Bio-sustainable Feeds (BSF) Ltd is a Bioresearch firm developing an alternative aquaculture feed. The firm has spent a lot of money in research and development of the technology capable of producing this kind of feed. The firm is contracting an audit firm to audit its financial statements as a requirement for all publicly traded companies.
Before accepting any audit assignment, it is significant for any audit firm to consider several issues. These include compliance with the ACCA’s code of conduct and Ethics or any other legislation in the country of audit, competency required to handle the assignment and contacting the outgoing auditor. It is important to determine whether there are any ethical issues involved from the outgoing auditor.
There are several risks involved in auditing a company such as BSF. These include control risk, inherent risk, and detection risk. The risk that there is a material misstatement of the financial statements due to a breakdown in the controls of the firm is the control risk. Inherent risk on the other hand is the risk that there is an error in the financial records of BSF. The risk that the audit procedures may fail to detect an error in the financial statements is the detection risk. The level of detection risk acceptable to an auditor varies inversely with the control and inherent risk. As the control and inherent risk increases, the detection risk the auditor can accept decreases. After accepting to undertake an audit, the auditing firm must develop an audit program, which includes aspects such as strategy, activities to be undertaken, timelines, who will undertake what activity, and the preliminary engagement activities.
BSF asserts that its research is socially and environmentally responsible. This is true and fair in that an aquaculture feed can increase the production of highly nutritious fish to feed the expanding population. In addition, the use of bacteria in the feeding of fish can reserve the plants such as beans and soya for use by humans. Developing this technology will require the issuance of patents. Valuing a patent depends largely on the exclusive control. BSF received a grant from CSIRO with an arrangement meaning it does not have exclusive control over the patent. Research and development cost is disclosed in the income statement as an expenses in the appropriate period when spent. If the research and development money is a grant, there is an entry of the same amount on the income side of the income statement to balance the expense.
Steps to consider before accepting an audit
Before accepting a new audit assignment, it is significant for the auditor to consider some issues, which might arise on the way. The major concern is the compliance with the ACCA’s code of conduct and Ethics or any other legislation in the country of audit. The auditor should determine whether accepting the task would create any threat to the compliance with all the fundamental principles of auditing. The guidelines are different from one state to the other, and the auditor should research on the specific principles in the specific country (Gramling et al., 2012 p 54). In the underlying audit, the auditor should determine whether accepting the BSF audit would create any compliance issues. This includes any potential threats to the professional behavior including controversial issues with the BSF.
The other thing to consider is whether the auditor is competent enough to handle the assignment. For an assignment like auditing BSF, it requires resources and skills, which might not be available to the auditor. The auditor should evaluate available resources and skills and then based on the BSF task make a decision.
One important step is contacting the outgoing auditor to determine if there are any ethical reasons for departure. However, the prospective auditor must obtain permission from BSF to contact the outgoing auditor. If granting of permission to contact the outgoing auditor fails to occur, then the prospective auditor should refuse the assignment. The outgoing auditor must also obtain permission from BSF to respond to the prospective auditor. Further, procedures used in client screening such as integrity evaluation, conflict of interest assessment with all existing clients, level of risk involved and whether the engagement fee is viable for the level of risk acceptable. The assignment should be commercially profitable to the auditor, but then the commercial benefits should not outweigh other issues such as risk and ethical concerns.
Auditing an organization is not a simple task. There are many issues involved and the auditing firm must maintain professionalism in conducting the audit. It is important to contact the outgoing auditor to determine the presence of any underlying issues one needs to consider before accepting the task. If mistakes and errors occur in the audited accounts later, the auditing firm is responsible for not being keen enough or for colluding with the management. It is thus significant to consider any issue before accepting the assignment to avoid disappointments in the middle of the audit.
Risk Involved in Auditing
Auditing involves several risks. This is so since an auditor audits accounts belonging to another organization. When a vast size of accounts is involved, an auditor takes a sample and this poses a risk. Probability techniques and assumptions are involved in sampling which further increases the risk involved. The sample to use must be representative of the whole population. Other errors such as omission and inadequate control measures are also possible.
Inherent risk is the risk that there is an omission or error in the financial statements of BSF. This omission might arise due to omission, error or because of other factors rather than a failure of procedures. The inherent risk is considerably high when the degree of estimation and judgment is high and when the transactions involved are highly complex. For BSF, the inherent risk estimate is 90% meaning there is a 90% chance of a misstatement in the financial statements. Given that BSF operates in a highly regulated sector, the level of inherent risk is acceptable
The control risk occurs when there is an error in the financial records due control failures in the entity. For an organization like BSF, there are controls installed to detect instances of error or fraud. If an organization does not have adequate controls in place, then the control risk is high (Gramling et al., 2012 p 68). Given that, BSF has a control risk of 5 %; then it considerably has adequate internal controls in place.
