Auditing and Assurance - Case Study Example

Topic: Auditing and Assurance Name: Lecturer: Course name: Course code: Date: Question one. A). Business Risk – it refers to adverse conditions to which it suppresses the business performances. These adverse conditions subjecting the business to greater risk can be externally or internally caused. The risk outsourcing This is unfavorable condition that relates to external factors beyond the business control. Also this risk can be regulated by producing internally. Regardless of the important benefits of outsourcing business firms is subjected greater risk and threats to the company that might lead to closure. Cheaper Eats Limited externally outsources 60 % of its major products from Zen Company. Cheaper Eats Limited is not in agreement with the Zen’s terms of payment where during previous period Cheaper Eats Ltd is known to delay the payment however discouraging and breaking the Zen’s conditions of credit. The business will be on an operational risk where it will depend on the 40% internally produced materials that will be insufficient to meet the company’s operation. In relation to outsourcing operational risk, the Zen’s Limited managers should strategically consider outsourcing agreements as a fundamental challenge and should place more emphasis in controlling outsource process. The 60% reliance on Zen’s Limited gives a competitive environment to Cheaper Eat Limited where the breach has contributed to decrease in the credit payment period which will contribute adverse potential impacts on outsourced materials. If the contract of supplies comes into ceased, this might lead to liquidation of the dependent company since the 40% internally produce materials cannot meet the company’s operations. Marketing Risk Zen the Japanese firm is attributed to supply the Asian produce at a lower price Cheaper Eats Limited which means there retail price will as well low compared to Cheaper Eats Limited, therefore as the Zen company planned to establishes its branches in Australia market, Cheaper Eats Limited will in potentially in high marketing risk. Due to the dissimilar retail price between the two Companies, Zen Company will have a deliberate advantage over Cheaper Limited due to supply chain partnership to Cheaper Eats Company. The Company will suffer due to competition from Zen Limited where it will be selling its similar products in the market. As a result of this risk of competition Cheaper Eats Ltd sales value is expected to drop drastically. Also as due to drop in the sales these will earned less return to the Cheaper Eats Limited. The change from the budgeted turnover trend of the business is expected to subject the management to potential risk of withdrawal. To cover this deviating business trend management will be forced to manipulate entries in the company’s books of account so as to cover the changes from the business expectation. The risk of competition in the market will then hold down the prices of Cheaper Eats Limited hence prompting reduction in selling prices therefore leading to lower rate of marginal income thus this will force the management to appropriate a way to be adopted in order to meet the forecasted business results. The divergence from the shareholders expectations will force Cheaper Eats Limited management to window dress the company’s transaction records to reflect the better business performance level and satisfaction to the directors and shareholders. Question 1.b) Business outsourcing risks Cheaper Eats Limited dependably rely on 60% supplies from Zen Limited, this depicts that the company mostly depend outsourcing materials. Failure to meet the dept settlement period will lead undesignated going concern in the Cheaper Eats Limited. The changes in company’s books of accounts will be not reflected so as to bliss the Auditors on the going concern mode of the business. The auditor should exercise the element of utmost due care to in disclosing the findings in the materially misstated Cheaper Eats books of accounts. Marketing Risk The cheaper whole sale prices of the Zen Limited give an appropriate similar retailing prices, thus cheaper Eats Limited suffer a marketing risk which will have an adverse effect on the sales revenue the business. The Auditor will be on a risk of giving a wrong opinion since the management will be forced to manipulate the books of account so as the books should portray a true and fair view to the company’s shareholders. Question 2, a) Control activities. Control activities refer to specific measure and procedures used by management to achieve the organizational objectives. The major controls measures that the Hawk Pty Ltd put in place to achieve its objective includes; i) Appropriate authorization- it ensures that all company transactions should be authorize by the responsible persons unless otherwise, the key departmental managers authorizes a different course of action. The Hawk Pty Ltd warehouse managers and their deputies are only responsible personnel to access the inventory management system and record the inventory system. This will enhance auditors reliability on the system as it limit chances of alteration of entries in the inventory system thus ensuring that the risk of manipulation of entries is limited. ii) Segregation of duties - This policy that ensures different individuals are assigned duties for different departmental organizational