Question

Tedy Brown has an accounts receivable insurance policy that allows the company to claim for bad
debts of up to $50 000 per annum. The amount covered under the policy has remained the same since
2012 (when the accounts receivable balance averaged $2 000 000). Since 2012, the average accounts
receivable balance has increased to $3 800 000.

Issue 2

Tedy Brown sales representatives are entitled to commission on sales above quarterly targets. Any
commission earned is required to be paid in the month following the quarter. In the year ended 30
June 2015, on two occasions, the commissions were paid three months following the quarter.

Issue 3

There were numerous occasions during the year where major debtors, representing 40 per cent of
gross revenues, settled their accounts 45 days after the due date. These debtors have been long
standing and reliable customers.

Issue 4

Tedy Brown does not enter into foreign exchange contracts to fix its exposure to foreign currency
movements, as it has never previously suffered significant foreign currency losses. During the year
ended 30 June 2015, Tedy Brown incurred foreign exchange losses representing 10 per cent of net
profit before income tax.

Required:

(a) Identify which two (2) items are primarily relevant only to the head of internal audit. Justify your answer.

(b) Identify which two (2) items are significant and direct concerns for both the external auditor and the head of internal audit. Justify your answer.

Answer 1

(a) The two (2) items which are primarily relevant only to the head of internal audit are Commission on Sales (issue 2) & Debtors (issue 3). It is so because these two items form part of the internal process, setup and accounting methods that the organisation has chosen. Unlike an internal auditor, whose goals are to improve the organization’s governance, an external auditor expresses an opinion regarding the company’s financial state and fair presentation to the public.

(b) The two (2) items which are significant and direct concerns for both the external auditor and the head of internal audit are accounts receivable and foreign exchange contracts. It is so because to verify, examine and provide an unbiased report, External auditors will report a true and fair condition to the public including, investors, creditors, and lenders. Internal auditors will look on this because to conduct standards which will help its companies eliminate ineffective or counterproductive practices, so they can run their businesses more smoothly