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1) Explain the purpose, content, format and practical applications/ methodologies necessary to provide assurance and audit services especially in the areas of risk assessment, audit planning, audit execution and the formulation of opinions

2) Identify any weaknesses in the internal control procedures and potential risk factors. 
3) Engage as a member of an assurance/audit team in the evaluation, development or implementation of control systems in computerized accounting information system in computerized accounting information systems.

In the given assignment two companies have been given for analysis towards the internal control being maintained by the entity, the strengths and weaknesses in the system, the affect effect or the wrong doing which may happen as a result of the weak internal control and finally the risk control assessment of both the companies has been done with the view to make aware the management of the company with the loopholes and how the same can be rectified so that the company does not suffers from any of the frauds or the misstatements.

Case Study 1: Acid Pty Ltd (ACID)

Strengths & weakness in the internal controls

Being the auditor of the Acid Pty Ltd., which has the main business of manufacturing the wide range of industrial chemical products, the following the main strengths and weaknesses in the internal control system of the entity.

Strengths:

  1. The internal control being maintained as Acid’s sales department is strong courtesy the proper routing and channeling being used to convert any order into the sales.(Anon., 2016) This might be a bit timely and tedious but this serves for the best documentation which will serve as a good audit trial and evidences during the audit.
  2. There is a segregation of duties within the department and the company is not dependent on a single person to make the entry of order or to check the edit check criteria, or to reconcile the invoice from the sales order and the picking slip quantity or dispatching the same through the goods terminal located in dispatch. This serves as the continuous check by the other person in the chain and will avoid any kind of discrepancy or fraud to be conducted in the system.
  3. The other major strength in the process being noted here is the reconciliation of the Accounts Receivable master file at the day end on each of the day. (Buchanan, et al., 2017)This will enable to keep a track of a new customers and orders added and to help in reconciling deviation, if any, on the same day itself rather than being dependent on the month end. This will increase efficiency and effectivity.

Weaknesses:

  1. The orders are also being received via telephone or fax or sale representative besides being through mail. An order from the customer needs to be well documented and should be a firm order at all the times such that the company is able to estimate its correct and certainity in the revenues and accordingly maintain the inventory as well. (Capaldi, et al., 2017)
  2. There is no proper control for the rejected orders as to how they can be converted into the firm orders after finding in the shortcomings and discussing and negotiating on the same with the customer. Simply they are rejected by the system, recorded by the data entry clerks and sent for investigation with no follow up procedures.
  3. In case the stocks is not available, the store person is altering the quantity in the picking slip with the amount of actual goods picked but later on this can be a tedious task to reconcile against which order, the delivery is still pending to the customer.

Implications of the weaknesses highlighted above:

  1. The implication of receiving the order through the medium like sales representative or telephone order or oral communication or via fax is not a firm order and the other party is no where legally bound to take the goods once ready for sale. This may result in fraud, in losing of revenue for the firm or in losing the customer, maintaining wrong levels of inventory in the organization resulting in the blocking of the working capital, reporting of wrong numbers or estimates of revenue to the management. Once the deal or order is entered, the same should be bound by an agreement or a contract that is enforceable and binding on both the parties. Also, it should be documented on the mail. (Goldmann, 2016)
  2. There is no internal control being stated by the management of the rejected orders on the grounds of not meeting the edit criterias on the terminal except for the credit control. There might be situations when the review system might have rejected an order and the pick up slip might not be generated because of few small reasons. The company should have proper department in order to check and rectify the same and convert it into the firm order such that the sales target are met and the customer base could be increased. This will also help in proper estimation of the future sales.
  3. The 3rdweakness in the system was altering the quantity of the stock in the pick up slip. This might increase the work of reconciliation of the order being asked from customer and the actual quantity picked up, so there should be a system such that the order is being placed immediately for the production when the customer order is final. This will avoid the time lag in delivery to customer and there will not be multiple delivery charges and all the goods can be sent at once and the reconciliation issues will also not be there.

