Auditing and Control in the Organisations: Auditing and Assurance Services
Question 1)
Assume you are an auditor and are facing the following separate circumstances. All the following items are material. You can assume that management have refused to make any changes necessary for the financial report to be able to become “true and fair” so that the circumstances mentioned still exist.
Required: For each of the above situations state the Audit Opinion that should be given with a brief reason/explanation related to each one
1-The value of the write off for the Allowance for Doubtful Debts is inadequate. Managements are unwilling to adjust it although the amount leads to a material misstatement of Accounts Receivable. The amount of the misstatement is limited to the Receivables and is able to be calculated.
Any item in the financial report which might have a material influence on the decision making of the shareholder or stakeholder can be provided with qualified audit opinion by the auditor in case of any significant mistake or miss statement. As far as the incorrect calculation of allowance of doubtful debt is concerned, it is important to understand that if the allowance of doubtful debt is understated, then it significantly enhances the net income of the company. Conversely, if the allowance for doubtful debt is overstated then it significantly increases the bad debt related expense of the company and reduces the net income level of the company (Averkamp, 2019).
It is mandatory for the concerned auditor to compare the current financial year technique used for calculation of allowance for doubtful debt with the technique used in the previous financial year to identify consistency in the usage of technique for calculation of allowance for doubtful debt (Jenarius, 2014). It is also mandatory for the auditor to make sure that balance of account receivable and allowance for doubtful debt is matching with the actual balance prevailing in the market with the customers to provide true and fair financial position to shareholders and stakeholders of the company. Auditors have completed right to provide qualified audit opinion if they are not satisfied with the technique used for calculation of allowance for doubtful debts. This is mostly because of the significance of this element in the income statement of the company (Riely & Pasewark, 2009).
2-A retailer provides a valuation for inventory at sales price less an allowance for sales margin.
Inventory is one of the most significant elements of a statement of financial position, and it is recorded on cost. The method adopted by the client is according to the accounting Principles because this technique is recording the inventory at cost. The auditor has the complete right to provide unmodified audit opinion regarding the financial reports of the company by looking towards this technique related to the recording of inventory. Unmodified opinion provided by the auditor is the opinion in which it is expressed that the financial reports formulated by the top-level management of the company are according to the Generally Accepted Accounting Principles and all the material information has been properly disclosed in the formulated financial reports (Gray et al., 2011). Unmodified audit opinion suggests that the financial reports formulated by the top-level management of the company are responsible for providing the true and fair financial position of the company to shareholders and stakeholders in the market (Fazal, 2011).
Under this scenario, qualified opinion cannot be provided by the auditor as the inventory is being recorded at cost according to the information provided in the scenario. A qualified opinion means that the auditor is not satisfied with the financial reports of the company and the financial reports are not responsible for providing the true and fair financial position of the company to shareholders and stakeholders in market (Seow & Pan, 2013). That is why it can be concluded that the formulated scenario is recording the inventory at cost, and auditor can provide unmodified audit opinion for such a scenario.
3-The Block company has just been advised that its main customer who purchases 45% of its stock has just gone into liquidation. Due to the specific nature of its products Block company is unlikely to find another customer of this size. Block has been starting to have difficulties in making sufficient sales to continue operating.
I certainly believe that this scenario is closely associated with the going concern concept according to Generally Accepted Accounting Principles. According to the accounting Principles, it is significantly important for the management of the organization to disclose information in financial reporting in notes to the account regarding Going Concern of the company. It is important to make sure that the business is kept as Going Concern and if it faces any issues related to Going Concern then those issues should be properly disclosed in notes to the account in order to provide complete information and material information to shareholders and stakeholders so that these involved parties could take their investment decisions accordingly.
As this matter is closely associated with going concern concept according to Generally Accepted Accounting Principles that is why it is a material concept, and it must be disclosed by the management in the financial reporting for the shareholders to make sure that all relevant and material information is provided to shareholders in order to formulate their investment decisions accordingly. Being an auditor, I will certainly include this point when I will write a letter to management regarding recommendations which must be implemented to improve the financial reporting to provide accurate and relevant information to shareholders and stakeholders of the business. I will recommend that this significant information should be properly disclosed in the notes to the account as it is material regarding the sales of the company. The customer was responsible for formulating approximately 45% of the cells, which is a significant amount, so considering this amount significant and material; it is important that it must be disclosed in the notes to the account.
