Auditing Assignment-ACT303
a) Define & importance actual and perceived independence
Actual independence can be referred as the liberty to the auditor to make the decision at own level without any interference. It is based on the mentality of the auditor. The auditor is independent to make decision based on his/her state of mind and ability to deal the situation.
It is difficult to measure the actual independence of the auditor because of issue in measuring the mental attitude and personal integrity of the auditor. At the same time, perceived independence can be referred as the liberty to the auditor to audit in appearance only (Chambers and Rand, 2011). This independence is easy to measure and provides fair and true viewed on the financial statements of the company.
- Bob:
In this situation, perceived independence can be observed in BOB’s behaviour, but not actual independence. It is duty of the auditor to acquire the needed information to audit but they are not allowed to use the information for personal use. In this condition, it can be effective for Bob to use this information by providing proper credit to the company through incitation in the used information (Arens et al., 2013).
- Wendy engagement
In this situation, there may be perceived independence by Wendy but the actual independence cannot be shown by him because he worked two duties as auditor as well as secretary to improve the performance of the firm.
He will not justify his position as auditor and may cause feel interference of the management while auditing the financial statement of the company. In relation to this, there is need to adopt transparent process in recruitment as the firm cannot give both duties to a single person. If firm assigned secretarial work to Wendy then it should contact with another auditor to audit its statements.
- Leo
In this case, perceived independence was shown by Leo as the process and methods were used properly by Leo to audit the Precision machinery. In this task, detailed testing of internal controls and the process of cash payment was needed.
Actually father of Leo works in the organization then there is possibility that Leo did not perform actual independence because his decisions may be interfered with the aspect that his father works in the company as foreman if he will provide the negative views on the audit of the machinery then his father can face any adverse effect by the management (Rittenberg et al., 2011).
In this situation, it is required for Leo to suggest the firm to make improvement in precision machinery for the betterment and avoid any audit issue.
- Chan associates
Chan & Associates does not show the perceived independence in this case because it accepted the new office furniture from its client Classic Reproductions. In addition, it also accepted the shareholding in an unrelated listed company.
So in this situation, due to influence of the gifts and other things which it received from the client, the auditor cannot give the fair and transparent views on the financial position of the company (Lin and Tepalagul, 2012). In order to avoid any issue, it needs to leave the responsibility as the auditor of the company and should not audit the financial statements of the company.
To study the case study, it seems that appointment decision of auditor has already been taken by the board of directors at the time of company’s annual general meeting in Games Limited. Also, audit partner is approached for accepting auditor’s appointment.
At the same time, managing director is not happy with current auditor appointment as auditor partner is changed this time. This reflects the conflicts in management and not unanimously agrees on this in current situation (Butcher et al., 2012).
Therefore, it can be stated that in case auditor is legally intimated by company on its letterhead, and now hesitant to accept this after the concern of anti corruption enquiry issue. This may lead to ethical and as well as legal obligation to the company form the auditors’ side.
As per the companies Act, the company board of members and direct must have informed regarding the auditors so that can concerns in respect to this can be raises and further action can be taken in this direction proactively (Davidson, 2014). Also, company companies must adhere the following steps need to be taken prior to the appointment:
- In every annual general body meeting company must hire the auditor for the company; such appointment can be board of members in case of first time appointment of auditor later done by auditors.
- The auditor must be informed regarding appointment at least before 7 seven days by the company.
- Thereafter, once the auditor get conformation for his appointment, must inform the Registrar of companies within 30 days of receipt of confirmations.
- The appointment procedure must be take place in prescribed form.
- The intimating by auditor itself is mandatory, only then company can appoint the auditor in annual general meeting.
Apart from above mentioned steps in regards to company auditor appointment there are certain ethical considerations as well that must be adhered. These are related to the fundamental ethical principles applicable on all professional body members.
At the same time, these are mainly based on integrity, objectivity, professional competence and due care, confidentiality and professional behavior. In context to Games Limited, it reflects that there in case audit partner refuse to appoint the company auditor, there is breach of due care and professional behavior (Hatfield, 2012).
At the same time, same rule applicable in case of refusal of auditor, company needs to inform the auditor prior 7 seven days.
