Question

‘How to do it’ is a company which provides information and products for the DIY sector. It has grown significantly in the past few years and turnover has increased from around $3m to over $15m per annum.

The company was originally managed by the owners who, as it grew, hired staff from predominantly amongst people that they knew or were already known to other staff. Staff numbers have grown from less than 10 to over 60 during this period and many employees were married to, or in relationship with, others within the company.

Audits are conducted annually and the audit company is well regarded and has been doing the audit since the company began. The auditors are regarded as part of the team and attend the Christmas function each year.

At the most recent Christmas function one of the auditors, commented to the general manager, as an aside during a conversation, that he was surprised that given the increase in turnover that the yearly profits were not higher.

The general manager decided that during the Christmas break he would look at the auditor’s report and review the situation. The auditor’s report made no such statement but after examining the figures it was apparent that profits should have been higher.

When the office re-opened he requested the auditors to undertake an examination specifically to discover why it was so.

The auditor’s investigated and reported that the section manager responsible for major purchases had paid invoices to a company which he and his wife owned. The amount paid to the company was in excess of $500,000.

The section manager was responsible for signing off on work completed, or supplies received, and authorising payments. His wife was responsible for issuing the cheques. Both were signatories to the cheque account.

What breaches of internal control were there and what modifications to procedures would you implement? Prepare a 5 page report outlining your suggested course of action.

Answer 1

Solution:

Ruptures of Internal Control

1. The extortion conspire is most effortlessly achieved when one or couple of people keep up power over numerous capacities and obligations, for example, obtaining, choosing merchants, and getting, and endorsing installments. Absence of sufficient composed money dispensing systems, for example, requiring free endorsement for distributions over a specific sum, additionally elevates the danger of such plan.

2. Outsider merchant industriousness was overlooked. The sellers ought to be investigated before going into contracts.

3. Same individual/Related people ought not have been permitted to approve installments and also to issuing checks. Here the senior chief and his significant other were in charge of authrosing installments and too issuing checks. This builds the odds of misrepresentation plots inside the association.

Recommended changes :

1. An autonomous outsider ought to occasionally review the database to guarantee that the recorded sellers are undoubtedly still dynamic and not being utilized to process imaginary solicitations.

2. When the new seller has been affirmed, he or she ought to be gone into an ace merchant database to which just a chosen few people have specialist to go into and change. These progressions ought to be made as per composed methodology requiring appropriate approval.

3. When the organization begins business with the merchant, a proper free individual ought to support all buy orders before being handled. What's more, satisfactory supporting documentation including a unique receipt from the provider, and a receipt to demonstrate that the item was conveyed, ought to be asked for and looked into to help all money payment.

4. A similar individual ought not have the capacity to both demand and support buy orders. Similarly, just assigned check underwriters ought to have the capacity to dispense installment.

5. Various distributions affirmed by one specific representative to a specific merchant which are simply beneath the worker's spending specialist or which are for huge even sums or which are made on abnormal dates, for example, ends of the week and occasions ought to be explored.

Examiners ought to catch up extortion markers by searching for:

Exchanges coming up short on all required supporting documentation;

Various distributions affirmed by one specific worker to a specific seller which are simply beneath the representative's spending specialist or which are for substantial even sums or which are made on surprising dates, for example, ends of the week and occasions;

Solicitations which don't coordinate with the first buy arrange and if pertinent the first deals contract;

Over the top "delicate costs, for example, counseling charges, deals commissions, and publicizing where there are no unmistakable items joined to the payable, paid to a similar seller by the equivalent or couple of workers;

Checks made to "money" or "conveyor" for supposed administrations or items got;

Suspect supports on checks; and

Checks with in excess of one underwriting, checks payable to organizations or people that were gotten the money for and not saved and checks supported by people.

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There was an Inherent Risk and Control Risk in the Company. The Related Party exchanges ought to be uncovered in the Financial Statements according to Financial Reporting Framework. There was a manipulation of $5,00,000 in the books of Accounts.

There was no ascent in Profits with the ascent in yearly Turnover. This shows there were reserving of some sham/counterfeit costs in the books of records.

Innate Risk is surveyed at Micro and Macro Level in the Financial Statements of the Company. Control Risk is evaluated on the Internal Control of the Entity. On the off chance that Inherent Risk and Control Risk are high, the Detection Risk ought to be kept at low by the Auditor to make Audit Risk satisfactory and bad habit a-versa.

The Following alterations to methods would be actualized:

1.) Internal check Procedures ought to be actualized on Related Party Transactions.

2.) Cut Off Date Procedures.

3.) Checking in Detail the noteworthy Entries at Year End.

4.) Internal Audit Team and Audit Committee ought to be set up in the Organization.

5.) Analysis of proportion and patterns of Profits with Turnover.

6.) Joint/Dual Authorization in Issuing Check rather than Single Issuer.