Auditing and Assurance - Cheaper Eats Company - Assignment Example

Topic: Auditing and Assurance Name: Lecturer: Course name: Course code: Date: Question one. A). Business Risk – it refers to unfavorable conditions that suppress the business performances. Cheaper Eats is faced with the external risk of marketing; Marketing Risk Cheaper Eats Company will suffer due to competition from Zen business which will be selling the same product in the market. Zen the Japanese firm is known to supply the Asian produce at a cheaper price, thus as the Zen company opens its branch in Australia there will be great marketing risk in their market place as Zen will have strategic advantage over Cheaper limited due to supply partnership[Tor06]. Due to the risk of competition Cheaper Eats Ltd returns is expected to drop. The diversity from the budgeted trend of the business is expected to subject the management to cover deviating trends. Management will cover this by manipulating business records to inline them with the budget. The risk of competition in the market will then suppress the prices of Cheaper Eats Ltd thus prompting lower rate of marginal income therefore this will force the management to design a way to adopt in order to meet the targeted results[Iai07]. Due to the occurrence of this risk the Cheaper Eats management will manipulate accounting entries to satisfy the share holders from the low business returns Business process outsourcing risks Despite the important benefits of outsourcing business organization is subjected greater risk. This process of outsourcing important business activities has great dangers and threats to the company that might lead to liquidation. Cheaper Eats Ltd is known to outsource 60 % of its major products from Zen suppliers. Cheaper Eats Ltd is not in compliance with the Zen’s terms of payment where during previous period Cheaper Eats Ltd delayed the payment however discouraging the Zen’s credit terms. This has led to decrease in the credit payment period which might have an impact on supplies[Lar11]. This will lead to operating risk where the business will depend on the 40% internal produce that will be insufficient to finance the company operation. Management outsourcing team should strategically consider outsourcing contracts as an important challenge and should place more emphasize to control outsource process. Due to the difference in the two companies, Zen Ltd is considered to have the competitive advantage over the Cheaper Eats Ltd. The dependency ratio of the Cheaper Eats Company is of fundamental that if Zen’s Ltd declines the contract of 60% supplies to would lead to wounding up of Cheaper Eats Ltd. Question one. b) i. Marketing Risk The marketing risk will have an adverse effect on the sales effect on the sales revenue, Managers we be forced to manipulate the books of account so as the books should portray a true and fair view to shareholders[KHS06]. Management will cover this by window dressing and kitting where it will lead to material misstatement by the Auditor. b) ii. Business process outsourcing risks The 60% supplies by the Zen Ltd portrays going concern in the Cheaper Eats books of accounts,. The disagreement on terms of payment will affect the auditor’s conclusion on the books of accounts which if utmost due care is not exercised by the auditor the Cheaper Eats books of accounts will be materially misstated. Question Two a) Control activities. Control activities refer to specific policies and procedures management puts in place to achieve its objectives. The key control activities that the Hawk Pty Ltd utilizes to achieve its objective involves; i. Segregation of duties This policy ensures that different individuals are assigned duties for dissimilar elements of organizational activities. Hawk Ltd has control procedure over the custody and the recording of the inventory system. Hawk Pty Ltd segregates its activities from the time the books enters the warehouse until the departure[Lar11]. On arrival books are coded by responsible staff and each warehouse manager counter check against delivery. Also on issue of books different department is known to counter check the transaction. Having different individuals responsible in performing the check functions creates a transparent system where the auditor can rely on inventory management system since the chances of errors are limited. ii. Proper authorization This control measure ensures that all company transactions should stick on guide lines established unless the key departmental managers authorizes a different course of action. The warehouse managers and their deputies of Hawk Pty Ltd are only personnel responsible to access the inventory management system and record the inventory system. This ensures that the risk of manipulation of entries is limited thus the auditor relies on Hawk Ltd inventory system. iii. Adequate documents and records This measure provides evidence that financial statements are not misstated. The controls designed by the Hawk limited to ensure proper documentation of inventory by the customer service department once and is received from the book store they are entered into the accounting system. Also once the order as been documented the accounting department checks the credit limit in comparison with documented credit limits before approval of an order[Leo11]. These show that auditor can rely on the system documentation and recordings. iv. Sequential pre-numbering of invoices This is a policy ensures that invoices are pre-numbered is issued in the sequential order thus facilitating clear control over fake receipts that can used in manipulating companies books of accounts. The auditor will rely on the pre-numbered receipts and invoice that are sequentially issued since it portrays effective control measures over issuing of receipts and invoices. v. System control This is a control measure that ensures that there is an authorized access over firm’s inventory records on the computer system. Hawk Pty Ltd ensures that the access of the inventory is password and the manager and the deputies have access privileged. Also they are required by the policy to be present during the busiest periods. To ensure proper and effective measures the password used are regularly changed. b) key weakness in the internal control The management of the Hawk Pty Ltd policy of the accessing the inventory management system limits the entering of business transaction to the managers and the deputies. It is known that delay may occur if both are not present in the company and that the firm management does adhere to the rules and regulation by taking leave during the busiest period which is against the company’s policy. Question Three a) Key controls relating to the ordering and transfer of inventory i. Use of secure ID control The control ensures that only authorized personnel can have access to the online order system. On making orders ShopPharm limited is provided with ID’s that enable them to access the system to check the goods in stores and whether the order can be placed[Jon11]. This ensures that the auditor risk of material misstatement is minimized as the auditor is relying on the sufficient and reliable audit evidence. ii. Coding control The purchase order issued by the warehouse staff is automatically coded by the Inventory Management System before delivery. This ensures ShopPharm Ltd has a proper issue of orders and the occurrence of frauds and errors are minimized. The auditor’s work is minimized since the coding is automatically generated by the inventory