Audit Risks of Accsys Technologies PLC
Accsys Technologies PLC is a chemical technology group listed on the alternative investments market segment on the LSE. The company’s primary focus is on the production and licensing of the Accoya solid wood and Tricoya wood products, both of which are trademarked products of the company. The company’s proprietary acetylation process that allows the company to produce wood products of superior quality, which many consider to be better than wood products made with alternative production process as well as natural wood. The three areas of company’s concentration are commercial scale production of Accoya wood, development of the acetylation technology, and licensing of other firms to use the technology. The company’s main operations are in the UK but it also has base of operations at Arnhem. At the time of creation of this audit report, the company’s shares under the ticker symbol AXS traded at a price of 63.94, having risen from the previous day’s closing price of 61.62.
There are several areas of possible audit risk that were identified in the course of this analysis. However, the paper focuses on only five areas, which are revenue, intangible assets, payables, assets, particularly inventory and PPE associated with Arnhem, and lastly exceptional items in the company’s financial statements (Van Deventer, Imai, and Mesler 2013). Focusing on the revenue of the company, an analysis indicates that the revenue rose from 33,512 in 2014 10 46,077 in 2015 (Accsys Technologies PLC 2016). The increase was due to sales of Accoya Wood. On the contrary, other items in the revenue sources remained constant over the same period of time. An 37.5% increase in revenue raises audit concerns, especially when compared to the Accoya Wood revenue that rose by 38.8% over the same period.
The second area of audit risk identified in the analysis is the field of intangible assets. An analysis indicates that the intangible assets rose from 8,333 in 2014 to 10,014 in 2015. The changes may be associated with acquisition of a new subsidiary. The intangible assets are an area of accounting that is detailed with requirements to be met for capitalization. The value in use computation would be required for an internal development of costs that are associated with the new acquisition and careful attention must be given for identifying whether any material misstatements existed in reporting of the intangible assets. The analysis of audit risks in this case should also encompass determination of whether the costs were capitalized (Bentley, Omer, and Sharp 2013).
The third area of possible audit risks that have been identified by analysis is the value of trade and other payables. An analysis indicates that in the period from 2014 to 2015 the payables increased from 5557 to 9625. The change the amount of payable was quite significant and consequently, there is a possibility of a misstatement (Accsys Technologies PLC 2016). Consequently, there is a need to conduct substantive tests on the trade and other payables in order to determine whether there are any misstatements regarding the data provided by the company.
Another area of increased audit focus should be the existence and value of the company’s inventory, properties, plant, and equipment values, as reported by the firm’s subsidiary at Arnhem. The audit risk in this area relates to logistical issues, considering the fact that the place of the subsidiary in another geographical location presents certain logistical complications. These logistical issues make it possible for there to be a misstatement, hence the need to conduct substantive tests in order to confirm the existence and values of the stated inventory and PPE.
The last area of interest is the exceptional items. The exceptional items generally involve those items that result in financial implications for the company, but which do not involve a company’s normal operations. Focusing on the company’s financial statements, exceptional items included other operating costs and a gain on the acquisition of a subsidiary. Other operating costs from the company’s financial statements (note 4) included a legal claim association with an arbitration case. Exceptional items should be further scrutinized in order to establish whether they actually exist, especially considering the fact that they are especially prone to misstatements (Hayes, Wallage, and Gortemaker 2014). An auditor needs to check the results of the arbitration process in order to determine whether the costs associated with the process are the same as those reported by the company (Christensen, Glover, and Wood 2012).
This section focuses more on the risks associated with an increase in revenue. As indicated above, the company’s revenue increased from 33,512 in 2014 10 46,077 in 2015 (Accsys Technologies PLC 2015). This represented 37.5% increase in the total revenue over the year. According to the analysis of the company’s financial statements, the increase in revenue was due to the increase in Accoya wood-related revenue, with all other sources remaining constant over the same period. The analysis indicates that the Accoya wood revenue increased by 38.8%, while the revenue from licensing and other sources have been unchanged over the period of consideration (Accsys Technologies PLC 2015).
According to the standard accounting standards, the timing of revenue is an important factor. The company ought to recognize revenue as and when the company offers goods or services to the customers and not when money is received (Kimmel, Weygandt, and Kieso 2010). If the company has not provided goods and services to the customer, the company should not recognize the revenue (Scott 2014). For instance, the company must not claim revenue for goods and services that it has not supplied. IAS provides for what the auditors should focus on when auditing revenue. According to the IAS, revenue should include the amounts received in cash as well as those amounts that the company ought to receive for the offered goods and services (Gaynor, Kelton, Mercer, and Yohn 2016).
An auditor should consider several substantive procedures in dealing with revenue in order to determine its existence, timing, and valuation. The first step is to conduct certain analytical procedures on the elements and sources of a company’s revenue. These analytical procedures include processes meant to ascertain whether or not the company actually engaged in the transactions resulting in the reported revenue and whether the changes are within the expected margins of growth (Deegan and Ward 2013). For instance, a growth rate of 40% would raise concerns if there are no justifications for such a growth from the market and from the perspective of the company. The second substantive procedure to conduct involves the assessment of the receipts to confirm the amounts of money received from the customers for goods supplied (Henderson, Peirson, Herbohn, Artiach, and Howieson 2013). An auditor should check the receipt amounts against the ledger amounts in order to confirm the completeness of the information posted to the edger against the information on the receipts. This would help the auditor in determining whether the cash amounts declared as revenue actually exist (Czerney, Schmidt, and Thompson 2014). The company must conduct substantive tests on the existence of the accounts receivable. A good starting point would be to look into invoices sent by the company over the considered period of time (Lobo and Zhao 2013). The receivables are the amounts of funds that the company expects from credit sales and the invoice is the first document sent to claim the payment for the funds. Checking the company’s invoices would enable the auditor to determine the total sales revenue from both cash and accounts receivable considering that the company sends an invoice in every situation (Harrison, Horngren, Thomas, and Suwardy 2014). The timing of the receivables is important in determining whether the sales actually fall within the period declared by the company in the financial reports. Notably, the auditor should consider contacting some of the debtors of the company to confirm the existence of the debts, their values, and their timing. This is important in determining the total value of the revenue recorded by the company against the values declared by the customers (Ramsay, Sinason, Strawser, and Thibodeau 2013). Concerning the license fees and marketing income, the company would need to focus keenly on the company’s key customers, especially given the fact that these sources have remained constant over the period in focus. The fact that they remained unchanged over this period of time means that there is a high likeliness for an audit firm to overlook the entries. Thus, there is a need to insist on focusing on the license fees and marketing revenue.