International Audit and Assurance

I need help for my assignment. Please guide.

Gr8 Hols Ltd prepares annual financial statements to 30 September. It was established by John Cougar and his wife Mary in 1990 operating as the owner of a small single caravan and camping site based near the village of Taithness in Western Scotland. John and Mary retired from the company in January 2015 having overseen the number of sites grow to a total of seven all based in Scotland and the north of England. On their retirement from the company John and Mary sold 25 % of the share capital in the company to friends and distant family members, and the remaining 75%, in equal proportions to their two sons, Reeves and Jukka and their daughter Sabina – all three of whom were then appointed as the only directors of the company. Whilst Sabina had always worked for the company at the Taithness site prior to obtaining her directorship, neither of the brothers had any experience of working in the camping or tourism sectors. Reeves, who tends to dominate his younger siblings, had previously been a full- time student and then university researcher and Jukka had worked as an area sales manager for a baby food manufacturer. However, all three are very entrepreneurial. This, combined with the fact that the company’s financial director is an enthusiastic 24 year old, and long – standing family friend with a degree in Business Studies and Accounting, gave John, Mary and the other shareholders confidence that the brothers and sister could take the company forward and expand its operations.

In 2015 the company commenced a five year controlled expansion program, as a result of which the company has established a further two sites based in England. Each and every year, all of the company’s sites are open 7 days a week for 35 weeks throughout the year for hires, and closed during the 17 weeks leading up to the end of April for site repairs, renovations and improvements.

The company owns 1020 caravans and 1450 family tents, all of which remain static on its sites, and are hired on a weekly basis to holidaymakers. A payment in advance (deposit), of 30% of the hire cost is payable at the time of booking and the balance at least ten weeks before the letting period. Deposits are kept by the company if bookings are cancelled within eight weeks of the hire period. On average, caravans and tents are booked four months in advance. Additionally, there are 300 caravan and 900 tent pitches for hire “on demand”. Payment for these pitches is payable strictly by cash on arrival at each site and pitches are hired out at flat rates irrespective of the number of occupants. Chargeable facilities on all sites include washing and laundry rooms, child care facilities, a gym, a café and a social club with evening cabaret. The Taithness site also has a swimming pool and spa facilities. Customers pay by cash, or debit/credit card for the use of all these facilities. On each site there are also amusement arcades and a mini-supermarket, all owned by the company?

Your firm are the auditors of Gr8 Hols Ltd, and having carried out the necessary audit procedures on the final day of the accounting period, staff are now preparing to carry out the detailed final audit for the year ended 30 September 2017. The audit manager in charge has ascertained the following information relevant to the audit:

(i) The company’s reported gross sales from all revenue streams was £7.2
million with net profit before tax of £1.1 million. The company adopts
uniform accounting systems and policies for all sites and the Taithness
site is its largest and most profitable site. Materiality levels set for the audit
include amounts equivalent to 5 % of the company’s net profit before tax.

(ii) Initial conversations with the directors have revealed that, in general occupancy
rates of caravans at sites were lower than those for tents. This seemed to be
as a consequence of families having less money to spend on holidays due
to the current economic difficulties in the United Kingdom. The directors define
“ occupancy” as ‘the actual unit nights of hire , divided by the available unit
nights of hire for the holiday season’.

(iii) During the year the company introduced a new computer – based accounting system enabling financial transactions, data and accounting information to be uploaded remotely onto the company’s centralised accounting system from site locations.

(iv) The company has followed a long – established policy of employing a relatively small number of permanent staff on sites and in the centralised administration, booking and accounts offices – gearing up with over 200 temporary workers for employment throughout the period May to December only. Whilst site employees are provided with caravan accommodation and free meals on site, to enable them to properly carryout their employment duties; compared to employees working in other sectors – the employees of GR8 Hols Ltd have poor pay and working conditions. In a recent email exchange between Sabina and your firm’s audit partner ,Sabina commented:

“As directors of the company my brothers and I are aware of the various risks to our business ( business risks ), and we do take regular account of these with a view to mitigating them, especially when exercising our recruitment policy. I have to say that I’m really puzzled and – given your hourly charge out rates- concerned, that you seem to spend so much time finding out about the business risks we face. Why are you so concerned about it, what has has business risk got to do with auditing ?

Please send me an email in which you provide a critical explanation addressing my concern. Also, given your own apparent expertise in the identification and mitigation of all types of business risk, please include commentary on how you would feel about providing us with ongoing business risk mitigation advice in addition to external audit services, and an estimate of how much you would charge for this additional service “.

(v) During May 2017, sewage waste from one of the company’s sites had leaked into a local river causing water contamination, depletion of fish stocks and extensive damage to a nature reserve. The local rivers’ authority has indicated in correspondence that it holds the company responsible for the leakage and in the absence of its agreement to pay full compensation for the depletion and damage; it intends to commence legal proceedings against the company for the recovery of the total consequential costs to be incurred of £120,000. The authority has provided written confirmation from an independent firm of experts on the make up of the £120,000.

