Auditing and Assurance Service in Australia - Essay Example

Auditing and Assurance Service in Australia PART A: 1. While studying the various departments associated with the Western Copper Ore Division of Cape Alston Mining NL, several problem areas of the business can be identified. Firstly the division lacks proper forecasting method and planning for production. The unsystematic and unplanned production process often effects in two ways. Firstly over production gets pilled up into the inventory thereby increasing the inventory holding costs. Secondly, excessive or unplanned production often results in the exhaustion of the mine. That means the ore is being mined out without any necessity. This over extraction also may hamper the ground support system of the mine. (Villaescusa, 1999, p.317) Here overproduction also signifies that there is huge lack in communication and interaction between the smelting division and the mining division. In fact it the problem with the entire company where signals are not present about the amount to be produced and how much amount of ore to be mined each time period. The second major risk that the division is currently having is the inability to gel with the acquired companies. As a result of this there is redundancy in operation as well as in costs incurred. These redundancies hurt more when the market is down for the ore. The business could fall drastically if the entire mining division is not centralized and integrated. The repeated processes of transferring the ores to the internal and external divisions are taking the cost component upwards. This is one of the major painful areas in the division. An ideal system would demand a proper coordination among the shafts, and well assigned targets of productions should be given to the individual shafts. These shafts should not be made liable for the sales of the ores; rather it would be the central sales department who would have knowledge about the production requirement of the smelting departments, the foreign and the local customer demands. According to the demands production planning should be done, not the other way round. For this to happen, the mining stores of different shafts should be integrated. This brings us to the third level of risk the division has. The stores of the different shafts are not connected and no computer data base is maintained for the amount of stocks that the division is holding. The sales department to have a better knowledge about the amount of stocks that are with the different shafts should introduce a new IT package for store keeping. A proper communication flow can be maintained between the shafts and the sales department if proper information is available in both the ends. The shafts should know how much to store, and the sales department should have prior estimates about the demand. This would reduce the redundancy somehow and will save cost. The debtors, for the mining division, though less in number but to have an account of the revenues earned from them, the entries should be integrated with the Ledger IT package. Also as mentioned earlier the sales department and the IT package for the stores should also be linked with the main ledger system. This will enable the management to view the entire division and will help them to identify the areas where more costs are being incurred. Thus if we summarize all the risks that the firm is having right now, will be solved immediately with the integration of all the connecting processes with the main system. Individual functioning and operation will pull the company downwards. 2. The informations received from the financial accountant will serve the purpose of identifying the areas where costs are being incurred, and where more liquidation of cash is going on. But it will not reveal the reasons why this is going on. To know the reasons why, the auditor must contact all the concerning departments individually where problem is going on. In the above section the areas of concerns are identified. Thus the auditor has to contact all the shaft managers, the sales department, the store keepers etc. The store keepers have to be contacted in order to match the actual amount of the categories that are stored and the amount of categories that are recorded in the system. A mismatch would necessarily mean that there is lack of proper coordination between the two departments. Informations also have to be collected from the five of the shafts, individually about the type of production order they receive and what operations they carry out. This information is necessary so as to check the redundant operations they are having and it will also help to ascertain whether they have any proper schedule for production. The sales department has to be contacted, to gather information about the process they work. Informations like forecasted sales, the major debtors and what is their demand trend is to be obtained carefully. As the sales done here is mainly inter group in nature a thorough investigation about the mining department’s linkage with the entire company’s operational process can be carried out. This information is needed to study the streamlining, Cape Alston is having. How the information is coming from the divisional managers to the operational and inventory heads is what is needed to be judged. So to make this sure that all the informations are with the auditor, the auditor has to contact all of the operational heads associated with the mine and should be able to extract their (operational heads) knowledge or lack of it about the entire process. Also third party information from debtors and the other direct and indirect customers sometimes help in the process. (Hildreth and Richardson, 1998, p.748) 3. Though a proper tracking system is needed to be added with the integrated stores, where counting would be updated after each period and sales manager would be benefited, but installing it would mean incurring another huge amount of cost. (Bragg, 2005, p. 175) But in the absence of this, some inventory counting policy has to be adopted. It is necessary to know that, in this division basically various types of final products which are being stored in the inventories. These products are classified according to the extracted material qualities. To take the attendance firstly knowledge about these categories is necessary. The ores range from being fine particles to lumpy end products. The monthly requirement of each of the separate quality of product is needed to be noted down from the store manager. Given the time of the month, the exact physical quantities actually present and what needed to be there is then calculated. Relevant informations should be collected from the store keeper or the store manager. After this estimations are needed to be made about whether the current stock that are present in the stores are lesser or greater than the requirement. This is the final information that is needed for auditing. If the stock quantity for any product is more, it will mean that there is over production which is going on and the division is incurring inventory holding costs. 