management system. iii. Pricing control This control ensures that the set prices are valid and effectively applied. ShopPharm Ltd ensures that warehouse managers are the legitimate personnel who notes down the price on the purchased order and sends to the accounting department. This enhances reliability of recording in financial statements. Question Three b) Appropriate procedure to test the the controls i. Use of secure ID control The auditor will visit the warehouse department and check the frequency with which the passwords are changed and whether they are changed by the computer aided personnel or any authorized personnel. The auditor is also obliged to approach the authorized personnel and check for the confidentiality and strengths of the passwords. The auditor would check for the system security control [Lar11]i.e. whether the company uses biometrics systems, automatic logging offs or any other controls that would aid in securing the passwords. ii. Coding control The auditor would check on the adequacy of the inventory management system control in generating the coding and whether proper system security is enhanced. The auditor would ensure whether the personnel responsible for managing the inventory management system is highly competent integrity and observes confidentiality in their work iii. Pricing controls The auditor would check on the company policy pertaining pricing strategies and whether they are adhered to by warehouse manager. Inventory Management System should also reflect the strategies of pricing adopted by the company to guarantee the control. The Auditor should request for the purchase orders and check for compliance with the management strategic pricing policy. Question Four a) Business risk on Profitability and Structure of the industry prior to HIH’s failure Provisional loss The company is making a drastic loss of $ 800 million which is risk to the business operation that can lead to winding up. Appointment of provisional liquidators also signifies that the company can be wound up or be revived[Jon11]. This shows that the company operation is jeopardize. Fall in market share The gradual fall in market share for the preceding two years show that the investors will not be attracted to invest in the companies since the business is not marking profits and thus it is highly risk to invest in the company whose share are drastically decreasing in its market value. The Impact of decrease in market share can lead existing shareholders to sell their shares and invest in a profitable firm. Also as the investor will not be attracted to invest and the existing shareholders will sell their shares this will lead to decline in the working capital of the company. However the company will be on a greater risk of wounding up. Audit and consultation fee HIH’s performances are drastically decreasing. This shows that the company is making huge amount of losses that it cannot cover its operating cost as well as paying dividend to the share holders. The management is opting to highly remunerate the auditor in form auditing fee and consultation fee which is material to the business. On high remuneration of audit fee the auditor’s independence will be compromised and thus the auditor will give false information to please the shareholder as to the company’s profitability[Leo09]. This shows that the company is at greater operation risk as the books of account is manipulated to be propitious and thus it cannot be relied in making viable conclusion as to the company’s performances. Premium loss The HiH’s company purchase shares at a premium from FAI insurance without proper consultation and due diligence. After two year HIH’s company was forced to write off the share investment from FAI insurance which made a premium loss that declines the company’s profitability hence putting the company in a risk position. Competitiveness of market shares The HIH’s company is faced with Steepness market share price competition that lead to decline in the share price. Management of the HIH’s company should strategies on plan to curb steadfastness in the market share so as to encourage investors and retain existing shareholders so as to have working capital that can finance company operation[Jon11]. The management of HIH’S did not adopt a strategy to restrain market competition and thus the effect led to fall in market shares prices that affected the profitability ratio of the company. High-risk areas of marine, aviation, natural disasters and film financing insurance, HIH’s company ventured in high and risky investment that experienced considerable losses. This is caused by poor management strategies to avoid future risk i.e. by re-insuring themselves incase of unknown future risks. Long term anticipation risk HIH’s limited invested premium received in the long term projects which are considered risk to the company. The company could have reduced the risk by investing in the short term projects which are highly profitable so as to save effect of prudential margin cut off. b) Inherent risk Inherent risk is described as a risk that the business transactions contain material misstatements with regard of internal controls. Fraud Fraud is known to be pervasive inherent risk that is committed by the top management of the firm. The firm’s top management has the ability to alter the effectiveness and accounting controls The management has the ability to manipulate and falsify accounting entries and evade detection by auditors[Leo11]. HIH’s management is known to have highly remunerated the auditor so as not to reveal the planned fraudulent activities in the business hence increases the auditor’s inherent assessment. Going-Concern Risk Going-concern risk refers to risk that a business will not be in operation in the foreseeable future. The management of HIH’s Ltd is ranking the business is propitious and thus the books of account should be clear. The manipulated financial information shows that the business is a going concern hence increasing the risk assessment Tone at the Top Tone at the top refers to a prime risk factor in evaluating assertions of the management by generating an atmosphere where firm’s leadership is trickle down to employees hence creating a culture[DrE07]. The culture then are in a position to commit a carry over fraud which is requires utmost due care in auditing so as it can be revealed. Directors and the management of HIH’s Ltd are known to collude to perpetrate a fraud in the company. However the company subjects the auditor to greater risk of assessment. Collusion risk The collusion risk refers to the activity where the employee from different departments comes together with an aim of defrauding the company. This risk is considered pervasive hence subjecting the auditor to chances of misstatement of accounting information. The freezing of the director’s accounts in HIH’s Ltd is alert of collusion. Uses of estimates The auditor of HIH’s Ltd is omitting the inherent risk of using forecasted estimation figures which would mislead the concept of study of the going concern. The business records will not be reliable as the changes can occur in cases of long term goals. Companies would suffer form inherent pervasive risk that would subject control in the assessment. Bibliography Tor06: , (Andersen, 2006), Iai07: , (Iain Gray, 2007), Lar11: , (Larry E. Rittenberg, 2011), KHS06: , (Pickett, 2006), Leo11: , (Vona, 2011), Jon11: , (Reuvid, 2011), Lar11: , (Larry E. Rittenberg, 2011), Leo09: , (Leonard J. Brooks, 2009), DrE07: , (Dr. Ernest Kan, 2007), Read More