You will be allocated a company quoted on the Alternative Investment Market (AIM) on the UK stock exchange. You should obtain, or download a copy of, the companys last annual report containing audited financial statements.
A. From the financial statements, the annual report and other sources, and using appropriate auditing procedures, identify THREE areas of heightened audit risk relating to the audit of this company this year. Explain in detail, using quantitative and qualitative analysis, why you consider these to be areas of increased audit risk.
(50%)
B. In relation to ONE of the areas selected in Part A identify in detail, and explain the reasons for, FIVE substantive audit procedures you would carry out in attempting to reduce audit risk to an acceptably low level.
(50%)This assignment has 3 areas about the risks; one of three is the most important and should provide detailed information. Explain why this risk area is the most important.
The words of part A&B better to be the same. There should be some calculation in part A.
Please read the notes of tutorials about this assignment carefully, pick up three risks and useful information from it.
Tutorials about this assignment
This assignment has 3 areas about the risks; one of three is the most important and should provide detailed information. Explain why this risk area is the most important.
The words of part A&B better to be the same. There should be some calculation in part A.
Some questions tips:
1. What is this company business?
2. Where the company faces their risk?
3. Some changes may increase risks. (Two certain types of risk)
4. Abnormal/unusually events & figures
5. Plan this auditing: this company’s big problem (work on already published figures)
Introduce the company
Website: 1.explain what the company does(most important points)
2. Homepage. explain the purpose of company:‘Mobile Streams retails Mobile Content including Apps, Games, eBooks, Music and Videos globally through mobile carrier partners and its Appitalism.com applications storefront.’
3. Company based on…?(what markets?)
Risk
Annual Report
1）Registered Office on UK, but may not do business on UK.
2）Page 26 Financial Statements.
Year 2014. Profits for this year (546)
Revenue in 2015 is half of 2014
1) Revenue: decrease significant, Why decline & decline so significant?
2) Decline in operations costs etc.
3) Going concern
4) Page27 Adjustment
Exchange difference on translating foreign operations decrease
5) Page28 Balance Sheet, low fix assets
Re-started figures not showing intangible assets —Amortizations
Why very low intangible base assets?
6) Trade and other receivables— maybe not from customers, most from advertisements.
7) Payables
8) Page 38 End of the notes— other intangible assets
9) Page 43 Why the company think 2015 is important?
21. Segment Reporting
Argentina: a. developing in mobile services
b. Someeconomy problems in recent yearsdetailed. Particular country which may lead to significant profits.
c. Currency restrictions in Argentina
d. Location of activities
e. Devolution of currency
10) Page 45 Mobile operator services decrease, mobileinternet services increase. Especially sporting related APPs, in Argentina(south American ) profits increase due to Olympics.
INITIALRisks Identified
1) Volatility of IT applications sector
2) Potentially obsolete software
3) Decline in turnover
4) Decline in Gross Profit margin
5) Decline in Selling & Marketing expenses
6) Taxation
7) Foreign currency translation
8) Receivables
9) Payables
10) Political and exchange risk in Argentina
11) Share based payment transactions
Risk Assessment
Part A summary
1. Decline in Revenue
Annual Report 2015
Page 5 Chairman`s statement
“Group revenue…… emerging markets’’
‘Much of the reduction in revenue is attribution to Argentina Revenue in Argentina (which equates to 87% of our revenue) on a constant currency basis…’
– Decline of 22% AR$ 440m to AR$ 343m
– In sterling: decline of 40% in turnover
Page26 Income Statement
Revenue 29063 48573
(48573-290630)/48573
Underlying explanation:
When did revenue decline? Was there a currency translation effect?
– Page 11-12 Different Risk
& Argentina division revenue(figures) 2014&2015
– Page 17 FS for the year ended 30 June 2015
Google Search “currency exchange rates”
CLICK ‘XE Currency Converter’
ARS (Argentina)GBP(UK)
Current: 1 ARS = 0.0466409 GBP (02/18/2016)
History Currency: look at the currency during thatperiod(22% decline)
Date 2015-06-30/2014-06-30
1 ARS = 0.069983 GBP
Working: 2015/06/30 £ 0.0700： 1 ARS $
2014/06/30 £0.0718: 1 ARS $
2.5% movement in exchange rate 0.0718-0.0700/0.0718
– Unexpected Fluctuation figure on the underlying
Are their materially mistakes?
Come back to Income statement Page 26
2. Gross Profits
2015- 26.4% 1673/29063
2014- 29.3% 14229/48573
2.9% — A decrease of 9.9% ( 2.9/29.3)
3. Selling & marketing
2015 – 11.7% 3405/29063
2014 – 16.2% 7872/48573
In the assignment, you should use some computational analysis to explain the risk.
4. Receivables
Page 28 Balance Sheets — the figures of receivable & payable is a big decline
Page 38 Receivables
– Trade receivables 1010 4341
Accruedreceivables 758 1223
Other debtors 2248 930
We interested in :
-decline in trade receivables
-increase in other receivables
-maintain the profit(interest payment)
-the ability to pay debts
Page 39 Payables
Overdue debts
5. Payables
Page 42 Trade and other payables
– decline in trade payables(margin)
– decline in accruals
– The significant decline in receivables and payables, shows that the possible of decline of operating activities, cash…etc.
Page 28 Current
– Trade and other receivables
– Cash and cash equivalents
6. Going Concern
These 6 points has interlinked.
Part B summary
Focus on just five points.
Revenue
1. Detailed audit procedures
Looking at specificallyareas(Test)
Substantive audit work
– Detailed analytical procedures
– Test of detail: Audit objective(briefly terms, test main areas )
– Completeness: classification, accuracy
– Occurrence: classification, accuracy, different example in different transaction
– cut off of the end of the last year
– Understandability: Presentation and disclosure
2. Background
Page 5 “Group revenue… into new emerging markets ‘
– decline in revenue( Presentation currency- £)
functional currency, most company is same but this company has different function of currency
– Attributable: attributed by company to Argentina (87% from Argentina)
– Revenue decline 22% in Argentina but in sterling£ term the decline degree is more than that
– Revaluation in Argentina $, the movement of currency (do some calculation and analysis)
3. Analytical Procedures
– Reconciliation of UK Revenue, Argentina revenue, exchange rate movement
– There is an unexpected fluctuation
– Month by month analysis of sales
– Match that to currency movements
4. Audit Objectives
a. Completeness
Detailed breakdown company`s revenue
Page 44 Risk to revenue (LatinAmericaMobile internet Services)
Advertising assets(costs)
– PAY as you go (payment systems)
Basic completeness test: Match log of downloads to accounting records
For example: check/prove track from log to accounts
– Subscription go from log of subscription& check appointment to time
– Not for log it self, but advertising itself control
– Advertising: go from advertising contracts & time period
b. Occurrence, it is actualoccurred ?
– pay as you go (online transaction)
note detailed different parts/kinds of services
confirm what is most population.
Sample for apps –detailed download- accounts
Subscription (system in accounting records)
– advertising: sample from adverts transactioncontracts
pay different level of money to different exposure
c. Cut off
– subscription: sample from subscriber base, both sides of year end
current time year around( correct accounting period)
– advertising: sample for advertising customers base
aprobability that test in different level exposure in market
Test procedures in different time period (monthly/half year)
– mobile operation services: long term contracts
Auditing: records in Argentina language may be one problem
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