Auditing and Assurance Services in Australia

Questions: 1. Using the SWOT analysis, identify any weaknesses and threats that will assist in evaluating Fashion Adornments Pty Ltd.s business risk and indicate how these may affect the audit of the financial report. 2.The continuation of assignment question above relating to chic fashion (CFL) new fashion Cloths Company. Refer to the background information provided there. (a) Explain the effect on inherent risk of CFLs relationship with the department stores. (b) Indicate two financial report items that would be affected and the assertions most at risk. 3. Identify six application controls present within the payroll system that you may be able to place some reliance on and explain why each is a control. 4. Explain the implications of the errors noted in the tests of controls. 5. (a) Provide two examples of CAATs that could be undertaken using gernelised audit software to assist with the audit of the vvaluation and allocation assertion for inventory of fashion. (b) Provide two examples of CAATs that could be undertaken using generalised audit software (GAS) to assist with the audit of existence for inventory of Fashion Adornments. (c) Give two reasons why you might not use generalised audit software to audit the inventory of Fashion Adornments. 6.Provide your opinion on appropriateness of your audit assistants conclusions in each of the two situations above. Answers: 1. Inherent Risk: This risk is also known as general risk. We assume that a some risks exists in all kinds of industry based on its specific peculiarities, nature of accounts, etc. This risk is specific to a particular industry or firm. It assumes that there are no internal controls and in absence of internal controls it is easy to figure out what items of balance sheet are material and what are not. Fraud can happen on those items which are material in nature. The components of inherent risk are as follows: 1. Risk that are related to enterprise and the environment in which the business operates: Tom operates in a business where it is difficult to enter into retail sector. There is a presence of leading competitors. These competitors will try to pull down Tom. Further the supplier is limited. The competitor may enter into contract with the supplier he may acquire the supplier. 2. Risks that have relation with capital structure: There are only three directors of the company who are past buddies so they can manipulate the results. 3. Risk that have a relation with financial structure: No such risk is there in Toms company. 4. Organizational risk: There is no long term contract with the supplier. (Radu FLOREA, 2012). 2. The terms and conditions of departmental stores are such which will affect the balance sheet items as well as the profitability of the business. These conditions and their effects are as follows: 1. Tom is able to get into only two retail stores but he got the facility of only two retail departments. In case if he does not make the goods deliver on time he may lose the customers. 2. The unsold items have to be returned within two weeks of dispatch. The retail stores may return goods having which cross two weeks duration. In some cases Tom has to accept the delayed returns in order to maintain the business relationship. This will affect the profitability if CFL 3. Sales are made on a 90 day term. This will affect the working capital. The current ratio may fall below 1. Cash blocked in debtors may affect operating cycle. So Tom should reduce the credit period or shall charge interest for delay in payment of loan. This will block the working capital and create short term liquidity crunch. 3. The types of application controls are as follows: 1. File interrogation control: under this control files are placed at a secure site. The unauthorized access to these files is prevented. Three things are ensured. These are confidentiality, integrity and availability. 2. Retention control: Before destroying any report a manager should determine the time period for which such control should be kept and where it should be kept and who will take the back up regularly and who will restore it. 3. Source Document Controls: The payroll is prepared by the paymaster on the pre-numbered sheet. This sheet has a fix format. The payroll software takes input directly from the source document 4. Run to Run Totals: this application control helps to verify that the data is accurate as it passes to different stages of processing. A payroll assistant at each store totals the list, enters the details into the computer systems and compares the hours worked as accepted by the system to the total calculated manually 5. Validation Control: This type of application control helps to detect errors present in the processing or the inputs. Limit check and check digit are the major validation control. The computer checks that employee number entered is a valid employee on the system 6. Segregation of duties: This includes authorization control. The changes should be approved by the IT manager. The paymaster at each store pays all employee in cash at the end of each week. On the receipt of their pay packet, each employee signs the payroll master listing. (Gary Schein, 2014). 4. When we look at the analysis from the table we see that the controls were in function throughout the year. The controls even detected the irregularities. We see that the errors in the payment system are 20% of the total transactions. The auditor should perform additional procedures to find detail on inaccuracies noticed by the internal controls. The controls are present but they are not reliable. They give the notation that errors are present but they do not describe it. This may affect the relationship with those suppliers to whom the payment was approved but was not paid. The table shows that there are frauds taking place internally. Auditor should discuss this aspect with Those Charged With Governance and should extend his audit procedures to identify the reasons for the fraud. 5. The stock audit is done at the end of the financial year. So in case those materials that are purchased in the beginning of the year can be identified at the end of the year when the value falls below 50% or when the quality totally deteriorates. So the company should not use Generalized Audit Software for the inventory of Fashion Adronments. 6. (i) The assistant has verified those invoices that are above $25 lacks. An invoice with amount below $25 lacks was found to be incorrectly recorded. Auditor has come to know certain facts after completing the audit work. In such a case he should investigate in depth again. He should reduce the amount above which he should audit the transaction. In percentage form it is only 3% but while looking to the amount it is approximately $42 lacks. This is a material amount. So the auditor should request the assistant to review his work. (ii) The tolerable deviation is 4% whereas the actual error amounts to 6%. This arise conditions that the auditor should investigate in detail. But when we look to the working papers we found that the errors were not material. The work of internal control is to prevent, detect and correct an error. The fact is irrelevant that the errors those went undetected were not material. In case if there is any material item that passes away the internal control then the fact that the item or the transaction is irrelevant. References Radu FLOREA, 2012, The Implications of Inherent Risks Assessment in Audit Risk Limitation, viewed on 25th January 2015. Gary Schein, 2014, IT General Controls and IT Application Controls- What businesses really needs to know, viewed on 25th January 2015. Information System and Control Audit, 2014, Auditing of Information Systems, viewed on 25th January 2014.