The Acid Pty limited is having a good efficiently working internal control system which is properly defined and there are segregation of duties enabling the respective person to be answerable and responsible for a particular function or sales till the end customer. But the control can be increased further the implementation of the team which will ensure that proper recording of the orders is ensured with backup and contractual clauses in place. Further, the pipeline estimation w.r.t. revenue and sales and the planning of inventory should be done efficiently to increase profitability and such that the working capital is not blocked. To comment on the positive side of the entity control, the company makes 2 invoices, one which is given to the end customer and one that acts as delivery docket which is finally returned to dispatch team by the delivery driver. (Jefferson, 2017) This acts as a check that the delivery has been made and hence the revenue can be recognised in the books. Further, the control can be increased in terms of recording of the accounting entries at the time of dispatch and delivery in terms of goods in transit and conversion into final sales such that the revenue recognition and provision criterias are also being fulfilled.

Case Study 2: Cannon Pty Ltd (Cannon)

Strengths & weakness in the internal controls

Being the auditor of the company Cannon Pty Limited, it has been asked to review the internal control processes, strengths, weaknesses and the suitability of the procedures being followed and to suggest for betterment, if any. The following is an excerpt to the same.

Implications of the weaknesses highlighted above for Acid Pty Ltd

Strengths:

  1. The best control being followed in the system is the crossing of all the cheques received from the customers so that the same can be deposited in the cannon’s bank account only. This will ensure no cheating being done or fraud being conducted at the company accounts level and the cheques being misplaced or deposited in the personal account.
  2. The other good control procedure being practiced at the company is to age the receipt and remittance advice as being given by the debtors such that the true picture of the ageing of the debtors could be given to the management and proper steps could be taken as the right time tio ensure that the debt due does not become bad debts after some time. Also, the unallocated receipts or those cheques which are with inadequate details are being allocated to the oldest balances first.  (Turban, et al., 2017)This is a good practice as this will ensure latest balances to be shown outstanding from the debtors and give a true and fair view of the ageing to the management and the stakeholders.
  3. The 3rdbest control being implemented and in use by the entity is the daily reconciliation report being prepared by the company at the overall level and all the cheques being deposited in the bank account at the end of the day which ensures no reconciliation issues arise at future periods and efficiency is increased.

Weaknesses:

  1. In the accounts receivables section, the first and foremost control is the receipt of all the cheques and being recorded correctly without any absconding or misplacing. But in the given case, the cheques are also being received by the sales representative directly from the customer.
  2. The 2ndweakness in the system is the collection of cheques, recording of the cheques in the books of accounts, entering the same in the terminal, ageing of the receipts and allocation of the cheques to the differnet invoices due from customer, preparing the consolidated amount to be deposited in the bank at the end of the day, preparing the master data file, all this being done by a single person in the organization. There is no segregation of the duties and such a critical process is being handled by one person from end to end. This is a major weakness for which the company may suffer in future. (Qi, et al., 2017)
  3. The third weakness here is the reconciliation issue which may arise when the customer sends his statement of dues in the future since intimation of the cheque adjustment is being given to the debtor such that they are aware of the same.

Implications of the weaknesses highlighted above:

  1. The cheques are not crossed by the customer himself and just handed over to the sales representative so this is a major loophole in the system where they may abscond with the cheques or deposit it in their personal account and the management may never come to know about it. This can seriously impact the collection and may result in negative cash flows for the company. There should be a real time tracking system or intimation process from the customer to the company such that such and such amount is due and will be paid on a fixed date. In that case, company would have track of the receivables. (Nakao, et al., 2017)
  2. In the absence of non segregation of the duties and the entire reliance being placed on the single person, the same may be used to the advantage of the employee himself such that the company would not be aware of the customer dues and when they are being collected. Hence, the same should be placed among different persons and different persons should be held accountable and responsible for their own functions.
  3. The reconciliation and external confirmation from the customer at the period end is one of the important internal controls being practiced at most of the organizations. Here also a system should be developed such that the customer books and the company’s books are reconciling at the end of the period. This will help to find out any issues in collection or in dues etc. Moreover, it will help in finding out the cheque sin transit, if any and the bank reconciliation statement as well. (Macmillan, 2016)