4-The Croucher company has been valuing its buildings using the fair value method. Its buildings are currently shown in the balance sheet at their current market value of 18.5 million dollars. The buildings originally cost 12 million dollars.
Assets can be recorded in the statement of financial position of the company on fair value or market value depending upon their category. As far as the building is concerned, it is recommendable that the building should be recorded under market value instead of fair value. This is mostly because there is a proper market related to construction and building. This market has enough knowledge and experience to provide the value or market value of the building. Fair value method is mostly used for those types of acids which are exchanged between different involved, knowledgeable parties while market value is the price at which a specific asset of the company is exchanged between the involved parties in the market.
The concept of revaluation can be utilized by the management to manage the value of the building on the balance sheet of the company. In case of high-level market value, the value of balance sheet will be increased, and in case of a decrease in the market value of the building, an impairment loss will be recorded in the income statement, and the net amount of building will be recorded in the balance sheet. I believe that auditor should suggest the top-level management to make sure that they implement market value method to record the building as compared to market value because the building has proper construction industry which can calculate the market value of that specific building in the market.
5-The Kaycee company values its inventory at LIFO and is unwilling to change it to FIFO as required by the Australian accounting standards. The amount of the misstatement is known and is limited to its effect on the inventory.
According to the Australian accounting standards, it is required by the companies to utilize the FIFO method to use inventory. If the company management has decided to utilize LIFO method, it should be the responsibility of the management to make sure that they disclose the LIFO reserve amount in the notes to the account related to the financial reports of the company. This reserve amount is considered to be the inventory cost associated with the difference between two accounting methods LIFO and FIFO (Loughran, 2019).
By using the LIFO method in inventory, cost of goods sold is generally higher mostly because the inflation rate is generally increasing with time and things are becoming more expensive with time. Due to expensive raw material, the cost of goods sold, and the cost of inventory is increasing with time. This increase in the cost of goods sold decreases the overall net profit or net income of the company. To provide appropriate and complete information to the shareholders and stakeholders of the company, it is highly recommended that the difference between the inventory cost of LIFO and FIFO should be properly disclosed in the financial reports of the company.
An auditor can recommend declined that they can use the weighted average method as well to record their inventory and utilize their inventory instead of using other two available methods as a weighted average includes the properties of both other types of inventory management methods.
6-The Genome company has prepared its financial statements but has left out details of its related party disclosures due to privacy issues. This information is required to be included under the Australian accounting standards and while the effects are material they are able to be calculated.
According to the Australian accounting standards, it is mandatory for companies to properly disclose notes to the account as notes to the accounts is one of the most significant elements of financial reporting. Notes to the account are responsible for providing material information and complete information to shareholders and stakeholders regarding the financial data included in the financial reporting. Notes to the account help the shareholders and stakeholders to analyze the financial data in the financial reporting more effectively and efficiently.
If the management has not provided detailed information in notes to the account, then auditor has the right to recommend the management to properly disclose details in notes to the account to positively influence the decision making of the shareholders and stakeholders. If the management is not willing to disclose information in notes to the account, then the auditor can provide a qualified audit opinion regarding the audit of the financial reporting of the company. By stating that the complete information has not been disclosed in the financial reporting due to which financial data cannot be properly interpreted by the stakeholders and shareholders of the company. Formulation of notes to the account is mandatory under Generally Accepted Accounting Principles because not to the account is one of the most significant and integral parts of financial reporting, and financial reporting cannot be considered as complete without notice to the account disclosures.
Question 2)
The Big Office company sells various stationery and office equipment through its stores. It sells items both at its shopfront and through its internet order service. Orders accepted over the phone are delivered in the Sydney metropolitan area within one day. All sales are made for cash. The following are the procedures for sales.
Required: Identify the weaknesses in the above procedures and explain why they are weaknesses.
1-Customers in the store pay for their stationery giving the cash to a staff member at the desk. The staff member creates an Invoice and gives the customer a receipt on a copy of the Invoice.
