Accounting a Business Perspective - Case Study Example

AUDIT A. RE: AUDITING METHOD FOR THIS YEAR Dear Mr. Marcus: Greetings! I am writing to you in response to the letter that you have given to Ms Tiger. In the correspondence, you have raised some doubts and reservations regarding the viability and effectiveness of the ‘risk approached’ as a possible method that maybe utilised for the company’s auditing for this year. I am happy that you have raised your concerns in such a way that we can iron out some points that need further clarification at the earliest possible time. In our meeting, I have informed you that we will be employing risk-approached for this year’s-financial audit. I have made such a suggestion based on the following points: First, I would like for us to come up with a financial statement with, if possible, nil misstatements As such, will be reflective of the company’s authentic financial status. This particular aim is of significant importance for the reason that we would want to arrive and formulate the suitable and appropriate audit opinion based on a financial statement that is actual and exact. Further more, with this particular approached we will not only be able to detect material misstatements in the previous financial statement. But, it will also show to us how some factors like adequacy of internal controls, the nature of transactions that company utilises, how the company monitors and oversees the production, how responsive is the management in addressing issues, how the company responds to human resources and human relations concerns, the possibility of senior management oversight and similar concerns within the company itself may contribute to risk and to financial statement that is materially misstated. And as a rule of the thumb in the business environment, a materially misstated financial statement may lead to an inappropriate audit opinion. And an inappropriate audit opinion may in effect lead to estimations that are detrimental to the company’s growth, profit, and solvency. Second, the market of the company is highly competitive and volatile. As such is the market environment of the company, risk-approached will help us center on divisions and facets of the company that are more susceptible to risks and problems like sales, auditing, and personnel hiring. This specific strategy in auditing will allow us to focus and zero-in on the more ‘problematic’ departments and divisions of the company while maintaining the supposition that good policies are in placed and are being observed. At the same time, this style of auditing will present to us the conditions that allow the less problematic departments to function in a manner that is aligned to the company’s goals and objectives. Thus, allowing room for the possibility of coming up with a more befitting method and technique in policy creation and structural analysis and evaluation that will highlight not only personnel efficiency in the performance of job but will also manifest the integrity and honesty of the workers as they embark on their work. These gains in using risk-approached are of important weight since it enable us to deal with the facet of the organisational structure that ensures and protects the assets of the company. Third, under this particular style of auditing, we will be able to resolve in the earliest possible time the impending problem regarding the company’s large amount of receivables whose payment scheme fall with in the danger periods of 31 days to 91 and over days. I have called it as danger period because it is a given fact that the longer the customer takes to pay the outstanding balance that he or she has incurred, the higher is the chance or the probability that he or she will not pay the debt. Furthermore, it is a known policy that transactions of sales are only completed if and only if when the exchange between the buyer and the seller is completed in itself. In our case, we have already delivered our products to the customer and as such have fulfilled our part of the bargain. While, on the other hand, we are still waiting for the buyer to fulfill its part which is payment of the goods. And being such, we still cannot claim, as of the moment, with certainty that indeed we have an increase in sales. Lastly, just like any the traditional manner of handling audit, the risk approached intends to give its client an accurate picture of the profitability and solvency of the company. And that foremost in my mind is on how we can reconcile the probability of material misstatements in last years financial statement with the current financial information. It is not to put into doubt the work of last years auditor but it is to protect the current data collected which are deemed necessary in making the financial statement for this year and in coming up with audit opinions for next year. In the end, what really matters is that for our company to be able to give you and the company that you represent an honest, accurate, exact financial statement that are to be perceived and deemed as reliable information needed by your managers in making informed and educated decisions regarding the distribution of the scarce resources. And at the same, reduce in high percentage any possible uncertainties that the company may encounter in the future. We do not want to grope in the darkness of the future but what we want is a light that may guide our way as we move towards the future for the achievement and attainment of our goal. I hope that with letter I was able to remove your doubts and reservations regarding the audit methodology that we are going to use. And please be rest assured that the services that we intend to provide you is something that will improve your management, your company. Respectfully yours, ON RISKS B. i As business organisations and companies are considered, appreciated, and seen as entities separate and distinct from the personalities of its owner or owners, theories have been created in order to better understand the intricacies and dynamics of organisational structures and frameworks as it respond to both internal and external factors and conditions that influence and affect it