Apart from that, audit partner can ask for explanation regarding the confusion of auditor appointment. As in these scenarios, managing director is unhappy with the change of auditing partner.
Therefore, company can resolve its internal conflict and negotiate on the option to accept or refuse the auditors management. However, these all must be legal and prescribed manner (Grout et al, 2014). Apart from that, there is another option is that change of audit partner, in this case study the major concern is managing auditor is not happy with that.
However, company audit partner must accept the appointment of auditor and comply al the legal requirements.
While the reviewing the case study, it is indentified that there few limitations in internal control for cash receipts and billing functions Everyday Supplies Pty Ltd.
Inadequate Documentation/records
This is the biggest drawback in small businesses also recognized in case of everyday supplies ltd. Documentation is the most effective evidence for the financial records. In regards to this company, the proper documentation is not in place. It seems like it is lengthy to follow and involved lot of paper work adopted documentation process (Ayam, 2015).
At the same time, it must be as per the advanced technology in the store reduces the human interventions. Thus, it can be stated that financial documents must be pre-numbered in order to maintain the transparency and avoid the duplicity in transactions.
Key business cycles not properly defined Lack
This is the most neglected area in small businesses that can add significant value in business. At the same time, it is found in this case study that Everyday Supplies Pty Ltd has not mentioned that policies and procedures in written can be leads to data fuzzing and misleading of fact reading handling of cash.
At the same time, the procedures related to cash transactions are complex in nature in this retail shop (Changchit et al., 2012). Also, it is required to have experience and knowledgeable personals needs to in organizations in order to maintain the accuracy and loyalty in this area.
Lack of control with authorization of transactions
There is lack of control in authorizations in the store as no specified personal in order to manage the particular activities. At the same time, there must be approval system so that expenses can be in control. Likewise approval must be taken as per the cost need to be approved authorized by two or more authorities.
No oversight and review
In small organizations like Everyday Supplies Pty Ltd there is no proper supervision of transactions. Due to which it can lead to financial losses and unlawful activities in store. When, it comes to review and monitor the internal flow and billing of cash in includes revenues, expenditure reports, monetary reports, budgets and reconciliations reports etc.
It is helpful in indentifying the lop hole in business and area of improvement (Sadiq et al., 2017). Financial review is very critical process and helps in decision making process. Therefore, it can be stated that it is very important to have effective review and monitoring system in place.
Lack of business continuity plan for business data
In regards to Everyday Supplies Pty Ltd, it lacks in terms of business continuity plan. Such shop has planned proactively the plans to continue the business in case any unpleasant incident happens in future. At the same time, cost constraints can be one of the reasons behind not maintaining it.
This is how, store could suffer economically and data privacy perspective There must be back plan for the business data so that all the cash related transaction can be recovered when requirement as it is very important to maintain the full fledged data instead of discreet one.
In regards to Retro Pty Ltd, various internal control weaknesses in Retro’s internal audit concerning and purchases and payments functions.
Purchase System:
- In purchase system, no independent check happened during the purchase of goods that could be leads to overstock and no good received note has been issued (Chen and Lee, 2012). At the same time, only copies of goods ordered and purchase order has been sent to accounts payable and store department.
- There might be chance of misplacement and purchase errors in case of sequence of number of units have been ordered.
- It is the most general purchase mistakes as selection of vendors are selected on the basis of their past performance due to lack of research, relations with existing suppliers and risk involved while doing business with new vendors (Panigrahi, 2012).
- All received goods received including fixed assets are not smooth cleared by accounts receivable system.
- There is no delegated authority in absence of order and delivery docket. It is only approved by inward manager (Ogneva et al., 2017). Thus, it can delay in sending purchase order not and expand the time limit of whole process.
Above mentioned limitations are in purchasing functions however, there are some in payment department as well.
- In is indentified that company is still following the traditional payment methods in accounts payable department which makes it time consuming, lengthy and complicated process with the moderate involvement of human interventions (Rendon, 2015).
- There is requirement to adopt the advanced software in accounts payable in order to fast track the payment schedules.
- As there is no match of order received and no GRN is received, it can turn into big financial losses to the company (Karim, 2018). If duplicate payment has been done without comparing the purchase order and goods receive notes.
