Audit planning is needed because it is strategy that is used before auditing a firm. there are factors of audit which comes into consideration such as materiality, the low and high risk and the span of an audit. Assessment of risks and materiality must be carried out by the auditor before beginning the audit. Here the auditors use the audit risk model to assess the risks and to, based on those risks, assess the level of materiality. The more they know about the business risks, the better they can assess the risk of material misstatements. Before the audit risk assessment procedures, planned audit procedures and a description of other audit procedures should be included. (Eilifsen et al, 2009, p 151-152)
The likelihood of non-compliance acts has to be measured. This concerns all kind of acts, intended or not, where the client isnâ€™t in compliance with the laws and convention. The main things to consider for the auditor are fraud and other acts which directly affects the financial statement. But the auditor also has to be attentive of acts which only have an effect on the financial statement ultimately. (Ibid) https://sites.google.com/site/auditingregulation/auditopedia-1/audit-planning (accessed 13/03/11)
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Limited companies and partnerships as well as public sector are required by law to have an auditor, but the sole traders are optional. The importance of audit process is that it benefits companies in many ways. for example, the long term benefits of audit include assurance for management and the board of directors that the accounting controls and processes used are effective. Audit gives confidence to investors, regulators and the public that the financial data and representations in the statements are, in the auditors' opinion, true and not misleading. also a true and fair view of statements increases the share prices to go up.
The audit risk model is relevant for auditing 'TuttiFruity Ltd', because this is a tool for auditors to be able to execute their plan as proposed, also it contains three components and audit risk is a function of three risks:
Inherent Risk (IR) - the risk of material misstatement, absent without any internal controls or any testing.
Control Risk (CR) - this is the risk that the clients company's internal controls will not do anything to prevent, detect or correct any possible future or current misstatement.
(IR x CR = RMM) this results in the risk of material misstatement.
Detection Risk (DR) - this is where the auditor will not identify any materiality in the statements. the risk is affected by the planning process of the audit and their objectives.
The auditor won't be able to take control of these risks which are mentioned because these are a function of, for instance the firms environment, efficiency etc. the risk that they can control is the detection risk because there they will test the statements for any material fraud.
The features of Internal Audit is to be independent of other departments, also have a separate line managers, and to report to the audit committee. their objectives is to review control systems, review the accounting and internal, examine the financial statements, review on how secure their asset is and review any climate change in the economy, the efficiency and effectiveness.
Based on the case of TruityFruity Ltd, the risks that I have mentioned is to be taken into consideration and assessed carefully because based on what I know, I realise that their firm does not have a strong internal control, but they only have one member of staff who is qualified by experience. the negativity of this is that when that one individual is off sick then there is no contingency in place, therefore there will not be any internal control for a fixed term.
3. If there were strong internal controls in the firm then it would give an advantage to external audit as it can reduce the amount of work they do by having internal audit.
The company generates revenue by supplying a national supermarket chain with its product through its distribution centre but retails its own sale locally. The sale is via a fleet of ice cream vans and they supply to local shops on a cash and carry basis. From the Case Study, the following problems are identified:
Always on Time
Marked to Standard
How is ice cream being imported?
Because this might have risk in particularly relating health issues. the goods must be checked if it's out of date or in good condition.
The approach needed for this factor is to ensure that the stock is protected at all times, security measures must be in place with contingency plan, i.e. extra refrigerator in the van.
Driver collecting cash from local shops on a cash invoice.
Cash can be stolen and not much secure as credit sale.
New control needed, i.e. a system receiving the order and the amount first before dispatching the goods. this can avoid any loss of stock if the refrigerators are down.
Each driver recording sale which updates the stock balance on the van and quantity sold.
Not all drivers might input these sales accurately and will give a negative impact on the balance. also not all drivers may not bank at the same time.
To prevent this happening a more accuracy system is needed like sales ledger account. also to ensure the safety of the stock, a camera might be ideal to be in place in the van.
Stock levels are maintained on a computerised system.
Computer can malfunction and will give a negative outcome of the business.
Therefore computer is needed as well as internal controls of running stock. i.e. FIFO, LIFO, AVCO. stock needs to be counted physically as well as computerised because these things breakdown and cause impact.
