Acacia Coal Limited Audit - Assignment Example

Name: .......................................................................................................xxxxx Institution: .............................................................................................xxxxx Title: ................ Audit Plan for Acacia Coal Limited Course: ..................................................................................................xxxxx Tutor: ...................................................................................................xxxxx @2012 Audit Plan for Acacia Coal Limited a. Understanding the entity and its environment It is very important for we the auditors to obtain an understanding of the client business to enable him identify and assess any possibility of material misstatement in the client’s financial statements and to design on how to perform further audit procedures incase of any risk in the client business (Gay and Simnett 2010). 1. Financial performance of the entity In the review of the firm’s financial performance, Acacia Coal Limited has had a reduction in total income from $947,202 in 2010 to $(178,728) in 2011. That is, the group recorded a consolidated loss of $178,728 in 2011. It also recorded a reduction in the value of trade and other receivables from $229,713 in 2010 to $20,139 in 2011 a clear indication that the company is not financially healthy and there is a possibility that the firm will fail in future. Revenue for the company increased from $904,904 in 2010 to $1,401,286 which indicates that the company was bale to obtain an increase in revenue from the sale of its products, a situation anticipated to increase in future. Net cash outflow from operating activities also increased from a loss of $417,501 in 2010 to $792,867 in 2011. The company has been under pressure due to the loss it incurred and this may put pressure on the management to either misstate the financial statements or to take action to improve the performance of the business. Understanding of the financial performance of the company will enable the auditor to determine whether such pressures exist which may increase the risks of material misstatements (Gay and Simnett 2010). 2. Nature of the entity Nature of the entity includes operations, ownership and governance structure and the way entity is structured. The nature of the business in Acacia Coal Limited which is a mining company is that, the company will invest huge sums of money in exploration in search for new coal sites. This type of operation costs the firm high amounts of money which may bring in any profit if there is a failure in any of its exploration investments. The kind of operation done by Acacia Coal Limited is a risky and requires the company to incur high processing costs. The ownership structure of Acacia Coal Limited consists of directors and a company secretary. Most of the directors hold shares with the company and are directors of other listed companies in the same sector. The financial recording framework in Acacia Coal Limited is in accordance with the Corporations Act 2001 and it complies with the Australian Accounting Standards (Gay and Simnett 2010). 3. Industry Regulatory and other external factors This type of business is also prone to risks associated with material misstatements which are due to economic, political, competitive, social and technical factors (Kana et.al 2007). The mining industry is a form of a long term business which may involve significant estimation of costs and revenues giving rise to risks of material misstatement in the company’s financial statements. For example, an application made for the easterly adjoining EPCA1801 comprising of 7 sub-blocks was lodged on 1 July 2009 and has not yet been granted to date. In this case, political factors pose high risks to the company. The operation of the company is also subject to the State and Federal laws and regulation in connection to environmental hazards and liabilities could be imposed for non-compliance. The company will be prone to risks and it therefore have to conduct its operations in an environmentally responsible manner. This understanding will help the auditors to understand the type and kind of disclosures to be expected in the company’s financial statements. 4. Entity’s selection and application of accounting polices We the auditors should obtain information on whether the company applies the accounting polices set by the accounting standards (Kana et.al 2007). The choice and application of accounting polices dictates the possibilities of material misstatements in the financial statements. Failure to comply with the Australian Accounting Standards may indicate the possibility of high risks in the company. 5. Objectives and strategies and related business risks It is important for the auditor to understand the objectives of Acacia Coal Limited as well as its strategies and all business related risks which may result. Long term projects like the construction drilling equipment may give rise to risks in the areas of costing, pricing, performance control and completion. b. Understanding internal control Internal control is the process of connecting procedures and policies in auditing to achieve audit objectivity. The auditor should understand the method used in the selection and application of accounting policies used in the entity (Gramling et.al 2012). There are five components of internal control which the auditor should have a clear understanding of: 1. The control environment Here, we will need to consider the design and implementation of the programs in the entity and the controls set to address risk of fraud in those programs. The Group used administration and company secretaries’ services of Mineral Administration Services Pty Ltd in which Mr. Colless and Miss Brown are shareholders and directors. This two are non-executive directors in the group. Key management Personnel in the company also have control and a significant influence on the operating policies in the entity and this has led to outstanding balances from the management personnel. The management is highly involved in the scrutiny of activities in the company and obtaining knowledge on the internal control will help the auditor to understand the actions of those charged with governing the entity. A consultancy agreement was also entered into on 11 August 2010 with Argonaut Capital Limited for the provision of services of Mr. Michael Mulroney as the Acting Chief Executive Officer to the company for interim period at a cost. This engagement was terminated upon being noticed and the consultancy agreement has been ceased since. This situation poses high risks of material misstatements on the financial statements of the company as this was done for material gain. Non-executive directors in the company do not receive performance based bonuses or retirement and termination benefits. That is, the group has recognized codes of practice which guides the remuneration of its management. The company entered into a contract with Venturex Resources Ltd for the provision of shared services in the company secretarial, finance and accounting and administration services at a fee. Two of Acacia Coal Limited directors who are Timothy Sugden the non-executive chairman and Michael Mulroney a non executive director have held directorship positions in the Venturex Resources Ltd. These results into a material contract between the two companies and may lead to misstatements in the financial statements. There have been no material contracts involving directors of the company with other companies from 2010. 