Honda (Pakistan)
Individual report on audit process
INTRODUCTION
Honda Pakistan limited is a merger between Honda Pakistan and
Honda japan and between Atlas Pakistan. This company is a listed on
Pakistan stock exchange.
The operations of this company was started in 1994 with the
production of Hondas first model. Its name was civic. After its initial
prosperity this company lounged Honda city a new car into the
market. It was in 1997. Later on in 2017 the company introduce a
new car to market. Its name is Honda BRV. This company has sold
more than 450000 cars in Pakistan. The production of this company
is increasing day by day as it has built a new plant in 2006. With the
help of this plant the production is gone up to 50000 units in one
year. Production of local parts are also done by company. The locally
made parts are as good as required by need.
RISK ASSESSMENT
BUSINESS RISK
1. Due to high increase in competition from other automotive
companies the risk of business increases day by day.
2. Due to increase in Japanese exchange rate business risk is
increasing.
3. Natural disasters around the globe are major cause of increase
in business risk.
4. Economic crisis are also cause of high business risks.
5. Increase in duties day by day is also indicator towards business
risk.
6. Credit risk is also a risk that increases the business risk.
7. Market risk in which chances of loss is also indicator toward
business risk.
8. Liquidity risk in which company is losing its cash day by day also
increases business risk.
9. Policies made by state also impact on increase in business risk.
10. In some of economies low bargaining powers of suppliers
also increasing business risks day by day.
INHERENT RISK
Inherent risk is a risk that occurs due to error or a fraud made by an
individual or individuals. It is not of due to weakness of internal
controls of a company
By keeping in view of above statement one of the major inherent risk
is forward looking financial statements due bad economic conditions.
In current period of covid-19 the company is wishing to show its
financial statements good that’s why there is also a risk that
company is looking forward while preparing its financial statements.
In future this risk could cause material misstatement as company
may mislead the society through its financial statements by
presenting false representation.
To measure the material misstatement it is necessary that the
amount of misstatement must be equal or higher of 5% of profit
individually or in aggregate.
CONTROL RISK
Control risk defined the failure of company’s system of internal
controls due to which materially misstatements are occurred.
In recent report of Honda there is no control risk identified as the
internal controls of the company are very strong.
As per requirement the revenue should be recorded manually and in
computer system also. There should also a system to check the
revenue dually. Revenue should be recorded by more than one
person as it will reduce the risk of error or fraud. The reconciliation
should be made after a specific period of time as to compare its
validity.
The top management of a company is responsible for making and
strongly implying of internal controls of a company due to which loss
of a company may get reduced. In a good system of internal control
the managers of the company should investigate the procedures off
and on on a regularly [Link]’s why internal controls for recording
revenue should be strong.
MATERIALITY
In accounting of modern ages materiality has different definitions as
according to generally accepted accounting principles and also
defined by international financial reporting standards. In spite of
these there may be more standards to explain the materiality. This is
a very important subject relating to audit of an entity. As due to this
investment decisions may change.
SOFP
In SOFP the materiality is calculated upon the percentage of net
assets as the percentage may vary between 2 to 5 % according to
situation.
In SOFP the materiality will be;
As assets are equal to 700,000
= 700,000(3%)
= 21,000
SOCI
In SOCI the materiality is calculated upon net profit or gross profit of
a specific period. It is calculated up to 5% or of net profit or 2% of
gross profit.
If Gross profit is 400,000
Then materiality will be
= 400,000(2%)
= 8000
If net profit is 150,000
Then materiality will be
= 150,000(5%)
= 7500
In Honda the quantitative aspect must be material as it refers to
listed company.
ANALYTICAL AND RISK ASSESSMENT
In this type processes financial information provided by an entity is
checked by auditor by comparing it with non-financial information
which has no directly link with financial statements as to check its
completeness as well as correctness. This type of information is
usually used by auditor to check the validity of financial information
as information used In financial statements.
By discussing the other side of coin risk processes of audit may
define as making an understanding of entity’s internal control made
by management of the company. These type of processes always
take place at the year-end of entity while financial statements of the
company are in process of being made. These are proves of good
implementation of internal control of the company made by
management of the company.
