Audit and Internal Control Issues at Sucre Delights - Coursework Example

?Report Jean-Pierre Christophe CEO, SUCRE DELIGHTS LTD Manager 23 May Audit and Internal Control Issues - Sucre Delights Limited Keeping in view the weaknesses in the internal control and management practices in relation to maintaining effective internal control, different areas of concerns are discussed in this report. The first part of the report identifies the major risks, which the company faces at present and the ways in which these risks can be eliminated. In the second part, the report discusses the information required and procedures to be performed for the purpose of audit planning and risk assessment of the entity. In the next section, the report identifies the tests of controls to be performed for obtaining sufficient appropriate audit evidence in relation to purchases made during a year. Lastly, the report discusses the substantive procedures, which are to be carried out for the purpose of obtaining reasonable assurance as to the reliability and correctness of the information pertaining to inventory in the financial statements of the company. A. Key Business Risks, Possible Consequences and Risk Mitigating Strategies Since the company is going through a declining phase as far as profitability and sales turnover is concerned, it is pertinent to consider areas which require management’s attention. The increase in the employee turnover rate and the fact that there are few experienced professionals left in the accounts department of the company pose significant risks in relation to the operations of the company and the preparation and presentation of financial statements which are free from material misstatements. Apart from this, the increase in competitors of the business also poses a significant threat in future. All these risks can act together to result in a risk related to going concern of the business. From an auditor’s professional skepticism point of view, these risks and developments can have serious implications on the financial reporting and internal controls maintained by the company, since there is a possibility that management may try to manage earnings and overstate the sales revenue and profits of the business. In addition to this, greater employee turnover reflects that there is a continuous inflow of new inexperienced employees who are expected to be less aware of the procedures and practices followed in the company. Moreover, the company’s automated purchase management system is also regarded by the employees as inefficient due to the complexities and lack of user friendliness and hence the transactions are often recorded manually in the system. This manual practice of recording transactions is another area where fraudulent activities may take place and intentional misstatements may be made by the personnel responsible for data entry. Moreover, there are only two persons in the organization who possess skills to operate the system. Lastly, the composition of the board is also an area of concern; there are different affiliations of board members and there is a risk that the members may have some conflict of interest which may promote unethical practices (Rittenberg, Johnstone and Gramling 2011). Keeping in view these risks and their possible consequences, the company can take several steps to mitigate these areas and overcome these loopholes. First of all, there shall be appropriate measures taken to ensure that employee turnover is brought down to a minimal level in order to ensure that experienced and professional staff members are working in the company and therefore the function of financial reporting, in particular, runs smoothly. On the other hand, there should be a resolution passed for the disclosure of director’s interest in Sucre Delights Limited and other companies, so as to identify and counter any conflicts of interest. The automated system shall be made more user friendly so that the users are able to run the system easily and are inclined to use it. Moreover, the fact that there are only two individual employees who have the skills to operate the system poses significant risk. This risk can be mitigated by way of offering training programs to other staff members also in the purchase department (Cowan 2005, Marchetti 2012). B. Procedures and Information Required for Audit Planning and Risk Assessment Audit planning and risk assessment allows the auditor to design and implement audit procedures in response to the risk that a material misstatement could have occurred. For the purpose of gathering information related to the risk assessment, it is pertinent to inquire management and other staff members who are expected to possess information which may help in the identification of risks of material misstatement in relation to the preparation and presentation of financial statements (Puttick, van Esch and van Esch 2007). Apart from this, the auditor will perform analytical procedures in order to identify those areas or information which has not been previously known to the auditor. These procedures will involve the comparison of financial and non-financial information, such as examining the records showing the number of units sold in a year and the corresponding sales revenue recorded in the financial records. In addition to the analytical procedures, the test of details is also considered necessary in order to obtain sufficient and appropriate audit evidence as to the fairness of the financial reporting process. The test of details will involve detailed testing of the transactions and accounting records, process of recording transactions, and physical inventory counts, etc. C. Tests