The Theater Group Ltd - Essay Example

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Business Report Senior Partner at JKWP Accountants May 12, Table of Contents Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Legal Requirements to have or not to have an External Audit . . . . . . . . . . . . . . . . 3 The Advantages and Disadvantages of an External Audit . . . . . . . . . . . . . . . . . . . . 3 Description of Risk-Based Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Identified Business Risks at Lordbury Playhouse . . . . . . . . . . . . . . . . . . . . . . 5 The Role of the External Auditor in the Detection of Fraud at Lordbury Playhouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Bibliography 1. Introduction This refers to your letter dated May 3, 2011 regarding the completed year-end audit of the Spectrum Theater Group Ltd. I have endeavored to give an explanation of the reasons for the huge amount charged for said audit. 2. Legal Requirements to have or not to have an External Audit There are legal mandates in UK for the conduct of external audit in an organization such as the Spectrum Theater Group Ltd. Under the Companies Act of 1985 , auditors are required to audit the annual financial statements of the organization and to submit a corresponding report to management if said report meets the requirements of said Act. The auditors shall also include in their report their findings regarding the accounting records of the organization if properly maintained. Under this Act, it is imperative that we conduct an audit of the Spectrum Theater Group Ltd as the turnover of the said organization in totality last year is more than 6.5 million, hence, it does not fall under the category of a small company which is the exception provided in the same Act. In addition, in accordance with the Combined Code on Corporate Governance effective November 1, 2003, we are also required to review compliance of the organization with the Listing Rules of the said code and to report findings accordingly. 3. The Advantages and Disadvantages of an External Audit An external audit aims to review the company’s financial statements and internal controls for the auditor to give an opinion as to whether the said financial statements are fairly presented. The auditor can also comment on the weaknesses of financial controls and records he finds in the audit. While recognizing the valid purpose of an audit, it has some advantages and disadvantages. Advantages Findings of the auditor regarding financial controls and operational weaknesses or inadequacies can be immediately corrected/improved/enhanced by management; Assurance for management and board of directors that accounting controls and processes used are in place and effective. Accurate financial statement is basis for proper tax filings of the organization , thus penalties and interests can be prevented ; The company’s image or status is improved/enhanced resulting to greater opportunities for projects by in-coming investors and trust by regulatory agencies and the public. Disadvantages The expenses incurred to pay the auditor and the cost of documentation shall involve a huge amount. The agency can rely on their internal auditors to conduct the investigation. External auditor gains access to confidential records. Duplication of efforts of internal auditors and external auditors conducting the audit procedures at the same time, same period for the same purpose. 4. Description of Risk-based Auditing Risk-based audit focuses on risks assessment and prioritization of risks rather than giving importance only on internal control. Audit risks consist of three types: a) inherent risk which is most likely there will be errors in the financial statements of Lordbury Playhouse. Thus, we reviewed the factors that may cause misstatements , such as the level of experience of management and staff to prepare the financial statement, dependence on obsolete technology and procedures , staff who may be abusing their responsibility and other factors. b) Control risk is the risk of possible error in the financial statements due to lack or inadequate internal controls. To assess this risk, we conducted tests of controls. Since there was no internal auditor or internal audit in the Lordbury Playhouse, audit procedures and tests of controls were extended to obtain accurate and reliable findings. c) Detection risk is the risk that we shall not be able to detect the errors in the financial statements. To counteract this, we intensified assessment of inherent and control risks. As our audit methodology, we combined inherent and control risks in the review of the theater’s financial records and internal control systems. Audit procedures included analysis of accounting records and reports, inspection, confirmation, observation and inquiries. Results obtained were carefully analyzed and we came up with high risk areas needing interventions and immediate actions by management. The high risk areas identified are as follows: 1. Inadequate organizational structure (e.g. several positions with similar functions) 2. Low financial accomplishment considering ratio of expenditures against income. 3. Fast turnover of staff casting doubt on the company’s recruitment process and assignment of functions. 4. Computer systems used are not updated. 5. Lack of Internal Auditor /internal audit. 