It is significantly important for organizations to have proper segregation between duties for the employees to make sure that the amount of risk associated with business operations can be reduced. Sales and collection are considered to be two primaries and two most significant aspects of any organization. It is important that these two aspects of any organization should be segregated to reduce the risk of fraud and chances of errors. If the employees are assigned with the duty of issuing the invoices and same employees are assigned with the duty of receiving the collection against those invoices, then chances of can be significantly increased because that specific employee can manipulate the record of the collection as he has complete information of sales invoices. It is important that sales invoices and cash receipt should be different from each other (Martine, 2016).
To record the invoice, there should be proper sales invoices as already the stationary company is using. As far as cash receipt is concerned, there should be proper receipt books provided to the employees concerned to collect the collection or payment for the invoices issued. This receptive can be given to the same employee who is issuing the invoices, but it is better that a separate cashier should be appointed to segregate functions of issuing invoices and collecting cash. This will help to significantly reduce the risk of fraud and error in the organization associated with invoicing and cash receipts.
2-Customers who have ordered over the phone are given a sales order number by the staff member who prints two copies of the order. The staff member then collects the items from the store and arranges delivery of the order giving the goods and the invoice copies of the order to the driver.
Placing orders on the phone is responsible for increasing the sales of businesses in modern days. In the above scenario, it can be suggested that sales staff provide the customers with sales orders on placing their order on the phone by using official platforms. Utilization of official platforms would make communication official and would reduce the chances of fraud and mistakes. For instance, if any customer calls the stationary shop in order to place his order then instead verbally telling him his sales order, it would be better if the sale order number is sent to his mobile number by an official message dispatched from the software of the company which is being used to generate invoices and sales orders.
This will also help the management to analyze the number of sales orders issued to different customers and relevant details related to sales orders like dispatching of orders. Other significant recommendation which can be implemented in order to improve this process is that the sales staff should place stamp on the issued invoice copies before giving them to the driver in order to acknowledge that we would have been given to the traveler for delivery to the customer, and it will also provide acknowledgment to customer that the invoice has been duly processed by the outlet and is ready to be received by the customer from the driver. This will help the stationary shop to reduce the chances of fraud caused by the driver as well.
3-The driver delivers the goods to the customer, collects the cash from the customer and receipts the customer’s copy of the invoice.
In this scenario, it is highly recommended that a proper receipt book should be used to collect cash against the invoices issued for the customers. Segregation of invoices and receipt books will help the business to reduce the chances of frauds and errors. It is also recommended that cash collection should not be the job responsibility of driver incident proper collectors should be appointed for this purpose or there should be an online payment system in which the customers placing orders through phone should pay through credit cards in advance before receiving the goods. Another significant recommendation is that goods can be delivered by the Logistic companies like United parcel services and other relevant companies, and they can be assigned to collect the cash from the customer against the invoices. This will help the stationary shop to reduce chances of frauds as cash collection What become the significant responsibility of the Logistic Company, and that registered company would be official is responsible fo, or cash collection and any kind of fraud or error would be placed on that specific logistic company.
Segregation of duties significantly important in any organization as it helps to enhance the level of internal control system placed in the organization and helps to strengthen the internal control system placed in the organization. Utilization of separate invoices and received books will also reduce the level of weakness prevailing in the internal control system in the organization and will help to reduce the chances of fraud and error by the employees working in the organization.
4-The driver returns to the store and hands over the cash and the second copy of the Invoice to a staff member in the store.
In this scenario, the driver should be given receipt books, and collection of cash should be carried out against these receipt books. On collecting a specific collection from the customer, the driver should give receipt voucher to that specific customer mentioning the invoice number on the receipt voucher, and there should be an acknowledgment of customer and driver on that receipt voucher. At the end of the day, the driver should submit the entire receipt voucher to the collection department against the invoice copies as well. As far as invoice copies are concerned, the driver should also take signature from the customer or stamp from the customer to obtain an acknowledgment from the customer for receiving the goods from the driver. It will provide official acknowledgment to the company regarding receiving of the goods and cash received watches will also provide official acknowledgment to the company for receiving of cash by the driver from the customer against issued invoice.
It might be possible that some customers may try to commit fraud by saying that they have not received a complete invoice after two days of receiving invoices. In this scenario, it can be tackled by getting a signature for the appropriate official stamp of the customer on the invoice suggesting receiving of the invoice. If the partial invoice has been received by the customer, then he should appropriately mention on the invoice regarding parcel receiving of the invoice and remaining invoice items should be returned by the driver on returning to a stationary outlet to appropriately update the records of inventory in the system.