of Controls for Purchases While conducting the test of controls for purchase function of the client, the auditor will aim at testing the validity, completeness, timeliness, authorization, valuation, classification and recording and summarization. For each of these areas, the auditor will carry out the following test of controls: Validity In order to find out that the purchased items which are received are appropriately recorded, the auditor will carry out observation of purchase and receiving functions in the organization and check whether there is segregation of duties. The auditor will further check the vouchers in order to gather evidence for purchase requisition, authorization and receipt of the purchased items. Completeness For the purpose of checking the completeness of the purchase transactions and their recording, the auditor will trace receipt report through the supplier and voucher for various transactions. Moreover, the auditor will also trace the same to the purchase journal in order to ensure proper recording of the purchases made. Timeliness In order to test the validity of the purchase transactions, the auditor will compare the dates on vouchers for purchase transactions with the dates on which the transactions were recorded. Authorization The auditor will review the limits identified by the client in relation to the authorization of entering into a transaction up to a particular level. Apart from this, the auditor will examine the orders for purchases in order to check whether they were properly authorized. Valuation In order to ensure that the amounts recorded for the purchase of items are accurate and valued properly, the auditor will calculate the amounts for some invoices and corroborate the amounts calculated with the recorded ones. In addition the auditor will also check information related to quantity and quality and other attributes of the products recorded by the department with the details mentioned on the purchase voucher. Classification In order to make sure that the purchase transactions are categorized appropriately, the auditor will review the classification of items presented in the purchase journals and general ledgers of the company. Recording and Summarization In order to find out that the posting made for the purchase transactions are correct, the auditor will reconcile the purchase journal accounting entries with that of accounts payable entries. Moreover, the auditor will also review the reconciliation of the balance of accounts payable with the general ledger balances. D. Substantive Procedures for Inventory Substantive procedures comprise of analytical procedures or test of details or a combination of both. In relation to inventory, the auditor will carry out the below mentioned substantive procedures which will be aimed at testing the cut off, ownership, accuracy, under or over estimation of the value of inventory items (i.e. valuation), classification and disclosure. Completeness In order to find out that inventory items reported by the client are in accordance with the actual inventory, the auditor will carry out physical count of inventory items and reconciliation of the counted items with that of items reported in the financial records. For the purpose of ensuring that the items of inventory consumed are actually consumed, the auditor will review the receipts of the items purchased and reconciling them with the inventory counted and consumed. Cut Off In order to ensure that inventory items are recorded at proper cut off dates, the auditor will compare the date of purchase of inventory items on receipt vouchers with the date on which the inventory items are recorded in the financial statements. Valuation The auditor will verify the correct application of lower of cost or net realizable value for the inventory in order to ensure that the inventory items are valued properly. Existence The auditor will send confirmations to the suppliers for checking the existence of inventory items which are reported to be in course or held by others. Obligations In order to determine whether any third party has any right in relation to the inventory stocks of the client, the auditor will determine whether there exist any collateral contracts with any third parties. Disclosure The auditor will review whether disclosures for depreciation of inventory items are made in accordance with the financial reporting framework applicable to the client. Source: (Pickett 2005, Moeller 2011) Summary This report has identified key risks which are of interest for the auditor and in light of the identified risks, the audit of the Sucre Delights Limited will require special consideration in relation to purchase department and inventory management. In this regard, the report has identified various audit procedures which will be used to assess the risk of material misstatements in the financial statements in relation to purchases and inventory. List of References Cowan, N., 2005. Risk Analysis And Evaluation. 2nd ed. Wiltshire: Institute of Financial Services. Marchetti, A.M., 2012. Best Practices: From Assessment to Ongoing Compliance. Hoboken: John Wiley & Sons, Inc. Moeller, R.R., 2011. Coso Enterprise Risk Management: Establishing Effective Governance, Risk, and Compliance Processes. Hoboken, New Jersey: John Wiley & Sons. Pickett, K.H.S., 2005. Auditing The Risk Management Process. Hoboken, New Jersey: John Wiley & Sons. Puttick, G., van Esch, S. & van Esch, S.D.K.S., 2007. The Principles and Practice of Auditing. Cape Town: Juta & Co. Rittenberg, L.E., Johnstone, K. & Gramling, A., 2011. Auditing: A Business Risk Approach. Mason, OH: Cengage Learning. Read More