Glisten Plc

8/6/2019 Glisten Plc

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6. Segregation of Duties

One person should not be responsible for the recording and processing of duties.Involvement of many people reduces the risk of intentional manipulation or error and

increases the element of checking. Functions which should be separated includeauthorization, execution, custody, recording and in case of computer-basedaccounting system, systems development and daily operations.

7. Custody of Assets:

Physical custody of assets and procedures and security measures designed to ensurethat access to assets is limited to authorised personnel. Access can be direct, e.g beingable to enter the warehouse or indirect access via documentation e.g personnelknowing the correct procedures, may be able to extract goods by doing the right paper work.

Examples are locking of securities (share certificates etc) in a safe with procedures for the custody of use of keys. Use of passes to restrict access to the warehouse. Use of password to restrict access to particular computer files.

Task 2: Preliminary Judgment about materiality.

The second part of my assignment is to determine the preliminary judgment aboutmateriality for the company. Materiality refers to the quantitative and qualitativeomissions or misstatements that make it probable the judgment of a reasonable

person would have been changed or influenced. These omissions or misstatementscan be material individually or in the aggregate. Assessment of materiality isimportant in planning the audit and in evaluating truth and fairness of the financialstatements. The assessment that I will made may differ from the materiality levelsused at the conclusion of audit in evaluating the audit findings, because thesurrounding circumstances may change and the additional information about theentity will have obtained during the course of the audit.

Materiality judgements involve an assessment of both the amount (quantitative) andthe nature (qualitative) of the misstatements. At this planning stage I will onlyconsider the misstatements that are quantitatively material.

Risk Assessment:

In developing a rational audit approach I have exercised professional skepticism thatdemands a critical assessment of audit evidence. I also considered risk relating to thecompany. As this was my first audit I reduced the materiality level. The reason for reduced aggregate materiality levels is the increased probability that several accountsor transaction classes might be misrepresented in order to effect concealment of theinitial misrepresentation.

Inherent risk and control risk related to the company set to be high that suggest lessreliance on internal control. I relied more heavily on external evidence such asconfirmations, physical inspections, calculations and reconciliations.


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Materiality for Income Statement:

For the income statement materiality could be related to revenue or to profit.Companys net income shows negative figure a loss of 675,000. I consider any

misstatement of over 700,000 would be material for income statement as it willconvert the loss figure into profit.

Materiality for Balance Sheet:

Based on the total assets of the company the estimated errors totalling 800,000 or 1% of total asset would be material for balance sheet.

Aggregate materiality:

For planning purposes I consider 700,000 to be material for any one of the financialstatements. If any one of the financial statements errors totalling exceeds this figure, itwill be considered materially misstated.

Task 3.

Materiality levels judged in part 2 are further classified on individual basis that meansthe impact of a single misstatement on the financial statements. I also consideredaggregate materiality that is the total effect of two or more misstatements, each of which is not material by itself. In this third part I allocated the materiality to therelevant accounts and set a tolerable misstatement for each account. The tolerableerror is the minimum misstatement that can exist in an account balance for it to bemisstated.

Allocation of Materiality to Income Statement Accounts

Revenues:

Although revenue figure does not fluctuate considerably if compared with previousyear. But still possibility of misstatement of the figure is high. Revenue amount could

be highly overstated or understated. Any overstatement or understatement of 50% of aggregate materiality i.e 350,000 will be material and revenue will be consideredmisstated.

Cost of Sales:

Cost of sales 58.6m represents 80% of total revenues that lowers the profit margin of the company. As an auditor I suspect an overstatement of this figure. It can misstatethe profit figure sizeably. Some precise measures are needed to evaluate the reliabilityof the stated figures because it directly effects the profits of the company. Thereforelow materiality levels are suggested and any misstatement over 300,000 isconsidered as material.


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Finance Cost:

The group holds an interest hedge over 23m of its debt to bring stability to itsfinancing costs. These hedges are classed as derivatives. The marked to market fair value of this hedge at the year end was a liability of over 4m which give rise to the

finance cost of the company to 6 million. There is a probability of misstatement of this figure due to its importance. As compare to previous year it shows an abnormalincrease, that raise the chances of overstatement of figure. With low materiality levelan amount of 50,000 is considered material which is 7% of aggregate materiality.

Table: Materiality to Income Statement Accounts

Account Materiality AllocationAmount () (%)

Revenue 350,000 50%Cost of Sales 300,000 43%Finance Cost 50,000 7%

700,000 100%

Allocation of Materiality to Balance Sheet Accounts

Allocation of the preliminary judgement about materiality to the accounts leveldepends on relative size and importance of the accounts.I expect certain accounts to be audit 100 percent. These accounts are cash, intangibleassets and line of credit. These accounts are not sample accounts. Audit sampling isan audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluation.

