STO Santos Ltd

STO Santos Ltd

4

STOSantos Ltd

Questionone

#a

Thecompany being analyzed in this document is , oil andgas based organization. By the end of year 2014, it recorded a netprofit of 533 million dollars. The operating cash flow wasapproximately 1.8 billion dollars. This was after a production of54.1 million oil barrels.

#b

Theaudit and risk committee of is headed by anindependent chair person. He or she is also accorded 4 more memberswho assist him/her in the audit process

#c

Theaudit and risk committee of is chaired by anindependent person. This makes the entire committee independentirrespective of the other members who will form the committee.

#d

Auditcan be defined as a process obtaining as well as evaluating evidenceconcerning assertions concerning a company’s economic events andactions objectively (Kumar&amp Sharma 2005, p.7).It aims at ascertaining the degree of correspondence of theseassertions and an established criteria and communicating results tothe interested users. The audit process also aims at obtainingreasonable assurance of whether the financial report is free from thematerial misstatement either due to error or fraud. If the committeeis dependent, the audit can easily be twisted to cover themisstatements in the financial report especially those developed as aresult of fraud. However, an independent committee will address theissue the way it is since he or she cannot be influenced.

#e

Thereare high chances of the non-audit service fee to exceed 10% of theexternal audit engagement fee. This is because the audit processconcentrates more on the internal processes of the business.

#f

Theaudit committee is not allowed to discuss the non-audit serviceprovided by the auditor. The auditor is also prohibited fromproviding various non-audit services to the audit client as well asits affiliates (Kumar&amp Sharma 2005, p.13).Some of these non-audit services include book keeping, actuarialservices, human resources or management functions and internal auditoutsourcing services among others. It is, therefore, evidentnon-audit service is not allowed to be discussed by the auditcommittee.

#g

Themain problem that arises the non-audit service fees tend to be highthan the audit engagement fees is that the quality audit is usuallyquestioned. It appears as if the auditors have permittedinappropriate accounting treatments through compromising theirindependence. The fact that the auditor is not allowed to communicatethe non-audit services threatens the economy of the company in such ascenario (Rawindara&amp Sharma 2011, p. 56).Since the non-audit service fees exceed the audit engagements fees,and the auditor is not allowed to communicate these aspects ofnon-audit can lead to misuse of these funds. This will automaticallycause the company to suffer loss. This is another problem that isperceived in case the non-audit fees is high than audit engagementsfees.

#h

Santosexternal audit firm is the Stantons international.

#i

Thechairman of the audit and risk committee is the one who signed theauditor’s independence declaration as well as the auditor’sreport.

#j

Theauditor’s report and the independence declaration which wasreleased in the February, 2015 was signed in January, 31st2015.

#k

Thestandards and regulations which the external auditor refers includethe committee members to verify independence, whether the auditorreceived all the relevant information and whether all the crucialaccounts were attended (Rawindara&amp Sharma 2011, p. 55).

Questiontwo

FIFAhas been linked with corruption allegations in the recent times. Itis an international association overseeing international football. Itis aimed to improve of late football in every corner of the globe.However, there is a cloud of corruption detected encompassing thisassociation. This has led to the questioning of the role of theassociation’s auditors, KPMGSwitzerland. This whole issue can be well explained through theelements of audit expectation-performance gap, porter’s provisionof 1993. Porter analyzed various gaps of expectations whereby themembers of the society have a set of expectations towards theauditor’s report (Kumar&amp Sharma 2005, p.15).

Thereusually exist reasonableness gap which tend to rise since peopleexpect more of an audit than it can be given in practical terms likedetecting all manners of fraud. In other words, members of thesociety expect the auditor to detect any form of misstatement in thefinancial statements as porter indicated. In other words, every fraudshould not go unnoticed by the auditor. If fraud case happens and theauditor fails to notice it, the members of the society perceive it asthe auditor’s flaw (Millichamp2002, p.75).The fact that the FIFA’s corruption was not detected KPMGSwitzerland, the society are convinced that the audit firm was partof the cloud corruption or they did not do their duties as they wereexpected according to Porter’s explanations.

Questionthree

Solvency

#a

Theclient’s solvency is not badly of but something needs to be done.The fact that the quick and current ratios are extremely strong givesthe business strength to remain relevant in its respective field. Itcan help to keep it moving on and doing its transactionssuccessfully. However, debt to equity aspect raises an alarm sincethe company is at risk of running at a loss (Kumar&amp Sharma 2005, p.17).Similarly, the fact that times interest earned aspect is negativeindicates that in future it might fail to cover its interestexpenses. This indicates that these two aspects can create adverseeffects to the organization.

