In order to conduct audit of an entity efficiently, it is important to have proper understanding and knowledge about the entity and its environment. Only with proper knowledge and understanding about the entity and its environment it would be possible to discharge the responsibilities of an auditor towards the audit of the entity (Cao, Chychyla and Stewart, 2015).
Vodafone PLC is one of the biggest telecommunication companies in the world and operates in the country as Vodafone Australia. The company has its shares listed in the Australian Securities Exchange (ASX). The company provides telecommunication services in the country for number of years now. Over the years the company has made a significant impact on the telecommunication industry in the country. In order to understand the inhere
The company operates in an extremely competitive telecommunication industry. The key business risks of the company are as following:
Ever increasing competition: The competition in telecommunication industry in Australia is immense. Over the last decade the industry has seen huge increase in number of firms. Vodafone must strategically handle competition to keep its market share intact.
Customer preference: With increasing competition, the business is facing the challenge of ever changing customer preferences in terms of services. To meet the expectation of the customers the company must continuously improve its services (Jans, Alles and Vasarhelyi, 2014).
Dwindling profit margin: The profit margins in the business is decreasing with passing of each year due to increase in cost of operations and reduction in revenue.
The auditors of the company in his report should state about the quality of financial statements of the company. The financial reports should correctly show the combined effects of all financial transactions on the performance and position of the company. Auditor must state whether the financial reports are materially misstated or not (Chan and Vasarhelyi, 2018).
The risk of material misstatement in financial statements due to factor other than control failure. The limitations in accounting principles and policies, lack of uniformity in accounting standards, measurement and valuation techniques used by the organization are the main contributory factors to the inherent risk of material misstatement. Vodafone however, has followed IFRSs properly to reduce the inherent risk to an acceptable level.
The internal controls and securities within the company is very strong and effective. A detailed evaluation of these controls have showed that the company conducts periodic review of its financial and accounting controls to ensure that the transactions are correctly recorded and reported in the financial statements.
In order to assess the risk of material misstatement in financial statements, analytical procedures can be used by an auditor. Analytical procedures include but not limited to ratio analysis on financial items disclosed in financial statements.
|
Vodafone Group PLC |
||||
|
All amounts are in EUR millions |
2015-03 |
2016-03 |
2017-03 |
2018-03 |
|
Revenue |
57,742.00 |
51,955.00 |
47,631.00 |
46,571.00 |
|
Cost of revenue |
42,229.00 |
38,593.00 |
34,576.00 |
32,771.00 |
|
Gross profit |
15,513.00 |
13,363.00 |
13,055.00 |
13,800.00 |
|
Gross profit ratio |
26.87 |
25.72 |
27.41 |
29.63 |
|
Operating profit ratio |
||||
|
Revenue |
57,742.00 |
51,955.00 |
47,631.00 |
46,571.00 |
|
Operating income |
2,932.00 |
2,356.00 |
3,678.00 |
4,358.00 |
|
Operating profit ratio |
5.08 |
4.53 |
7.72 |
9.36 |
|
Net income ratio |
||||
|
Revenue |
57,742.00 |
51,955.00 |
47,631.00 |
46,571.00 |
|
Net income from continuing operations |
8,013.00 |
(4,841.00) |
(1,972.00) |
4,757.00 |
|
Net income ratio |
13.88 |
(9.32) |
(4.14) |
10.21 |
The extract used from income statement of the company to calculate profitability ratios clearly indicate that the revenue of the company is on the decline. In addition the profitability ratios of the company shows that despite the reduction in overall revenue, the company has been able to earn significantly higher profits in 2018. Gross profit ratio of 29.63% in 2018 is highest in last four years. Despite a reduction of €5,384 million in gross revenue of the company in 2018 from 2016 the net income of the company has increased by €9,598 million.Net profit ratio of 2018 has increased to 10.21% as opposed to the negative net income ratio of 9.32% in 2016. Such significant difference must be evaluated by the auditor to check whether financial statements are materially misstated (Yoon, Hoogduin and Zhang 2015).
|
Vodafone Group PLC |
||||
|
All amounts are in EUR millions |
2015-03 |
2016-03 |
2017-03 |
2018-03 |
|
Current ratio |
||||
|
Total current assets |
27,139.00 |
35,687.00 |
42,737.00 |
37,951.00 |
|
Total current liabilities |
39,514.00 |
42,346.00 |
42,389.00 |
39,024.00 |
|
Current ratio |
0.69 |
0.84 |
1.01 |
0.97 |
|
Acid test ratio |
||||
|
Total current assets less inventories |
26,480.00 |
34,971.00 |
42,161.00 |
37,370.00 |
|
Total current liabilities |
39,514.00 |
42,346.00 |
42,389.00 |
39,024.00 |
|
Acid test ratio |
0.67 |
0.83 |
0.99 |
0.96 |
Another important aspect of the analytical procedure is the current and acid test ratio. Both these ratios have improved over the last 4 years despite lack of profits in 2016 and 2017. From 0.69: 1 in 2015 the current ratio of the company improved to 0.84: 1 and 1.01: 1 in 2016 and 2017 respectively (Plumlee, Rixom and Rosman 2014). Though the inherent and control risk of the company have been assessed low still the auditor should carry out necessary substantive procedures to keep the detection risk as low as possible to collect necessary audit evidence to support his opinion on the financial reports of the company.
Conclusion:
Thus, the auditor must use extensive audit procedures on items of revenue, expenditures, assets and liabilities to reduce the overall audit risk to an acceptable level. The overall audit risk must be within acceptable limits to conduct the audit of the company effectively. However, based on the results of analytical procedures it is important to carry out all necessary procedures to express an appropriate opinion on the financial statements of the company (Appelbaum, Kogan and Vasarhelyi, 2017).
References:
Appelbaum, D., Kogan, A. and Vasarhelyi, M.A., 2017. Big Data and analytics in the modern audit engagement: Research needs. Auditing: A Journal of Practice & Theory, 36(4), pp.1-27.
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement audits. Accounting Horizons, 29(2), pp.423-429. [Online] Available from: https://www.aaajournals.org/doi/abs/10.2308/acch-51068?code=aaan-site [Accessed 30 September 2018]
Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Jans, M., Alles, M.G. and Vasarhelyi, M.A., 2014. A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), pp.1751-1773. [Online] Available from: https://www.aaajournals.org/doi/abs/10.2308/accr-50807?code=aaan-site [Accessed 30 September 2018]
Plumlee, R.D., Rixom, B.A. and Rosman, A.J., 2014. Training auditors to perform analytical procedures using metacognitive skills. The Accounting Review, 90(1), pp.351-369.
Yoon, K., Hoogduin, L. and Zhang, L., 2015. Big Data as complementary audit evidence. Accounting Horizons, 29(2), pp.431-438.
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