Question

SCENARIO-1

ZED plc, a Construction company underwent a major restructuring with new management takeover. The old CFO Mr. John was terminated after the company found a lot of cash embezzlement and forgery work in accounts and invoice payments. Mr. John who was with the company for 15 years had the full authorization power in the company as most of the transactions were routed through his personal account.

The new management was headed by Mr. Fahad. Mr. Fahad noticed that the books and records for the last 8 months were incomplete, cheques to suppliers had got dishonored and the company could not keep track of cash movement.

The new management now wants to get things right and bring in proper control measures. The first initiative taken was to update its accounting records. ZED plc needs to get an immediate review done by their auditor MARKERS & Co. as part of takeover procedure and to submit the audit report to the bank.

Question 1: - (based on Scenario 1) “One of the good management principles is to have a sound Internal control system.” Comment on the failures in internal control system in ZED plc. before takeover and suggest areas of improvement in having a sound internal control system. Page 5 of 6 Assignment /summer/2020

Question 2: -( based on Scenario 1) “Auditors should maintain their fundamental principles in all their audit work while dealing with the client. “ Explain the principles and ethical conduct, that MARKERS & CO should follow in this case, while doing the review work of ZED plc.

Answer 1

Answer 1= It is very important for any business organization to have effective internal control so that the different types of business transactions can be tracked down and its sources and destinations can be found. The strong internal control will also facilitate the prevention of any financial fraud, misrepresentation of business information, facts, and any type of corrupt actions by the employees of the organization and will help in ensuring the promotion of the shareholder's interests.

If we look at the given scenario, it is clear that the company lacks in having a strong and tight internal control as the previous CFO committed a lot of financial frauds and used the company's resources and funds for his own benefits. There was no internal or external auditing that is very important for internal control. The misuse of funds of the company can be tracked as the ex- EFO used it to build his own balance. The payment of the suppliers was not paid and similarly, there were many such incidences which show that the complete absence of the internal control.

In order to improve this, first of all, it is important for the company to develop the strict guidelines for every business transaction and monitoring by both the internal auditors and the external auditors. The concept of corporate governance must be implemented that will ensure that all the information related to the company is publicized and it will be open for the public scrutiny to prevent any type of fraud. Anyone who is found guilty of breaching the corporate governance guidelines must be punished.

Answer 2= The basic and most fundamental principle of any auditing process is to ensure that all the accounts and information are verified with the reliable sources and any kind of misrepresentation or lack of consistency must be reported to the corresponding authority. No work of misrepresentation of misinformation must be hidden from the stakeholders and all these types of incidences must be presented in the audit report. The financial frauds, inconsistency, irregularities all must be reported in the audit report. MARKERS & CO must follow the high level of ethics and professional accountability and thus all the irregularities found on the organization must be included in the audit report that has to be submitted to the bank so that the correct financial position of the company can be judged to take various actions.