Auditing and Assurance - Fashion Adornments Pfy Ltd - Assignment Example

Topic: Auditing and Assurance Name: Lecturer: Course name: Course code: Date: Question 6.35 SWOT analysis on evaluation of business SWOT analysis is a planned method applied in assessing the strengths, weaknesses, opportunities, and threats concerned with a business enterprise. SWOT analysis can be performed for a product, market or industry (Mark S Beasley, 2008). It entails specifying the purpose of the business enterprise and recognizing the internal and external factors that are positive and averse to attaining that purpose. Weaknesses are internal characteristics that put the business at a disadvantage in relation to others. Weaknesses that will assist in evaluating business risk are; i. Integrity of employees in Fashion Adornments Pfy Ltd Employees in the newly acquired fashion accessories company might take advantage of the new owners because they have not gotten the knowledge of the business fully. The might decide to manipulate the books of accounts for their own selfish gains and even they might end up hiding or misappropriating the company assets (Eilifsen, 2010). This is an internal weakness that Tom and his friends might face. The employees have a better understanding of the daily operations of the company and also they are well conversant with the internal control and the loop holes that might be present. These weakness posses to be Adornments Pty Ltd and it might affect the audit of the financial reports. ii. Management knowledge and experience Tom, James and George who are the management team have no idea in the fashion accessories business. Their lack of knowledge and inexperience in the new venture posse’s weakness in the company’s management The employees might take advantage of their weakness to manipulate the company's books of accounts for their own benefits. The business being new to the management also might face challenges in the daily operations and also its profitability and stability (IAASB, 2009). This is because of the time that the management will spend in trying to have an understanding of the business might be prolonged hence might stagnate the running of the business (Mark S Beasley, 2008). It is a business risk and it can affect the audit of the financial report because of the employees might take advantage of the management's knowledge and inexperience in the business. iii. Counterfeiting of Watches Tom wants to his watches to represent 'quality' and to have a wide range of innovative features. Tom intends to achieve his product's quality by producing watches that resembles to the leading fashion watches in the market but he will sell his at a cheaper price. This is a business risk because that might affect the audit of the financial reports in the sense that employees might be under pressure to produce these kind of watching (Vona, 2011). They might go on and produce poor quality watches that will not sell in the market which in turn will lead to losses. The employees might then go ahead and manage the company earnings by stretching the accounting principles to the extreme which is illegal. iv. Transition The process of transition posses to be a business risk to the company and can affect the audit of the financial reports. This is because the staff in the newly acquired company may engage in the misappropriation of assets and manipulation of company accounts for their gains. Threats that assist in evaluating business risk and how they affect the audit of financial report Threats are external characteristics that put the business at a disadvantage in relation to other companies in the. Threats that will assist in evaluating business risk are; i. The term of contract Switch watches does not have a long-term contract with its manufacturing sources in China. There is a threat in that the long of contract might be terminated at a point when the business has stabilized. The company is subjected to business stopping its operations hence leading to losses to the company. Effect in auditing of the financial reports might be experienced if the employee does not want to reveal these losses. ii. Factors affecting the industry Tom's business is dealing with garments and now he is expanding to fashion accessories business. Tom acquired Fashion Adornments Pfy Ltd. This company deals with fashion accessories and a weakness in terms of the kind of product (fashion watches) is a new thing to Tom and his partners. The business will face stiff competition because of their imitated fashion watch. This process to be a business risk and it may affect the audit of financial reports. iii. Market pressures. Market pressures for instance changes in rates of inflation and currency rates changes are ideal indicators for threats that assist in evaluating business risk. The company has engaged itself to purchase watches from China (Ballou, 2009). This means that the company might be affected by the currency fluctuation risks. This threat is out of control by the company management because it is due to market forces, therefore might affect the audit of financial reports. Question 7.35 The effect on inherent risk of CFLs relationship with the department store ASA/ISA 200.13 and ASA/ISA 200.A37 explains that risk involving material misstatement at the assertion level is of 2 components, that is control risk and inherent risk. The auditor must have an understanding of the internal control of the company (ASA/ISA 315.12), the control environment to enable him in making assessment of risk of material misstatement (ISA/ISA 315.A106) and he should also consider the effect of control risk in relation to risk of material misstatement (ASA/ISA 315.26) Effects on inherent risk of CFLs in relation to department store are; i. Tired or deviant staff's actions can cause breakdown of controls in an organization. Their actions will cause an effect on inherent risk of CFLs relationship with the department store. Some employees due to their selfish activities may be tempted to temper with the controls in the company for their own selfish gains (Larry E. Rittenberg, 2011). The auditor must have a good understanding of the internal controls to enable him identify such malpractices in the company. Control environment consist of the management and the overall attitude of the management, awareness and actions taken regarding internal control and its usefulness in the company (ASA/ISA 315.A65). ii. The staffs ‘possibility to override the controls. The company must establish ways of assessing risks, how to manage and how to address each specific risk identified. A satisfactory internal control should be able to monitor and minimize the company risks, it should provide for segregation of incompatible duties and responsibilities, it should provide for recording, authorization, and adequate procedures to guard the company assets, revenues, expenses and liabilities of the company. iii. Sound pre-numbering of transactions and checks are practices that will boost mitigation of CFLs risks in department store. Employees will have such controls in place to assist them in monitoring their activities in the company. iv. Satisfactory internal controls should have