Auditing Issues - Assignment Example

Name: Lecturer: Course name: Course code: Date Question one Audit Report on the performance of the following Accounts We have audited the following account in line with the auditing standard as well as observing the auditing guidelines. The detail report of the accounts is stated below. Accounts receivable. In ascertaining the audit risk on debtors account, I performed audit trail review as well as the cut-off test procedure of some specific debtors more specifically the bad and doubtful debtors. This process is deeming efficient since audit misstatement or errors will be identified. It was evident that debtors account is free from material misstatement since the cutoff-test procedure shows that the previous year’s balance is consistent with the opening balance implying that the books of accounts are in agreement. Current investments In ascertaining the legality of the current investment, Performing audit checks on the minutes of meeting of directors as well as checking on the bank statement is relevant in order to ensure that only legitimate transaction was executed and that correct amount of funds was expended on the project. It was evident that the current investment is legal and approved by the management of the company. Property assets In ascertaining the company’s assets, I performed field visit in order to ascertain the existence as well as the value of the property’s performed detail check on the value of the building in the statement of financial position in order to ensure that the right method of valuing the property is applied and that there is no existence of fraud. Intangible assets intangibles assets of the company is one of the potential places where fraud might be perpetrated and hence, audit trail as well as valuation method of intangible was the relevant method that could be used in testing for asset existence and valuation. The audit trail review revealed that the intangible asset was properly valued and that there was no inconsistence of valuation from the preceding years and there therefore the account is properly accounted for. Deferred development expenditure This are long-term capital expenditure in which are susceptible to fraud. I performed detail audit test of the expenditure in the statement of financial position to ensure that they are properly documented and well accounted for. The assertion made on this four account is existence of the property. It was certain that all of the four assets existed and were properly valued hence there is no fraud or misappropriation of company’s funds. Account Substantive audit procedure (test of detail) Deferred development expenditure For existence, Check details of the property in the statement of financial position to guarantee for documentation and existence Intangible assets Audit trail review is performed in order to ensure that there is existence and proper valuation of the asset Property assets Visiting the premises to check for existence and confirm the value of the assts. Current investments Checking on the minutes of meeting of directors as well as the bank statement in order to ensure for accountability and legitimacy Other business risk affected by the company is the decline in level of sales as well as the competition that the company faces. This risk will affect the general performance of the company and thus the relevant marketing department should ensure that proper product branding and quality is adhered to so as to guarantee for constant revenue to the company and, minimize business risk Question two Potentially effective internal control systems in the company, risk of this control that might reduce as well as a test of control for each of the identified potentially effective controls. a) There is effective control system in the invoice delivery department and hence the internal control system would mitigate risk such that undelivered invoice will not be used my by fraudulent individuals to perpetrate fraud by maliciously taking goods from stores that is ought to be delivered to customer. Test of control to be performed is to check on the number of incomplete deliveries with the Local purchase order while paying concentration on the amount goods, date when LPO was created to check whether they reconcile with the incomplete deliveries. b).There is an effective internal control in generating the monthly aged analysis since the system generates the monthly return based upon all invoices that have been processed onto the system for the period up until the last day of the month hence there is no loophole for committing fraud. The test control to be performed on the effectiveness of the system is to check on periodic service of the system as well as the effectiveness of the password in line with who is the authorized person to change the password as well as accessing the system. This therefore gives an individual the responsibility in ensuring that the internal control system is enhance while processing the aged data analysis 3)There is effective internal control system when raising the payment voucher since the personnel places reliance on the computer automatically generate the invoices and gives the stock code for the invoice which is to be used when creation a delivery note[Wil11]. This internal control minimizes the risk of fraudulent personnel taking goods from store without being recorder in the system. The test of control to e performed is to check for competency and skills of the trade receivable clerk since all the responsibilities of entering the data into the trade receivable account is bestowed on the clerk 2). Internal control Weakness in sales and trade receivable that must be brought to attention of CTL management 1) Receivables Receipt from debtors is opened first in the mail room before being forwarded to the receivable department. This is a weakness of the internal control system since the mail room may perform fraud on the receipts. The management of CTL should ensure that debtors receipt are directly addressed to the accounts department without being tempered since receipt entails cash and is susceptible to fraud. 