Management Antifraud Programs and Controls

Question: Describe about the Management Antifraud Programs and Controls. Answer: a) S.No Basis Audit Planning Issues 1 Circle Rate While performing the audit of City Ltd. (Property developers) identification of circle rates and calculating the same is the major area of concern, since the company is facing downturn in the commercial property sector it was difficult to obtain accurate circle rate of the area. Also it is to be reported if the land and building is sold higher than the circle rate which will be difficult to obtain in this case. 2 Market Scenario Since there are few buyers of this project, creating a suitable market strategy to attract the buyers for this project is essential. Auditor needs to address the issue of appropriate and suitable audit strategy of the company that will benefit the company in the future projects also. 3 Customer's Identity Perspective Downturn of the commercial property sector is a major issue as the sales of the company reduces to a significant level and it makes it difficult for the auditors to obtain the data about the customers identity, proper verification of the allotment letters should be done and the personal data of the buyers such as Id which is in companys records to ensure that the sale has actually taken place and there are no bogus customers. 4 Going Concern Auditor should after obtaining the data of the companys performance make judgments about the going concern of the company, if the going concern of the company is questionable the financial statements should disclose such facts and auditor should mention the same in the audit report b) S.No. Basis Audit Planning Issues 1 Report Extraction Web Ltd. In this case has purchased a new software, thus the report generated from the new software is to be verified by the auditor to ensure that the report is complete and accurate and is free from any errors. 2 Software Knowledge The auditor should be aware about the working of the new software purchased and the areas which requires attention. Auditee should also have the complete working knowledge of the software and management should ensure that the software purchased meets their requirement needs. 3 Testing the Software Testing the software is an important part of the audit, dummy entries should be entered in the software to ensure that the correct and effective results are generated. These tests are done to ensure that the software can be applied in the company effectively or not. 4 Flexibility Auditor is concerned whether the new software can adapt the changing information needs of the company and can accurately meet the same. Whether the software meets the changing external and internal environment needs. c) S.No. Basis Audit Planning Issues 1 Storage costs While planning the audit, auditor should focus on the storage costs incurred by the Beauty Pty Ltd, as the lead time is reduced by transferring the goods from Australia to overseas branch the storage costs to the company will increase. 2 Overall Costs Since the Beauty Pty Ltd established an overseas operating branch the overall cost of the company will increase due to increase in the labour cost, employee costs, raw material costs, office space etc. The auditor should ensure that the costs are as per the requirements and within the budget. 3 Market share The auditor should calculate the increase in the market share of the company, whether establishing new branch has positively affected the company and has increased its market share and the company has earned more revenue which exceeds the cost of establishment of new branch overseas or not. 4 Prospective Customer Base The auditor should compare the sale of the current year after the establishment of branch with the previous year to find out the percentage increase in sales and the increased customer base of the company. Whether the branch established overseas will be able to generate more customers in the future for the company, and will ultimately increase the companys profit or not. Solution No. 2 a) Various issues should be considered to decide which approach should be followed (substantive approach or test of control approach). Identify different type of risk whether it is inherent risk, control risk or detection risk. Level of risk should be considered to decide which approach (substantive approach or test of control approach) should be followed to mitigate the risk. Preliminary assessment should be performed to know which compliance procedure should be followed. If inherent risk is high then substantive procedure should be conducted but if inherent risk is low then test of control should be followed. To know which approach should be followed one should know about the existence of various types of risk and their level. Inherent risk arises at a level of management. Control risk also arises at a level of management whereas detection arises at auditor's level. Level of risk should be considered before applying compliance procedure. Factors affecting risk at the level of financia l statement are integrity of management, management experience and knowledge, unusual pressure on management, factors affecting industry. Factors affecting at the level of account balance and transaction are quality of accounting system, accounts prone to misstatement, asset which are prone to misappropriation, occurrence of unusual transaction at or near end period. Cost effectiveness, potential of human error, manipulation by management should also be considered to decide which approach should be followed. b) There is an inverse relationship between inherent risk plus control risk and detection risk. IR+ CR = 1/DR If detection risk is low then substantive procedures will be high, if detection is high then substantive procedures will be low. And as we know there is inverse relationship between detection risk and inherent risk+ control risk. So, if detection risk is low then inherent risk will be high and control risk will also be high. We will apply substantive procedure in this case. In the above case study inherent risk, control risk and detection risk is medium for disclosure and existence of financial leased asset. Hence in this case we will apply both the control substantive as well as test of control because all risk exists at medium level. For measurement completeness of depreciation expense inherent and control risk is low and detection risk is