There is the risk that substantive audit procedures may fail to detect a misstatement in the financial statements. This is the detection risk and is considerably a function of the efficiency of the audit measures. This risk exists because most of the auditors do not examine 100% of the records rather they use a sample. The level of detection risk acceptable to an auditor varies inversely with the inherent and control risk. The higher the inherent and control risks, the lower the detection risk acceptable by the auditor. The BSF detection risk is 80%.
Audit risk=Detection risk X Control risk X Inherent risk
Audit risk= 0.8 X 0.05 X 0.9
Audit risk=0.036 which translates to an audit risk of 3.6%.
An audit risk of 3.6% is not high, and it is acceptable to the audit firm.
The auditing firm has to consider all the available risks and then determine the acceptable risk. If the risk is high, then other consideration are made including rejecting the assignment. As mentioned earlier, the auditor takes responsibility for any errors in audited accounts, which can tarnish the name of the auditing firm. This is the underlying reason why the auditor has to consider the involved risk.
Developing an Audit program
After accepting to audit the accounts of BSF, the audit firm has to prepare an audit program. An audit program documents the procedures that the auditor will follow in validating that an organization has complied with the relevant rules. The major objective of an audit program is to develop a detailed enough frameworks such that an outside auditor can understand the procedures followed and the conclusions reached. It also includes the analysis behind every conclusion made.
One of the things that are included in BSF audit program is the preliminary engagement activities. These are the activities at the beginning of the audit. For BSF, the auditor must determine compliance with ethical requirements. Included should be procedures to perform regarding the continuance of the relationship.
Another thing in the program is the activities to be undertaken. For a complex organization such as BSF, there are many activities to undertake in the auditing process. The program should also inform who will undertake a specific activity and the timelines (Gramling et al., 2012 p 43). It is significant for the upper management of the audit firm to determine if there are matters that are important to BSF financial statements over financial reporting and how such matters will affect the auditing procedures.
The program should also include that audit strategy. This includes the scope, direction and timing of the audit activities. The audit strategy should consider the reporting objectives, factors important in directing the auditing activities, results of the preliminary engagement and the resources necessary to perform the activities.
In all procedural activities, a program is required to guide the process. Auditing is procedural, involves timelines and thus requires a plan. With a program of events, it is hard to follow the timelines and keep touch of all the involved activities. A program will help to in the management of the auditing activities while still maintaining integrity and ethics.
Consideration of Journal Entries
To an organization such as BSF, a grant is not income. This is so because the company has not spent any money to earn the grant rather it is a non-repayable token from another organization for a specific purpose. In the case of BSF, the grant is solely to help in the research and development of an alternative aqua feed. The grant will have to be record in the journal entries following both the research and development rules and grant rules.
According to the Financial Accounting Standards Board, all research and development costs are disclosed in the income statement as expenses in the appropriate period when they are spent. BSF has already spent $ 500 million AUD on research and development. However, the research and development amount is a grant from CSIRO. For a grant, the amount spent for a specific period is recorded as income in the same period to match the expense entry (Needles, Powers and Crosson, 2011 p 36).
The spending of the CSIRO grant has occurred over a three years period. The amount spent in a specific period is recorded as an income and as an expense. The auditing firm must make sure that recording of these entries is appropriate. Companies have a tendency of recording the research and development entries in the period when they are not spent (Barge-Gil and López, 2014 p 1640).
Environmental and Social Responsibility Assessment
Much research has occurred on this topic and it is agreeable that to maintain the ever-growing population, the world needs to come up with other means of increasing food production. Fish is one of the foods consumed worldwide in many cultures and societies. Thus, its increased production can upgrade the availability of food to the societies. Fish also has nutritional benefits since it provides the Omega-3 vitamin, which is vital in killing diseases such as stroke, cancer and heart disease. The use of plant-based feed will ensure that production of fish occurs more efficiently and in large quantities in different areas of the world and help solve the food problem.
BSF is concentrating on researching the use of sustainable aquaculture feeds. Its objective has been to develop a plant-based feed to be used in the place of the fish based fish feed. Traditionally, the fish feed has been produced using fish but in recent times this is being changed to plant based feeds.
It is agreeable that this research is socially responsible and environmentally friendly. With issues such as world hunger and increase in population, mass production of fish could be part of the solution. The use of fish-based feed will limit the plan in that the available fish is used to produce fish feed. This will reduce the production capability. However, with plant-based feed, massive production is possible. As Sarker et al., (2016 p1) stipulates, aquaculture has been expanding rapidly over the last few decades. Between the years 1980 and 2010, the use of artificial feeds increased by 16% increasing the global human consumption of fish to 47%. Additionally, scientists expect that the aquatic foods can feed the growing population.
