Auditing: Question & Answers - Assignment Example

Auditing: Question & Answers Assignment Student’s Name Institution Question 1(a): Factors that Would Affect Preliminary Assessment of Inherent and Control Risk at Queen Island Dairy Some of the factors that would affect the firm’s preliminary assessment of inherent risk include; first, it should be understood that cheese is a perishable commodity, which indicates that there is a higher risk of wastage hence a likelihood of negatively affecting the inventories of the firm altogether (Inherent Limitations, 2004). Second, in regards to the sales resulting from tourism activities at both the shop and café, there is a higher risk that would emanate from fluctuating level of demands for the product at hand. Third, it is established that the business engages in intense export sales that postulate complicated foreign exchange activities, which poses a greater incorrect pricing risk given that the transactions are complicated in nature. Subsequently, the process of engaging in foreign exchange transactions by the firm might pose a challenge in regards to risk assessment strategies employed at any given time (Inherent Limitations, 2004). Fourth, there is a likelihood of competing for incentives that emanates from export sales as well as café consulting business activities. Fifth, Queen Island Diary cheese operations require highly skilled personnel that are able to engage in the skilled processing activities of the firm altogether. Sixth, the fact that the firm survival depends on intensive exports poses a vulnerability risk to this fundamental revenue-generating activity. On the other hand, factors that would affect the preliminary assessment of control risk for the business include; first, there is imminent risk relating to commodity spoilage that would likely affect the immediate value of inventories. Cheese inventories are sensitive to manufacturing and handling process hence it is important that the level of spoilage is reduced to a minimum amount in order to avoid possible future losses due to insufficient inventories of poor inventories for that matter (Inherent Limitations, 2004). Second, there are poor controls of sales mechanism that are affected by Jim and his immediate brother Bob as well as other staff members within the facility. For instance, it is ascertained that Jim Bannock is poor at completing detailed paperwork, engages in poor export deals documentation and also, he incorrectly makes adjustments to debtor accounts using credit notes. Third, it is ascertained that the quality control of the business is highly positioned however; the degree of effectiveness in regards to quality control over cheese product operations is poorly managed hence negatively affecting the level of sales attributed to the product at hand (Inherent Limitations, 2004). This is basically attributed to the fact that spoilage levels have not been minimized at all in the course of product handling. Fourth, it is established that there is a lack of effective communication between Jim and Bob in matters related to applying different processes to different customers. This lack of communication between the two brothers and the entire staff at large is likely to affect the management practices of the entire company as a whole (Inherent Limitations, 2004). Question 1(b) It is important to realize that the lowly placed assessment level of control risk technique is considered to be appropriate whenever it is ascertained that the level of control risk is postulated as being low (Mongelluzzo, 2001). On the other hand, predominantly substantive technique is considered to be vehemently appropriate and effective for that matter whenever the level of control of risk is postulated as being higher. However, it is also considered appropriate and highly effective not to entirely rely on control mechanisms altogether. For instance, such aspects as the lack of communication mechanism put in place by Jim and his brother as well as other staff members, Jim’s natural flair of competing incentives as well as the poor regulation of his immediate level of actions postulates that control risks in these fundamental areas of operations would be positioned highly. This is mainly because the legitimacy of the sales activities that relates to both contracts and sales amounts are at a higher risk (Mongelluzzo, 2001). Jim’s immediate actions to adjust debtors’ accounts are not controlled in a manner that is required. Significantly, in regards to sales that are affected to clients are not posted in their respective correct states into the business books of accounts. The level of control risk for both sales and business debtors is considered to be too high, which postulates that the predominantly substantive technique would have to be applied in the aforementioned areas of concern (Mongelluzzo, 2001). The level of control that is made over the production process of the business is considered to be positive. Subsequently, the level of inventory quality is maintained at a high position at all times. Notwithstanding, the inherent risk, which is attributed to inventory wastage, as a result of spoilage, is depicted as being high (Inherent Limitations, 2004). This translates to the assumption that the lower assessed level of control risk could be applied for inventory. Significantly, the activities that are involved with testing of testing of inventories and thereafter securing appropriate outcomes would translate to a less substantive testing being required altogether within the business at hand. Question 2(a): Key Assertions that would be affected First, the firm’s immediate maintenance accounts on major airframe and engine maintenance would be affected due to exaggerated capitalization processes hence accumulation of the costs being witnessed on a single financial year rather than being apportioned over the exact usage years. Second, the fact that depreciation is conducted in a shorter period visa vie the scheduled usage period means that the book values of the airframe and engines would be diminished within a shorter timeframe than required under the different AASB requirements (Haun,1955). This means that the assets accounts would reflect minimal values due to massive single-phased depreciation treatment. Third, engine and aircraft costs that include major