Discuss about the Auditing Capacity and Planning Function.
The audit plan structured to facilitate the process of auditing of the K&S Corporation for the year 2016. This audit plan is meant to reduce the risk to acceptable level when reporting the evidence about the true and fair financial state of the company (King, 2007). Good plan outlined in this paper will give a clear understanding of the client, identify significant accounts, set planning materiality, indicate what can go wrong, an understanding of internal control and in between develop an audit strategy to be executed for the audit purposes of the company. The audit plan will also outline the time frame and emphasis to ensure the audit process is effective and the auditor verifies the financial reports for the interests of the shareholders (Bepari and Mollik, 2016).
K&S was founded in 1945. The corporation’s managing director is Paul Sarant. The corporation provides logistics, fuel distribution, transportation, warehousing and various services to companies across Australia. The company offers rail, road and coastal sea forwarding. The company is also involved in export packing and supply chain management to key customers.
The corporation provides it diverse services under the following subsidiaries; K&S Bulk, K&S NZ, K&S Fuels, K&S freighters, DTM, Regal General, Regal Heavy, NTFS, Scott Corp and Aero Refueller. It is through these subsidiaries that the corporation is able to serve it widespread customers throughout Australia and New Zealand (Ksgroup.com.au, 2016).
The organization key customers are; Coca- cola, BHP Petroleum, Alcoa, Santos, Norske Skog, Blue Scope, One Steel, Woodside Energy and The Laminex Group.
K&S corporation main competitor is Santa Fe Wridgeways Australia Limited (WWA). In this case, K&S can be described as the market leader while Santa Fe Wridgeways as the follower in the Australian market.
The company financial Calender started on 1st July 2015 and ended on 30th June 2016. The company 2015 general meeting was held on 24 November 2015. The half year results and interim dividends were announced in February 22th 2016. The Corporation paid a dividend of 7.0 cent for the year 2015 (InvestSMART, 2016). The annual general meeting the year 2016 will be held on 22nd November.
The K&S Corporation has integrated it services with IT systems to enhance service to more customers. The IT system provides an interface between customers and the company to book services and communicate with the company. The company uses the IT system to manage it vessels by use of GPS to track their operations. The company also uses IT system to offer training to the workforce about the emerging issues and facilitate short courses .Finally and most important is that the IT systems are used to prepare and keep financial records in the organization (Ksgroup.com.au, 2016).
Expense account
This account faces a risk of being understated when presenting expenses in the financial statements. This account contains costs incurred to run the corporation and realize revenues. Due to the company’s large operations and several subsidiaries, the group is faced with high expenses to keep the business running. The importance of assessing this account is significant due to the pressure of the corporation to record minimum expenses in a financial year (Moroney, 2015). The management would like to record the lowest amount incurred by the organization in order to maximize wealth. It is within this rationality that the account is significant for it high susceptibility to be understated in the financial statements.
The business combination account susceptible due to it measurement methods. K&S group acquires business and accurate and reliable financial statements are to be drawn from the acquisition. The measurement of the assets and liabilities from the acquaree is significant and understatement or overstatement is material to the financial statements of the K&S Corporation. The amount analysed from these businesses of K&S group are huge and determines the financial position of the organization. A misstatement of this account will lead to false presentation of the financial statements to the shareholders. The account requires deductions as a result of accumulated depreciations from plant and equipments, vehicles and intangible assets. The company also has several assets that require revaluation which increase in value. For instance land, goodwill and patents. This account will be significant and will be reviewed to ensure that the figures in the financial statements represent the true and fair value of the assets of the corporation (A2Q2, 2016). Therefore, our team will highlight the business combination account as a significant account to ensure no errors are entered in the financial statements in the process of measurement.
K&S group is involved in large amount of inventory that is a current asset to the organization. The transaction of inventory in this company in terms of volume is complex therefore susceptible to misstatements. Also the nature of this account is frequently and irregularly updated on daily basis exposing the account to risk. A misstatement in this account can lead to organization’s financial ratios drawn from the financial statement to be misleading to managers, lenders, suppliers and shareholders.
