Principles of Auditing - Case Study Example

CASE 1: RED MINERALS The case of Red Minerals is in line with the international standards of auditing number 400. (ISA 400). The ISA is known as internal control systems. It determines the strength of the systems that are put in place by companies in a bid to eliminate fraudulent activities that can be present in the undertaking of the routine activities of the business. (UNITED STATES.1994.) They are determined by how the roles, duties and obligations that are accorded to all the members of staff of the company. They include also such things as supervision levels and the division of the different roles and mandate of the members of the company. A company with a strong internal control system is able to reduce and eliminate the cases of frauds and thefts in its premises. Following the analysis of the information as pertains to Red Minerals, the internal controls of the company are very weak. The indicators of this are very many. The first indicator is the contents of the documents of the company. They indicate that there were members of the company that were stealing and later reselling the alcohol from the company. The second indicator of this is the charging of the members of staff of the company with theft and frauds. The third issue that raises questions over the state of the company is the resigning of the Chief operations officer of the company in the year following the charging of the staff members. (UNITED STATES.1994.) Following the analysis of the trends of the company, a lot needs to be done in terms of the control. According to ISA 400, Internal Control Systems, an organization is defined by the strength of its internal controls, which it has put in place. This is because they determine how the business is able to carry out its everyday business in a manner that is straightforward and free from any fraudulent activities. Through this, the cases of theft and frauds in organizations with strong internal controls are completely eliminated. In respect to this, there needs to be put in place control measures that will help reduce and if possible eliminate the cases of theft and frauds in the company. This can be with theft proof measures. The first measure that can be put in place is the control on the staff access to the assets of the company and the inventories. The inventories of the company should be well recorded and traced. With this, the people who are responsible for the undertaking of changes and movement of the inventories should be the authorized personnel only. With this, the cases of theft will reduce. This is because it creates a sense of independence and easier supervision of the properties of the company. The people who are responsible for illegal activities should in this case be easy to monitor. The second control measure that can be put in place is the installation of monitoring systems. They include CCTV cameras around the workplace. They monitor the undertakings of the staff. They also aid in better management. This is through the constant check on the daily activities of the staff. CASE 2: SAMPLE SIZE FOR CONTROL TESTING This case falls under ISA 530. This is on Audit Sampling. The main reason for the development standard was to aid people in the making of wise and fair judgment when it comes to the determination of the samples that they intend to use. Some of the main features of the samples as defined by the ISA include that the sample should be representative of the whole amount of the population. It should also not be predictable. With this, an accurate result will be obtained from the analysis of the sample. (BAGSHAW, 2014) A company that has strong internal controls provides a strong basis for sampling. This is unlike one with weak internal controls. This is because a weak one does not give insight as to the accurateness of the records that exist. It is also more risky and less accurate to deal with samples from a company that has weak internal controls in place. According to her analysis of the situation at hand, Alice is able to determine that the controls that have been placed in the accounts payable are operating in an efficient manner. This allows her to take samples from the whole population. Reduced control variations help in the increasing of the accurateness of the sample that is taken to represent the total population. This increases the confidence of the auditor in the determinations of the accurateness of the data that she is dealing with and which in this case is the accounts payable. The employment of the additional staff member to deal with the accounts payable of the company helps in the improvement of the efficiency at the department. This is the main reason that she recommends that a lower rate of deviation would be acceptable in the current year. This is a recommendation that is given to a company that is deemed to be undertaking its respective mandate in a manner that is considered as being efficient for the good of the company. (BAGSHAW, 2014) She further recommends that substantive tests of the accounts payable should be less extensive as compared to the past years. This is a note of the confidence levels that she has with the records of the company. Through this, it will be possible to take samples from the data of the company with high levels of confidence as to the accurateness of the records. Substantive tests are defined under ISA 330, which deals with the auditors procedures in response to the related risks. They are tests as to the accurateness, completeness, existence, rights and obligations and the general nature of and the presentation of the working papers of a given company. They are deeper in the areas that the internal controls are weak. In this case, it is recommended that they should be less extensive. This means that the level of confidence as to the condition of the books of account is high, it will hence be easy and more correct to take samples of the whole population. Through the reduction in the intensity of the substantive tests that are undertaken on the books of account of the