Question

(Auditing Principles & Procedures)

Case Study

Assume that you are an audit manager for Haya & Partners Certified Public Accountants, a firm that has recently gained two new audit clients of a similar size. Your audit staff have completed their preliminary investigations of the two clients. You are reviewing their notes which can be summarized as follows: -

Client 1 Norah is an old-fashioned family company which has been in business for over a thirty years and trades as wholesalers of fruit and vegetables. Its management structure is divided into five layers ranging from supervisor, deputy manager, manager, senior manager and director. The senior managers and directors have been with the company for many years. Each level of management has clear authority limits set down in the company manual, which also sets out detailed written procedures for every job. Management at all levels generally has an unforgiving attitude to errors and inefficiencies. Most of the systems are paper-based, although the accounting ledgers are maintained on a computer and there are rigid systems of authorisation before transactions can be processed. Staff turnover in clerical posts and at supervisor and deputy manager level is high. -

Client 2 Sumayah Advertising Est. is a new company set up six months ago. It trades as a website design business and as an advertising agency. Sumayah Advertising Est. is run by two sisters who manage the business jointly. Sumayah Advertising Est. mostly employs creative people but it does have a small clerical staff to deal with billing and time recording. The approach to work is casual, spontaneous and rather uncontrolled. Error detection is not seen as a priority. The management’s view is that they will deal with errors and problems when they arise. Staff are happy and so staff turnover is low. Required In your review of the control environment for each of these clients, what conclusions would you draw about the risk of error arising in the accounts?

NO HAND WRITER PLZ, Thank you.

Answer 1

FOR CLIENT 1:

Norah has strong internal control in place which can be clearly seen from the follwing points:

a. Proper heirarchy of Authority and Responsibility in the organisation.

b. Unforgiving attitude of Manager's for any mistake.

c. Rigid systems of Authorisation before transactions can be processed.

However the audit risk areas are:

a. High Employee Turnover at lower posts of Clerical, Supervisor and Management Levels. The organisation showing high attrition which reflects lack of employee empowement and lower satisfaction level.

CONSIDERING ALL ABOVE FACTS, IT CAN BE CONCLUDED THAT THERE IS VERY LOW RISK OF ERROR ARISING IN ACCOUNTS.

FOR CLIENT 2:

Lack of Internal Control can be clearly seen from the follwing observations:

a. Lack of well defined Organisational Structure.

b. Unsystematic, Casual, Spontaneous and Uncontrolled Work Style.

c. Error detection is not priority.

d. Low Employee turnover.

FROM ABOVE POINTS, IT CAN BE CLEARLY SEEN THAT THERE IS HIGH RISK OF ERROR ARISING IN THE ACCOUNTS.