Question

Grocery Stores Inc. (GSI) is a regional chain of grocery stores operating in southern Ontario. GSI stores are strategically spread throughout the province, outside major metropolitan areas. The great distances between the stores and the head office make them difficult to manage and control. For some time GSI has been tackling a variety of efficiency and image problems, hoping to find a way to improve its stable but lackluster performance and attract additional capital. One improvement that is to be implemented is the upgrading of the point-of-sale (POS) computer systems. Currently, each store uses old stand-alone cash registers with stand-alone credit/debit card systems. There is no tie-in to the inventory systems. Ted Bear, GSI’s vice-president of store operations, believes that several benefits will occur with the new systems. He wants to improve the stores’ image not only with customers but also with potential investors. He wants to hold the line on expanding existing store facilities or hiring more checkout personnel by increasing the flow through capacity at existing locations. In addition, he believes that the information provided by the on-line, real-time capture of sales and inventory data will improve GSI’s management of inventory, reduce carrying costs and out-of-stock conditions, while helping to reduce the alarming amount of waste and pilferage that GSI experiences, which is above industry averages. Mike Jones is the new audit senior assigned to the coming financial statement audit of GSI. Nina Ng, the previous audit senior, has left the firm and joined GSI. Her job title is assistant controller, but as GSI does not have an internal audit department, she will also be responsible for assessing efficiency and effectiveness of GSI’s operations. Nina’s first task will be to conduct an operational audit of GSI’s sales and inventory management systems so that any needed improvements can be implemented as part of the coming information systems upgrade. Nina reports to GSI’s corporate controller, who continues to be the liaison with the financial statement auditors. The controller hopes that the audit fee for the current year will go down, because Nina can prepare some of the working papers for the audit. Nina will have an incentive to reduce costs, as she has been given stock options and will have a bonus tied to administrative ACCT 322 – Auditing 1 Fall 2020, Group Case Assignment 3 – Page 2 of 2 cost reduction. Mike’s firm will be assigning Mike and two new employees to GSI’s audit. The new employees have just completed their university degree and will not have any time for additional training before starting the GSI audit. Mike is counting on Nina to help these two staff, since her knowledge of auditing will compensate for their lack of training. Since there has been no change in risks, Mike plans on conducting the audit the same way this year as last year. Just prior to the commencement of the audit, two months prior to the year end, GSI informed your firm that it has acquired a competing chain of regional grocery stores, NAS (New Age Stores), that has six stores. These stores are larger than GSI stores and have a somewhat different type of product focus. NAS has a broad selection of local produce as well as locally manufactured and packaged products. Many of these are cottage industry products such as organic sauces and jams, dehydrated fruits and vegetables, and locally butchered meats. NAS has a higher profit margin on these products, but is having trouble managing inventory from so many suppliers. It has a larger than normal waste percentage as it must discard products that expire – many organic and locally produced products do not have preservatives and have a shorter shelf life. Required: Note that points raised under each part of the question must be different.

A. Use the definition of auditing to assess Nina’s operational audit of the sales systems.

B. Assess whether Mike’s plans for the financial statement audit violate GAAS. Justify your response.

C. Provide five specific quality control actions that Mike or his firm could take that would address any GAAS violations you discovered in Part C. Match the actions taken to the GAAS violation.

D. Use the eight phases of the financial statement audit process to describe actions that the auditor should take in the current year’s financial statement audit that address changes to the risks in the engagement from the prior year.

E. Provide five specific balance-related audit objectives for the audit of NAS inventory that address the risks associated with NAS inventories described in the case. State the general audit objective associated with each specific balance-related audit objective.

Answer 1

A) Definition of auditing: i) “Auditing is a systematic examination of the books of records of business or other organization in order to ascertain or to verify and to report upon the facts regarding its financial operations and the result thereof.” –Prof. Montgomery

ii) “Audit is not an inquisition and its mission is not one of fault finding. Its purpose is to bring to the notice of the administration lacunae in his rules, regulations and lapses, and to suggest possible ways and means for the execution of plans and projects with greater expedition, efficiency and economy.” –A.K. Chandra

Nina's job title is assistant controller, but as GSI does not have an internal audit department, she will also be responsible for assessing efficiency and effectiveness of GSI’s operations. Nina’s first task is to conduct an operational audit of GSI’s sales and inventory management systems so that any needed improvements can be implemented as part of the coming information systems upgrade. Nina should examine the books of records of business, verify them and suggest possible ways and means for the execution of plans and projects with greater expedition, efficiency and economy.

b)  Mike plan on conducting the audit the same way this year as last year since there was no changes in risks is wrong and violates GAAS. Also, The new employees have just completed their university degree and will not have any time for additional training before starting the GSI audit. this is also against GAAS standards.

