Auditing For Additional Responsibilities: Internal Control Weaknesses And Misstatements

Background and Abstract

In the given assignment on audit and assurance, four individual case studies have been given on the audit of the entity and what are risks encountered in the financials during the audit of an entity. The requisite audit procedures to be employed in such a case has also been explained in detail. In Question two of the assignment, the internal control weaknesses in the organization and how to correct and improve them has been suggested. Section B of the assignment deals with the audit opinion and Section C deals with the actions that the auditor would have taken in the different circumstances, which have been given.

Matter #	Audit Risk Component(s)	Account(s)
1 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	In the first case, the company is selling an inexpensive sandwich maker which has a very low cost heating element and is the main reason behind excessive heating of its parts due to which the complaints of the products have increased by more than 4 times from 3% of sales to 12% of sales. This affects one of the audit risk components of inherent risk as it is quite evident that low price goods will compromise on the quality (Bailey, Collins, & Abbott, 2017).	Sales account, debtors accounts, warranty expenses account, inventory account
2	In the given case, a newly graduated Roberta is being given additional responsibilities which includes handling of customer queries, creating the sales invoice in different currencies, maintaining and adjustment of stock levels and recording of sales in accounting books. This shows that there is overlapping of the functions and the non-segregation of the duties might lead to chances of material misstatement door to the failure of the control as she is not well aware about the foreign exchange translation.	Sales account, foreign exchange translation reserve, inventory account
3	In the given case, three employees of the company have been terminated on account of theft who were from different departments and stole the stock and sold it at lower prices. They made false journal entries in the books to cover up for these illicit activities. The CFO of the company believes that these were the only three and this clearly points out the detection risk in the organization as the auditor might miss out on finding the misstatement in the company despite having sufficient internal control within the organization (Kuhn & Morris, 2016).	Inventory account, sales and purchases accounts

The detection risk is one of the three elements of the audit risk and is the risk that the auditor may not identify the material misstatement during the course of the audit in spite of applying the audit procedures. There is inverse relationship between the detection risk and the substantive testing applied. Some of the factors that do affect the detection risk include the nature, timing and extent of the audit procedures, the sampling and non-sampling risks. The issues in the above matters where the auditor could have set the detection risk while planning the audit are:

Detection of the segregation of duties in the second case as to whether it might lead to accounting errors and improper accounting if different responsibilities are given to single person(Appelbaum, Kogan, & Vasarhelyi, 2018).

In the third case, if failure to detect the fraud the correct time can lead to heavy financial losses for the firm. He should have checked for the trend in inventory accounting and if those are the only set of persons who are involved in the forgery.

For each of the given cases in the case study, the weaknesses in the internal control, the types of misstatements that are likely to occur and the steps to improve the internal control in each case has been shown below:

Case Description	Weaknesses(s)	Type(s) of miss-statement(s)	Control Improvement(s)
A.	The weakness is there are chances that the quantity may be changed by the receiving department or then the accountant while recording the quantity and amount in the purchase and inventory books and then while making a payment to the vendor. Furthermore, there is no segregation of duties with regards to the recording of purchases in vendor account and the payment to the vendor account (Lessambo, 2018).	This might lead to misstatements in the form of recording wrong purchases in the books and mismanagement of the inventory. Furthermore non segregation of duties might lead to extra or less payment to the creditors or even fraud in the organization as the same assistant accountant has the authority to record the purchases in the books and he only makes the final payment.	There should be 3 copies of the purchase order, one of which should be with the production manager, one given to receiving department and one to account department. Furthermore the checking of the inventory and the recording of the vendor liability should be cross checked with the vendor invoice along with the purchase order and the company should also be employing another person for payment processing.
B.	The weakness in the internal control that is evident here is that the system is quite manual and the timesheets are handed over to IT department for input in computer system. The current system leads to wastage of lot of time and effort which can be automated and a lot of manual error which are inevitable can be avoided.	The misstatement can be in the form of the fraud whereby the IT department can change the time in the time sheet and the employee would not be able to proof the same. Furthermore, there are chances that the time maintained in system can also be manipulated later on. All this may lead to mistrust amongst the employees and an audit issue on the entire payroll process.	The solution for the same is that the process should be automated and the biometric should be introduced in the organization where the attendance and time would be automatically input in the system and no chances of manipulation would be there. This would also help in reducing the manpower cost.
C.	The major control weakness is that the bank account is opened in the name of the employee rather than the name of the business. Furthermore, the heads sales assistant is having access to all the reports and can use the bank account to settle all the expenses without any approval mechanism. She receives the mails directly regarding bank correspondences and since the cash report is under here control, there are huge chances of cash embezzlement and fraud.	The misstatement can be in the form that Leila Vaddagh may also pay the personal or other than business bills through the same account, she can also transfer and embezzle the amounts as she is the only one having control of the bank account. The cash report is also being prepared and presented by her which means that the four eye principle may not be followed (Choy, 2018).	The weakness can be corrected by ceasing the existence of the account in name of Leila Vaddagh and opening the bank account in the name of the business. Furthermore, for approving the payments, 4 eye principle should be followed and there should be a separate person who should be made accountable for generating and presenting the cash report in the finance meeting.