Internal Control Asssessment for cash receipt system of Cannon

The current internal control at cannon for cash receipt is not strong currently and envisages a lot of loopholes and the gray areas which can go against the organization. Proper system needs to be implemented such that the sales representative does not directly receive the uncrossed cheques as it may result in depositing in different account. Further, there should be a monthly confirmation statement from the debtors such that the cheques or cash collection missed out, if any can be easily traced and brought to the notice of the management immediately. It will also help in identifying the ageing of the debtors, the major customers, the riskier ones which may require provision and an immediate follow up. Besides this, the segregation of duties and placing different SPOCs at critical function and position is warranted to avoid any future issues w.r.t. SOX compliance. (Li, et al., 2017) Further more, the extent of manual intervention in the entire process can be negated by introducing automation in receivables module of the entity where only the exceptions will be handled manually and rest everything would be system drovin and controlled.

Conclusion

From the above two case studies, it can be understood that different companies has different types of control being maintained. Some maintain it at high level where the cost incurred is high but the system is effective whereas some companies have moderate internal control but ultimately as per the IFRS and the auditing standards a high level of control is being required to be maintained. We saw that relyin too much on manual intervention like collection through sales executive or non segregation of duties in an organization can result in multiple compliance issues and frauds and thus, it needs to be taken care off.

In case of Acid Pty Ltd. the company should also take a mail confirmation once the order is confirmed and allot an order ID to each transaction for easy tracking in the future. Further, reliance on the sales representative for the order is not fine as he/she can defraud the company and make use of the reliance on him. There should be proper system in order to replace all these weaknesses. Further, in case of Cannon Pty. Ltd., automatic mail triggering system can be set up such that in case a receivable is aged more than 60 or 90 days, an immediate mail with all the data like invoice number, amount, date etc. will be triggered to both the management and the debtor by the system itself.

References

Anon., 2016. When is a Heads of Agreement legally enforceable?. [Online] Available at: https://legalvision.com.au/heads-agreement-legally-enforceable/[Accessed 8th August 2016].

Buchanan, B., Cao, C., Liljeblom, E. & Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197.

Capaldi, N., Idowu, S. & Schmidpeter, R., 2017. Dimensional Corporate Governance. CSR, Sustainability, Ethics & Governance, pp. 175-187.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Li, S., Sougiannis, T. & Wang, I., 2017. Mandatory IFRS Adoption and the Usefulness of Accounting Information in Predicting Future Earnings and Cash Flows. SSRN , pp. 1-47.

Macmillan, P., 2016. Thomas Klikauer: Hegel’s Moral Corporation. Journal of Business Ethics, p. 302.

Nakao, S., Oliveira, N. & Nardi, P., 2017. Analysis of the influence of audit firms on disclosure in notes to financial statements. Nakao, 14(2), pp. 9-14.

Qi, Y., Roth, L. & Wald, J., 2017. Creditor protection laws, debt financing, and corporate investment over the business cycle. Journal of International Business Studies, 48(4), pp. 477-497.

Turban, E., Whiteside, J., King, D. & Outland, J., 2017. Implementation Issues: From Globalization to Justification, Privacy, and Regulation. Introduction to Electronic Commerce and Social Commerc, pp. 383-413.

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My Assignment Help. Internal Control Assessment Essay For Acid Pty Ltd And Cannon Pty Ltd. [Internet]. My Assignment Help. 2021 [cited 25 February 2024]. Available from: https://myassignmenthelp.com/free-samples/audt317-auditing/control-risk-asssessment-for-acid.html.

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