#b

Inthe entire audit process there are various accounts which auditor hasto consider. One of them is the sales and purchases account. This isa very crucial account that needs a critical scrutiny by the auditorso as to understand that every information recorded reflects is freefrom errors. It is in this account where frauds and errors are likelyto take place. The other account is salaries and remunerationaccount. This includes the permanent employees, casuals as well ascontractors in any. This is another crucial aspect that individualstry to incorporate frauds activities. The other account that theauditor considers is the tendering accounts. Tenders’ account isusually faced by a lot of frauds right from the offering of tendersto the allocation of these funds (Millichamp2002, p.76).A lot of cash can be lost if the accounts of tendering are notthoroughly scrutinized.

#c

Solvencyof any business is very essential. To understand the client’ssolvency further information which I would request is the statementson the closed loans and debts repayment (Rawindara&amp Sharma 2011, p. 57).This would help in determination of their repayment strength.Similarly, it will be easy to understand whether their repaymentstrength is either improving or deteriorating. I would also requestinformation on the main reasons that triggers their borrowing so thatto understand whether it is an issue that can be tackled once and forall.

Efficiency

#d

Inthis aspect, the three main accounts which need to be considered inthe audit process are the assets account, receivable accounts andreturn on investment accounts. These three accounts mean a lot indetermining the efficiency of the client. It is crucial to determinewhether the low assets turnovers which have featured are justifiableor not. Similarly, the receivables mean a lot to the efficiency andthe success of the business (Millichamp2002, p.79).Return on investment which works hand in hand with accountsreceivables and assets is another account that the auditor has toconsider. Understanding these parameters will help to determine whatslowing efficiency is and what can be done.

#e

Theclient’s efficiency is growing at a very slow rate which can easilycause the organization to retard. Only the inventory turnover whichhas recorded a 25% increase, while the other two assets turnover andaccounts receivables are zero and one percentages respectively. Sinceasset turnover is constant, the company can fail to make anyimprovement. Secondly, accounts receivable turnover is very crucialin every business and a growth of 1% reveals that the business is notgrowing rather it has retarded (Rawindara&ampSharma 2011, p. 60).

#f

Tounderstand more about client’s efficiency I would request the listof the assets. This will help me to understand the nature of theclient’s assets. This will help in determination of the reason asto why the assets turnover is that low. It will help in diagnosingthe real cause of the stunted development of client’s efficiency(Kumar&amp Sharma 2005, p.18).The other information I would request the accounts receivables of theprevious years. This will help in understanding whether the conditionhad cropped up or it has been a trend.

Profitability

#g

Theclient’s profitability reveals a great problem in the progress ofthe company. All the analyzed aspects of profitability have recordedand negative variation. This reveals that the profitability isdeteriorating year by year. If the trend continuous that way and nosteps will be taken to curb the situation, the company is at risk ofrunning at a loss. This can even cause the company to becomebankrupt. Profit is the main target of every business, if the companyis just running at a loss, it is of no benefit (Millichamp2002, p.82).This, therefore, indicates that something needs to be done if thebusiness is to remain relevant.

#h

Theaccounts that need to be analyzed in this scenario are thereceivables account, assets accounts and the expenses account. Theseare the chief accounts linked with profitability of the company.Receivables account determines the amount the organization isreceiving. Similarly, profit is dependent of the differences betweenexpenses and receivables (Rawindara&amp Sharma 2011, p. 59).So as to understand the profitability aspect one have to analyze thetrend between the receivables and expenses accounts. Assets accountis also essential since it is the determinant of the organization’sreceivables.

#i

Soas to understand the client’s profitability, I would like to getthe list of company’s assets. This will help me to understand thenature of these assets and realize the main reason as to whyprofitability is deteriorating (Millichamp2002, p.76).Similarly, I would like to understand their sales list of severaldays so as to understand the rate in which their products are beingconsumed. Similarly, I will be able to understand whether the declinein profitability is caused by the profit margin. I would also like toreceive expenses and receivables accounts of a couple of previousyears so as to understand the trend.

Question4

Part1

#a

Goingconcern assumption can be termed as one of the accounting’sfundamental assumptions on the basis of the statements prepared. Thegoing concern assumption or going concept states that businesses needto be treated like they will continue operating indefinitely or longenough until its objectives are accomplished (Kumar&amp Sharma 2005, p.25).In simple terms, going concern assumption assumes that organizationswill have a long life and not be sold or close in the near future.All the companies which are expected to continue are termed to be agoing concern. All the companies which are expected to shut in thenear future are hence not a going concern.

#b

Thereare various factors which are considered by an auditor to determinethe likelihood that a particular client meets going concernassumption specifications. Some of these factors are the client’sposition of net current liability and net liability (Millichamp2002, p.79).These will be valued with respect to current assets and net assets.Considering these aspects will determine the likelihood of thebusiness to live a long time or collapse in the near future. If theliabilities exceed assets, that business is not a going concern.However, if the client’s assets exceed liabilities, that businessis automatically a going concern.

