Introduction
Companies produce financial statements that provide information about their financial position and performance. This information is used by a wide range of stakeholders for e.g., investors, shareholders, banks, suppliers and customers in making economic decisions. Typically, those that own a company, the shareholders, are not those that manage it. Therefore, the owners of these companies, as well as other stakeholders take comfort from independent assurance that the financial statements is free from errors and accurately reflects the company’s financial position and performance.
To enhance the degree of confidence in the financial statements, a qualified external party (an auditor) is engaged to examine the financial statements, including related disclosures produced by management, to give their professional opinion on whether they fairly reflect, in all material respects, the company’s financial performance over a given period(s) (an income statement) and financial position as of a particular date(s) (a balance sheet) in accordance with relevant Generally Accepted Accounting Principles (GAAP). In many cases this is required by law.
Three questions/scenario have been written in the task tab. Please read each statement/scenario carefully, before attempting to respond to same.
Task
Group Work
Instructions - The tutor will divide the class into two groups. Each group will be sub-divided into 3 sub-groups. Each sub-group will be assigned to respond to one of the scenario below.
Question 1
Mac Co is a large private company, whose business activity is events management, involving the organisation of conferences, meetings and celebratory events for companies. Mac Co was founded 10 years ago by Danny Hudson and his sister, Stella, who still own the majority of the company's shares. The company has grown rapidly and now employs more than 150 staff in 20 offices.
You are a manager in the business advisory department of Flack & Co. Your firm has just been engaged to provide the internal audit service to Mac Co. In your initial conversation with Danny and Stella, you discovered that currently there is a small internal audit team, under the supervision of Lindsay Montana, a recently qualified accountant. Before heading up the internal audit department, Lindsay was a junior finance manager of the company. The members of the internal audit team will be reassigned to roles in the finance department once your firm has commenced the provision of the internal audit service.
Mac Co is an existing client of your firm, and to gain further understanding of the company, you held a meeting with Lindsay Montana. Notes from this meeting are below.
Notes of meeting held with Lindsay Montana on 1 June 2010
The internal audit team has three employees, including Lindsay, who reports to the finance director. The other two internal auditors are currently studying for their professional examinations. The team was ste up two years ago, and initially focused on introducing financial controls across all of Mac Co's offices. Nine months ago the finance director instruted the team to focus their attention on introducing operational controls in order to achieve cost savings due to a cash flow problem being suffered by the company. The tema does not have time to perform much testing of financial or operational controls.
In the course of her work, Lindsay finds many instances of management policies not being adhered to, and the managers of each location are generally reluctant to introduce controls as they want to avoid bureaucracy and paperwork. As a result, Lindsay's recommendations are often ignored.
Three weeks ago, Lindsay discovered a fraud operating at one of the offices while reviewing the procedures relating to the approval of new suppliers and payments made to suppliers. The fraud involved an account manager authorising the payment of invoices received from fictitious suppliers, with payment actually being made into the account manager's personal bank account. Lindsay reported the account manager to the finance director, and the manager was immediately removed from office. This situation has highlighted to Danny and Stella that something needs to be done to improve controls within their organisation.
Danny and Stella are considering taking legal action against Mac Co's external audit provider, Manhattan & Co, because their audit procedures did not reveal the fraud.
Danny and Stella are deciding whether to set up an audit committee. Under the regulatory framework in which it operates Mac Co is not required to have an audit committee, but a disclosure note explaining whether an audit committee has been established is required in the annual report.
Based on the above scenario, each team is required to evaluate each question carefully and respond accordingly.
Team A
(i) Evaluate the benefits specific to Mac Co of outsourcing its internal audit function
(ii) Explain the potential impacts on the external audit of Mac Co if the decision is taken to outsource its internal audit function.
Team B
Recommend procedures that could be used by your firm to quantify the financial loss suffered by Mac Co as a result of the fraud.