high. Hence in this case test of control will be applied significantly because we know that if inherent risk and control risk is low , we have to apply test of control in this case( inverse relationship). Similarly for right obligations for vehicles detection risk is high and other two are low in this case we will apply test of control (same as previous case). For valuation of vehicles detection risk is low so substantive procedure should be performed and there is inverse relation between IR+ CR DR. c) To check the accuracy completeness of depreciation expense, test of control approach should be followed. Auditor should check the authorization of purchase for minutes of board. Auditor should verify who is authorized for disposal of important assets. Auditor should check whether the non current asset register exist or not and he should ensures that all the assets are identified and appropriate comment is provided about the condition of asset. Auditor should verify the depreciation chart rate and change in rates of depreciation and who is authorized for the same. Auditor should check all the relevant calculations regarding depreciation of the asset. Auditor should conduct physical verification to know whether asset exists or not which are shown in books of accounts. Auditor will evaluate which method is followed by Vroom ltd. Straight line method or written down value. He assures that method to recognize the depreciation remain same throughout the period. Accounting policy follow ed by vroom limited should be same throughout the period. If vroom limited shift from straight line method to written down value and vice versa then appropriate disclosure should be made by Vroom limited. To ensure the effectiveness and completeness of depreciation expense above audit procedures should be followed by Vroom limited. Solution No. 3 Accounting information should be communicated in such a way which contributes to the objective of the organization. Auditor plays a very vital role in communicating accounting information. Auditor provides assurance to the users of the financial information that accounting information provides true and fair view and it is free from any biasness. Both the term auditing and communication of accounting system are interrelated. Audit is a systematic and independent examination of books, records, documents and vouchers of the organization to ascertain whether the financial statements are free from material misstatements and provide true and fair view of the financial information. Preparation of financial statements is the primary responsibility of the management of the company. Companies take important steps to ensure that the records are accurate and are free from any material misstatement. Important measures includes to maintain controls over both the records and assets of the company, hiring outside auditors which independently verifies the fairness of the financial statements, formation of committee of board of directors to oversee the integrity of other safeguards. Audit is an examination of financial reports which management prepares; to ensure that they are prepared as per the generally accepted accounting principles and they clearly represents what they claim. Auditing the accounting information which is to be communicated to the users of financial statements such as investors, stakeholders, lenders (banks, financial institutions, and creditors), management, government etc is necessary to ensure that the data presented is accurate and complete and is free from material misstatements. If the accounting information is audited then the users of accounting information can place more reliance on the information provided. Opinion of the independent auditors on the accounting information communicated through Balance sheet, income statement, Cash flow statement etc. helps the investors to evaluate whether it is profitable for them to be associated with the company and whether the company is carrying on its operations in an efficient and effective manner as per the prevalent laws and regulations. Only a licensed CPA can issue an audit report as they have responsibilities towards general public as well as of the specific business that take up his se rvices. While performing an audit the independent CPA examines the transactions of the company and the accounting methods which are used to account for these transactions. There are two tools of financial communication which are accounting information and financial information. For determining what financial information should be provided and what values it must contain we should consider the types of users to whom the financial information is addressed as well as the purpose for which they are using the information communicated to them. For the investors audited financial statement is important to ensure that the company in which there funds are invested operates in an efficient and effective manner and complies with all the generally accepted accounting principles, also to obtain the information about the profit earned by the company, value of their shares and dividend income earned. Government uses the audited financial information to ensure that the company complies with the appropriate laws and tax requirements, company is regular in depositing amounts in the appropriate statutory funds established and whether there are any defaults made by the company. Lenders use the audited financial information to evaluate the credit worthiness of the company, they obtain data about the other lenders of the company, mortgages of the company, banks also relies on the opinions of the auditors on the financial statements of the company and prospective financial information which is provided by the auditors to provide loans to t he company, banks and financial institutions requires the clients to submit the audited information before providing them with loans and grants. Thus as per the above information, there is a close relationship between auditing and accounting information, before communicating the accounting information the same should be audited to secure the faith of the users of financial information and to provide them the assurance that the affairs of the company are conducted in the appropriate manner. References: T, Joseph Management Antifraud Programs and Controls. American Institute of Certified Public Accountants. New York. 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