Question

King Companies, Inc. (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. KCI has gone from two auto parts stores to five stores in the last three years, and it plans continued growth. Eric and Patricia King own the majority of the shares in KCI. Eric is the chairman of the board of directors and CEO of KCI, and Patricia is a director as well as the CFO. Shares not owned by Eric and Patricia are owned by friends and family who helped the Kings get started. Eric started the company with one store after working in an auto parts store. To date, he has funded growth from an inheritance and investments from a few friends. Eric and Patricia are thinking about expanding by opening three to five additional stores in the next few years.

KCI employs 20 full-time staff. These workers are employed in store management, sales, parts delivery, and accounting. About 40% of KCI’s business is retail walk-in business, and the other 60% is made up of regular customers for whom KCI delivers parts to their locations and bills these customers on account.
During peak periods, KCI also uses part-time workers.

As part of gaining an understanding of KCI, you inspect (1) the accounts receivable trial balance that lists amounts owed by each customer and (2) an aging of accounts receivable schedule. One customer, Tire Repair Specialists (TRS), has a large material balance that is more than 90 days past due. You discuss the TRS balance with Jonathan, one of KCI’s accounting staff, and he says there are rumors that TRS is having serious financial difficulty. Jonathan says no adjustment or allowance has been made regarding the TRS account.

You just completed a continuing professional education (CPE) course at your firm, Thornson & Danforth, about audit documentation. AU-C 230 has specific requirements about documenting audit work. In particular, paragraph 9 states:

“In documenting the nature, timing and extent of audit procedures performed, the auditor should record:
a. the identifying characteristics of the specific items or matters tested;
b. who performed the audit work and the date such work was completed; and
c. who reviewed the audit work performed and the date and extent of such review.”

In addition, paragraph 11 states:

“The auditor shall document discussions of significant findings or issues with management, those charged with governance, and others, including the nature of the significant finding or issues discussed, and when and with whom the discussions took place.”

Based on the information, evaluate which accounts and assertions are at risk of misstatement.

Answer 1

Solution ::

1. Need of Internal control in small entitites is more stringent rather than in big corporates, where the putting control ,its efficiency and effectivness is itself a question. So, requirement of internal control in small entities is important and has its own pros and cons.

Let discuss with the advantages:

- . Financial reporting transparency: Internal control brings the transparency in reporting of financial statements to stakeholders, build the public confidence and helps in making comparision with competitiors in industry.

- . Misappropriation of facts/ figures: Chnaces of fraud / influence for self gain and also intentionally is very high, benefit onselves from corporate cost is one of the empoyees mindset in the small entities, implementation of same will curb, restrict the same at higher riskier level.

- Safegiuard of assets: Internal control helps in safeguarding of assets , prevent stealing and misuse of organisational resources. and ensure compliance with operational requirement.

disadvantages: Internal control not having disadvantages but yes, difficult in its implementation, checking its efficiency and effectivness which helps organisation to operate and perform in better way and same will also reflect  in its financial statements.

Resistance from employee: effectivness Internal control basis is segragation of dutoes , maker - checker appeal. resistance from employees for a task that can be handled by single user screened through two - levels. i.e maker and checker and its requirement that both maker and checher need to be different person also.

Lengthy process: Deployment of control is not a easy task, it includes the phase of whole process analysis, change understandability of process, walkhroughs, risk analysis, control required , risk classsification etc, all this is time consuming process and need to be tested on annual basis to assure that control in place are effective in nature.

2.   In the given case KCI is being in auto part trading business. Privately owned. Less numbers of employees.

Knowing the facts of the case, currently jonnathan handling the accounting department and heading to its retirement, Abby is graduate and naive in the functional and operational of the KCI and its management too.

Drawbacks required to be curbed on: Appointment of assistance: Jonathan is heading to its retirement appointing assistance for him will take a burden from him and easy for pass on the responsibility as handled by the jonathan and meanwhile till its retirement knock the door most things will be handled by the assistance and jonathan will act as a checker during the work is completed by his assistant.

Payroll Responsibilities: Abby is currenlty handling payroll department who is complete fresher, chances of fraud is very high in payroll departmenta s funds are involved, putting abby solely involved put KCI at great risk. Putting a higher authority above abby helps him to learn and provide KCI a good and talent resources to be kept in organsiation for long prospectively.

It is good that employee are happy and doing their work in appropriate manner , it is the duty of organisation to keep them motivated for their stature by giving benefits in terms of monetary , non - monetary by way of block holidays on rotational wise. It builds sense of confidence among employees.

Control environment:

Lack of Maker - Checker

- Authorization matrix is not appropriate

- Proper segregation of duties

- Rotation of duties in department

Above facts are lacking in the KCI for effective internal control.

Thank you::::