activities. Hawk Ltd has control procedure over the custody and the recording of the inventory system. Hawk Pty Limited assigns different employees in recording the books as it enters the warehouse until the departure. On delivery books are coded by responsible staff and each warehouse manager counter check against delivery. In addition on issue of books different department is assigned to counter check the transactions. This system of having different individuals responsible in performing the check functions creates a transparency in the validity of the books of accounts assuring the auditor on the reliance of inventory management system. iii) Sequential numbering of invoices This control policy ensures that invoices are pre-numbered and are issued in the sequential order thus facilitating clear control over forged receipts that can be used in manipulating company’s books of accounts. The auditor credibility on reliance on effective control measures over pre-numbering receipts and sequentially issuing of receipts will be enhanced in the system. iv) Adequate documentation and recording - This measure promotes evidence that enhances transparency in the financial statements. The Hawk limited designed controls that ensure accurate documentation of inventory by the different organizational departments. The customer service department ensures that once book are received they are entered into the accounting system before it is stored. In addition once the order as been documented the accounting department checking of the credit limit in comparison with documented credit limits is examined before the ordering approval. These reflect that the system is free from material misstatement and that the auditor should rely on the system. b) Main weakness of the internal control Hawk Pty Ltd management policy of the accessing and recording business transaction in the inventory management system is limited to the managers and their deputies. It is articulated to prompt delays in recording of transactions if both are not present in the company and that the firm management does not comply with the rules and regulation provided by the policy by evading the business operate on the busiest period Question 3, a) Major controls relating to the ordering and transfer of inventories i) Coding control - The purchase orders that are issued by the warehouse department is automatically coded by the Inventory Management System before delivery. This ensures the ShopPharm Limited has a proper control of issuing of orders and hence the chances occurrence of frauds and errors are decreased. Auditor’s responsibility of detecting errors and frauds is minimized since the process of coding is automatically generated by the inventory management system and hence the risk of material misstatement is reduced. ii) Use of secure ID control - The control ensures that only authorized management personnel accesses to the online order system. When making orders, ShopPharm limited management are provided with ID’s that enable them to access the system to check the goods in stores and whether the order can be placed. This provides sufficient and reliable audit evidence that ensures that the auditor risk of material misstatement is minimized. iii) Pricing control - This control ensures validity in of management the set prices are effectively applied. ShopPharm Limited ensures that warehouse managers are the responsible management personnel who record the price on the purchased order and sends to the accounting department. This will boost reliability of financial statements; hence the auditor can rely on the statements. Question 3 b) b) proper procedures to test the controls i) Coding control The auditor should ensure that the personnel responsible for managing the inventory management system are competent enough and they should observe confidentiality in the actions of their work. The auditor should also check on the satisfactoriness of the inventory management system control in coding the books in the stores. The auditor should also consider checking the sufficiency of the proper system security to limit alteration of the coding process. ii) Use of secure ID control The auditor should make a surprise visit and check for confidentiality authorization of accessing passwords by investigating on the responsible persons in their system passwords. The auditor is also obliged to check for d strengths of the passwords. The auditor will visit the warehouse department and check the frequency at which the passwords are changed and whether they are changed by authorized personnel. The auditor should make a visit and watch on the system security control by establishing wether the responsible personell has install automatic screen log offs to protect display of confidential information to un authorized persons. iii) Pricing controls The auditor should consider checking on the company policies and strategies of pricing and whether the warehouse managers have design a model of attaching prices to different books regarding their coding. Inventory Management System should also consider on reflection the strategic of pricing paradigm adopted by the company to enhance sufficient pricing control. The Auditor should request the responsible personnel for the copies of purchase orders and consider checking for the compliance with the established management premeditated policies of pricing the pharmaceutical products. Read More