- There is manual human intervention involved in the company’s accounts payable. However, this must be automated and backup plans need to be ready in case any uncertainties (Rendon and Rendon, 2016).
- The accountant undertakes all the forms and accounts on monthly basis however, this need to be done weekly basis in order to conduct payment runs to supplier and creditors.
In addition to these internal limitations, there are few common negative points that generally occur in accounts payable functions as follows:
Collating invoices from different suppliers
Company’s accounts payable team faces challenges while coordinating as they issue and follow the different criteria’s for invoice generation in terms of currencies and formats. It can be depends on supplier whether they are domestic or foreign suppliers.
Errors caused by manual entry
This is the most common type of error in accounts payable systems. it can be happen because of typo mistakes (Vovchenko et al., 2017). At the same time, it can take huge amount of time and resources in order to identify and correct the mistakes.
Exception Handling
Accounts payable team always challenges when it needs to manage the transactions complex in nature. Such kind of challenges in case of non-standard and documents with discrepancy.
Inaccurate and Length close
The inaccurate low and lengthy close can be one the major issues in accounts payable due to invalid validation the on some invoices and that effects the AP close (Haut et al., 2012).
Lack of control and visibility
This is closely related to the above mentioned issues and reflects the lack of control and visibility in AP process.
Apart from that, there are some limitations of internal control found common in accounts payable and purchasing the goods.
Management override
On the part of accounts payable it is really important to train the AP employees in order to operate AP platform effectively. In this area, management role is very important to create a proactive working environment that makes the staff efficient in order to cope up with uncertain situations.
As to why, all the transactions are based on the sectioning money to different suppliers and other creditors (Tauringana and Adjapong, 2013). Similarly, it lies with accounts receivable in order to maintain the transparency in system.
Missing segregation of duties
There must be clear segregation of duties so that every activity can be performed effective and avoid internal conflict in store among staff.
A. 6 lacking areas of control measures
Purchasing order:
There is automated process for the generation of purchasing orders but the purchasing orders contain only information related to date, supplier name and address and required raw materials. Rather than this, there is need to include following information in the purchasing orders:
- Name and address of suppliers
- Date
- Quantity of raw materials
- Price
- Mail address
- Payment information
- Invoice address
- Purchase order number (Arens et al., 2013).
Distribution of purchase order:
Company produces and distributes three copies of purchase orders including to ware house, accounts clerk and supplier. But it should also distribute one copy to business office.
In addition, one more copy namely originator copy should be signed by the supervisor and delivered to the business office. There is need to develop the requisitioner’s copy that holds other information like partial shipments, changes in price, payment requests, and any other information.
Production orders:
Generally production orders should have information related to products planned to manufacture, materials needed, products manufactured, materials selected, products manufactured in past and materials used in past manufacturing operations.
But company only provides the information related to date; sub-contractor’s name; raw materials required; finished goods needed in production orders (Lin and Tepalagul, 2012).
Password access:
Password access is available for the stores staff of raw materials and finished goods, production controller and accounts clerk. There should be a control on all these access by the management. It may be possible of occurrence of fraud if there is no control of the management on this access by the staff members.
Masterfile amendments:
The stock masterfile of the company contains information like existing stock items with code and location of warehouse, approved suppliers and subcontractors. But it should have information relayed to payment in transactions and invoices.
Orders are only generated to suppliers and subcontractors that cannot be said effective. There is a need to make orders to the purchasing department too to adopt effective control measures (Dennis, 2015). In addition, there is no segregation of duties as the production controller also completes the master file amendment form as a record of the changes made.
Automated system: the computer system of the firm automatically selects the suppliers based on the price and delivery times. But there are other factors like brand image of the supplier, service, and risk that need to be considered while selecting the suppliers.
B. Audit testing of controls for the inventory systems
One of the audit testing of controls for the inventory system is comparison of assets to records. In this method, there is need to check the inventory levels periodically against the records by an individual who is independent of the stores personnel and material differences investigated.
At the same time, perpetual inventory records should be maintained at least one year. Apart from this, there is need to pre-determine the maximum and minimum inventory levels and regularly review for adequacy (Chaumont, 2013). In addition, the reorder quantities need to be pre-determined and regularly review for adequacy.
