How to Go about Auditing Tesway - Assignment Example

How to Go About Auditing Tesway Auditing is defined as: “The examination of records and documents and the securing of other evidence for one or more of the following purposes: (a) determining the propriety of proposed or completed transactions, (b) ascertaining whether all transactions have been recorded, (c) determining whether transactions are accurately recorded in the accounts and in the statements drawn from the accounts.” (Illinois State Board of Education, 20071) Before going on to audit the firm, there is a need to understand that there could be a considerable amount of risk that is associated with auditing. This risk is known as the acceptable audit risk. This risk is named because this is the risk that is most acceptable by the auditor during the procedure. This risk is associated with the validity of the financial statements that have been provided to the auditor. It is the role of the auditor to evaluate the credibility of the financial statements but there could be a chance that the company may have hidden some information that was of use to the auditor and the auditor may not have a chance to find it out. This is a major risk because then the results of the audit would not encompass that piece of information and this could in turn change the results of the audit to another side. Hence, there must be some calculated risk that the auditor takes before performing the procedure of the company. The following step in the auditing procedure would be the planning stage where the auditor would try to understand the environment the company works in and what the purpose of the business is. It is understood from the previous section that the company is currently working in a very competitive environment where there are a number of retail shops open that are providing the same products at a lower price. This is the reason due to which the company had to reduce its prices and bring in different schemes or promotional purposes. The main objective of the business is to provide a large variety of products and services to the customers at their own convenience. The company has spanned from being a conventional store to an online store and this is the main scope of the company. The scope of the company will further be analyzed for its validity. Both the income statement and the balance sheet show a picture with a lot of discrepancies. There are some problems such as that of the increase in the revenue and the costs which are leading to a lower profit. It seems that Tesway has made a number of investments such as that of sourcing as well there has also been some restructuring of debt. However, all these changes cannot be understood till the notes to the financial statements are not understood clearly. These notes will be studied further in the next section of the paper and hence, there is a need to list the number of observations that have been made from the financial statements so that there is a clear indication of the things that must be understood and analyzed. The observations that have been made in the income statement are: 1. The group revenue of the company has increased by a greater percentage than that of the cost and this is the reason why the gross profit has also increased by almost 50%. 2. There has been no financial tax profit from the joint ventures in the year. 3. The financial costs of the company have increased whereas the profit from the financial charges has moved in the other direction. 4. The company has not sold many of its properties as compared to the previous year and hence, there is a reduction in the profit received from it. 5. The company has invested in having an IT in source which means that there has been an IT system developed in the company that is being used for the online transactions or for recording data. 6. The debt has been restructured along with the financing of the fair value movements due to which the company is facing a cost, reducing the overall profit to the company. 7. There was no discontinued operation in this year which is why there was no profit redeemed from it. 8. The earnings per share have decreased in the year because of the minority interests being on the negative side as compared to those of the previous year. The observations that have been made in the balance sheet are: 1. There is a significant increase in the non current assets of the balance sheet due to the increase in the accounts receivables which means that there have been a number of credit sales that have been made by the bank. 2. There have been some available financial assets for sale in the balance sheet as well. 3. The company has reduced on its intangible assets, investments and its property, plant and equipment figures. 4. The company has invested in increasing its inventory along with the cash and the cash equivalents that it currently holds. 5. The company has reduced the short term borrowings that it used to take in order to finance itself. 6. It has now invested in a number of derivative financial instruments and also in the provisions as before. 7. The overall liabilities have also increased in this year due to the heavy investment that is being done in the long term borrowings. 8. The company has adopted a number of new instruments that it can finance itself with. 9. The total equity of the Shareholder’s has reduced due to the changes in the reserve amounts that have taken place. The observations that have been made in the balance sheet are: 1. The cash received from the operations is less due to the number of operations that are done on credit. 2. The investment of the company has also reduced due to which the cash flow from the investing activities has almost reduced by a 100%. 3. The financing activities show a number of activities that have taken place within the company concerning how the company has used its money in order to meet its objectives. 4. The net cash flow from the financing activities has reduced considerably and this is due to the proceeds that have been received through the long term borrowings. 5. The cash and cash equivalents due not match the cash and cash equivalents amount in the balance sheet which means that there has to be a loophole in the recording of the data. Auditing the Financial Statements This section will rely upon the substantive analytical procedures rather than the substantive test details because then the later would be a lengthy procedure and it is not possible due to the time and the cost constraints that are associated with this research paper. The two terms will be explained below. The substantive analytical procedures take place when the auditors assume that the financial statements that have been provided are correct and that there is a lesser a chance of the internal control being weak for creating any loopholes. This means that the auditor would assume that all the information has been jotted down in the financial statements and that the auditor just needs to compare the financial information with the other information in the financial statements and then provide a result. The substantive test details, on the other hand, assume that the financial statements are not credible enough and that the auditor needs to look for the details of the transactions such as the invoices or the receipts for each so that the statements can be