Lack of Proper Accounting Records, Incompetent Employees, Detection Risks - Assignment Example

AUDITING Question .1.A There are a number of approaches that the audit can adopt in order to perform the audit engagement. One of the ways includes the business risk approach (Eilifsen, Aasmund, Knechel, W.Robert, Wallage, Philip, 2001). Business risks are the factors that affect the company’s ability to meet its goals and obligations and can either be internal or external within its operations. (Knechel, Salterio and Ballou, 2007) and is classified as financial risk, operational risk and compliance risk. According to Nice On the following are the business risk that could be facing the entity: 1. Competition. The company is likely to face a lot of competition in future. This may affect the sales which may result high losses in the future. Already there is fall in the profit. This may affect its future performance and the directors are not keen since they are busy doing the marketing business development. These element posses a big threat to the business operation as when they start reporting losses, the directors may not be able to bring it on track and given the fact that there are other branches still in operational, the growth and expansion may weaken the strategic plans given by the management. 2. Lack of proper Accounting Records. Recording of financial data is one of the requirements of the IFRS, 2009, whereby the entity is supposed to comply with the underlying standards and its requirement. Nice On has been keeping their records poorly. Their records accumulate, even the supplier records where no authorization has been involved for control purpose. This indicates errors of omission can occur. Also stocks there no formal policies to show how goods on transit are recorded. (Swanson D, 2006) 3 .Incompetent employees. Qualified personal are asset to the organization (Armstrong M, 2003) and every employer ensures they have the best personnel. Nice On has employed twenty staff with only two technical staff and who also are unable to cope with the volume of the work. Some staff may not be knowledgeable enough to pass correct entry to the books of accounts, an example is where Nice ON has a fleet of 12 trucks used daily yet they are not properly recorded in the books of accounts. 4. Foreign Currency changes. Since Nice On operates many branches, Sydney, Melbourne and the rest the company is exposed to the risk of currency fluctuation. This may bring to the auditor the inherent risk as the currency might fluctuation any time and also the business can loss heavily due to currency is devaluation. This may bring to the auditor the inherent risk as the currency fluctuation may affect some entries at the end of the period 5. Technology and Security Controls Technological changes might affect the operations of the Nice On business in the sense that management are still ignorant to use passwords and there seems to be little to be done as the management insists they do not need password on accounts transactions whenever they want to access. Question 1.B With regard to the accounts payable systems, the controls are bad. Fiona is the only staff handling the supplies invoicing. This might mean that requisition notes for purchases have not been authorized for control purpose. The records of the order level are not kept since Melbourne seemed to cater for short supply which is very costly. No record has been made to show supplier names and quantity ordered and also suppliers document are exposed to anybody. Luck of proper controls may lead to material misstatement due to errors of omission and commission. A notable issue is where Fiona Li had kept a big pile of supplier invoices which means most of them or all had not been entered into the system, which can bring a big variance in the financial statement. IT controls might contribute to material misstatement in the financial statement since the management refuse to use passwords for control purpose. Any body can alter the records since authorization of passwords not in place. C. Detection Risks. This is the risk that the auditors ‘substantive procedures will not detect material misstatement that exists in either individual accounts balances or when aggregated with misstatement of other account balances. The reason being that auditors may use sampling methods in collecting the audit evidence and in this event, a material item may be omitted that which can cause a material misstatement. Substitutive are tests performed to enable the auditor detect any material misstatement in the financial statements. According to Nice On, the recommended approach to detect any material misstatement should be substantive. This is due to the fact that most of their records are not up to date especially the supplier invoices piling up. They also issue invoices and dispatch goods while stock taking is in progress. This indicates stock control procedures and policies are not in place and can result to big difference hence wrong balances. Question 2 The auditor performs some tests of transactions in order to confirm the company has been able to satisfy the financial statements assertions. These are the presentations which are presumed or embodied in the financial statements. According to Nice ON, we consider: 1. Existence This can be