4. The Identified Business Risks at Lordbury Playhouse The audit showed that there are high risk areas identified through assessment of inherent and control risks which resulted to risks areas under audit risks. However, to enable the organization to ensure attainment of its organizational goals and objectives, the broader category of risks such as business risks were identified which relate to the agency’s organizational goals and objectives. It also refers to the cost incurred if the business does not accomplish their projects and activities as planned. The identification of business risks resulted to the allocation of more time in the audit procedures which otherwise have been done by an internal auditor or equivalent staff in the theater if there were employees functioning as such . Recognizing the importance of addressing the business risks of the Lordbury Playhouse, below are the company’s business risks for immediate consideration and attention by Management and the Board in the performance of their functions and daily activities. The Operations Director is also the main supplier of interval drinks and light refreshments to Spectrum Theater Group Ltd which can lead to purchasing irregularities. The Financial Controller is also handling activities not within the functions for said position such as the cleaning and catering services of the theater. This may lead to manipulation of financial reports in connection with expenditures for said activities. There is duplication of functions of the Financial Controller and the Management Accountant relative to financial reports preparation which can be rolled into one to save on cost for personnel services. The functions of the Financial Accountant are only that of a clerk, thus depriving the company with specialized services relative to accounting functions and indicates undue wastage of resources. The disbandment of the Internal Audit Department will lead to further irregularities and fraud in the company. The suspension and sacking of the Payables Manager indicates weaknesses in the internal control system. Nobody in the organization has been assigned to do internal audit in the absence of the internal auditor/staff. The Sales Manager performs two different functions such as handling of accounting records and sales invoices/receipts which does not promote check and balance. This shows that the sales manager has access to the cash or records of cash sales. Fast turnover of staff at the Payables Department would result to the disruption of the activities thereat which would cause delay in the department’s work accomplishment. It further indicates problem in the recruitment procedures of the company and distribution of duties and responsibilities within the department. Procedures for purchasing and payments are inadequate . Pre-printed cheques are not secured and no system of authorization in the recording of transactions relative to suppliers account which indicates accessibility of anyone thus exposing the records to risks and tampering. There is no disaster recovery plan which can pose a great problem to the company considering there is no back up mechanism. The box office systems and procedures need further improvements and upgrading from manual operation to computerization for sales of tickets and reservations. It is noted about twenty different processes are performed regularly or a total of 30 processes. It is for the advantage of the theater to have a simplification of these procedures, thus, can save on operational costs. There is no review function for financial reports before submission to Head Office. The financial reports on the monthly accounts prepared by the Financial Controller are directly submitted/emailed to Gordon Finney without review and approval by the Operations Director. This shall affect the Operations Director’s planning, monitoring and decision-making functions. 5.The Role of the External Auditor in the Detection of Fraud at the Lordbury Playhouse The external auditor’s role is basically to review and validate the financial statements of the subject organization. While he can comment on the weaknesses in the agency’s internal control system, he lacks deeper knowledge and understanding of such system and agency operations as well. Detection of fraud therefore lies in the internal auditor or equivalent staff of the agency. Nevertheless, the external auditor’s reports can serve as eye openers for management and the board to conduct further investigations for doubtful financial transactions and reports found in the audit. Specifically, in the case of the Lordbury Playhouse, since it has no internal auditor or internal audit at the moment, the responsibility of discovering fraud lies in the director who has overall responsibility in running the theater. 6.Conclusion In summary, the above explanations pointed to the necessity for and importance of the external audit at the Lordbury Playhouse. Also, it clarified the issues on the huge audit fee, length of time incurred in the audit and role of the external auditor in detecting fraud at the Lordbury Playhouse. Bibliography 1. ArticlesBase. External and Internal Auditing.: What’s the Difference. April 6, 2009. (online) Available at:  http://www.articlesbase.com/careers-articles/external-and-internal-auditing-whats-the-difference-853393.html 2. ASOSAI. Risk-based Audit-Appendix C. (online) Available at: http://asosai.org/R_P_auditquality/appendixc.htm 3. eHow.Advantages of External Audit. (online) Available at: http://www.ehow.com/facts_557112_advantages-external audit.html 4. Francies, M., July 2000. International Financial. Law Review. United Kingdom – Corporate Governance – News Publications. (online) Available at: http://www.weil.com/news/pubdetail.aspx?pub=4017 5. Simmons, M. R. Internal Audit Objectives: A Comparison of the Standards with the Integrated Framework for Internal Control. (online) Available at: http://www.facilitatedcontrols.com/internal-auditing/spiacoso.shtml Read More