2. Risk assessment in the entity The company is exposed to three types of business risks which include market risk, liquidity risks and credit risks (Kana et.al 2007). Though the management monitors and manages these risks, the risks are likely to result to material misstatements in the company (Gay and Simnett 2010). Credit risk arising form the receivables obtained from investment securities may result to material misstatements in the financial accounts. The credit risk exposure for the company was 2,174,959 in 2011 an amount which may have been misstated. The liquidity risks faced by the company may due to the company’s failure to meet its financial obligations. The management of the company may be forced by pressure to misstate the financial statements to cover the liquidity risks facing the company. The auditor will also assess whether the methods used to identify the business risks is appropriate. It is therefore important for the auditor to assess the risks in order to evaluate the likelihood of material misstatements. 3. Understanding the information systems The auditor should obtain an understanding of the information systems and there relevance to financial reporting objectives and this includes accounting system, procedures and whether the records are manual or automated (Gramling et.al 2012). Acacia Coal Limited Company has high quality system of recording its financial records and this has highly affected the ability of the management to make appropriate decisions in controlling the entity and has led to the preparation of reliable financial reports. With that, there are low chances of material misstatements in the company’s accounts. 4. Control activities These are the procedures and policies that are applied in companies to ensure the directives of management are carried out to the latter (Kana et.al 2007). The management of Acacia Coal Limited Company is always present during the recording and preparation of the financial statements a clear indication that all the transactions are authorized and approved before they pass from one stage to another (Gay and Simnett 2010). Control activities of the internal control in terms of authorization are highly practiced leaving low chances of risks occurrence. The financial statements of Acacia Coal Limited Company have been prepared on the basis of historical costs. Estimates and judgments on assets, liabilities, expenses and income is used in the preparation of the group’s consolidated financial statements. The assets of the firm are well accounted for in the financial statements, that is, accountability of assets is high in the company. For example, the value of plant and equipment is estimated based on its useful live and the value well accounted for in the books of accounts less its accumulated depreciation. Security has also been enhanced in the country to prevent unauthorized access to the financial records and the control system is strong. Segregation of duties is high in Acacia Coal Limited with some employees have the role of recording of transactions and maintaining the custody of assets. All this is done under the supervision of the management in order to reduce any chance of any person in any position perpetrating errors and frauds in his or her duties. 5. Monitoring The management of Acacia Coal Limited Company had been taking all corrective actions by going through the activities of valuations and timing to ensure accuracy in bank reconciliations. The aim of this monitoring is to ensure that all the procedures are followed to the latter c. Assessing the risks of material misstatements In assessing the risks of material misstatement, we the auditors will identify five account balances at risk of being materially misstated (Gramling et.al 2012). Acacia Coal Limited Company experienced a reduction in gross profit from $233,378 in 2010 to $-4,226,682 in 2011 a situation which may be due to misstatements in the cost of investments sold. The investments sold are supposed to bring revenue to the company and not losses a situation which may be misstated. Intangible assets costs are carried forward to the extend that they are expected to be recouped through successful development in activities which have not reached a stage which permits the existence of economically recoverable reserves. This might lead to financial misstatements in the operating expenses account. The liabilities on the salaries and wages of employees should be settled within twelve months of the reporting date. These amounts are measured at the amounts expected to be paid when the liabilities are settled. One the liabilities are settled, the transactions should be reflected in the financial statements failure to which material misstatements will have occurred. Sales from the products made by the mining company are not reflected in the company’s total revenue. Failure to include these sales in calculating the total revenue for the company may be a risk of material misstatement in the financial accounts. A statement of the company’s comprehensive income shows that the company incurred audit and taxation fees of $18,500 in 2011 and $72,623 in 2010. In the real case, the company did not record any income tax expense for both financial years. There is likelihood that these values may have been misstated. d. Responses to the assesses risks In response to the risks associated with the gross profit, the auditor will confirm from the bank to determine the actual bank balance (Gramling et.al 2012). The auditor will have to write a bank standardization letter in order to conform whether the bank balance tallies the balance in the financial statements. The auditor will have to vouch all the necessary accounts in order to determine whether the intangible assets actually exists, whether they are owned by the company, whether accuracy has been used in disclosing them in the financial statements. The auditor will determine whether the payment of the employee’s salaries and wages is computerized so that the liabilities are settled at the right time. The auditor will also review pay slips to determine their accuracy and the completeness of the transactions after the stipulated twelve months period. The auditor will also check whether the said pay slips were prepared, checked, authorized and approved by any senior member of the company from all the departments dealing with the salaries and wages. The taxation and auditing fees should be separated when reporting them in the financial statements. In this case, the auditor will therefore seek to determine the exact amount of auditing fees incurred by either writing to the previous auditor all by checking all cheques. To understand the control of sales, the auditor will go through the sales orders, the process of issuing credit notes and determine whether the company has a policy over the writing off of bad debts and whether the policy is consistently applied in the company (Gramling et.al 2012). References NRL 2011 annual report, http://www.newlandresources.com/investor_relations/2011.htm. Accessed on April 02, 2012 Catherine Anne Usoff, 1994. An examination of factors affecting audit planning across accounts. Ohio State University George Puttick, S.D Van Esch, Kana, 2007. The principles and practice of auditing. Lansdowne [South Africa] : Juta K. H. Spencer Pickett, 2006. Audit planning: A risk based approach. Hoboken: Wiley, Cop Larry E. Rittenberg, Karla M. Johnstone, Audrey A. Gramling, 2012. Auditing: A business risk Approach. Mason, OH: South-Western Cengage Learning Gay, G., Simnett, R., 2010. Auditing & Assurance Services in Australia, 4th edition, McGraw Hill Pty Ltd ACA Australia, 2012, Auditing and Assurance Handbook, Wiley Read More