Auditing - Internal Controls for Small Business - Essay Example

(ii) In this case, there is a breach of duty, which can be seen when Wendy performs the duty of a company secretary.  As an engagement partner of the firm, Wendy has the responsibility of decision-making on significant auditing and accounting functions. The task of an engagement partner is complex and performing the company’s secretarial duties for even a little while will cause distractions in her duties and she would not be able to fulfill these duties effectively. “Generally, employees should not perform duties outside their job description” (Business Management: Internal Controls for Small Business, 2008, pg.23). It is evident that Wendy is responsible for performing the accounting duties only. So in order to solve this issue, the auditor must provide suggestions to the top-level management for the appointment of a new employee who would carry out the duties of the company secretary.

2 (i) Audit risk is the risk that an auditor faces because of problems created due to lack of rectification in financial records which are materially misstated. “Before issuing an opinion on the financial report, the auditor needs to reduce audit risk to an acceptable level to ensure the opinion is reliable” (Christopher, 2012, slide. 15). Audit risk comprises of two components: detection risk and risks of material misstatement. “Detection risk” (Christopher, 2012, slide. 17) refers to the risk that arises in the methods adopted by the auditor to decrease audit risk. Whereas, material misstatement risk refers to the risk that occurs when financial records are materially misstated prior to the audit. It involves “inherent and controls risk” (Christopher, 2012, slide. 17). In the first case, the company faces cost-cutting and margin falling issues. “Cost-cutting and pricing pressures are key risks to the business agenda” (Turn Risk and Opportunities into results 2013 The CFO Perspective- at a Glance, n.d, para. 3). Stress to cutting the costs comes not only from internal forces that function to protect margins but also from outside sources. The company pursues cost-cutting plans and they expect rising competence from their partners and suppliers. In this situation, the company faces an inherent risk in doing the business as nobody is aware of the occurrence of this risk.

 (ii)  In the second situation, Getaway Pty Ltd faces the audit risk of not carrying out the conservative business strategies effectively. The company faces inherent risk while reducing audit risk to a certain level. “The auditor will spend quite a bit of time at the early planning stages obtaining information to assess these risks so that “the engagement is performed in an effective manner” (Burke, n.d, pg. 1). The managers can make a decision, regarding business risks that occur due to poor information management, by determining if the time that they themselves and their assistants spend in gathering data is already available or not. Another method of measuring these risks is by observing performance data regularly and checking if reports are late or missing.

3. (a)    For the successful completion of the auditing, there is a need to review all areas of operating effectively. In the first scenario, the audit assistant has checked all the inventory of the company and she did not find any malpractices. Therefore, it can be concluded that the data she collected will be appropriate for auditing the operations of the business.

(b) In the second situation, the auditor cannot reach a final judgment because there is no evidence whether the sales clerk has checked the invoices or not due to the absence of a signature. While carrying out the audit work, the auditor needs suitable proof and any misconduct will affect the whole process.

(c) In the third scenario, as there is no sale of the product 75L, the auditor could come to the judgment that the product was a failure in the market and record only that particular sales in the financial report.