a system that will align the capabilities of employees to their responsibilities. This will ensure that employees in each department including the department store are capable of executing their duties appropriately. Financial report items that would be affected and the assertions most at risk i. Assets of the company are financial report items that would be affected. Assets like the inventory are at most risk of misappropriation and manipulation. Proper recording and identification of pricing systems will reduce the risk. ii. Expense for example inventory expenses can be easily manipulated if the internal controls are not satisfactory. Question 8.38 Controls present within the payroll system i. Segregation of duties Segregation of duties stipulates that no single person should be in charge of initiating transaction, approval of transaction, recording of transaction, reconciliation of balances, handling of assets and reviewing of reports. Segregation of duties is very important to effective internal control because it minimizes the risk of committing errors and inappropriate actions in the payroll system (Vona, 2011). For instance, the company segregates well all the duties in the payroll system, the weekly payroll listing is prepared in each store by paymasters, timesheets are approved by the department managers, each store has payroll assistant who does all the calculations and verification of figures, and the human resource manager is the one that approves changes to wage rates. ii. Control over source documents All the payroll records of the company are kept in a computerized system which is in a very secure room. The computer system has passwords and don’t allow installation of other unauthorized programs. The information in these computer systems are protected by very efficient and effective anti-virus software and firewalls. Information technology experts back up all the information on regular basis and keep copies of all computer files in secured areas. iii. Checks, Approvals and Reconciliations Checks for accuracy, approvals and reconciliations are well implement in the payroll system. The company’s staff check approves and reconciles all the entries. They also have a computerized way of checking if the employee number entered is valid or not (Vona, 2011). The paymaster prepares the weekly payroll list of the department, payroll assistants at each department check the totals of the list and check the manual calculations with comparison to the computer system’s totals, and the human resource manager approves the changes in the payroll rates (Mark S Beasley, 2008). iv. Authorization The workers of the company are supervised. The number of hours worked are authorized by their seniors for processing of payments. The company also has its computer programs approved and authorized by the information technology manager. This will facilitate accuracy in the salaries and wages of the employees basing on their contribution to the company. v. Computer system controls The computer system in the payroll department is highly protected and secured. The Information Technology manager is only person who approves software that will be used, the computer system rejects any unapproved software, the computers have password which allow only authorized personnel to access the information, and also the computer system is protected by firewalls and latest versions of anti-virus software. vi. Check use of approved pay rates Any changes on the employee master files are approved by the human resource manager who is stationed at Sydney, the company head office. Approved pay rates will facilitate equity in employee rewards in terms of salaries and wages. Question 9.33 The implications of the errors noted in the tests of controls Payments that were not made to an approved supplier were 3. The implication of this error will be seen in the increase the costs of the company. Payments that were made erroneously to suppliers who are not approved will be very difficult for the company to recover from them. This will increase the company’s expenditure on supplies. Payments that were not matched to an approved purchase order even though all other documentation was attached were two (Larry E. Rittenberg, 2011). This will subject the company to incur extra costs of replacing the unapproved purchases that have been already paid for if they will be found to be defective. The purchased items not approved can also lead to poor quality products of the company if those items will be found to be faulty. There were three payments that did not bear evidence that calculations on creditor’s invoices have been checked (Leonard, 2009). The implication will be either underpayment or over payment of creditors. If there will be under payment, the creditors will come back and ask for their balances which the company had not planned hence can lead to credit worthiness of the company going down. Also, if there were over payments, the company will have incurred losses. There were two payments that had no supporting documentation attached. These were in relation to the leased printer and photocopier (Larry E. Rittenberg, 2011). There will be no material implication because the original amount has no changed. The company should go back and implement changes in their internal controls that will see these errors prevented in future. Question 11.40 Appropriateness of conclusion in each of the two situations In the first situation, the internal auditor should have sampled also the balances which are less than $2,500,000. This would have shed more light on the existence of errors. It was not enough for the auditor to base his conclusion only on the balances over $2,500,000 even if he selected all the balances. An error of 3% should have prompted the auditor to carry out investigations and it should have been a red flag to him on other balances that he did not audit. The auditor should have taken a sample for test from all the accounts receivable balances so that it enables him to make an objective conclusion. In the second situation, the auditor’s conclusion is not appropriate. This is because an error of six percent and a tolerable deviation of four percent is a big margin. The auditor should trace and establish the root causes of these errors and recommend on the controls so as to prevent such errors in future. Reference List Ballou, B., 2009. The impact of strategic-positioning information on auditor judgments about business-process performance. Auditing: Journal of Practice and, pp.71-88. Eilifsen, A., 2010. Application of the business risk audit model. Accounting Horizonz , pp.214-31. Leonard J. Brooks, P.D., 2009. Business & Professional Ethics: For Directors, Executives and shareholders. Larry E. Rittenberg, K.M.J.A.A.G., 2011. Auditing: A Business Risk Approach. IAASB, 2009. Handbook of International Auditing, Assurance, and Ethics Pronouncements International Federation of Accountants. NewYork. Mark S Beasley, J.V.C., 2008. GAAS Guide 2009: A Comprehensive Restatement of Standards. Kille., M., 2009. International Auditing on business risk. Canada: Gray publishing. Vona, L.W., 2011. The Fraud Audit: Responding to the Risk of Fraud in Core Business. Read More