Prepared by (Student’s Name)
Question 1: Segregation of Duties in Small Business
Taking a closer look at the accounts presented indicates that the underlying controls relating to sales, debtors and cash receipts are not fairly disclosed. It can be vehemently noted that these accounts have not been updated while the client’s immediate financial statements have not been issued for a period of four months. It is important to note that the entire responsibility of updating these statements lies with the existing junior trainee; Sally, who should be under the supervision of Max. Max seems oblivion of the situation at hand, which is a clear and concise indication that he is not engaged in efficient and effective monitoring of overall processes as required. Following this line of perception, it can be easily concluded that the entire management team’s attitude towards the company’s internal controls especially in relation to preparation and disclosure of accounts is indeed dire. In essence, the fact that there has been a call for a meeting with the bank indicates that the management is also inefficient in managing and sustaining a steady cash flow pattern (Ge, Koester, & McVay, 2014). The management is seen to be lagging behind in ensuring that they maintain a steady cash flow position for the company.
Apart from Betty handling the technical aspect of the business and also being the owner, it can be ascertained that she still needs to make sure that overall goals and objectives of the company is at par with modern business practices. She is expected to uphold the administrative function of the business and thus, devise effective ways for which to execute activities. It is apparently clear that both Max and Betty are unproductive personnel considering the fact that they have failed to determine and formulate sufficient and workable internal control mechanism and to implement them for the betterment of task execution. While it is not clear that the staffing personnel are unethical in their work duties; they seem not have been trained or even selected for the position that they hold within the organisation.
Ojala, Niskanen, Collis, & Pajunen (2014, p.802-805) indicates that in such small business as the one at hand; overall management involvement is the best replacement for large formalised control systems present in bigger entities. It thus goes without saying that the business needs thorough involvement of both Max and Betty especially in activities relating to authorisation and supervision of day-to-day transactions.
For this business, the segregation of duties should adhere to a wider and overall principle that should ensure the following duties are separated;
Reporting of the day-to-day transactions
Management and supervision of the underlying assets
Authorisation of the day-to-day activities or transactions especially the ones that will likely affect the existing asset-base.
The control relating to the processing of transactions should, at all times, be distinguished from reporting of any given day-to-day transactions conducted within the business.
Sally is a junior trainee employed to assist with day-to-day administration of the business. The business also has a computer technician as well as salesperson with the later employed on a part-time basis. Thus, presently, it is only Max and Sally that are fully entitled with the responsibility related to administration process. It thus means that there might be an enormous challenge to segregate duties with only two staffing personnel prompting to burden them with even more tasks that could include; review of debtor’s immediate balances and day-to-day transactions; bank reconciliation processess and auditing of transactions conducted with a certain period of time. However, although the Sally might be used for additional tasks apart from banking; it is important not to involve her in the recording of transactions especially cash receipts. Instead, Max can be effectively used for this duty as Betty takes on the responsibility relating to inventory control, which means that sales personnel will be, in any way, involved with the maintenance of stock records and, also have full access to the stocks needed for sales translation process.
Question 2: Documentation
According to ASA 230, which focuses on audit documentation, an auditor should engage in the preparation of documents of a given audit on a timely manner while still ensuring to avail sufficient amounts of proper records showing the distinctive basis of the auditor report and evidence portraying that the audit process was planned and conducted in regards to ASA; and legal and regulatory stipulations in place (Pearce & Rutledge, 2015).
Pearce and Rutledge (2015, p.95) emphasizes that audit documentation of all audit procedures should record the following items; the identification of the characteristics relating to particular accounting items or even matters tested; details of the auditor behind the auditing process and the exact date for which the work was fully completed; the person that was tasked with the review of the audit work as well as the dates and breadth of the review conducted. Most notably, the audit documentation process should be done in a way that will allow another audit expert to comprehend the nature of the work performed as well as the end results obtained as well as any other significant matters relating the entire audit process.
The audit assistant has ensured to provide a documentation that indicates the absence of any replies made in relation to particular accounts receivable as par the positive confirmation letters. In regards to Jennifer’s review process, any decision to take no further action after there is a non-reply from customer is deemed improper. Certainly, a response provided to positive confirmation request is deemed proper and necessary for obtaining sufficient and appropriate evidence (ASA 505 External Confirmation, Par.13).
Paragraph 12 ASA 505, postulates that an auditor should conduct alternative audit processess in order to gain relevant and reliable evidence in relation to each of the non-responses made. Therefore, Jennifer should make sure to conduct extensive audit work while adhering to specific audit practices. The most notable examples of alternative audit procedures an auditor can execute include; the examination of particular cash receipts; shipping details and documents in place; as well as the sales transactions conducted at the end period of the non-responsive customers (ASA 505, Para.A18). It is crucial that specific consideration should be made in regards to the overall implication of these non-responses to all audit risks relating to accounts receivables (ASA 230, Para. 8-12).
