Risk-Based Approach

2021-05-13 03:40:27
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A risk-based approach is pragmatically define as a technique that is designed to be used during the process of the audit to effectively and efficiently focus the nature as well as the extent and timing the pragmatic procedures of audit to those areas for the most probable areas attributable to material misstatements in the firms financial report (Ramsay et al. 2013). A Risk-Based Approach is an approach that is related to the concept of audit risks and materiality. According to ASA 315, Assessing and Identifying the risk of material misstatement through company environment understanding and ASA 330 for auditors reactions to the risks assessed that specially set out the risk-based audit method. The aspect of risk based approach usually requires the auditor to primarily understand the entity and its background so as to recognize the risks that may result in material misstatement of the financial report. In this particular approach, the auditor carry out an assessment of those risks at both the assessment level and financial report because the assessment comprise taking into account a number of diverse factors such as the risks nature, the level of required audit evidence and the relevant internal controls.

Case Study: Home Retail Group plc

Home Retail Group plc is the United Kingdom based home and general merchandise retailer and the company is considered to be the parent company of Argos and Habitat. Home Retail Group plc is listedon the London Stock Exchange, and it is a constituent of the FTSE 250 Index. Argos and Habitat and the Home Retail Group operate in more than 800 stores across the Ireland and the United Kingdom (Ramsay et al. 2013).

Features of Home Retail Group plcs results for 2013 2015 that might indicate that the company was facing going concern problems

External audit rotation

The rotation by the company of its internal auditors creates a material misstatement because the new incoming external auditors aremaybe new to the company. The requirements that any auditor who is appointed to audit the company should, first of all, have prior knowledge about the company background and the nature of its particular operations. PricewaterhouseCoopers LLP being the current external auditors upon appointment at 2006 where the external audit has never being contracted again.In consideration of the review of the regulations attached to the appointment tendering of the external audit as well as the guidance issued during the year, the audit committee decided that the company auditors needs to be tendered for the audit company to be reappointed as the Groups auditors for FY16 and then commence anaudit tender process for the financial year 17 audit.During the previous year, Home Retail Group plc had appointed to the current Price Waterhouse Coopers LLP as their current external auditors (Ramsay et al. 2013).

The aspect of misstatement can be experienced in this particular aspect because various external auditors uses diverse auditing procedures and also the level of experience matters, the rotation of auditors by Home Retail Group plc will results to material misstatements in the accounting books because of the procedures variance.

An example of how I may collect evidence in this particular issue and also asses the degree of business by obtaining an understanding of the entity and its environment and also assessing the risk of the material misstatements is through asking the resultant auditors about any information that relates to the company operations and their management. In doing this, I can be able to note down if the appointed auditors have prior knowledge about what Home Retail Group plc do as their main business operations.

Features of Home Retail Group plcs for 2013 2015 that might indicate that the company is facing going concern problems (Audit committee report, 2015).

Sales dropped down by 2% to 2,629

The decline of sales with a 2% is a clear indication that the company is experiencing a going concern problem. The sales of the company cannot drop with that significant percentage over a small period. It shows that the company is not doing well with its operations, and it needs the managers to wake up and improve the company operations. Group benchmark profit before tax increased slightly during the first half; performance overall was mixed. Home base delivered a good first half, with like-for-like sales growth and an improvement in operating profit (Ramsay et al. 2013). It also made good progress with its Productivity Plan and the store closure plan in particular, which helped Home base to achieve further cost reductions.

Cash grown margin dropped by 1% from 1000 to 973

This indicates that the whole company is not doing well, and its shows that it is facing a going concern problem. The fall in cash grown margin shows that Home Retail Group plc company or the other branches will not be in a position to continue with its operation for a period of time that is sufficient to carry out its commitments, obligations, objectives. In other words, the Home Retail Group plc will have to liquidate or be forced out of business in the foreseeable future because the continuous downfall of the cash means that the company will not have sufficient money to continue its operations.

Operating and distribution costs of Argos increased by 14m

Argos first-half sales and profit were negatively impacted by declines in both electrical and seasonal product categories. Argos continued to make good progress with its Transformation Plan, delivering strongly against its digital store opening programme. Argos also substantially completed the technology and operational steps necessary to launch Fast Track its new home delivery and store collection propositions. Argos is investing significantly in the launch of Fast Track, and although the rate of customer take-up cannot be certain, we are confident that customers will increasingly embrace this market leading service over time (Audit committee report, 2015).