company, then, this is an indicator of the near accurate nature of the records of the company. CASE 3: PREVENT CONTROLS The International Standard on Auditing (ISA) 265 defines this case. This states that, communicating deficiencies in the internal controls to those charged with governance and management. This intends on putting in place the appropriate measures to deal with such deficiencies and misdoings that are undertaken in the working of the normal routine of the company. According to the case in hand, the sales team go ahead to direct the sales of the company to new and existing customers without the accessing of their credit worthiness. This has the effect of making sales to the customers, which is beyond their credit worthiness. This has the effect of raising the possibility of default to making the sales. There should be controls that should be put in place to deal with a scenario like this. This is where the sales representatives should be under strict instructions to make sales only to the people whose credit worthiness has been verified. This would be effective for the company due to the fact that only the people whose credit worthiness is equivalent to the sales that are intended for them. This has the effect of reducing the cases of default and delayed payment of the credit sales by the customers. Through this, the bad debts of the company are reduced and controlled. According to this scenario, the implementation of the prevent controls results to the lack of sales to the customers beyond their credit limit. This means that the standard and controls that had been put in place was successful on the first aspect. This is translates to reduced possibility of bad debts by the company. The company will hence be able to make maximum returns from the sales that it makes. This scenario can also mean that all the sales made will have an increased likelihood of being paid back. This is because they fall into the credit range of the buyers. The returns of the business because of this will be increased due to the reduced likelihood of making bad debts from the sales that are made. Profit maximization will be the characteristic of Alabama Industries due to this. (QUEENSLAND AUDIT OFFICE, 1990) According to the analysis of the trends of the company, there has been sales that are made to a large group of regular customers. All standards that are put in place have a likelihood of some small deviation. This materiality of the cases that divert in which case is two is very small. They can hence not result to the nullifying of the whole prevent control. They are an indicator that the prevent control is near perfect but needs some improvement so as to work efficiently and for the best results to be obtained from it. Before concluding that the prevent control has failed, there should be material facts and evidence to prove that the sales have been made to people who do not qualify for the amounts that they have been given. There should hence be adequate ground to result to the giving of such a recommendation or conclusion. (HAYES, 2014) CASE 4: SELECTING DEBTORS FOR SUBSTANTIVE TESTING In this case, there are issues that exist as to the settlement of the accounts of the amounts owed by the debtors. In order to determine the best placed people to analyze their accounts, it is best to determine their proportion of the total debtors amount. The selection process should be carried out based on some aspects. The first process that should be considered in the determination of the selection of the debtors to be tested is the general materiality of the debtors. This can be arrived at based on the total proportion that they hold in the total number of the trade debtors of the company. This should also be on the materiality of the amount that they hold and that they owe the company. Those with large amounts owed should be the most tested as compared to those with less amounts owed to the company. In this case, the travel agents would be the people who should be subjected to further tests. This is because they represent almost three quarters equivalent to 75 percent of the trade debtors. According to the details that are provided in the case, they are the most prone to delays. It has been stated that they settle their accounts within a period of between 60 to 90 days. This is as compared to the allowable 30 days. With this, they should be subjected to more testing to arrive at the best results as to why this is eminent. They cannot be stopped at once because they make up the largest proportion of the people who make bookings. By a dealing with them in a wrong manner, the levels of the returns that are made by the company will dwindle by great amounts. They should hence be addressed in an appropriate manner. The development of better standards for the development of the controls that are put in place by the company is effective in the control of the amounts of the trade debtors that exist in the company. It is also effective in the development of policies that will aid in better management of the debtors and their amounts. This will be for the general good of the company in question. (HAYES, 2014) In this case, the testing of the debtors would be carried out at the end of the financial year. This is after the occurrence of the events that make them to be constituted as debtors of the company. The testing will allow for the formulation of a better means or standards that will be efficient in the control of the debtors and the repayment of the amounts that they owe. References BAGSHAW, K., & SELWOOD, J.2014. Core Auditing Standards for Practitioners. http://site.ebrary.com/id/10853187. HAYES, R. S., GORTEMAKER, J. C. A., & WALLAGE, P.2014, Principles of auditing: an introduction to international standards on auditing, Harlow, England, Prentice Hall, Financial Times. QUEENSLAND AUDIT OFFICE.1990. Auditing standards. QUEENSLAND, & QUEENSLAND AUDIT OFFICE. 2007. Auditing standards. Brisbane, Qld, Queensland Audit Office. UNITED STATES.1994. Government auditing standards, Washington, D.C., United States General Accounting Office. Read More