The revenue account indicates the cash inflow in the organization. The account is significant and has to be reviewed to ensure that the recorded transactions only reflect economic benefits to the group. The sale of goods, rendering of services, interests earned and dividends are sources of cash inflow for K&S Corporation Limited. Misstatement in this account will alter the financial statements that will fail to reflect the true and fair state of the business. There is an incentive for the corporation to overestimate this account and therefore important to verify to avoid giving a wrong opinion on the organization’s financial statements.
The consolidation of the K&S group consist all the subsidiaries together preparing one financial statement. The subsidiaries of the K&S Corporation are also required to prepare financial statements of their company that must be in accordance with the accounting policies. Since the financial reports are prepared at the same time, consistency will be checked by our team to verify that all the accounts in the K&S Corporate financial statement are accurate.
Emphasis will be put on accounts that show the obligation of the organization. These accounts are significant and any misstatement can lead financial statements not reflecting the true and fair situation of the organization (Campbell, 2013). The liability account will have to be reviewed to ensure that all the account payable and borrowing incurred by the K&S and its subsidiaries are listed in the financial statements. The existence of parties in the K&S group requires that transactions are accurate to avoid exposures to company incurring losses. Therefore, the significance of this account is important and determines the liquidity of the organization.
Also an emphasis will be put on account receivables that represents current assets that the group is expecting to be settled by debtors in the near future. This account is sensitive especially when determining the liquidity of the organization and it failure can lead to bankruptcy. When doubtful debts are not well accounted for, they can lead to misstatement of this account resulting to false financial statements.
Our plan for materiality to determine the fraud or misstatement in the K&S financial statement is to apply analytical procedures for verification. Since the K&S group operates in a wide spread, scrutiny of the control and coordination operations. The materiality of the K&S group is likely to be cause by illegal acts (fraud) or several errors in the subsidiaries amounting to cause materiality in the financial statements. Emphasis will be put to understand and verify that the internal control in the subsidieas companies is efficient and effective ( Gul, (2009). We will audit preliminary materiality and be revised to attain more information.
When establishing the strategy to execute in the audit process, the materiality for the K&S group financial statements will be determined as a whole. This will be done because it can influence an economic decision when aggregated that individual item (Moroney, 2015). It is also in this stage that we will determine performance materiality for in the organization with an aim of assessing the risks in misstatements and determine the timing, nature and extent if further audit procedures will be carried.
For the account of profit before tax will be calculated at 5%, revenue at 1%, and total revenue at 2%.
Example operating revenue of $699.2 million calculated at 0.0004= $699.2 million x 0.0004 = $279,685.
The total revenue account which is revenue less returns and discounts will be valued and declared material if it omission or misstatement or combined will form more than 0.5 % of the total revenues.
Materiality in the total Assets account will be declared material if misstatement or omission combined form more than 1% of the total assets. If misstatements or omission are below 1% will be regarded immaterial and not capable of influencing the economic decision.
Materiality in current assets and current liabilities accounts will be declared if misstatements or omission combined will form a percentage greater than 5% of the total assets or liability. Anything below this amount will be immaterial and will not change the auditor’s opinion.
Tolerable misstatements will be allocated on both the income statement and the balance sheet accounts to enable progression where the omissions and misstatements are immaterial. In this plan materiality, tolerable misstatements are set at a maximum of 75% of the planning materiality. Also, any tolerable misstatements in the audit process of the K&S Corporation Limited will only be allowed if it does not exceed four times of the planning materiality.
This section will assess the risk in the significant accounts outlined in this paper. This section will also select and plan for implementation controls to reduce the auditor’s risk (Colbert, 2012). The following are the assessment of the risks in the significant accounts that can go wrong leading to auditor’s risk;
Business Combinations: K&S is involved in business combinations to strengthen it capacities and reach more customers in Australia and New Zealand. The corporation has in the past acquired several companies which later as become subsidiaries to K&S group. The accountings for these businesses are independent and are finally incorporated to the K&S financial statements. The measurements used in the business combination are prone to misstatement if the sum is not calculated as per the acquisition date fair value. The acquisition should be measured at the fair value. When this is not observed, it will happen that the acquiree net assets identified will either be underestimated or over estimated which is material and can lead to influencing the economic decision (Campbell, 2013). Therefore, the auditor opinion in this case will be misleading and of no importance to the organizations stakeholders.