Question 3: Performance Indicators
The performance indicator in the report at hand appears to be useful for the client. It thus means that the supervisor within the procurement department seems to be using these performance indicators in these reports to evaluate the performance of the overall purchasing team, which is an indication that the client at hand; has total faith in the quality of the data in use (Hřebíček, Soukopová, Štencl, & Trenz, 2014). The presiding therefore has a significant level of confidence in the data provided for review process. On the contrast, the supervisor ascertains that these performance indicators are not utilised for the purpose of following-up on unexpected outcomes within the underlying financial reporting system. It is certainly clear that the existing performance indicators are entirely focused on non-financial informational data provided. Even though the non-financial data is deemed to be relevant to financial data like the case of overtime requests can be related to payroll expense classified as overtime payments. It seems that the client is not focused on relating the overall performance indicators to the existing financial reporting frameworks. It means that the relevance of these performance indicators to the topic of financial report auditing framework is in fact lower (Micheli & Mari, 2014). Furthermore, the auditor could perform specified tests of the non-financial data in order to obtain proper assurance in regards to reliability and relational aspect to the financial data prior to utilising them in the full audit practice.
Question 4: Persuasiveness of Evidence from the Analytical Procedures
The below are deemed to be the questions that Mathew would ask;
Is there any acquisition and disposal processess that have happened for each of the underlying depreciable asset class?
The answer to this question is deemed to be necessary because it will provide information pertaining to the balance of assets held at the end of each operating period although there is evidence that depreciation expense is conducted for all assets that are held in the course of this same period. Some of the notable sub-questions that can be asked under this overall question include; are similar rates being used for each of the depreciable asset within a same class? Have efforts made to ensure that the closing balances for each of these assets are effectively verified? Could there be another form of change in the business that suggests that the underlying asset balance is entirely different? Could there be any significant level of changes witnessed from the previous financial operating period?
Is it possible that the existing sales commission is ever awarded at non-standard rates? In the event that this is true, how is it impacted to salespersons or products involved?
Off course, this question will also include other sub-questions that will be asked as follows;
Has the amount related to the total sales revenues been effectively verified? Could there be any form of significant change that is posted from the previous operational period.
Has the company experienced any level of employee turnover? If so, has the business engaged in making changes to the underlying compensation packages for particular employees? Could there be any other form of changes within this business that suggest that the employee numbers or even payroll expenses should be altered for the better? Could there be any form of significant changes witnessed from the previous accounting period?
For all cases involved, the outcomes of the underlying analytical procedure should be more persuasive in the event that the informational data provided is indeed audited and remains to be consistent with other auditing evidence obtained from prior audit works. Furthermore, for all of the cases involved, possible relations within the existing informational data at hand is consistent with relevant situations, which are deemed to be similar to prior operating periods (Yoon, Hoogduin, & Zhang, 2015). Taking a close look at the first two question tests; it can be concluded that they remain the most viable and persuasive ones since they involve more than a simple comparison with prior operating years (Yoon, Hoogduin, & Zhang, 2015). Although, there still is a room for improving both of these tests as the first test would be even more persuasive in the event that proper adjustments for both acquisitions and disposals are made while the second test will require additional information about product lines and relevant sales commission practices conducted by the company . In essence, test 3 could be improved in the case that the total payroll expense was computed on an employee-basis prior to making comparison with prior operational periods. In the case that the test is deemed to be more persuasive, it means that minimal additional substantive testing would be needed. Consequently, for each of the tests described as above; there is a high likelihood that there will be no further testing that will be needed in the event that all of the questions posed receive satisfactorily solutions and improvised as recommended.
Ge, W., Koester, A. & McVay, S.E., 2014. Assessing the accuracy of small firms’ internal control disclosures. Available at SSRN 2405187
Hřebíček, J., Soukopová, J., Štencl, M. & Trenz, O., 2014. Corporate key performance indicators for environmental management and reporting. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 59(2), pp.99-108.
Micheli, P. & Mari, L., 2014. The theory and practice of performance measurement. Management accounting research, 25(2), pp.147-156
Ojala, H., Niskanen, M., Collis, J. & Pajunen, K., 2014. Audit quality and decision-making in small companies. Managerial Auditing Journal, 29(9), pp.800-817.
Pearce, C.D. & Rutledge, D.N., 2015. Participation in Quality Improvement: Provider Perceptions Regarding Documentation Audits. Journal of Patient-Centered Research and Reviews, 2(2), p.95.
Yoon, K., Hoogduin, L. & Zhang, L., 2015. Big Data as complementary audit evidence. Accounting Horizons, 29(2), pp.431-438.