Another testing method for inventory control is approval and control of documents. In this the issues should be determined based on properly authorized requisitions. If the requisition is not made with proper authorization then the audit needs to be performed of these documents. In addition, it is also crucial to carry the review of damaged obsolete and slow moving inventory. Apart from this, there is need of authorization of any write-offs (Dennis, 2015).
Arens, A.A., Best, P., Shailer, G. and Fiedler, B. 2013. Auditing, Assurance Services and Ethics in Australia. Australia: Pearson Higher Education AU.
Ayam, J.R.A., 2015. An Analysis of revenue cycle internal controls in Ghanaian universities. Case Studies in Business and Management, 2(2), pp.1-17.
Butcher, K., Harrison, G., McKinnon, J. and Ross, P., 2011. Auditor appointment in compulsory audit tendering. Accounting Research Journal, 24(2), pp.104-149.
Chambers, A., and Rand, G. 2011. The operational auditing handbook: auditing business and IT processes. USA: John Wiley & Sons.
Changchit, C., Holsapple, C.W. and Viator, R.E., 2001. Transferring auditors’ internal control evaluation knowledge to management. Expert Systems with Applications, 20(3), pp.275-291.
Chaumont, M. 2013. The risk-based audit approach: Auditing. Germany: GRIN Verlag.
Chen, K.T. and Lee, R.M., 1992. Schematic evaluation of internal accounting control systems (Doctoral dissertation, University of Texas at Austin).
Davidson III, W.N., Xie, B. and Xu, W., 2004. Market reaction to voluntary announcements of audit committee appointments: The effect of financial expertise. Journal of Accounting and Public Policy, 23(4), pp.279-293.
Dennis, I. 2015. Auditing Theory. UK: Routledge.
endon, J.M. and Rendon, R.G., 2016. Procurement fraud in the US Department of Defense: Implications for contracting processes and internal controls. Managerial Auditing Journal, 31(6/7), pp.748-767.
Grout, P., Jewitt, I., Pong, C. and Whittington, G., 1994. ‘Auditor professional judgement’: implications for regulation and the law. Economic Policy, 9(19), pp.307-351.
Hatfield, R.C., Jackson, S.B. and Vandervelde, S.D., 2011. The effects of prior auditor involvement and client pressure on proposed audit adjustments. Behavioral Research in Accounting, 23(2), pp.117-130.
Haut, E.R., Pronovost, P.J. and Schneider, E.B., 2012. Limitations of administrative databases. Jama, 307(24), pp.2589-2590.
Karim, N.A., Nawawi, A. and Salin, A.S.A.P., 2018. Inventory control weaknesses–a case study of lubricant manufacturing company. Journal of Financial Crime, 25(2), pp.436-449.
Lin, L., and Tepalagul, N. K. 2012. Auditor Independence and Audit Quality: A Literature Review.
Ogneva, M., Subramanyam, K.R. and Raghunandan, K., 2007. Internal control weakness and cost of equity: Evidence from SOX Section 404 disclosures. The Accounting Review, 82(5), pp.1255-1297.
Panigrahi, P.K., 2011, June. A framework for discovering internal financial fraud using analytics. In 2011 International Conference on Communication Systems and Network Technologies (pp. 323-327).
Rendon, R.G. and Rendon, J.M., 2015. Auditability in public procurement: An analysis of internal controls and fraud vulnerability. International Journal of Procurement Management, 8(6), pp.710-730.
Rittenberg, L., Johnstone, K. and Gramling, A. 2011. Auditing: A Business Risk Approach. USA: Cengage Learning.
Sadiq, S., Governatori, G. and Namiri, K., 2007, September. Modeling control objectives for business process compliance. In International conference on business process management (pp. 149-164). Springer, Berlin, Heidelberg.
Tauringana, V. and Adjapong Afrifa, G., 2013. The relative importance of working capital management and its components to SMEs’ profitability. Journal of Small Business and Enterprise Development, 20(3), pp.453-469.
Vovchenko, N.G., Holina, G.M., Orobinskiy, A.S. and Sichev, R.A., 2017. Ensuring financial stability of companies on the basis of international experience in construction of risks maps, internal control and audit. European Research Studies Journal, 20(1), pp.350-368.