4. The audit report that would be composed can be considered as a way of communication with the organizational heads. (Arter and Charles, 2003, p.115) The message that would be conveyed by means of the audit report should critically identify the problem areas within the systems. An audit report can be considered as a guide for the company so that they can rectify their mistakes. Like any report the audit report should contain a formal introduction. (Arter and Charles, 2003, p.115) This introduction will state the reason for the choice of the audit. For writing the audit report of Western Copper Ore Division, these are the things which should be considered. Introduction: The audit program was chosen for this particular division because of its weak performance and also because it has recently collaborated with few new companies. So a proper assessment about the current functioning of the division was needed. This audit report aimed to sort out the various redundancy and communication related problem that the company was facing. The report critically identifies the areas of problem and the departments which are having some adverse effects on the growth of the company. Setting Standards: For running a mining division certain parameters have to be considered. Firstly consideration should be made about the extent to which the resource should be excavated and stored. A periodic assessment of the ground condition is necessary. Also along with that a proper record of the types and quality of the ore is needed and the exact quantity of the produced ore should be recorded. This production should match the demand to some extent and it should not happen that same category of the ore is being stored over and over again. The proper coordination of the sales department should be there with the inventory manager such that the inventories can readily provide those materials, which the sales department demands at any point of time. Also the different shafts present in the division should have their internal communication so that there are no redundant processes in the system. Assessment of performance: The assessment which was made about the division reveals that the company’s operational quality lies far away from the set standards. In here most of the shafts works in isolation without having any proper communication between them. They are running on redundant processes and incurring the same costs which would have been reduced if the process was centralized. The production process and the sales team does not have any proper communication and also the there is no proper estimated sales figure to guide the production process. This is making the inventory management more difficult to implement. The shafts fail to identify the exact quantity of product produced under each category which makes the coordination process more difficult to implement. Also the information system of the organization is not up to the standards were all the informations about the departments should be accumulated at a single place. Areas of changes: All the shafts are needed to be connected at first under a single information system, so that they can identify the functions that are becoming redundant. Also the sales department and the shafts should be connected under an interrelated system where the demand for each category of product is accurately communicated to the individual shafts, and also the shafts should successfully segment their production under the various standard categories. PART B: 5. The first entry explains that the stock provision reserve that was created has been debited by four hundred thousand dollars while the inventory account has been credited by the same amount. It infers that there was excess inventory cost that was being incurred thus the provision account was used. The next transaction shows a investment income being made. The cash in hand of hundred thousand dollars were invested in the share capital of another company, and a gain was earned out of it. The third transaction shows loan component where lease of eighty four thousand dollars were paid with an additional interest payment of six thousand dollars by cash. For the first entry where the provision account is debited, proper evidence can be collected from the cost incurred by the inventory during that cycle. It is likely though that the holding cost of the inventory has gone up due to the excess or unplanned production of materials. The evidence for the second gain can be collected by observing proper documents of the share purchase and redemption. This evidence will give the proof of the exact date and the amount invested in the share capital of XYZ and also the value of the shares at the time of redemption. From that the investment profit made can be calculated. The third transaction can be verified by checking the lease document paper and by observing the interest payment agreement. The internal audit that is being planned covers wide range implications of different audit areas. (Moeller, 2005, p.10) The areas that this audit program covers is the system audit, the product audit also the process audit. It verifies the compatibility of the system and also studied the areas in which the organization lacks. So though apparently it looks just like an operational audit, but if minute attentions are given one can see that this audit process covers the above mentioned areas also. 6. The last finding has huge implication in the audit report. This finding points out that the division is lacking in receivables recovery system also. This can be regarded as an insult to the injury given the financial condition of the division. Most of the sales figures shown are actually receivables and they are not actual revenue earned. So the risk is huge. And a portion of debtors also are not responding to the call made from the auditors end. So this becomes a critical factor for the company and it definitely will change the audit approach as the point of view about the company will change. The procedure which then needed to be applied should be more financial in nature which will include collecting relevant documents and information about the assets and liabilities of the company. The cash flow statement also needed to be observed in this case as a major portion of the asset part is showing receivables, which might actually be converted into bad debt in due time. Reference: 1. Hildreth B, Richardson JA. 1998. Handbook on Taxation: CRC Press, New York 2. Bragg SM. 2005. Inventory accounting: a comprehensive guide: John Wiley and Sons, New York 3. Moeller RR. 2005. Brink’s modern internal auditing: John Wiley and Sons, New York 4. Schofield J, Swanwick T, Deanery L. 2004. How to write an audit: A guide for GP registrars submitting for Summative Assessment, accessed on June 5, 2009, available at: http://74.125.153.132/search?q=cache:lcG81LG92XIJ:www.londondeanery.ac.uk/general-practice/files/summative-assessment/audifeb04.pdf+How+to+write+a+audit&cd=1&hl=en&ct=clnk&gl=in&client=firefox-a (Accessed on June 5, 2009) 5. Villaescusa E, Windsor CR, Thompson AG. 1999. Rock Support and Reinforcement in Mining: Taylor & Francis, London Read More