Basis consolidation: The K&S Corporation Limited comprises a financial statement for itself and its subsidiaries. This consolidated financial statement of the group is prepared at the year ending 30th June for the parent company and subsidiaries. The group financial reports accuracy depends on the accuracy of the subsidiary companies. Therefore it important for our auditing team to spend time checking and verifying the accuracy, reliability and precision of the financial statements of the subsidiary companies to ensure that the accounting standards have been observed. When there is material misappropriation in one subsidiary, the group financial statement will not be able to attain a true and fair reflection of the financial position. In order to verify if the financial statements of the subsidies are prepared in accordance to the standards of Australia and international accounting standards, our team will review the internal control (Moroney, 2015). The control of the subsidiaries is done by the parent company after consolidation. Therefore, the operation of a subsidieiers depends on the corporate governance of the organization. The risk of subsidiary company presenting wrong financial statements will be assessed by the level of controls instituted by the group management.
Expenses: The expense account is an important element in the financial statements and it facilitates the organization to verify the amount it used to earn it profit. It is the cash outflow that is intended to provide cash inflow. An organization will always try to minimize the expenses to maximize it profits (Bepari and Mollik, 2016). There is a risk of an organization understating it expense because of the incentive to minimize expenses in it operations. This scenario will lead to materiality in the financial statements where the profits of the group will be over stated therefore representing the false state of the financial status. The expense account will be assessed by checking the inclusion of all outflow that were used provide the revenues in the organization. The process will also check to ensure that expenses incurred in the financial year are included in the year.
Liability account: The liability account indicates the group’s obligation to it renders authority and suppliers. The account is important as it determines the liquidity state of the organization. The account misstatement lead to impact on the economic decisions made in the corporation. Assessing this account will involve identifying the borrowing, account payables, tax payable and ensuring that they are recorded in accordance with the accounting standards. Since most of the group operations are automated, our team will review the IT systems used to record tax obligations, suppliers’ credit and borrowings from financial institutions. Understating this account will lead to the group lowering it credit rating therefore getting denied access to credit facilitates from lending institutions. The risk of omitting or misstating an obligation can be intention from the corporation workforce to fraud the organization. Therefore, our team will review this significant account to ensure that it reflects the true and fair state of the K&S group financial statements.
Revenue account: The revenue account indicates the cash inflow to the corporation. The revenues earned from the subsidies are consolidated to the K&S group financial statement for the financial year. There is pressure to overstate this account from the management .The incentive is from the shareholders who want wealth maximization for their investments. This account is important and enough time will be spent to verify all the receipts that have been recorded cash inflows. The risk in this account can be material as an individual or in aggregation (Moroney et al, 2015). Our team will be checking to ensure that earning after the closing of the financial year are not included in the financial statements of the concluded year. Revenue account is used to show the growth of the company’s returns. Therefore, misstatement in this account will lead to auditor giving invalid opinion if it not noticed.
Conclusion
In conclusion, the audit plan has outlined important details to be used to execute the audit process of K&S Corporation Limited. The audit plan has described K&S group that has brought clear understanding of the nature of its operation, industry and financial position. The plan has identified significant accounts and transactions, discussed materiality, identified what can go wrong and an understanding of internal controls. This audit plan has also outlined the risks in the process of auditing in K&S group and the mitigations necessary to minimising the auditor’s risks. The significant accounts outlined will be added the amount of time spent to verify them to ensure that the auditor’s opinion is based on true evidence in the original books of entry. The audit plan outlined in this paper has sufficiently given a guide that will be used to carry out a successful audit process of K&S Corporation Limited for the financial year 2016.
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