In the given case the auditor would be issuing the “qualified opinion” as even though the audited financial statement of the material investment entity is not available but the same is not significant enough to give a disclosure of opinion on the overall accounts. An unqualified opinion can also not be given, as it is one of the material entities and cannot be fully ignored.

The auditor would be giving a “qualified opinion” in the given case as the disclosures in the financial statements about the going concern assumption, operating losses and the working capital mismanagement has been adequately made and thus a true and fair view has been given to the investors(Knechel & Salterio, 2016).

Discussion and Analysis

In the given case, the auditor would be giving “adverse opinion” on the financial statements as the cash flow statement forms one of the major parts of the financial statements and is incomplete without it. It is also noncompliance of the Australian GAAP and the IFRS standards.

The auditor would be giving the “qualified opinion” as in the given case the accounts of ABC Pty. Ltd. has not been considered material to the financial statements of the economic entity under consideration (XYZ Ltd.). In case the same is considered material, the auditor would issue a “disclaimer of opinion”.

In the given case, the auditor would be giving an “adverse opinion” on the financial statements, as there are a number of weaknesses, which has been identified in the new inventory management system, and the same has been considered a material account for the financial statements.

The appropriate action that the auditor will be taking in the given circumstances have been mentioned below:

In the given case, the company ACCO Ltd. has entered into the contract to supply organic facial and skin treatment products to MYA, a major departmental store. This transaction is in the normal course of business and does not qualifies as material event which poses a necessity to be shown in the annual accounts ended 30^thJune, 20X8 and therefore need not be included for the given accounting year. However, the auditor should be checking the contract and check all the terms and conditions are ok and in line with the policies of the company (Bumgarner & Vasarhelyi, 2018).

Since the patent application was being given post 30^thJune, it does not qualifies to be an event to be reported in financial statements of company for the year ended 30^th June but since it would have a material impact on the company’s future performance, the auditor’s should be asking to disclose the same as “events occurring after the balance sheet date”.

In the given case, fraud has been reported by the internal auditors of the company and as per the audit and accounting standards, the same needs to be disclosed as notes to accounts in the section “events occurring after the balance sheet date”. Since this will have a material impact on the future of the company, the same needs to be investigated by the statutory auditor and steps needs to be taken to check the possibility of fraud within the audit period as well.

Since the accounts receivable is an integral part of the financial statements of the year ended 30^thJune and it is estimated that the amount from one of the customers is not likely to be received as the customer has suffered fire in premises and the business was not insured, therefore the auditors should provide for bad and doubtful debt on account of the same in the annual accounts (Axelsen, Green, & Ridley, 2017).

As an auditor of the company, he/she should not be affected by the views or forecasts of the financial planner and thus even if the share prices of the company has declined by 40% , the auditor should be giving the true and fair opinion based on the financial statements for the year ended 30^th  

References

Appelbaum, D., Kogan, A., & Vasarhelyi, M. (2018). Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics. . Journal of Accounting Literature, 40(1), 83-101.

Axelsen, M., Green, P., & Ridley, G. (2017). Explaining the information systems auditor role in the public sector financial audit. International Journal of Accounting Information Systems, 24(1), 15-31.

Bailey, C., Collins, D., & Abbott, L. (2017). The Impact of Enterprise Risk Management on the Audit Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), 25-46.

Bumgarner, N., & Vasarhelyi, M. (2018). Continuous auditing—a new view. Continuous Auditing: Theory and Application, 20(1), 7-51.

Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, 145. Retrieved from https://doi.org/10.1016/j.ecolecon.2017.08.005

Knechel, W., & Salterio, S. (2016). Auditing:Assurance and Risk (fourth ed.). New York: Routledge.

Kuhn, J., & Morris, B. (2016). IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).

Lessambo, F. (2018). Audit Risks: Identification and Procedures. Auditing, Assurance Services, and Forensics, 3(1), 183-202.