According to general standards of GAAS, The auditor must have adequate technical training and proficiency to perform the audit. here, the 2 new employees heve just completed their university degree and  do not have adequate training to perform the audit. Also, Mikes plan on relying Nina to help these two staff, since her knowledge of auditing will compensate for their lack of training is also against the GAAS standards as Nina is a part of the internal auditing functions of the firm. According to Standards of Field Work of GAAS,

1. The auditor must adequately plan the work and must properly supervise any assistants.
2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.
3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

c) Quality control actions that Mike or his firm can take that would address the GAAS violations they have done:

1. Personnel management:

Assign well trained and proffesional employees for GSI's audit. Here,  Mike’s firm thought of assigning Mike and two new employees to GSI’s audit. The new employees have just completed their university degree and will not have any time for additional training before starting the GSI audit. A firm's quality control system depends heavily on the proficiency of its personnel.

In making assignments, the nature and extent of supervision to be provided should be considered. The quality of a firm's work ultimately depends on the integrity, objectivity, intelligence, competence, experience, and motivation of personnel who perform, supervise, and review the work. Thus, a firm's personnel management policies and procedures factor into maintaining such quality.

2. Independence, Integrity, and Objectivity:

Policies and procedures should be established to provide the firm with reasonable assurance that personnel maintain independence (in fact and in appearance) in all required circumstances, perform all professional responsibilities with integrity, and maintain objectivity in discharging professional responsibilities. This could address the Mike's action to rely on Nina to help these two staff, which is against GAAS standards.

3. obtain sufficient appropriate audit evidence:

The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. Mike should not conduct this years audit the same way as the last year simply by assuming that there was no change in the risks. He should obtain sufficient and appropriate information from this is years financial and operational records and then do the audit.

4. Engagement performance:

Policies and procedures should be established to provide the firm with reasonable assurance that the work performed by engagement personnel meets applicable professional standards, regulatory requirements, and the firm's standards of quality. Mike or his firm should proffessional employees for the audit.

5. Monitoring:

Mike and his firm should monitor their actions to ensure:

1. Relevance and adequacy of the firm's policies and procedures.
2. Appropriateness of the firm's guidance materials and any practice aids.
3. Effectiveness of professional development activities.
4. Compliance with the firm's policies and procedures.   When monitoring, the effects of the firm's management philosophy and the environment in which the firm practices and its clients operate should be considered.

d) The eight phases of the financial statement audit process to describe actions that the auditor should take in the current year’s financial statement audit that address changes to the risks in the engagement from the prior year:-

1. Create A Plan Beforehand:

First of all, the auditor need to create a financial reporting audit plan and make sure everything has been documented appropriately. Audit planning reduces the audit risk to the minimum level. A person should always be available during audit fieldwork for smooth communication with the audit team. Then his/her hired team of auditors will supervise the engagement team members and review their work.

Open line communication must be maintained between the organization and the auditing team during the year instead of waiting for it to be discussed during the auditing process at the end of the fiscal year. This communication will allow the company to make appropriate changes.

After collecting the data based on risk assessment, the auditors develop a plan to test the accuracy of financial statements and internal control environment. Audit planning gives an auditor an insight view of the organization’s business and industry.

2. Keep Updated About Accounting Standards:

Accounting is a field where laws, rules, and tools keep on changing. To best serve the company, the accountant needs to keep himself up to date to manage or track data in a different way. In order to implement new standards, make sure the accounting person knows everything.

3. Follow Changes In Company Activities:

For financial audit, the auditor need to be informed about changes in the company activities like launching of a new program, the grant received, a significant change in the control systems and discontinuation of any activity during the year, or any impairments. Any other changes in activities other than those that may affect accounting and reporting should be communicated during the planning process.

4. Learn From Previous Financial Audit Adjustments:

It’s better to take a round of previous audit adjustments to happen last year, check out the internal control recommendations, or any special efforts encountered in the previous audit. They can become a good starting point as to not repeat the same mistakes twice.

During the planning, meet with the auditors, discuss what went well during last year’s audit and where there may be opportunities for improvement or more effective communication between the organization and the auditors.

5. Create A Course Of Events And Assign the Task:

Review the previous work papers and timetables mentioned by the reviewers, trying to get an explanation of the mentioned data when important. Assign roles and responsibilities to the responsible members and set deadlines.

Tackle the most troublesome, complex, or tedious zones first while planning an audit. Provide the drafts of financial statements, schedules, work papers or other items requested by the financial reporting experts on the first day of the audit.

6. Organize The Necessary Details:

Make suitable review plans and schedules that can be even considered for the future. Consider making subfolders for critical financial transactions and classifications, for example, money, income and receivables, costs and payables, speculations, fixed resources, debt, and so on to make it simpler to recovery plans.

Workpapers or other documents with sensitive information, like payroll should always be password-protected or should be kept in a restrictive folder.

7. Ask For Clarifications:

If something unclear is mentioned by the financial reporting expert, ask for an explanation so that significant errors or delays can be avoided. Auditors usually feel glad to respond to the complicated questions related to audit and financial reporting. Also, it’s better to ask questions about the business or organization to obtain information to prepare footnote disclosures.

8. Final Evaluation:

After reviewing all the necessary information, in the end, maintain a smooth line of communication with your financial auditors during the fieldwork and delivery of the audit report.

If you have some kinds of open items at the end of your fieldwork, it’s better to decide on the agreed-upon dates for all the details to be provided to your auditors when possible. If your auditor has to attend meetings with the financial department or board of directors then make sure your auditor has a proper date, time and other information about the meeting.