Letter to the Management Regarding Approach to Audit- Audit of Financial Statements to 31st December 20XY
This letter identifies the procedures that were used in the internal audit of the company for the financial statements to 31st Dec 20×1. The approaches on the audit of each issue are discussed in this paper.
Please see the section with the title “Approach to Audit” for details on how the audit was conducted. We will be able to give you further explanations on issues raised in this paper in case you have any question.
Approach to Audit
ISA 404 provides guidelines on the audit of internal controls in an organization. Broadly, internal controls are the procedures and policies that the management designs in order to ensure that the company achieves its objectives. Therefore, the internal controls assist in ensuring that the company’s financial statements are reliable, if there is efficiency in operations, and if the entity complies with the law. Our audit of the internal control system aimed at fulfilling the aforementioned requirements in TWT.
IAS 18 provides guidelines on how revenue should be recognized and accounted in the financial statements. This regulation was used in the assessment of the internal control as pertaining sales. Generally, revenue from a sale is measured at fair value and the amount of consideration that will be earned is determined when all the conditions of the contracts have been fulfilled. The IAS 18.14 provides the following requirements must be fulfilled for there to be a sale:
- Significant risks and benefits have been transferred from the buyer to the seller
- The seller does not have any effective control and management over the sold item
- The value of the sold item can be measured reliably
- The economic benefits from the sold item will flow to the seller
- The costs regarding the transaction can be measured reliably
In the analysis of recognized revenue, we checked if the amounts recorded had been from transactions that fulfilled the requirements of IAS 18. Therefore, we checked if the risks associated with the ownership and use of the purchased coal had been transferred to the buyers. If the new owners had control over the coal they had purchased. We also checked if the value of the sold coal could be measured. Finally, we evaluated if the economic benefit of the coal was transferred to the buyers.
IAS 37 provides information on how to account for provisions, contingent liabilities, and contingent assets. We used this guideline to assess if adequate provisions had been allocated for doubtful debts by the company. In general, provisions are given at best estimate and they include the risks and uncertainties associated with a specific obligation. In the provision for doubtful debts, IAS 37 requires an organization to present adequate provision if there is a constructive obligation, if payment is probable, and if the collectible amount can be estimated correctly.
When auditing TWT, we checked if the company had provided realistic provisions for bad debts with regards to the ability to collect these amounts.
IAS 2 provides a guideline on how to account for inventories. Generally, this regulation requires inventories to be recognized at the lower of cost and net realizable value (NRV). Inventories are simply assets that an entity holds for the purpose of sale. IAS 2 requires that inventories should consist of the cost of purchase, conversion, and transportation to their present location. The cost of the inventory should not include storage, administration overheads, selling, interest rate cost, and costs due to abnormal waste. When conducting an audit of the inventories, we evaluated if these items had been valued correctly by TWT, as provided for by IAS 2.
IAS 12 recognizes the impact of current tax and future tax on the carrying amount of an asset or a liability. Therefore, this rule recognizes that an entity must account for the effects of tax in a similar manner as it accounts for transactions of other events. Further, this rule also notes that tax should be recognized at the same time as the asset, in order to determine the future tax consequences. In light of this, we reviewed if the company had provided adequate rules and guidelines on how income tax was calculated TWT. Further, we also evaluated its treatment and recognition of deferred tax.
Presentation of Financial Statements
IAS 1 provides guidelines on how the financial statements should be presented, on the balance sheet, cash flow statements, statement of changes in equity, and income statement. In addition, it also provides information on the structure of these statements such as going concern and accrual basis of accounting. In addition, it requires organizations to have a consistent presentation of financial statements, materiality, as well as guidelines on offsetting, comparative information and presentation period. In light of this, we assessed how TWT had presented its financial statements with regards to rules and regulations provided by IAS 1. In particular, we were interested in whether the statements had a consistent presentation, if the company complied with rules on offsetting, materiality, and the going concern of the entity.