The stock that was damaged and made un-saleable.
As reported that the driver is responsible for the stock loss because the driver should've reported it straightaway. also the stock could've been written off wrongfully and sold by the drivers make money of their own.
A temperature gauge should be installed in the drivers van, also visible to the driver so that he is aware of any breakdowns of the refrigerators. Drivers with confidentiality, integrity are needed so that they practice.
The risk is that the employees assess their own timesheets, holiday, and sickness returns. also they are paid in cash every week.
The factor is that it is not accurate whether or not these records are being recorded accurately. also it is not being reported to the personnel department constantly, because the personnel department is responsible for employees rights and issues. risk is that the employees could be involved in false accounting without checks.
It is highly recommended that all employees must be paid in BAC'S. this is because of the statements showing true and fair. it is important to carry out a starters and leavers test because if I find any problems, I will discuss them with the company's management. If I detect a fraud, this will require further investigation. Therefore a stronger personnel department must be in place to periodically check the wages, sickness, holiday, hours worked of employees.
The clerk that has dealt with the processing has been in the same post for 15 years and knows all the drivers by their first names and socialise with them regularly.
Risk is that the driver must not be close to the clerk that is doing their process of payments. because this affects the objectivity as you must be independent of a firm. also being friends to them is not a good idea, work is a professional place and everyone must be treated as professionals and basic rights are met.
In order to prevent this happening, a new clerk must be hired and to act upon his professional ethics, i.e. integrity, objectivity so that all employees are treated as employees and not friends.
No drivers have been dismissed by the company.
The risk factor of this is that since the drivers assess their own timesheets and hours etc. this cannot be a true statement, because it isn't checked.
Therefore it is important to review the drivers role and see if their performance are met which is required by the firm. if not they must be dismissed.
Fixed salary, other personal information
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This is risk because if they are not properly checked then the employees might get paid too little or too much. it is important to check for the correct employee, this can be done by checking DOB,, bank details, address and photo ID.
Distributing wage around the firm to all employees is an important part, this must be improved by ensuring the employees are working according to their contract with the firm.
Based on the case study the following controls must be in order to eradicate risk. this control is used mainly by internal auditors. it is known as SOAPSPAM. these are defined as:
Segregation of duties
http://a.quizlet.com/i/spacer.gifseparate people raising a sales invoice and recording the receipt of funds
http://a.quizlet.com/i/spacer.gifgiving people a job description and ensuring they know what they should be doing
http://a.quizlet.com/i/spacer.giftransactions require an authorised signatory to be approved
http://a.quizlet.com/i/spacer.gifa locked safe to store cash before being banked
http://a.quizlet.com/i/spacer.gifa superior to review work and ensure quality and completeness
http://a.quizlet.com/i/spacer.gifappraising staff regularly to ensure performance is satisfactory
http://a.quizlet.com/i/spacer.gifArithmetic and counting
http://a.quizlet.com/i/spacer.gifa bank reconciliation that balances
http://a.quizlet.com/i/spacer.gifa hierarchy of responsibility to ensure individuals and organisations are accountable
http://quizlet.com/897336/c02-audit-internal-control-types-soapspam-flash-cards/ (accessed on 13/03/11)
Once these are in place as you can see from the audit risk involved in the case. these are the solutions for it. Risk controls are needed where there are risks. Risk can either be detected prevented, or corrected, correction of data backup. The sources of threats come from the environment that the company operates in, these sources include:
Employees values (honest)
Employees abilities (competence)
company's procedure and systems.
The company's internal audit should do tests like compliance test i.e. check new accounts and credit limits authorised, also check numerical sequence of purchase orders. also carrying out test like substantive test confirming balance with cash book and bank; and examine original invoices.
In May 2011, the turnover seems low because the breakdowns of the vans and loss of stock could be the cause. However there are no computerised or physical evidence such as invoice of new stock purchased that will be enough to state why the profit or sale is low. The management accountants are qualified and will do good budgets to predict the outcome of the years turnover. the suspicion is that the driver might be involved in theft, as the sales were only low in the van sales. The cause of this is that there were no security measures in place to track each sale, the drivers were independent. However on a state level the ice cream sales could be down due to the either because the ice cream is only busy during summer, so its seasonal.