validated. This is a very lengthy job and hence, can get very costly as well. The substantive analytical procedure reduces the amount of acceptable auditor risk that the auditor may face in the process whereas, the auditor risk is increased in the substantive test details where there is a chance that the financial statements are not valid and hence, the results of the audit may be affected. Auditing the Income Statement The first heading in the income statement is that of the revenue. Now in the revenue, there are a number of sales and services that have been provided to the external customers. These external customers may have a different meaning for the organization and this is why there is a need to understand the meaning before the auditing. The external customers can then be asked to coordinate with them the receipts and the date at which the transaction was made, that is, when they came for shopping. However, these results will be coordinated with the records that have been made in the systems as well as the ledgers and other financial books. The cost of sales which is the cost of manufacturing the products can be checked up by the suppliers. The suppliers can be asked to supply a number of invoices that have been provided to them and then the same can be done with them as they can be done with the receipts of the customers. A company would also always have the record of the goods receiving notes which means that these can also be used by the auditors to ensure that the company did receive the goods at the time that is specified by the suppliers and also the customers can be cross questioned about the details of their transactions. The values in the general ledger but be collaborated with that of the income statement to understand the area from where the revenue is being generated and what costs are being incurred because the ledger allows the auditor to have a complete view of the transactions that have been conducted by the organization. The next one is the administrative expenses where this entails the entire management and the other expenses that are faced at the time of operations. This will be entailing the manager’s fees; the transportation of the goods etc. and this can be done by simply looking at the receipts for these costs. A company always records its transactions in the informal manner till it is not complete and then it records it in the financial books. However, these books and these receipts can then be matched in order to understand how the transactions were carried out. For instance, the drivers of the transport can be asked for details when they were to arrive and depart from a location with the goods. The manager must also be checked for his / her attendance in the days of the transactions and whether there was any genuine cost in the whole idea of having hefty manager fees for the work that is being done in the year. An auditor can also look at the projects that have been taken up by the company to improve so that the responsibility of the manager can be understood and the stress that had to be taken in order to approve the fees assigned. In order to see the operating loss and whether it is an authentic one, the company will be audited by simply going to the areas that have been leased out to the company or by the company to understand the situation clearly and so that the accounts of the company can be cleared out for the costs or the revenues it is generating. Any company would always take a loan from the bank to have a certain financial back up in cases there is a need for sudden cash for a project. In such matters, the auditor would go to the bank and verify the transactions that have been done by the company for that year to understand what interest payments have been made to the bank and what are remaining. Since the company also provides a banking service, there is a chance that the company may provide loans to other people. In such cases, the company would be audited when the auditors would receive the complete profile of the clients and then these would be cross verified with the help of the physical audit. The bank can also be checked to see how the company has changed its debt structure and whether there is a correct value assigned to the task. In such a case, the bank would be asked for the papers that have been changed and then the auditor can reconcile the values and the procedures that the company had to go through. The income tax for any company is always provided to the government. In such cases, there would also be records that the government would also be updating in order to ensure that every one pays their required taxes. The government officials can be asked for some help in reconciling the amounts and then the tax rate that has been used in each area. For the auditing of the balance sheet, there is a need to understand the assets and the liabilities. The assets will be audited by having a physical check up in order to understand whether the plants and the equipment that is being used really does exist or it does not. This is a costly procedure and must be done. In order to understand the rationale behind the increase in the inventory, the auditors should go to the employees and ask them as to why they have increased the storage amounts and that whether there was a need to do so. The auditors must also check whether the goods are perishable or not because if they are, there is no need to keep so many inventories and then let it waste. An auditor would always go through an observation period where the company would be asked to allow a few external auditors in its departments so that the methods of each can be understood and the company can understand how the working of the business goes on every day. This is an essential aspect. Such an issue can be related to the inventory tracking where there are some companies that may use the FIFO and then there are some that may use the LIFO method. There are still some who may use the lower cost method. Hence, using all these techniques is a difficult job and there is always one method that is used by a company. To understand the usage of the method the employees must be communicated with and this is the aspect that the next section will talk about so that the company and the auditor can have a better communication and they can find out the loopholes in their business together and take out the best from the audit. One of the major issues that are seen in the company’s financial statements is that the value of the cash and cash equivalents in the balance sheet does not coincide with the end result of the cash flow statement of the same year. In theory, it is known that the value should be the same. Any asset of the company can be audited when the auditor makes a physical appearance at the area where the assets have been placed and are in use. There are a number of times when the assets are not in use but they are still in possession of the company and they may record it for doing manufacturing. In order to catch such loopholes, the auditor would try to go through all the procedures. There are a number of receivables that the company is owed to get and these will be received at a later future date. However, there is a need to understand the auditor needs to contact such people and analyze the transaction that has been conducted along with the amount that is due by