasing the value of the total asset (Fogarty, Graham & Schubert, 2006:n.p.). 3. Impairment The next substantive audit procedure would be to evaluate the amortization method that has been applied to account for the change in the value of both land and buildings of the company in the course of the five year period. The change in the formula of impairment of the land or building value can in turn result in unbalanced allocation of the changes in the values of these assets (Fogarty, Graham & Schubert, 2006:n.p.). Thus, this audit procedure would be necessary to ensure that the impairment formula applied for land and building has been consistent over course of the five years. 4. Asset additions The audit procedure for asset additions evaluation would entail both physical and financial record inspection of the additional assets that have been acquired by the company during each year. The physical inspection audit procedure would be undertaken to ascertain that the company has indeed acquired the additional assets as entered in the financial report. The next audit procedure would be the inspection of all the receipts of the additional assets transactions, and investigating and confirm whether the value of the additional assets recorded in the financial statements tally with the value of the asset as recorded in the purchase receipts. 5. Asset disposals The final auditing procedure as related to the auditing of the total assets of the company would entail investigating all the receipts of the asset disposals that have been made by the company in each year, and confirming whether the disposal transactions have been recorded accurately. This would help to determine if the reduction in the value of assets as recorded in the financial statements match with the disposing transaction records and receipts. References Fogarty, J., Graham, L. & Schubert, G. (June 30, 2006). Assessing and Responding to Risks in a Financial Statement Audit. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/issues/2006/jul/assessingandrespondingtorisksinafinancialstatementaudit.html Havelock Europa Plc (2013). Havelock Europa Plc: Annual report 2013. Havelock Europa Plc. 1-108. Worldscope Annual Financial Overview (April 19, 2015). Havelock Europa Plc 5-year Financial Statements’ Overview. 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