Question

Triple J Movers Ltd. is owned by Jacques Tétreault. The company used to be profitable but several new small companies have started to compete with Triple J, off ering very low prices that Triple J cannot match. Jacques thinks he can make his company profi table again if he eliminates his competitors, which will allow him to raise prices. He therefore decided to purchase one of his competitors each year for the next four years. The first company he bought was a proprietorship called Jerry’s Trucking. Jacques has hired your audit firm to review the accounting system and controls at Jerry’s Trucking to see what changes are needed before he can integrate it into Triple J Movers. Jacques hopes there are not many problems. You interviewed the owner of Jerry’s Trucking and the company’s bank manager and learned the following information: The company has customers in both Canada and in the United States, and the owner was not very knowledgeable about customs fees that must be paid and regulations that have to be followed when transporting goods across the borders. Also, the owner, Jerry, often simply took any cash that the business earned and spent it on personal items, instead of taking a salary from the business. There is only one office staff member besides Jerry: Jerry’s cousin, who does all of the bookkeeping. His cousin is not an accountant but has taken some accounting courses. Jerry explained that controls at Jerry’s Trucking are strong because: ● He can trust his cousin completely. (Having honest employees is important for effective control.) ● Jerry personally checks all of the bookkeeping entries, making any corrections he feels are necessary. ● At the year end, Jerry takes the bookkeeping records to a tax preparer, who prepares his tax return. Discuss the inherent risk at Jerry’s Trucking based on the above information. Include six observations in your answer.

Answer 1

Hi there,

Inherent risk is the risk which can occur due to failures out of our control. Such as data complexity, forecasting, decision making involving an expert judgment.
With consideration to the aforesaid scenario, the inherent risks Jerry's Trucking could face are as below:-

1. While preparing financial statements, as it requires standardized universal specifications.
2. Excess taxation, the lack of knowledge over cross-border transactions would increase the unnecessary payment outflow.
3. The collaboration initiated would require an intense level of detailed working, wherein the entire accountancy is being taken cared of a single person "his cousin", which could lead to numerous calculative errors. This reminds me of a case in the late '90s where just because of a typing error of a Zero"0", a complete sale was devalued by millions and the buyer suffered a million dollar loss in the deal.
4. Since the cousin is not a Professional Accountant, it would be having the least knowledge about interest rated effects which would be very ineffective while proposing long term investments or debts
5. Auditing cannot successfully be executed due to prevailing incompetencies.
6. A non-standardized pattern of remuneration would be lead to major complications while preparing the statement of owner equity which would lead the complications while preparing the balance sheet.
7. As stated Jerry trust his cousin and has handed over all the accountancy responsibilities to him to which I would like to mention that in the real world the business does not run emotions. Trust is not any substitute for knowledge. Although it is very much required for a long term prospect. So in order to balance the equation, there should be some competent hiring at responsible positions.

I hope the above explanation would meet your requisites.