Auditing Case Study Example | Topics and Well Written Essays - 1750 words

Auditing - Case Study Example Overstating of revenues and the understating of expenses Revenues can be overstated so as to show that the company is doing well and that would attract new shareholders. The shareholders would be attracted by the increased revenues and that would imply that they would also get more dividends from the company because of the god performance of the company. The understating of expenses will mean that the profits of the company will increase and that will be appealing to the shareholders of the company (Kara and David, 178). The above facts will make the area of revenues and expenses more risky because the areas will have a direct effect on the shareholders decision concerning investment decisions. The auditor should carry out all the required procedures to ensure that the financial statements of the company reflect a true and fair view and the information will be useful for the shareholders and other company stakeholders. From the financial statements of the company, the operating incom e from sales has increased from 175.80 in 2011 to 197.40 in 2012. The increase in income is consistent with the increase in the previous years. However, that should not be the case because the margin of increase of tax is more than the other years, which are 33.30 in 2011 to 51.50 in 2012. That could imply that there is a probability that either the revenues were overcastted or the expenses understated and hence the area is a risky area. The company also has a reduced gross margin of 83.30 from 132.40 from 2011 and that could serve as an indicator for further investigations to ensure that there was no under stating of the expenses and the overstating of the incomes listed as other incomes. 2. Understating cost of sales The cost of sales can be understated to show an overstated profit. Cost of sales usually increases because of inefficiency in the company operations. Efficiency usually arises from the machinery that are been used, the company processes and the operations of the emplo yees. The company should ensure that it purchases its raw products at the lowest price possible to keep costs at a low level. The level of efficiency in a company is usually hard to calculate. The efficiency of the machines is usually dependent on a number of factors that may include the age of the machine and the power supply available to the machine. In that case, the auditors should treat the area of the cost of sales as a risky area because if the amounts are understated, the investors are likely to get a loss because of wrong investment decisions. Most investors usually carry out an analysis such as ratio analysis that can be used to endure that the ratios are favorable for the investor. The change in the cost of sales as compared to the prior years as per the financial statements of Stagecoach Company is not consistent. The issue of inconsistent could act as a risky area that needs further investigations and the auditor should analyze that area. The cost of sales has increased to 2507.40 in 2012 from 2257.40 in 2011. However, the operating income of the company in 2012 is greater than that in 2011. 3. Current assets and liabilities The area of current assets and liabilities is a risky area because a company can overstate its current assets and understate the liabilities to make the financial position of a company to be more appealing to investors. That is not a good thing on the part of