5-At the end of each day each staff member gives all the cash they have taken to the Store Manager who locks it in the safe overnight.
According to this scenario, it is recommended that the cash collection should not be handed over to the store manager. Instead, Cash collection should be submitted to the collection department or accounts department so that they could update collection in the system. It should be the responsibility of the accounts department or collection department make sure that the deposit the collection to bank daily by making sure that the safe balance is reduced to zero at the end of the day as it will help to reduce the chances of frauds by the employees. It will make sure that whatever collection is received by the collection department is being deposited in the bank daily.
This procedure will make sure that no cash is left in the branch at the end of the day for overnight and it will also help to reduce the chances of theft of cash because all the cash will be deposited to the bank daily. Segregation of duties related to the store manager and collection department is significantly important (MaRS, 2019). As far as internal control system strengthening is concerned, it is important to understand that sales department should not the given access to store collection for overnight instead collection should be submitted to the collection department daily to make sure that it is deposited to bank daily. This will significantly strengthen the internal control system prevailing in the stationery branches.
6-The next day the staff manager opens the safe and takes the cash to the bank alone.
As far as this step of taking cash to the bank by restore manager is concerned, it is recommended that the cash should be submitted to the collection department, and they should submit it to bank daily. It is highly recommended that a proper form should be utilized by the management to track the movement of cash from the safe to the bank. At the time of transferring the cash from safe to bank, concerned employee should be required to fill the form mentioning the information like amount taken by the employer for deposit, balance of safe, details of cash by denomination and his signature acknowledging that he has taken the cash from the safe in order to deposit in the bank. This will significantly help to reduce the chances of fraud as money will be properly tracked.
Another significant recommendation is that only specific employees should be given authorities to deposit the collection and bank and these specified employees should not be from the sales department as they can manipulate the collection because they are well aware of the details of the invoice. Separate employees should be appointed under the accounts department to make sure that complete collection is received by him, and that specific complete collection should be deposited at the bank safely on a daily basis. Considering cash deposit, the responsibility of the store manager will significantly increase the fraud chances as store manager is aware of the daily invoice details, and it can provide him with the opportunity to manipulate the election accordingly. That is why; segregation sales department duties and collection department should be considered as the primary objective for strengthening the internal control system implemented in the organization.
References
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Gray, G.L., Turner, J.L., Coram, P. & Mock, T.J., 2011. Perceptions and Misperceptions Regarding the Unqualified Auditor’s Report by Financial Statement Preparers, Users, and Auditors. Accounting Horizons, 25(4), pp.659-84.
Jenarius, T., 2014. Evaluating The Efficiency Of Accounting Recording For Doubtful And Bad Debts Case Study: Unity Co-operative Society (UNICS) Cameroon, compared to Nordea Bank Finland. [Online] Available at: https://www.theseus.fi/bitstream/handle/10024/54412/taku_jenarius.pdf.pdf?sequence=1&isAllowed=y [Accessed 24 May 2019].
Loughran, M., 2019. Auditing Valuing Ending Inventory Systems. [Online] Available at: https://www.dummies.com/business/accounting/auditing/auditing-valuing-ending-inventory-systems/ [Accessed 24 May 2019].
MaRS, 2019. Internal controls in accounting: Key benefits. [Online] Available at: https://learn.marsdd.com/mars-library/internal-controls-accounting-key-benefits/ [Accessed 24 May 2019].
Martine, E., 2016. 5 Areas Where Segregation Of Duties Can Reduce Risk And Prevent Employee Fraud. [Online] Available at: https://www.receivablesavvy.com/blog/5-segregation-of-duties/ [Accessed 24 May 2019].
Riely, M. & Pasewark, W.R., 2009. Assessing the Allowance for Doubtful Accounts. Journal of Accountancy, 1(1), pp.1-6. Available at: https://www.journalofaccountancy.com/issues/2009/sep/20091539.html.
Seow, P.S. & Pan, G.S.S., 2013. Governance of Financial Reporting. In Getting your Accounting Right. CPA Australia Ltd.