Team C
Prepare a report to be presented to Danny and Stella in which you:
(i) Compare the responsibilities of the external auditor and of management in relation to the prevention and detection of fraud; and
(ii) Assess the benefits and drawbacks for Mac Co in establishing an audit committee.
Professional marks will be awarded in respect of this requirement for the presentation of your answer, and the clarity of your discussion.
Question 2
You are an audit manager in Webb & Co, a firm of Chartered Certified Accountants. Your audit client, Mulligan Co, designs and manufactures wooden tables and chairs. The business has expanded rapidly in the last two years, since the arrival of Patrick Tiler, an experienced sales and marketing manager.
The directors want to secure a loan of $3 million in order to expand operations, following the design of a completely new range of wooden garden furniture. The directors have approached LCT Bank for the loan. The bank's lending criteria stipulate the following:
'Loan applications must be accompanied by a detailed business plan, including an analysis of how the finance will be used. LCT Bank need to see that the finance requested is adequate for the proposed business purpose. The business plan must be supported by an assurance opinion on the adequacy of the requested finance.'
The $3 million finance will be raised as follows:
Construction of new factory - $1,250,000
Purchase of new machinery - $1,000,000
Initial supply of timber raw material - $250,000
Advertising and marketing of new product - $500,000
Your firm has agreed to review the business plan and to provide an assurance opinion on the completeness of the finance request. A meeting will be held tomorrow to discuss this assignment.
You are required to:
(a) Identify and explain the matters relating to the assurance assignment that should be discussed at the meeting with Mulligan Co.
(b) State the enquiries you would make of the directors of Mulligan Co to ascertain the adequacy of the $3 million finance requested for the new production facility.
Individual Assignment
Question 3
You are an audit manager in Cedar & Co, responsible for the audit of Chestnut Co, a large company which provides information technology services to business customers. The finance director of Chestnut Co, Jack Prowle, contacted you this morning, saying:
‘I was alerted yesterday to a fraud being conducted by members of our sales team. It appears that several sales representatives have been claiming reimbursement for fictitious travel and client entertaining expenses and inflating actual expenses incurred.Specifically, it has been alleged that the sales representatives have claimed on expenses for items such as gifts for clients and office supplies which were never actually purchased, claimed for business-class airline tickets but in reality had purchased economy tickets, claimed for non-existent business mileage and used the company credit card to purchase items for personal use. I am very worried about the scale of this fraud, as travel and client entertainment is one of our biggest expenses. All of the alleged fraudsters have been suspended pending an investigation, which I would like your firm to conduct. We will prosecute these employees to attempt to recoup our losses if evidence shows that a fraud has indeed occurred, so your firm would need to provide an expert witness in the event of a court case. Can we meet tomorrow to discuss this potential assignment?’
Chestnut Co has a small internal audit department and in previous years the evidence obtained by Cedar & Co as part of the external audit has indicated that the control environment of the company is generally good. The audit opinion on the financial statements for the year ended 31 March 2014 was unmodified.
You are required to:
Evaluate the arguments for and against the prohibition of auditors providing non-audit services to audit clients.
Process
You may use all of the links below to learn more about fraud risk assessment, outsourcing of internal audit and more!!!The information contained in each link will enrich your entire learning experience. The more links you visit, the greater your chances of becoming a trailblazer.
