Audit Report

To: Directors of the company

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From: Audit Senior Manager

Date: 9th December 2009

Re: Tendering Inside The Box

The purpose of the briefing paper is to identify and discuss the issues that should be put under consideration in deciding whether or not to tender for the audit of Inside the Box.

1.0: Inside The Box (Company Background)

Inside the Box is a local United Kingdom based company in the manufacturing industry and they are listed on the London Stock Exchange.

Their main source of income derives from producing and exporting television components to one hundred thirty four countries around the world.

1.1: Financial Background

Previous year??™s financial statement show annual sales amounted to ?21,259 million billion with a profit of ? 11 million. Though from the audit report, the company received an unqualified audit opinion but their cash flow statement were slightly negative.

2.0: Issues and Impact

a) Resignation of the external auditors.

The reason of their resignation is due to the audit does not generate sufficient income. Logically speaking, Inside The Box is an established conglomerate in their field. It does not make sense why does the external auditors said that the charging fee??™s to audit a huge corporation like Inside The Box would be too low.

There must be other reasons on their resignation. Thus, we have found that initially the relationship between the internal auditor and external auditors were quite good until they had a dispute. It is clear that both of the external and internal auditors have different opinion about the obsolete stocks.

Not only that the internal auditors wouldn??™t want to speak to us but the production managers are also reluctant to speak to us.

Impact:

??? Our company have major experience in auditing in the manufacturing, wholesale and retail business plus previously we have offered Inside The Box with accounting and payroll services.

??? The resignation of the external auditors could be seen as a loss for Inside The Box but it brings business opportunity to our firm as we can generate income upon auditing the company. Thus, this generally offers job opportunities as we need to strengthen our recourses if we would want to make it in the big leagues. This means we can attract freshly graduates as we have funds to spare.

b) Possible take over

There have been rumours about a possibility to take over Inside The Box by several large manufacturing companies but no bids have been made yet.

Impact:

??? If there is a takeover, assumingly the new board would want to revolutionize the company by replacing the old management and they would set new rules and regulation replacing the old one.

??? The old management aren??™t that friendly but more hostile towards our auditors. It would be a thing to have a fresh start with the new management as to have a better understanding so that work can be done without facing hostility from the management.

c) Lawsuit

A German and Korean company both are filing a lawsuit for breach of design rights by Inside The Box. The outcome of the event is still unknown but Inside The Box will be hit rock bottom if they lose. The case is expected to be finally decided in about 4 years time so for the current moment Inside The Box is safe from all harm??™s way that will have an effect the company.

Impact:

??? If Inside If Inside The Box loses the company will most probably be hit with a huge and heavy fine. This will affect our auditor??™s performance if we are tendering the audit. Knowing that the company they are auditing are being sued and they would probably want to be worried about their monthly allowances or salary.

??? If Inside The Box is found guilty, it will have a contingent liability. However, if not found guilty, the company will not have an actual liability.

d) Audit committee attendance during meeting

The audit committee is comprised of non-executive directors from six different countries. Their latest meeting were to discuss about the resignation of the external auditors though this is an important issue, sadly only four members attended. The meeting before this not all of the directors participated. From this it clearly shows that the members of the audit committee members aren??™t committed and don??™t take their job seriously.

Impact:

??? The audit committee reviews the company??™s financial statement quarterly and issues an opinion on the accuracy of the company??™s annual financial statement audited by the auditor.

??? Selecting external auditors will need the approval of the committee.

3.0: Additional Info

??? From the analysis of the financial statement how can a company with many subsidiaries like Inside The Box whom yearly profits 11 million but their cash flow are slightly negative. How is it possible that they receive an unqualified audit report.

4.0: Questions to ask the Director

??? Has your company ever been involved in breach of design right and are those speculations true.

??? Why did you have the dispute with the previous auditor about to write or not write down the obsolete stocks How would your company benefit from those situations.

??? What is the rate that the previous auditor firm charged in auditing your company

REFERENCES

http://en.wikipedia.org/wiki/Audit_committee#Role_in_oversight_of_the_external_auditor

http://blog.accountingcoach.com/contingent-liability-contingency/

http://en.wikipedia.org/wiki/Takeover

http://www.corgenix.com/InvestorRelations/CorporateGovernance/AuditCommiteeCharter/tabid/75/Default.aspx

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