In this respect as we are considering for upcoming audit the auditor
should compare the amounts of previous year with the current year
amount. If there is a difference between amounts like a change in
loan or increase in amount of interest paid by company.
In respect we should calculate the interest amount;
As if the loan amount is 4,000,000 and interest rate is 12% then
interest payable will be equal to
= 4,000,000(12%)
= 480,000
If there is no major change in loan amount than interest will be equal
to this amount until no principal amount is paid.
CALCULATING RATIOS
For the good healthy business the auditor should check the ratio also
as;
Current ratio= Current asset / Current liability
2020 2019
26,602,167/14,810,128 26,296,126/14,009,886
=1.79 =1.87
This indicates that there is decrease in current assets of company.
Debtor turnover ratio= (receivables / sales) 365
2020 2019
(868,505/55,046,264)365 (1,122,986/95,128,289)365
= 5.75 = 4.30
Increase in turn over days refers to risk of bad debt.
FRAUD FACTORS RISKS
In accounting and auditing the detection of fraud is method usually
used by management of a company to get knowledge about the
week points of company that indicates that there may be a fraud
factor in financial information? On detecting the fraud factor it may
be get reduced to nil by the top management of the company. By
this management may have idea to make its controls more good and
valuable as there must be less chance of error or fraud. In other
words management has power to change its controls according to its
need and implementation for sake of good book keeping for
company.
There may be following opportunities;
1. Large amounts of cash or other valuable inventory items on
hand, without adequate security measures in place,
2. Heavy dependence on a few key employees, who have too
much power and too few checks and balances,
3. Employees with conflicts of interest, such as relationships
with other employees and financial interests in vendors or
customers,
4. Unrealistic goals and performance-based compensation that
tempt workers to artificially boost revenue and profits,
5. Failure to conduct background checks and other pre-
employment screening, and
6. Weak internal controls.
Auditors are responsible for using professional scepticism
throughout the audit process, as well as planning and
performing the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement, either caused by fraud or error. Auditors
generally aren’t required to investigate fraud. But they are
required to communicate fraud risk findings to the appropriate
level of management, who can then take actions to prevent
fraud in their organizations.
If conditions exist that make it impractical to plan an audit in a
way that will adequately address fraud risks, an auditor may
even decide to withdraw from the engagement. When
conditions are ripe for fraud, we can help you pursue a formal
forensic accounting investigation to find out more.
RISK CATEGORY TABLE
In SOFP risk assessment procedure may involve following;
Description Risk of material Detection risk
misstatement
Property plant and High Low
equipment As there may be an Because company is
error of wrong doing its own
method accounting
methods
Assets Medium High
As may be you are A difference
not aware of between current
misstatement and previous year
Equity Low High
Because there are As small change will
less chances of be able to detected
change in capital
amount in a period
Liabilities High Medium
As it may be As auditor has to
increased or compare the
decreased due to amounts to any
good or bad misstatement
performance of the detected
company
In SOCI risk assessment procedure may involve
Description Risk of material Detection risk
misstatement
Sales Low High
As sales will be A small amount
equal to previous must be get
because there is detected
no change in sale
procedures like
discount
Cost of sales Low High
As opening and Difference may
closing be able get
inventories may highlighted
be get detected
Expenses High Low
There may risk of Small amounts
error or fraud may not be able
to highlighted
Income High Low
There may be Difficult to detect
chance to false small amounts
representation
Tax Low High
Tax rate may be Easy to get
changed knowledge about
tax laws
AUDIT PROCEDURES
Description Explanation Procedures
Change in debtors It indicates the Auditor should
moving of doubtful compare the
debts balance with
confirmations
Change in creditors It indicates towards External
understatement confirmation and
sales purchase
record must be fair
Shut down of Assets are not on Reading minutes of
business their actual value AGM
Review the steps of
management
Increase in non- It may include Receipts must be
current assets misclassification checked by auditor
and physical
verification is also
needed
Expenses It may include Comparison with
misstatement previous year is
necessary
Investigation of any
major change in
expense.