Part2

#c

Gapsof expectation analysis indicate that all the members of the societyexpect the auditor to provide as perfect report as possible(Kumar&amp Sharma 2005, p.22).They believe that no flaw should pass the recognition of the auditor.Shareholders are significant members of any given organization. Sincethey have invested in this business, they rely greatly on theauditor’s report so as to understand the trends going on as far astheir investments are concerned. The fact that the auditor signed areport that is unmodified indicates that the auditor owes theshareholders a lot. The shareholder has a legal right of receiving avalid audit report.

#d

Thecompany also depends greatly on the audit report so as to understandthe progress of the organization (Millichamp2002, p.80).If the company realizes that the company has incurred a loss, theycan be able to develop measures in advance before they becomebankrupt. Signing of the unmodified audit report by the auditor ishence a liability to the company. The auditor is a part of thecompany’s failure and hence the auditor owes the company much.

#e

Individualcreditors are also members of the general society who are dependenton the auditor’s report. Similarly, they are liable to be paid infull the debt they owe the company. This indicates that the company’sbankruptcy is a big blow to the creditors. The fact that the auditorsigned an unmodified audit report reveals that the auditorfacilitated the client’s bankruptcy. Bankruptcy will automaticallycause the losses of these creditors. This, therefore, reveals thatthe auditor is a real liability to these creditors (Kumar&amp Sharma 2005, p.27).They have every right, therefore to sue the auditor for misleadingthe organization and causing them to incur losses.

Question5

#a

Thereare various aspects which can affect the inherent risk’spreliminary assessment. One of them is the environment or externalfactors of a business. In the external and environmental factorsthere are various aspects encompassed in it. Rapid change is one ofthese aspects where an organization whose inventory which becomesobsolete rapidly tend to experience a high inherent risk (Millichamp2002, p.83).The economy state is another aspect. The general economic growthlevel is another factor which tends to affect all the businesses.These factors will automatically affect preliminary assessment of theinherent risk. This is because they create a form of uncertainty. Theother factor that can affect the preliminary assessment of inherentrisk is the prior-period misstatements. If there were mistakes in theprior years in the company’s financial statements, these errorstend to be brought forward in the future statements. This tends toaffect the inherent risk’s preliminary assessment.

#b

Thereare factors which can affect the preliminary assessment of controlrisk. Control risk can be defined as the risk of materialmisstatement in financial statements which tend to arise as a resultof failure or absence in the operation of the relevant entitycontrols (Kumar&amp Sharma 2005, p.16).The main factor that can affect the preliminary assessment of controlrisk in an organization is lack of enough internal controls in thatorganization to detect and prevent cases of error and fraud. Lack ofsufficient internal controls of detecting and preventing error andfraud instances in the financial statements is the chief aspect thatcan affect the preliminary control risk’s assessment.

#c

Thereare several inherent risks of the “Amazing Coffee.” Improperhandling of the coffee is one of them which have potential ofdeteriorating the quality of coffee. Human is to error and,therefore, chances of handling the coffee poorly are very high. Thiswill eventually affect the quality of coffee and thus impact adverseeffects to the business (Millichamp2002, p.85).Similarly, the business production unit can easily be affected by theclimatic conditions. The production and storage stages of the entireprocess are the most susceptible stages in the chain of AmazingCoffee’s business.

Incontrol risk aspect, “amazing coffee” has very poor internalcontrol measures. It is evident that the export division is thebiggest income generator of “Amazing Coffee.” However, Francescohas poor administration skills as well as very poor in developing andmaintains detailed paperwork. This will automatically make thebusiness vulnerable to errors and frauds (Rawindara&ampSharma 2011, p. 54).

#d

“Amazingcoffee” is in real need of adopting a substantive approach if it isto work free of errors and frauds. Levels of control risk have toimprove encompassing the sales, accounts receivables and inventory.The fact that Francesco does not keep detailed paper work creates asignificant flaw which will make business to highly vulnerable toerrors and frauds. These may easily cause the business to incur aloss. Every business is there to make profits but not losses. Toavoid these losses, the business control parameters need to be wellplaced and they should be effective at the same time. This indicatesthe “Amazing Coffee” as a business must come up with asubstantive approach so as to lower risks which would affect thebusiness adversely (Millichamp2002, p.87).

ReferencesList

Kumar,R., &amp Sharma, V. (2005).&nbspAuditing:Principles and practice.New Delhi: Prentice-Hall of India. Pp. 7-27

Millichamp,A. H. (2002).&nbspAuditing.London [u.a.: Continuum. Pp. 75-87

Rawindara,K., &amp Sharma, V. (2011).&nbspAuditing:Principles and prctice.Pp. 54-62