each. The company has conducted a number of transactions in the banking company where the company now either owes the customers some money or the other way round. In both ways, the company does not have enough money on its hands in order to make the banking company a profitable one. In order to understand the cash flow statement, there is a need for the auditors to sit down with the employees who are responsible for this work and then ask them how they have used and generated the cash and what their rationale was behind using the cash in such a manner. There could be a number of loopholes that could be found in such a procedure and this is why auditing for any company is necessary. The company has also invested in some IT systems for the retail business where there is a possibility that it may be done for the new online business that they have started. In this case, the company needs to make sure that the investment is valuable and that it is used in the right manner. The auditor can always look at the loopholes in technology as to see how long the machine ha been on and who logs on to it and how long it is used. All these points and factors must be measured so that the auditor can know the worth of the investment. Usually IT is considered as an immeasurable investment where the company may use it as an overhead. However, several auditors have found the method of conducting a successful audit and have used this in order to understand what the technology is being used for and in what manner. There are a number of techniques in order to control the managing of the technology and also tracking who uses the technology. The next notes show that the company is suffering on the financial side because now the company has a greater amount of financial costs that it has to face due to the number of changes that it has made in the financial instruments that it uses. These costs acted as heavy duty on the statements of the company. The auditor must understand the reason for such steps were taken in order to reorganize the instruments and then also understand the rationale of closing down on short term and investing in long term borrowings. As it has been set before that every action has a reason behind it and this is what the auditor must do. Even though the number of employees has reduced in this one year, there has been an increase in the cost of the employees. The reason for this could be that the company raised everyone’s salary for motivational purposes and that the company wanted to retain its employees. The auditor needs to go through the evaluation of each employee in order to understand why the salary increases as well as the benefit increases were made. There is a need for the company to be audited on the human resource side because there has been a large increase in its costs and there must be a reason behind. The problem could be of the employees that are being asked to work in the night shift or there could be other retaining problems that the company was facing due to which it had to provide the employees with hefty benefits in order to retain them for a few more years. As an auditor there is an important factor or subject that mist be studied in order to analyze the company even better. There is a need to understand the techniques that the company may use in order to take down its transactions or the way it may conduct business because till this is not done, the true essence of auditing cannot be received. This area should be understood because these are the kind of areas that cause the auditors to do a little investigation about the business and the way it is conducted. The result in the cash flow is lesser than that in the balance sheet which means that either of the two values is wrong depending upon the factors behind the two. There is a chance that the value in the cash flow statement may be wrong which means that the company has taken out some of the cash from the account of the company and that there is a need to have a record of that. There are also chances when the company may window dress its statements in order to improve upon its statements and ratios. The auditor needs to ensure that the company is not using any of those techniques in order to improve upon the statements and ratios and this is the main purpose of auditing. The company may improve ratios so that the image of the company for the investors would improve and then there would be more investment in the company on the public side. The Role of the Staff in the Auditing The employees can also play a major role in the auditing procedure of the company. The employees are the ones that may help the auditor understand the procedures of the company and what technique that use in recording data or for sales and the number of employees they have on the night shift or the day shift. The employees can allow the auditors in order to plan the whole procedure by simply asking them about the operations that they conduct and then to go about asking them the details as to what plants they and where and what kind of inventory system they hold. They can also help the auditors understand the financing techniques that they use in order to record their transactions. The employees can assist the auditors to find out information that is not readily available at the time of audit. Hence, there are always a few employees that are at the service of the auditors for any situation that they may not understand or a certain area of the company that they may not understand. Scams in Tesway The scams that can be found in Tesway are the number of different transactions that have been done over the year that complicates the financial statements even more. This shows that the company might be trying to window dress its statements in order to make a profitable scenario for itself. A major scam that can be pointed out in the financial statements is that the value of cash in the balance sheet and the cash flow statement do not match. There has been a problem in the reconciliation of the two values and there is a chance that the company is either trying to prove that it has more cash or has made some mistake in recording a few transactions. It can be seen in the balance sheet that the value of the cash and its equivalents amounts to £1,028 million whereas the value in the cash flow statement equals £842 million. This is a major scam that can be understood in the statements. Every accountant knows that the value in the cash and its equivalents in the balance sheet and the result of the cash flow statement must be the same. Another scam that can be found is that there are a number of changes that had been made to the long term financing mode of the company. There are a number of changes in the cash flow statement but there is very little effect on the balance sheet that also has a section on liabilities of the company. According to the income statement, the debt restructuring has taken a loss of £38 million; however, this effect is not seen on the balance sheet where the long term liabilities equal £2,178 million in the year 2002 whereas in the year 2001, the liabilities had equaled £1,793 million. This is also a major scam that can be considered and analyzed. References Illinois State Board of Education. (2007). Glossary. Retrieved on February 13, 2007 from: http://www.isbe.state.il.us/sfms/ABCsofAFR/Glossary.htm Read More