However, as Chung (2016) stipulates, there are concerns about the use of plant-based feed. She argues that the plant-based feed uses plant ingredients, which come from somewhere. With time the production of fish using plant, based feed will be massive putting a strain on the ingredients. This poses a danger to the environment. In addition, depending on how these crop ingredients are grown, they may include pesticide and other chemicals from industrial production. These may lead to negative effects on the humans who feed on the fish produced using such ingredients. She also has concerns about the level of Omega-3 on fish produced using plant-based feed.
There are measures put in place to solve the concerns such as those raised by Chung. As stipulated by Lothe (2013 p 1), treating the plant feed with pressure and heat as well as adding some high-quality protein feed could reduce the negative effects of the plant feeds. Scientists can produce bacteria from biogas and natural gas and transform them into high-quality protein. The protein content of these bacteria resembles that of fishmeal. With this, it is possible to reserve plants such as beans and soya for human consumption.
There is the concern of conversion ratio. To make one kilogram of high-value fish, 30 kilograms of plant-based wet feed was required. This means that massive production of fish can put a strain on the plants affecting the population. However, as BSF stipulates, use of bacteria from sugarcane residuals, wood chips and methane can be a solution to this problem. The use of plant-based feed can increase the scale of production of fish thus increasing the food available for consumption. It is also economical in that using plant-based feed lowers the production cost of fish, which will lower the price of the price making the whole process socially responsible (Rust, 2011). If scientists manage to use wastes as methane, sugar cane residual and wood chips in the production of fish, then our environment is safer from pollution.
Valuation of Patent
A patent is an exclusive right granted to an inventor for a fixed period (Kim et al., 2015 p 50). BSF is developing an aquaculture feed, and if successful, other investors cannot use the formula without the prior permission of BSF. The BSF grants the permission for one to use its formula in the production of the feed since it owns the rights to the formula. The valuation of a patent depends on the exclusive control of the patent.
For BSF, it has already spent $500 million AUD on research and is planning to spend $200 million AUD more on development. The valuation of a patent depends largely on the cost, future cash flows and the market. However, all these factors depend on the exclusive right to the technology.
It is arguable that BSF does not have an exclusive right to the technology. The company received a grant three years ago from the Commonwealth Scientific and Industrial Research Organization (CSIRO). In return, BSF Ltd was to spend at least $100 million AUD on alternative aquaculture feeds. BSF has no exclusive rights to the technology since it has to make sure that it fulfills the arrangement made with CSIRO. If BSF decides not to sell the patent, then the $100 million AUD arrangement with CSIRO will be unattainable. The fact that it has developed the technology does not entirely give the company a right to sell the patent at any price. There are other arrangements for consideration such as grants.
The auditing firm has to consider whether the projected value of the patent is viable before signing on the statement to be true. There are other organizations still participating in a similar research and if they happen to develop the technology before BSF, then the value of the patent can reduce dramatically. In addition, the company has not yet developed the technology and thus anything can happen on the way.
Barge-Gil, A. and López, A., 2014. R&D determinants: Accounting for the differences between research and development. research Policy, 43(9), pp.1634-1648.
Chung, E. (2016). ‘Greener’ fish farming could lead to unhealthier seafood. [online] CBC News. Available at: http://www.cbc.ca/news/technology/aquaculture-feed-1.3262922 [Accessed 5 Sep. 2016].
Gramling, A., Rittenberg, L. and Johnstone, K. (2012). Auditing. [Mason, Ohio]: South-Western/Cengage Learning.
Kim, J., Kim, J. and Kim, S.K., 2015. A Patent Valuation Method Using Game Theoretic Real Option Approach. Journal of the Korean Operations Research and Management Science Society, 40(2), pp.43-61.
Lothe, R. ,2013. Fish feed-research may help reduce world hunger. [online] sciencenordic.com. Available at: http://sciencenordic.com/fish-feed-research-may-help-reduce-world-hunger [Accessed 5 Sep. 2016].
Needles, B., Powers, M. and Crosson, S., 2011. Principles of accounting. Mason, Ohio: Cengage Learning.
Sarker, P.K., Kapuscinski, A.R., Lanois, A.J., Livesey, E.D., Bernhard, K.P., Coley, M.L. 2016. Towards Sustainable Aquafeeds: Complete Substitution of Fish Oil with Marine Microalga Schizochytrium sp. Improves Growth and Fatty Acid Deposition in Juvenile Nile Tilapia (Oreochromis niloticus). PLOS ONE, 2016; 11(6), Available at: http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0156684 [Accessed 5 Sep. 2016].
Rust, M., Barrows, F., Hardy, R., Lazur, A., Naughten, K., & Silverstein, J. 2011. The Future of Aquafeeds, NOAA/USDA Alternative Feeds Initiative, NOAA Technical Memorandum NMFS F/SPO-124.Available at: http://www.nmfs.noaa.gov/aquaculture/docs/feeds/the_future_of_aquafeeds_final.pdf [Accessed 5 Sep. 2016].
Do you need an Original High Quality Academic Custom Essay?