operation. In lieu with this, one of the most basic yet fundamental and integral tool that is being used in order to prepare organisations and companies to problems and concerns that it may encounter as it move towards the achievement of its goal is - auditing. In this particular paper, we will try to apply knowledge that we have gained in auditing via analysis of the company Sunshine Limited. Sunshine Limited is a company that is involved in the manufacture of toys. The general risks that are technically involved in the sphere of its market, it being “highly competitive and volatile,” are first, fast phase change in the demand on the kinds of toys that are actually purchased by its customers. Second, an increase in the demand for toys is basically seasonal. And being such how can the company maintain the customers’ interests in purchasing their product even if it is not during the peak season for toys. Third, factors like devaluation and increase interests rates have a strong impact and influence on the cash inflows of the company. Fourth, marketing strategy, which is extremely necessary, if the company wants to gain some advantage in the market competition. And this fact will definitely add to the company expenses. Fifth possible price increase in the raw materials being used for production. Sixth, depreciation of assets. Seventh, increase of foreign exchange currency rate. Lastly, the plausibility of workers demanding an increase in salary or a greater benefit or more subsidy. These general risks that are technically a combination of internal and external factors are concerns that the company has to face and address as it embarks in the competitive market of toys. B. ii But as we delve into specific concerns, one of the most important facets that should be given primordial importance is the accounting-auditing department since all factors in the company’s production and managerial decisions are guided by the financial statements and information made by this particular department. Since, “a reliable information is necessary before decision makers can make a sound decision involving the allocation of scarce resources…eliminating the need for a crystal ball to estimate the future.” (Hermannson, Edwards & Mahir 1998, p 2) Beings such, let us look over some major points that are perceived to be high-risk in lieu of the company. First is the problem with sales and trade debtors. Just like any other companies, a profit and non-profit -driven company seeks to ensure that there is a proper recording of all the sales invoices. Sales invoices are the documentation of all sales transactions that are being undertaken by the responsible departments of the company. As such, it is mandatory that there is a proper, accurate and authentic recording of this document for sales means profit. As such, the problem with sales documentation is how can we guarantee that there will be no changes made in the in voices. Technically, this is a problem of trusting the right person or using the right technology that will be doing this delicate job. When it comes to trade debtors, the major problem lies on the collection of the receivables. How can we be really certain that they will actually pay? As in the case of Sunshine Limited, noticeable in their debtor balances is the larger amount of receivables from debtors that intends to pay their balance in period between thirty-one days to ninety-one and over days that amounts to £ 2850 compared with those debtors that intends to pay their balance on a period of 0 –30 days. This scenario for Sunshine Ltd. is a little bit alarming since “the longer a company has to wait for the payment from a customer, the more likely the customer is to not pay at all.” (Hermanson, Edwards & Maher 1998, p. 214) and we know that the moment that these customers will not pay Sunshine Limited will be in trouble for it is lost in earnings. In the same manner, the problem about the care and proper inventory valuation of stocks and work in process is always in the loom. In fact, this is one of the main concerns in auditing for the reason that “a merchandising company can prepare accurate income statements, statements of retained earnings, and balance sheets only if its inventory is correctly valued.” (Hermanson, Edwards & Maher 1998, p. 248) As such, the demand for accuracy and nil error in the inventory of stocks and work in progress is mandatory. Likewise, one area of concern that we need to look at is the internal control structure. This is basically the framework that supports and guides the company’s internal operations. There is an important need in the accuracy of the records that are pertinent to this area for the reason that it is perceived as a viable factor in the protection of the assets. Since, it minimises waste or even help in achieving nil waste and helps in the attainment of increase efficiency among the personnel. As I see it, the problem in accounting auditing boils down to the question of trust. C. ON PLANNING For the forth coming audit of the financial statement, I think the audit risk can be set to 1%. And this is arrived at using the formula AR= IR*CR*DR. In both the inherent risk and the control risk, after going over the given data such as the problem regarding last year’s audit wherein a slight problem has been encountered with the auditing company, the nature of the business and its market being “highly volatile and competitive.” Plus the fact that they have mentioned that they have done separate small transactions with other businesses and the tenure of the audit company which is only one year. Considering all these factors, both IR and CR are given the value of 75%. On the other DR is will be given 2% because the auditor will be intending to do an extensive and comprehensive study of the organization to be able to come up with a more factual data for the financial statement. AR= IR*CR*DR X= 75%*75%*2% X = .01125 X = 1% D. ON AUDIT PROGRAMMES In the face of risks and concerns that we are facing in the aspects of sales and trade debtors, stock and work in progress and internal control structure, it is but necessary that we come up with some audit programmes that will