maintenance costs cannot be similar to last year’s costs meaning that the firm has overlooked time value for money concept. This basically means that the costs of the equipments are understated within the current financial period. Fourth, the fact that depreciation costs have decreased by 7 per cent does not postulate a true reflection of the book values of both engine and aircraft airframes. This means that the accounts for both of these assets would be overstated within the current financial period due to poor recording of depreciation costs. It is important to realize that depreciation costs should be apportioned on a straight-line basis where each financial period is assigned a proportionate and equal depreciation cost for the entire useful life of the asset at hand (Haun, 1955). Thus, the decision to shorten depreciation costs and thereafter, decreasing it by 7 per cent means that the firm is not adhering the consistency principle of accounting that requires it to follow a single process of accounting for all financial years at hand. Question 2(b): Evidence in the Case The fact that the firm employs different depreciation techniques for different consecutive accounting periods depicts that there is a lack of consistency in depreciation policy applications as required within AASB. Subsequently, the fact that the firm maintains a financial data depicting aircraft and engine costs that includes major maintenance costs is suspicious and wrong. Maintenance costs are supposed to be reflected with the expenses section of the income statement where they are deduced from gross profits. Also, it is suspicious that the costs attributed to both aircraft and engine costs are similar as last year’s costs. This means that the assets have not undergone any depreciation at all (Shing-Han, Shi-Ming & Lin, 2007). Question 3(a): Potential Problems that could Occur in Powersys’ Maintenance and Improvements Programs First, there is a likelihood that there might be insufficient supplies of the necessary tools and equipment being held at the company’s stores within any given moment in time. This might possibly result to poor and late response to emergency situations involving fires. Second, in case there is poor maintenance, such company’s equipment as vehicles, vans and cherry pickers might cease to function properly in case of emergency situations. Third, there is likelihood that there might be problems attributed to communication systems, which might translate to stoppage of emergency alerts reaching the numerous company’s response teams in a timely fashion. This would prevent efficient operations since response teams rely heavily on positive and timely communication before they can respond otherwise they can act on false alarm and thereby waste company’s resources (Gramling, O'Donnell & Vandervelde, 2010). Fourth, there is a likelihood that a problem might arise due to insufficient trained staff necessary for executing response activities at any one given moment in time. This might be attributed to mismanagement of leave or availability of poorly trained workers that cannot assist with effective response capacities. Fifth, in the event that there is storm experienced, there is a likelihood that a problem might arise due to insufficient number of trained response workers or office staff needed for purposes of coordinating and planning for effective responses. Sixth, the company’s store might be inaccessible in case of emergency situations due to misplacement of the keys or in case the person in charge of operating the place is either sick or away on leave. Seventh, a problem might arise in the event that the company holds too many office staff that is tasked with normal maintenance operations of the equipment while fewer workers are employed to deal with emergency response within given regions. This is attributed to mainly a lack of staff balancing skills on the part of the human resource department of the firm, which might translate to inefficiency of the entire operations at large (Gilbert and Engle, 2005). Eighth, problems might arise whenever the regional police are unable to contact the company in case of emergency situations due to the fact that they do not have access to the company’s immediate contact information like phone numbers and emails hence rendering the company unable to respond to the emergency situation at hand. This will likely affect the degree of effectiveness of the company in executing its emergency response mandate (Gilbert and Engle, 2005). Question 3(b): Internal Control Mechanism that Could Help Avoid the Problems First, in regards to poor balancing between the office staff and the field-based workers, the human resource department should make efforts to attain recommended staffing requirements and thereafter, make reports on the same to senior management on attainment of staffing objectives (Haun, 1955). Second, the responsibility attributed to the maintenance of the company’s communication system should be assigned to senior and well experienced personnel. Third, the firm should adopt the recommended scientific techniques of responding to emergency situations in order to avoid possible alterations to the population and climatic conditions of the areas under siege (Jerome III, 1953). References Gramling, A. A., O'Donnell, E., & Vandervelde, S. D. (2010). Audit partner evaluation of compensating controls: A focus on design effectiveness and extent of auditor testing, Auditing: A Journal of Practice & Theory, 29(2), 175-187 Gilbert, W, J and Engle, T, J. (2005). The use of control self-assessment by independent auditors, The CPA Journal Haun, R. D. (1955). Broad vs. narrow concepts of internal auditing and internal control, Accounting Review, 30(1), 114 Inherent Limitations. (2004). Primer on Internal Controls & Auditing: Crucial to Government & the Economy, 30-32. Jerome III, W. T. (1953). Internal auditing as an aid to management, Harvard Business Review, 31(2), 127-136 Keinath, A. K., & Walo, J. C. (2008). Audit committee responsibilities disclosed since Sarbanes-Oxley. CPA Journal, 78(6), 32-37 Mongelluzzo, B. (2001). No detail is too small. Joc Week, 2(49), 36 Shing-Han, L., Shi-Ming, H., & Lin, Y. G. (2007). Developing a continuous auditing assistance system based on information process models, Journal of Auditing, 48(1), 2-13 Read More