(vi) It transpired that the leakage referred to above had occurred as a consequence of damage to the main underground drainage pipes on the camp site. The directors of Gr8 Hols Ltd have claimed that the leakage could have been prevented if the ( large national) firm of drainage contractors, employed by the company to carry out an ongoing maintenance programme on the drain the drainage systems had been more diligent in their work. The contractors have denied any culpability, the loss is not covered by insurance and the company’s own legal counsel has provided advice to its directors advising that in court the company would have at best only a 10% chance of recovering any of the loss from the drainage contractors. In the circumstances the company’s directors instructed another independent firm of consultants to assess the loss caused by the leakage. They agreed with the sum of £120,000 and confirmed this in a formal report to the directors. Given the directors’ views on the issue and their intentions to negotiate reimbursement from the drainage contractors, a net provision of only £30,000 has been included in the company’s financial statements in respect of the river authority’s claim. This is the maximum provision the company is prepared to make for the claim, on the basis of the directors’ firm belief that at worst the company is only one quarter culpable for the loss and – even if it is totally culpable – there will be sufficient profits arising during the next financial year to absorb any losses not recognised in the current financial year. Given their responsibilities as directors, and that they own 75 % of the company’s shares , Reeves , Jukka and Sabina are firm in their conviction that they should have the final say as to the content of the financial statements. They also believe that the inclusion of any sum in excess of £30,000 is tantamount to the company accepting liability to that extent and would therefore weaken the company’s position in any subsequent legal argument.

(vii) The company continued to upgrade both older tents and caravan stock during the year, replacing numerous older units with new modern units. It enhanced its caravan fleet with twenty new caravans, each with a cost of £25,500 – six of these being placed on the Taithness site. All caravans are depreciated to a scrap value of £500 over a ten – year period in equal instalments, with a full year’s charge in the year of acquisition. As part of its ongoing commitment to invest in site facilities, during the year the company enlarged and renovated one of its mini-markets and also renovated amusement arcades at three of the company’s sites, including Taithness, and it continued its ongoing policy of improving both the customer experience and efficiency of the company by continually updating smaller items of camp site plant and equipment and disposing of the old. The company also incurred costs of £66,000 in general upgrades to underground drainage.

(viii) In July 2017, Reeves, Jukka and Sabina were approached by the directors of Campies Ltd, another camping and caravan site operator, and offered the opportunity to purchase one of their sites.
The reason given for Campies Ltd wishing to sell, is that the site in question does not fit into that company’s future strategy for growth. The initial interest expressed in the site by the directors of GR8 Hols Ltd, has since developed to the point where they have asked your firm to carry out a valuation of the site, and then be part of the of Gr8’s team in subsequent negotiations to purchase the site.
In conversations between Reeves and the partner responsible for your firm’s audit of his company’s financial statements, Reeves confirmed that the existing site accountant employed by Campies Ltd would be made redundant if the purchase does proceed. However, he pointed out that the accountant may then be a useful addition as a new employee to your audit firm given his previous audit experience, especially on future audits of the financial statements of Gr8Hols Ltd. This is because the accountant has detailed knowledge of the camp site on offer and of the holiday sector generally. Reeves also indicated that all shareholders are in agreement that the purchase of the site should proceed, and it is likely that Gr8 Hols Ltd would make the purchase in the summer months of 2018, and that the company would rely almost entirely on a bank loan to finance the purchase. Finally he mentioned that as the company was trying to reduce overhead expenses generally, with effect from next year’s audit he would like your firm to carry out the company’s non – current assets and inventory counts at the Taithness site and absorb the cost of doing so into normal audit fee.
.
REQUIRED

(a) Critically evaluate the directors’ reasoning for including a provision of £30,000 in the financial statements of GR8 Hols Limited for the year ended 30 September 2017, in respect of the claim made by the local rivers’ authority. Your evaluation should state, with reasoning, whether the provision in the sum of £30,000 is reasonable and appropriate or whether an alternative amount should be provided for.
( 13 marks) *

(b) Draft the content of an explanatory email to Sabrina in which you critically address her concern about your firm’s interest in business risk, and respond to her request for your firm to provide ongoing business risk mitigation advice in addition to the provision of external audit services .

( Note if you need to refer to any technical ” auditing ” terms you must explain these in your own words , such that a competent business executive would understand their meaning ).
(13 marks ) *

(c) Identify TWELVE inherent risks associated with the financial statements of Gr8 Hols Ltd, and explain the impact that each risk identified could have on information included in the company’s financial statements for the year ended 30 September 2017.

For each risk identified you should set out your answer in the following format :
Nature of Risk
Area of Financial Statement affected
Audit Concern – impact and effect on the financial statements
(40 marks)*

(d) Carry out an analytical review of the summary of financial information for the Taithness site included in Appendix I (attached) , and:

(i) explain any audit concerns that you may have with regard to the reported income figures for caravan hire, tent hire and pitch hire including occupancy rates.
(9 marks )
(ii) explain any other audit concerns that you any have with regard to EIGHT other areas of the reported financial information.
(16 marks )

Total (25 marks)*

( e) Advise, with justifying rationale, how your firm should proceed with regard to :

(i) assisting Gr8 Hols Ltd in the possible purchase of the Campies Ltd site, as requested , or

(ii) employing the site accountant currently engaged by Campies Ltd , as suggested by Reeves ,or

(iii ) carrying out future end of year non – current assets and inventory counts as requested by Reeves

(9 marks ) *