address the risks that are raised. In terms of the records of sales, what is important is to come up with mechanisms that will secure the “ integrity of the audit data and be checkable by all interested parties; this way mistakes or wrongdoing are likely detected, allowing those in charge to be held to account.” (Baldwin & Shiu 2005, p. 263) And this can be done by applying some of the major developments in the field of sciences as laid down in the article of Bose and Frew (2005), wherein they stipulated that by using some of the methodology of scientists for data retrieval, businesses will be able to come up with the data necessary for the analysis of the market and of what the customers prefer. Furthermore, developments in technology have paved the way for secure hardware that “creates a virtual trust domain” (Baldwin & Shiu 2005, p275) thereby allowing those who may manipulate the data to be responsible for their wrongful actions while at the same time the integrity and accuracy of the data is maintained and protected. Likewise, when it comes to dealing with trade debtors, the appropriate means of securing their payment is by consistent and persistent manner of reminding them of their obligations. This may be done not by harassing them or by being disrespectful but by employing some means and ways wherein debtors may even be encouraged to pay in an earlier scheme. One of the ways that may be applied in order to lessen the problem is by offering sales discount to customers who will be able to pay on an earlier scheme. Another is by “putting the account on hold.” (7 Credit Pros Reveal 2006) so that the customer will not be able to avail of new products or further deliveries. In addition, it is important that the persons responsible for the account should always keep in contact with those accounts, which have, outstanding balances. This may be done either by telephone or by letter. Nevertheless, what is important regardless of the method employed in dealing with trade debtors, is that there is a constant communication between the company and the customer. While for stocks and work in progress, what is important is that pilferage, theft, and wastes of raw materials are avoided. And this I believe can be avoided by setting up security measures like video cameras in the production area, by using computer hard wares or programs that are difficult to manipulate and over write, by coming up with policies that allows employee to achieve personal growth in the company, by decentralising management and by recognising the importance of the development of a harmonious relationship between the workers and the management towards the achievement of the company’s goals and objectives. Lastly, when it comes to internal control structure, it does not only entails change in the style of management from autocratic to democratic, from hierarchical decision-making policy to recognition of group effort, team work. But it also recognises the truism, that the moment the workers see themselves as an integral part of the company and not just ‘robots’ that are utilised for profit, they themselves will learn to love and embrace the vision of the company as their own vision. The workers of Toyota (Womack, Jones, & Roos 1991) have experienced this particular fact as the management adopted lean management and move away from fordism. Being such, the manner with which the problem of trust that permeates almost all facets of accounting and auditing can be resolved via by information and communication, employment and utilisation of modern technology and a shift in management style from one–man decision to group work, team effort. E. ON COMPUTERS Audit software may be utilised in all aspect of auditing. Starting during the creation of the account, continuing while the account is still active and will only cease functioning the moment that is closed This is for the reason that audit programmes such as Microsoft excel allows us an easier access to data which will enable us in making an informed and educated decision regarding the maintenance of business relationship with our customers/ clients. Being such, the first time that the customer made the first purchased of the product, it should be automatically entered into the computer system. For it will allow us an easier access, tracking and data retrieval the moment it will be needed. Moreover, only trusted and reliable persons will logged all the transactions made by the customers in their respective account. Thus, it will give the company the chance and the control of pin pointing persons responsible in case some errors and discrepancies in the records occur. In this way, the company will be able to see and objectively assess the ability and capacity of the customer to pay and the quantity of his/her orders plus the frequency. This is claimed on the basis that the files that we have created for the customers allows us to view pertinent and necessary data needed if we intend to pursue a business relationship with the customer. Moreover, the presence of audit software in itself may act as deterrent for people that may wish or intend to do some pilferage in the company since the accuracy and security that these programmes have are more or less breach proof. Thereby, empowering the company that uses it. In the end, what really is of vast importance is the achievement of all the goals, objectives and aims of people involved in the company. REFERENCES: Baldwin, A. & Shiu, S. 2005, ‘Enabling Shared Audit Data,’ International Journal of Information Security, 4, pp 263-276. Bose, R. & Frew, J. 2005, ‘ Linear Retrieval for Scientific Data processing: A Survey,’ ACM Computing Survey, Vol 37, No 1, pp 1-28. Hermansonn, R. H., Edwards, J. D. & Maher, M. 1997, Accounting: A Business Perspective 7th Edition, Irwin McGraw Hill, Boston. Womack,J. P., Jones, D., & Roos, D. 1991, The Machine that Changed the World: How Japan’s Secret Weapon in the Global Auto Wars will Revolutionize Western Industry, Harper Perennial, New York. ‘7 Credit Pros Reveal Internal strategies to Rein in Unauthorized Deductions,’ 2006, Managing Credit, Receivables & Collections, Issue 06-11, pp 1, 11-12. Read More