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Compass Group plc. is a British multinational company that provides food services to its customers. The headquarters of this company is located in Chertsey, England. It is identified that it is the largest foodservice company that works contractually in the United Kingdom. Dominic Blakemore is the Chief Executive officer and Paul S. Waish is the chairman of this company. This company generates £357 million as Net profit in the year 2021 which increases at a high range as compared to the previous year 2019 which stands at £135 million (Compass-group.com, 2021). In addition, the annual report of this company represents that total assets, total equity, and total liabilities stand at £14868 million, £4919 million, and £9949 million for the year 2021 respectively. Based on this identification, it can be stated that this company has increased its ability to increase its profitability in a financial year. It is observed from the annual report of this company that the group engagement team assessed all the risks and strategies included in the audit. This team evaluates the sufficiency of the evidence regarding auditing as well. Therefore, it can be stated that this company can mitigate issues or risks related to audits in a significant way.
Timetablefor an audit (in case the year-end is December, 31)
Key Stages Descriptions Required time
Planning stage Planning activities included in auditing financial statements show identification of strategy, considering of entities, planning an audit, changes in planning decision, direction, review, and supervision.
In addition, there are seven primary steps included in this stage such as appointment of auditors, assessment of risks, approach for audit, administration, briefing audit team, client service, and communication with client (Russellbedford.uk, 2021). Therefore, it can be stated that auditors of Compass will be conduct these plan beore starting auditing. Around 3-4 weeks, (From May, 13 to April, 9)
Interim stage In this stage, auditors examine the books of account based on the record of transactions made in a company in a correct way. The primary objectives of this stage are the identification of profit of a company, detection of fraud, improvement of employee’s efficiency, and many others. Moreover, auditors make attempt to understand the environment, activities, procedure, and policies of a business for the purpose of assessing risks of material misstatement that might be included in the financial statement. Therefore, it can be stated that auditors will follow all these key steps in this stage in the context of Compass. Around 2-4 weeks (From September, 2 to September, 21)
Final stage In this stage, auditors review the evidence collected from the company regarding financial statement, evaluate misstatement, review going concern, and conduct a meeting regarding audit clearance. Moreover, in this stage, auditors prepare a report based on their tests to express their opinion regarding accuracy of financial statement. After considering all these steps and reviewing financial statements, the auditor signs off the report in this stage. Therefore, it can be stated that these steps will be followed by the auditors of Compass. Almost 4-6 weeks (From December, 4 to January, 14)
It identifies that the financial statement of a company includes different types of material mistakes which can raise audit risk. For instance, a company has understated liabilities in their financial statement because of a due fine. Similarly, this company can face audit risks in their financial statement as well which include misstatement medially and detection risk. Accounting Standard no. 8 helps to identify the potential risks an auditor can face during auditing of a financial statement. According to this standard, material misstatement can be conducted due to fraud which consists of inherent risks and control risks (Pcaobus.org, 2022). Moreover, detection risks refer to such risks which cannot be detected by the auditor during auditing the financial statements of a company.
The annual report of Compass represents that this company identify their materiality misstatement mostly based on their revenue. Due to this reason, this paper considers revenue or sales as the most appropriate benchmark for identifying the percentage of materiality. This is selected as the benchmark for this company as it has materiality misstatements in its revenue or sales. It is identified that materiality of this company stands for £62 million in the year 2021 while in the year 2020, it was £68 million. Materiality in 2021 stands for 0.35% of revenue while in 2020, it was 5.2% of PBT. In addition, there are performance materiality in this company as well which was set at 75% of materiality regarding financial statement as whole. Based on this identification, this paper represents the percentage of materiality for the year 2021 which stands for 80%. This is because revenue of Compass decreases in the year 2021 by 10.2% because of continuing implication of Covid-19 on the operation of this company. Therefore, it can be stated that materiality misstatement in the year 2021 is less risky.
There are three types of audit risks that Compass can face during auditing materiality as Inherent risk, Control risk and detection risk. These risks regarding Compass are presented below:
Inherent risks Reasons it can arise audit risks
Increased risks of data theft Overstatement of record data because of theft
Increased risks of cyber fraud Misstatement in data due to cyber fraud
Increased cash transaction It can arise risks regarding possibility of theft
Lack of liquidity in the future There is a requirement of disclosure regarding going-concern concept
Operation in large scale Lack of understanding regarding large number of operations which is complex as well that can arise risks in audit in the terms of misstatement.
Poor allocation of resources It can arise risks in planning and completion of audit as well as on the strategy of audit
Control risks Reason it can arise audit risks
Lack of finance director This company has only one finance director namely, Dominic Blakemore, therefore, there is a risk to lack in look after the preparation of financial statement.
Poor internal control This company faces risks due to poor internal control which represents that this company might not be able to detect and control risks. This risk create many issues in audit and other functions of this company.
Detection risks Reason it can arise audit risks
Pressure on auditors during auditing financial statement Most auditors face time pressure which can arise risks as they become unable to detect misstatement. Huge work pressure is present on auditors and for this reason they can manage all tasks and thus audit risks are created
Lack of knowledge in junior auditors It can arise risks regarding misstatement being missed.
Hilorme, T., Zamazii, O., Judina, O., Korolenko, R. and Melnikova, Y., 2019. Formation of risk mitigating strategies for the implementation of projects of energy saving technologies. Academy of Strategic Management Journal, 18(3), pp.1-6.
Poddubna, N., 2021. Modern Mainstream in Audit: Risks and Their Assessment. ????????? ? ??????, (2 (81)), pp.102-106.
Accountingtools.com, 2022. Materiality. Viewed on: 16/02/2022 from <https://www.accountingtools.com/articles/what-is-materiality-in-accounting-information.html>
Compass-group.com, 2021. Annual report. Viewed on: 16/02/2022 from <https://www.compass-group.com/content/dam/compass-group/corporate/ar-updates-2021/annual-report-pdf/CompassGroupPLC_AnnualReport2021.pdf.downloadasset.pdf>
Hkicpa.org.hk, 2022. Audit risk in materiality. Viewed on: 16/02/2022 from <https://www.hkicpa.org.hk/-/media/HKICPA-Website/HKICPA/section6_standards/standards/sas220.pdf?la=en&hash=F0E56D65091E41E4AE7687E517D05FF3#:~:text=There%20is%20an%20inverse%20relationship,and%20extent%20of%20audit%20procedures.>
Pcaobus.org, 2022. Audit risks. Viewed on: 16/02/2022 from <https://pcaobus.org/oversight/standards/archived-standards/pre-reorganized-auditing-standards-interpretations/details/auditing-standard-no-8_1838>
Russellbedford.uk, 2021. Stages of planning. Viewed on: 16/02/2022 from <https://russellbedford.uk/news/the-7-stages-of-planning-an-audit/>
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