The cash flow ratios include Ratio examples:

Cash grown margin

Cash grown margin = 973 * 100

1000

= 1%

Cash grown margin decreased from 1000 to 973 indicating a 1% decrease indicating that the company is on experiencing a going concern problem.

Operating Profit margin

Operating Profit margin = operating income

Revenue

Operating Profit margin = 67 million * 100

137.4

= 4.8%

Operating Profit margin decreased from 137.4 to 70 indicating a 4.8% decrease indicating that the company is on experiencing a going concern problem.

Home grown Gross Profit

Gross Profit margin = gross profit

Revenue

Gross Profit margin = 1773 million * 100

5,710.4

= 3.1%

Operating Profit margin decreased from 137.4 to 70 indicating a 4.8% decrease indicating that the company is on experiencing a going concern problem.

Return on equity

Return on equity = Net income

Average total assets

Return on equity = 100.0

4372.7

= 2.2%

Operating Profit margin decreased from 137.4 to 70 indicating a 4.8% decrease indicating that the company is on experiencing a going concern problem.

Sales/revenue

Sales/revenue = Total revenue

Average revenue

Sales/revenue = 2105.5 * 100

1388.5

= 2%

Sales/revenue margin decreased from 2,965 to 2,629 indicating a 2% decrease indicating that the company is on experiencing a going concern problem (Audit committee report, 2015).

Qualitative factors or information that might suggest that the company would be able to continue in business for the foreseeable future

The cost of operation and distribution decreased by 10 million from 951 million to 941 million

The cost of operation and distribution decreased by 10 million from 951 million to 941 million, and this is a clear indication that suggests that the Home Retail Group plc might be able to continue for a longer period of time (Ramsay et al. 2013). A company that cuts its costs or reduces its costs of operation usually have an outstanding chance of its business continuation. Reducing approximately 10 million by Home Retail Group plc form a clear indication that the company will continue its operations for a foreseeable future according to the Home Retail Group plc report of the audit committee

Benchmark profit before tax

Benchmark profit before tax increased by 3.2m from 30.9 million to 34.1 million or a 10% increase and also Home base increased by its benchmark profit by 6.5m. This aspect suggests that the company will continue its operations for a foreseeable future as we can see from the Home Retail Group plc report of the audit committee shows that the financial statement overall benchmark profits increased from 30.9 million to 34.1 million indicating a 10% increase (Ramsay et al. 2013). The increase in profit usually means that the company is doing well in providing its services to the public.

With reference to the Independent auditors report of Home Retail Group plc and specifically the areas of particular audit focus identified by Price Water Coppers LLP, the factors that may influence me in forming my opinion on the financial statement of Home Retail Group plc for 2015 include;

Limitation of scope

The company managers not providing necessary information and the explanations that are needed for auditing because according to PwC, they did not receive all the information and explanations that they require for their audit. This will prompt me to qualify my report because of the limitation of scope. Directors Remuneration Report was not tallying with the audited report. If the company financial statements and the part of the Directors Remuneration Report do not tally with the audited report, then this raises a lot of eyebrows that will influence my decision. I will make emphasis on the matters paragraph that there is no clear indication in the company records that the directors remuneration have been increased, they are not in agreement with the accounting records and returns.

Drop in sales volume for the company

Drop of Home Retail Group plc sales by 2% raises a lot of questions that may influence my decision on forming the audit opinion. Dropping sales by 2% mean that the company directors have a lot of products they took for their private use (Audit committee report, 2015).

Fall of cash gross margin

Home Retail Group plc cash gross margin dropped down from 1000 million pounds to 973 million pounds indicating that there is a probability that the company executives are misusing the company money (Ramsay et al. 2013). I will make emphasis on the matters paragraph that there is a possibility that the company executives are investing in private development, and this is a dangerous aspect that may cut its aspect of going concern.

Bibliography

Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2013. Auditing and assurance services. New York, NY: McGraw-Hill/Irwin.

Audit committee report April 2015. Retrieved from

https://www.homeretailgroup.com/media/269233/home_retail_group_plc_annual_report_and_financial_statements_2015.pdf

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