http://www.russellbedford.com/index.php?option=com_content&view=article&id=479:outsourcing-internal-auditing&catid=91:features-and-analysis&Itemid=90 https://na.theiia.org/standards-guidance/Public%20Documents/PP%20The%20Role%20of%20Internal%20Auditing%20in%20Resourcing%20the%20Internal%20Audit%20Activity.pdf http://deloitte.wsj.com/cfo/2013/06/05/how-outsourcing-can-improve-internal-audits-strategic-capabilities/ http://deloitte.wsj.com/cfo/2013/06/05/how-outsourcing-can-improve-internal-audits-strategic-capabilities/ http://www.journalofaccountancy.com/issues/2003/Jan/AuditorsResponsibilityForFraudDetection.htm https://www.kpmg.com/RU/en/topics/Audit-Committee-Institute/events/Documents/2011-26-02-4_Responsibilities_Alexey%20Romanenko_eng.pdf http://ww2.cfo.com/accounting-tax/2010/04/what-is-the-auditors-role-in-finding-fraud/ http://users.ipfw.edu/pollockk/SAS99Article.pdf http://www.grfcpa.com/resources/publications/audit-committee-responsibilities/ http://www.bmss.com/news-story.php?cn=154 http://www.lerchearly.com/publications/428-could-your-company-benefit-from-audit-committee
Evaluation
Rubric:
|
Criteria |
Excellent |
Good |
Satisfactory |
Poor |
|
Introduction and Interpretation (5 marks) |
Introduction shows a sound grasp of the assignment brief and provides a clear outline of the scope of the essay. Key issues are stated in a concise manner and provide a framework for answering the question. 5 points |
Introduction shows a reasonably good grasp of the key issues; Some key issues are stated in an attempt to provide a framework for answering the question. 4 points |
Introduction shows a fair grasp of the key issues but not many issues are stated and so there is not a clear framework for answering the question. The introduction is not concise and rambles on at times. 2-3 points |
The topic is not well introduced; scope of the essay poorly defined; there is a launch straight into the essay with little or no attempt to introduce and define the topic, purpose of assignment is misunderstood. 0-1point |
|
Development/Quality of Argument/Understanding of Topics (20 points) |
Develops logical argument and clealy marshals the relevant ideas and evidence and their strengths and weaknesses; well argued exposition of the topics; all main issues have been explored fully, analysed and evaluated. 17-20 points |
Ideas are logically and clearly developed; some aspects of argument are weak; reasonable grasp of the topic and most of the main issues have been explored; evidence of critical evaluation; Most of the main issues in relation to the topic have been explored; evidence of some analysis and evaluation. 12-16 points |
Ideas are not always logical or clearly developed; Some aspects of the argument are weak; There is a reasonable grasp of the topic but many of the main issues have not been explored; Little evidence of analysis or evaluation. 7-11 points |
Poor or inappropriate organisation and sequencing of material; clear theme or line of argument not developed; Major weaknesses in argument not discernible; Few issues have been explored; little or no evidence of analysis and critical evaluation; The work is rather descriptive. 0-6 points |
|
Conclusion (10 points) |
The conclusion draws together the strands of the argument and reinforces the importance of the thesis statement; it creates a coherent perspective on the question and indicates links to related deep issues; it is based on the argument and evidence presented and gives a sense of completeness to the essay. 9-10 points |
A clear concluding section that draws together the various important points made but there is a rather brief conclusion to the essay which does not give the reader a strong sense of completeness. 7-8 points |
A conclusion that draws together only a few important points made and so does not reinforce effectively the importance of the thesis statement. It seems incomplete an does not leave a strong final impression on the reader. 4-6 points |
Conclusion merely rephrases the introduction; Little or no conclusion is not based on the argument and evidence in the essay. 0-3 points |
|
Presentation (5 points) |
Correct and effective use of English, accurate referencing. 5 points |
No problems with grammar; minor spelling errors; reasonably good use of English. 4 points |
Few spelling errors; some minor errors in grammar; syntax. 2-3 points |
Several intrusive spelling errors and many errors in grammar, syntax; So many intrusive errors in spelling, grammar and syntax that reading is difficult. 0-1 point |
|
Use of evidence/sources (5 points) |
Critical and wide ranging use of relevant literature backed up by good bibliography; evidence well evaluated; connections have been made between evidence and the framework of the question. 5 points |
Critical and wide ranging use of relevant literature backed up by a good bibliography; Some of the sources and material are relevant to the theme/topic. 4 points |
Use of relevant literature but from limited sources; some of the sources and material are relevant to the theme/topic. 2-3 points |
Inclusion of some irrelevant or unlinked material; Little evidence of supporting reading that shows inadequate preparation. 0-1 point |
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