2) Sales The weakness in sales is that, sales journal is compiled monthly which pose threat of manipulating with the sales journal before the end month where the entire sales journal will be processed by the system once. The receivable clerk is the sole personnel who then post the journal to the general ledger. There should be a segregation of duties as well as daily or weekly sales journal should be generated in order to minimize chance of fraud occurring. Question three MO sales account A) Key assertion at risk with respect to timing of delivery stock sales The assertion of ownership is at risk since it will be hard to ascertain goods in store that belongs to the company and those that need to be returned as per the credit note hence perpetration of fraud more likely is going to be executed by fraudulent personnel[KHS06]. Also timing of recognition of goods is long and hence making conclusion on the ownership of the goods is hard. This therefore poses a risk to this type of assertion. b). Assertion at risk in relation to credit notes. Assertion of existence of credit note will be at risk since there is too much credit notes that was processed in the first two weeks of January and therefore some credit notes that are already processed will be lost or fraudulently perpetrated by individual in the organization and their existence of credit note will not be seen. This is risky to the business and therefore the management of MO should ensure that there is an effective internal control system in this department in order to guarantee for safe and credit notes before they are dispatched to the relevant clients. 2) Relevant substantive tests of detail to substantiate the existence of trade receivables balance at year end Issuing debtor’s circularization In checking for accuracy of debtors balance, I will issue debtors circularization to specific debtors with high value of doubtful debt or account that had a lump sum settlement of debt[Lar11]. This circularization will aid in confirming the amount of closing balance as well as the date to which last settlement is made, debtor’s circularization therefore will be used in making comparison with the company’s debtors analysis and where irregularities is realized, Clear explanation Should be provided by the management otherwise the irregularities in the debtors balance will be included in auditor’s report. Audit trail review This is an in-depth audit investigation of debtor’s balances in order to check for any irregularities. In ascertaining for debtors consistently, I will be check for details of each and every debt settlement by confirming on the date in which the settlement was made in comparison with the bank stamen for consistency. Also debtor’s circularization will further substantiate the legality of debtors balance. Checking on the closing balance of debtors account and performing the cut-off test is relevant since, this procedure reveals fraud. After performing all this test of details on the debtors, It is apparent that either fraud or consistent of debtors balance will b observed. 3a) Impact of the timing of the recognition of the consignment sales and credit notes issued in January on the inventory account balance at year end Timing of recognition of the consignment sales as well as the credit note issued early January will lead to understatement of closing inventory since, not all goods will be accounted for in the inventory account and also, the credit notes issued in January are accounted for the income statement but goods in store have not yet been shipped back to the client and thus this goods in store will create while performing stock take[Mic12]. The stores department might which erroneously or intentionally records the goods under credit note as part of the company’s product and therefore the general effect of stock overstatement will lead to overstatement of the net profit to the company. Delay in stock consignment as well as recording will also lead to inventory understatement and therefore inventory should be properly accounted for in order to avoid overstatement or understatement of the company’s net profit. 3b) Key assertion at risk A. Major assertion at risk with respect to Inventory balance Valuation as an assertion of management on inventories will be at risk since under statement or overstatement of inventories will not give a true and fair value of inventories at the year end. Consequently, valuation of inventories will not be relied upon for making a decision on the value of the inventories at the end of the year hence, Measure should be taken in order to ensure there is proper documentation account of inventories in order to reduce pile of credit note as well providing and effective consignment of inventories so as to guarantee assertion of management on inventories since, an auditor is required to provide an audit report that is free and fair and in conformity with Auditing and Accounting standards B) Major assertion at risk with respect to timing of delivery stock sales The assertion of ownership is at risk since it will be hard to ascertain goods in store that belongs to the company and those that need to be returned as per the credit note hence perpetration of fraud more likely is going to be executed by fraudulent personnel[GPu08]. Also timing of recognition of goods is long and hence making conclusion on the ownership of the goods is hard. This therefore poses a risk to this type of assertion. Assertion of existence of credit note will be at risk since there is too much credit notes that was processed in the first two weeks of January and therefore some credit notes that are already processed will be lost or fraudulently perpetrated by individual in the organization and their existence of credit note will not be seen. This is risky to the business and therefore the management of MO should ensure that there is an effective internal control system in this department in order to guarantee for safe and credit notes before they are dispatched to the relevant clients. Appendix Question one Trend statement Ratio Analysis Profitability ratio Gross profit margin= {gross profit/net sales} 2013 2012 2011 Gross profit (6634/20,888)= 0.32 (7583/25,278)= 0.3 (6937/27,814)=0.25 Return on assets= {Net income/total assets} 2013 2012 2011 Return on assets 1521/44,653)=0.034 3587/38,916)=0.092 3477/31,999)= 0.1 Net gearing = [net debt/equity} 2013 2012 2011 Net gearing 23510/21,143)=1.1 19644/19,272)=1.02 16314/15,685)= 1.04 Liquidity ratio Current ratio= {current asset/current liability} 2013 2012 2011 Current ratio 13253/7350=1.8 13116/8500=1.54 12099/7310=1.7 Activity ratio Degree of operating leverage= {%change in net operating income/% change in sales] 2013 2012 2011 Degree of operating leverage 1521/-4390)=-35% 3587/-2536*100%=141% - Assets turnover= {net sales/total assets} 2013 2012 2011 Assets turnover 20888/44,653)=0.47 25278/38,916=0.65 27,814/31,999)=0.87 Reference list Wil11: , (Wiley 2011), KHS06: , (Pickett 2006), Lar11: , (Larry Rittenberg 2011), Mic12: , (Knapp 2012), GPu08: , (G. Puttick 2008), Read More