obtained through physical inspection, balances brought forward to ensure correctness of the amounts recorded in the financial statements. The management should proof the assets exist and it belongs to the entity (Knechal, Salterio and Ballou, 2007). According to Nice On, there is a risk of existence especially the company tracks which transport goods, are not correctly recorded in the company’s books. One of the directors seems not sure of the record and the tracks are on hire. Nice On should ensure that all title documents of Assets are available and in the name of the entity for example log books, property documents etc. 2. Completeness. In the events where some of the assets, liabilities, expenses, incomes and accruals are omitted, the accounts may not show true and correctness view of the accounts balances. Verification of account balances from original document up to the recording stage should be carried for accuracy and completeness. In Nice On, there is evidence that the management have not calculated the depreciation value hence balances of the assets could be misstated in the balance sheet. Also in the accounts payables there is a problems since supplier invoices are pile for long without recording them. These shows Nice On do not have proper controls as to in recording them in the books of account. (Clickeman P, M.2004) 3. Valuation. Evidence of valuation can be obtained through appropriateness of the accounting policies, determination of the cost, determination of value and legal requirement. According to the information of Nice On, they have no proper policy of stock taking process hence the risk that the stock may have been over or under valued. The report indicates there are valued at cost and not at net realizable value and further more no impairment test was done to the tangible assets and are recognized at face value. Valuations of the assets are subject to reduction in the value due to wear and tear. (Clikeman P.M, 2004). 4. Presentation and disclosures. The audit requires that all information to be disclosed by the accounting standard and must be included in the financial statements. Proper accounting treatment of transactions must be demonstrated, if the item is expenses should be recorded as an expenses and an asset should be recorded as an asset. (Clikeman P.M, 2004). According to Nice On, the goods in transit seems not to be included in the stock account as no policies put in place to ensure during stock taking the work should be suspended to get accurate result. 5. Rights and obligations. The nature of evidence that pertains to the rights and obligations can be obtained through the evidence of ownership. For fixed assets, like motor vehicles, a document of logbook with the full details of the company should show the evidence of ownership by the entity. An asset should not be recorded in the books of an entity if it’s not fully owned by the company. (Clickeman P, M.2004) In the case of Nice On, the directors agreed that the fleet of the twelve tracks are on lease and according to the management representation, the director was not sure of how the transactions were recorded in the books. 6. Occurrence. The evidence that something occurred is very important. According to Nice On, there seems to be some risks associated with the clarity on occurrence especially on record keeping. Due to pressure of work, Fiona piles the supplier’s document which means that the date at which the event took place may be altered. 7. cut-offs. The cuts off tests will involve the physical inspection of the assets at the end of the period and examine the records of the goods received notes and dispatch notes. According to Nice On, they accumulate these records especially the supplier’s record and no cut off procedures observed during stock taking. Audit assertions which are at risk. Completeness, the supply invoices are not recorded properly and no segregation of duties for control purposes. Valuation of Assets is at risk since stocks valuation is not done, thus not reflecting fair value in the financial statements. Presentation and disclosure, not adequate because warehouse fire was not disclosed nor provided for. Rights and obligations, the firm’s litigation procedure is not accurate and claims from Insurance were under paid. Cut off procedures are not observed especially during stock taking and the stack valuation may be overstated or understated. There is also risk of occurrence associated with poor record keeping. From the above findings the firm has inherent risks which must addressed and take necessary measures. Eilifsen, Aasmund, Knechel, W.Robert, Wallage, Philip, Application of business risks audit. A field study, 2001, vol.15 Swanson D, Business Risks vs. audit risks, internal auditing 2006. Janet L. Colbert, Michael S. Luehlfing, and C. Wayne Alderman, Engagement Risk, the CPA Journal, 2009, Clickeman .M, Financial statement assertions, the Internal Auditor journal article, 2004 International Standard on Auditing 315 Understanding the Entity and its Environment and Assessing the Risks of Misstatement Knechel, Salterio and Ballou, Auditing: Assurance & Risk (3rd Ed.). Thompson South-Western, 2007. International Financial Reporting Standardes, 2009, guidelines Armstrong M, Human Resource Management Practice, 9th Edition,2003. Read More