Goodwill and other intangible Assets:

The carrying amount of goodwill is based on the companys cash generating units.Goodwill is valued on assumptions of forecasted profits, growth rates and discountfactors. Significant fact is that the amount of goodwill is more than half of the totalassets amount. I expect there is more chances of materiality to be overstated.Therefore it will require a 100% audit.

Cash and Bank balance:I expect no errors in cash and bank balance as these are very important for liquidityconsideration of the company. Any error in cash can mislead investors decision.Therefore I suggest zero materiality and a 100% audit.

Equity:Equity figure needs to be accurate and I expect no error under this head. This accountneeds a 100% audit.

Inventories:


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Inventories represent 10% of total assets and this amount does not vary noticeablyfrom previous year. There are possible chances of errors in the inventory figure andcost of detection is higher. An error upto 30% of aggregate materiality i.e 200,000/- isestimated to be maximum misstatement in this account.

Property, plant and equipment:I expect few errors in property, plant and equipment figure. There are acquisitions,additions, disposals and accumulated depreciation in this head. An 8% of aggregatemateriality i.e 56,000 is the maximum tolerable amount for this account.

Trade and other Receivables:It represents 15% of total assets. Any understated or overstated amount cansignificantly misrepresent the balance sheet figure. Keeping in view the previous year figure the estimated limit for any misstatement is amounted to 250,000 which is 35%of aggregate materiality.

Long-term & Short-term Liabilities:

Financial Liabilities:

The group holds an interest hedge over 23m of its debt to bring stability to itsfinancing costs. These hedges are classed as derivatives. The marked to market fair value of this hedge at the year end was a liability of over 4m which give rise to thefinance cost of the company to 6 million. There is a probability of misstatement of this figure due to its importance. As compare to previous year it shows an abnormalincrease, that raise the chances of overstatement of figure. With low materiality levelan amount of 35,000 is considered material which is 5% of aggregate materiality.

Borrowings:

Company has three loans and overdraft facility from banks. Bank loans due after oneyear showed 24m. Materiality is presumed to be zero and a 100% audit required for this head.

Table: Materiality Allocation:`

Account Materiality AllocationAmount () (%)Inventories 245,000 35%Trade and other receivables 350,000 50%Property, Plant & Equipment 70,000 10%Financial Liabilities 35,000 5%

700,000 100%

This allocation is made on the basis of expected monitory misstatements and auditcosts. Larger materiality allocations are made to receivables and inventories as Iexpect more misstatements in these accounts and also the cost of detection related tothese accounts is high.


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Task 4:

As I mentioned earlier materiality levels are subject to revised or reallocate as theaudit work proceeded. I allowed greater proportion of the total allowablemisstatements to remain in those accounts where it would be most expensive to

detect the misstatements.

On the basis of evidence and information I gathered from the work I have performed Ineed to reallocate some portion of materiality to accounts.

Controls over Revenue and the Purchasing:During the audit of the company I found that the company has adequate controls over its revenues. Sales registers for Cash and Credits are maintained separately withsupported documents. All credit sales are authorized by credit control department thatalso maintains a record of receivables. Therefore there are less chances of misstatements and the maximum misstatement in revenue account is estimated to be250,000 that was previously 350,000.

On the other hand in purchasing process I found some weaknesses that need to beadequate. Some large amount purchases need to be verified from external sources. Iexpect some overstatement that will effect the cost of sales. Therefore materialitylevels need to be high. The maximum tolerable misstatement figure is increased by100,000 i.e from 300,000 to 400,000.

Controls over Inventory

Inventory figure includes raw material, consumables, finished goods and goods for resale. The stated amounts represent all and only existing stock and work in progress.Adequate provisions are made for foreseeable losses. I found reasonable evidence thatstocks and work in progress presented in the financial statements in accordance withthe Companies Act and accounting standards. The maximum misstatement ininventory account is estimated to be 250,000.

Controls over additions to plant, depreciation and impairment

Property, plant and equipment are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost of fixed assets less their estimated

residual value over their expected useful lives. Any addition or disposal requireapproval by concerned department. Additions of 2 m has been made during the year.Disposals also show a large figure for the year. All additions, depreciations andimpairments has made according to the rules.

Controls over the valuations of financial instruments

Financial instrument of the company comprise borrowings, some cash and liquidsources and items such as trade receivables and trade payables that arise directly fromits operations. The purpose of these financial instruments is to manage the finances of the companys operations. Loan and receivables are non financial assets with fixed or

determinable payments that are not quoted in an active market and are included incurrent assets. Financial liabilities are carried at amortized cost. Company has good


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internal control procedures to value these instruments. I expect less errors under thishead.

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