In: Accounting
You are the audit manager of ChefNZ Ltd, a large company, which
runs a number of select gourmet restaurants throughout New Zealand.
During the planning phase for the current year audit, you note the
following information:
Darcy Strong, the general manager has discovered a fraud involving
the theft of more than $70,000 of cash. The person(s) who stole the
cash were waiters/waitresses who simply pocketed any cash they
received from restaurant customers and destroyed the manually
generated hard copy bills for the orders charged to these
customers. No correcting entries have been posted as yet, because
the fraud is still being investigated and Darcy is not sure of
exactly how much money has been stolen.
You plan to ensure that relevant Internal Control Questionnaires
(ICQs) are checked to ensure that they properly cover the above
scenario.
Required:
a) Identify and explain which financial statement assertion is currently not true with regard to the restaurant sales amount in the accounting records of ChefNZ Ltd.
b) Identify two internal controls you would expect
to be in place to prevent and/or detect theft of this nature. Your
answer should include identifying at least one relevant control
from any two of the following possible categories of
controls:
i) source document design;
ii) independent checks or reconciliations; and
iii) personnel or segregation of duties.
c) Briefly explain what an Internal Control
Questionnaire (ICQ) is and what it is used for.
d) State how you would test each of the controls
examples which you have identified in (b) above, using a different
audit procedure for each.
A.
There are two financial statement assertions that have been violated in the given case. Completeness and Understandability and Classification.
Completeness: All account balances, transactions and disclosures that should have been recorded have actually been recorded and included in the financial statements.
Understandability & Classification: Transactions have been recorded in the proper accounts. Financial information is appropriately presented and described, with disclosures clearly been expressed.
B.
Going forward with this case, two internal control activities should have been in place in order to prevent and detect fraud of this type. They are namely, independent checks to maintain Accountability of the assets and segregation of duties.
Independent Checks for Accountability: Independent checks involve the verification of work previously performed by other staffs. Examples can be:
Segregation of Duties: Segregation of duties involve ensuring that individuals do not perform incompatible duties. To say, duties should be segregated such that the work of individual leaves a cross-checking on the work of another individual. No one single individual should be in a place to take charge of end-end-end activity flow from the initiation to the end. If that happens, one can be well placed for perpetrating a fraud like stealing cash and simultaneously destroying the evidence like shredding the vouchers and walk away freely leaving no impact on the financial statements.
Generally, assigning different people the responsibilities of authorizing transactions, recording of the transactions and maintaining custody of the related assets reduces the opportunities for any individual to both perpetrate and conceal errors (intentional) or fraud in the normal course of duties.
C.
In order to obtain a clear understanding of the Internal Control of the Auditee, the auditor needs to have certain mechanisms handy, one of the vital method is called Internal Control Questionnaires or Checklists.
An internal control questionnaire (ICQ) generally consists of the list of questions to be answered briefly in the form of “Yes”, “No” or “Not Applicable (NA)” type of responses. A negative response denotes to draw attention to a possible weakness in the internal control system. However, written explanations must be given for the negative responses. The format of the questionnaire can also be open-ended requiring explanation by the employee/s being interviewed.
The ICQ is designed to address internal controls over an element, account or a process. More specifically, these questions should address each of the relevant control procedures. There is no generalized or standard format for ICQs. Because the questions to be inserted depend on the entity structure under audit.
D.
Independent Checks: Matching stocks with the revenue is a relevant consideration to correctly determine the amount of sales. With each and every single order, how much cash is collected is to be accumulated and deposited in a bank account at say a weekly interval. At the end of month, all the tokens generated for the orders made is to be reconciled with the collections during the month.
Customers who would be paying in cash must be segregated from those who are paying by cards. Individual staffs must be assigned for different activities. Different staffs have to be assigned for: Taking the orders, processing of the orders, waiters who serve the food, billing staff and finally the personnel at the cash counter. One supervisor should be there to cross check the tokens deposited with the receipts generated for each customer each day. The staff who would be doing the accounting work has to be a completely separate person. With each of the order served successfully and the payments made, the accounting staff should record it in the books properly and promptly.