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The amount of misstatement in the accounts receivable is able to be calculated for which rectification is not made and instead the management has written off wrong amount of allowance for doubtful debt. Thus a qualified opinion shall be given in this matter since the effect is material and sufficient and appropriate evidence is obtained that the financial statements are not free from fraud and errors. The Allowance for doubtful debt can only be written off if the management has made proper estimate about the recovery of such accounts receivable. Since in the given situation it is clearly visible that the writing off of allowance for doubtful debt is not based on estimate but is being done to adjust the misstatement related to the account receivable, therefore the opinion shall be qualified by the auditor in accordance with Australian Standard on Auditing (ASA) 7052 and ASA 705 by explaining the effect of misstatement in accounts receivable and inadequacy of amount of allowance for doubtful debt written off (Schmidt, 2016).
As per AASB 1019 ‘Inventories’ Para 5.1 inventories shall be valued at an amount which is lower out of cost of such inventory and its net realizable value. However if it is impracticable to separately measure each item of inventory due to large quantitative of homogenous items and each having different cost the rule can be applied to group of sub\chi inventories. Here a retailer has valued its inventory at sales prices less sales margin which comes out to be cost of inventory and net realizable value is not considered which is a deviation from accounting standards therefore opinion shall be modified by the auditor. Since the effect on financial statements is material but not pervasive the auditor shall give a qualified opinion explaining the effects of misstatement on financial statements and net profit. As a result of wrong valuation of inventory the profit will be either overstated or understated.
The liquidation of a major customer of Block Company who contributes to purchase of 45% of its stock and non- availability of another customer of this size by the company which results in difficulties in sales of sufficient quantities is an event which relates to the existence of circumstances for discontinuation of operations by the company at Balance sheet date. This is neither a misstatement in financial statements nor an evidence that financial statements are not free from frauds and errors, however, ASA 570 Going concern and ASA 701 Modification to the Auditor/s report require an auditor to modify the report by adding a paragraph which highlights the uncertainty that relates to going concern. Since there is a situation which relates to the uncertainty of going concern of Block Company therefore the auditor shall modify the opinion by adding paragraph highlighting that the sales could not be made by the company in future being major customer is liquidated and it is unlikely that the company will find another customer of large size because of specific nature of the product of company (Jones, 2011).
As per AASB 1041 ‘Revaluation of Non-current assets’ an entity may choose valuation of its non-current assets to be cost value based or fair value based depending upon the initial recognition and the same basis shall be applied for every subsequent recognition. Since the Crouche Company has been valuing its buildings using the fair value method therefore the same shall be applied by the company. Thus the valuation of buildings by the company at 18.5 million despite cost being 12 million is correct. The opinion of auditor shall not be modified in this regard. In accordance with ASA 701 the auditor shall issue an unqualified opinion since sufficient and appropriate evidence has been obtained that the financial statements are free from material statements and comply with the accounting standards and there is no change in accounting policy which has to be disclosed in accordance with AASB 1001 ‘ Accounting policies’ (Nguyen, 2014).
AASB 1019 ‘Inventories’ require a company to ascertain the cost of inventory by FIFO or weighted average cost formulas unless the items are not ordinary interchangeable and relate to any specific project. Kaycee Company values its inventory at LIFO method and is unwilling to change to FIFO. This is the case of noncompliance of accounting standards by the company. Since the amount of misstatement is known by the company and the amount is limited to the effect of using LIFO method by the company as determined by the auditor therefore sufficient and appropriate audit evidence has been obtained by the auditor that the financial statement are not free from material misstatements. Thus the auditor shall issue a qualified opinion explaining the effect of using Life method on the financial statements of company in accordance with ASA 705.
As per AASB 1017 a reporting entity is required to disclose the relationship and transactions with related parties of reporting entity. The Genome Company prepared its financial statements without disclosing the details of related party because of privacy issues despite the effects on financial statements being material. This relates to the deviation from the compliance of accounting standards. Therefore the auditor shall give an adverse opinion in accordance with ASA 705 since the effect of non-disclosure of related party transactions is material and pervasive. The effect is not related to specific elements of financial statements therefore they have a pervasive and material effect on the financial statements resulting in the modification of opinion by the auditor. Thus auditor shall give an adverse opinion explaining the effect of non-disclosure on financial statements (Martínez, 2014).
The Office Two Company indulged in the selling of stationery and office equipment’s sells its products through its physical store or shops and internet ordering service by receiving orders on phone and making deliveries of products to respective customers who are located within the Sydney Metropolitan area. The staff members of the company make the delivery of products within one day from ordering. All the sales whether at shop or through online orders are made in cash? The procedure adopted by the company for the sales and collection and deposition of cash includes generation of an invoice by a staff member for customers who come to store and purchase products and giving a receipt on copy of invoice by same staff member. For customers who order on phone are given sales number by the staff member who generates two copies of the order and make arrangement for the delivery of product by giving the ordered products and copies of invoice orders to the driver and after that the driver makes the delivery of goods and collects the cash from the customer for the goods delivered to them. The driver also gives the customer a receipt on the copy of invoice and after returning to store hands over cash and copy of invoice to staff member of company. The staff member accumulates the cash of whole day and give to the Stores manager who locks the cash in the safe whole night which is deposited by the staff manager in the bank the next day where he goes alone with the cash (Wines, 2015).
Need of Standard Operating Procedures and Internal controls for a small business
Internal control refers to all those policies and procedures which are adopted by the business entity to prevent the operations of business from fraud and error and misstatements of facts and safeguard its assets. It enables the creation of an environment in which the business operates smoothly and effectively in compliance with the applicable framework and statutory obligations. The effectiveness of internal control determines the risk associated with the audit procedures. Strong internal controls reduce the inherent risk and control risk of auditor and increase the detection risk while weak internal controls result contrary. In any business the designing and implementation of internal controls is quite essential for the achievement of objectives of the business and prevention and detection of fraud and errors. It helps in reducing the risks of unexpected losses and allows the management of business to take appropriate action against the performance shortfall resulting in good management practices and overall growth and development of business (Xu, 2013).
Weaknesses in the procedure
Cash collection –Cash is the most important asset of any business. The Office Two company adopts the policy of complete cash sales therefore it is very important for the company to design and implement internal control mechanism for its cash collection procedure in order to safeguard its cash and also other assets such as inventory. The weaknesses in the existing cash collection procedure of company are as follows:
- The staff member who collects the cash at the store and from the driver and the staff member who generates and issues the invoice are not separate persons.
- The cash receipts are not pre listed by the staff member before handing over the cash to the Stores Manager.
- Daily cash receipts are not tallied with the deposit slips into the bank for the cash generated by the Stores Manager.
- A cash register is not maintained by the company for recording the cash sales by any other staff member than that who collects cash or issues invoice.
- The cash collected by the driver is not verified by the staff member to match it with the value of goods delivered by him.
Sales –The accuracy of sales is important for the business to determine the relevant figures of its stock and revenue in order to ascertain the growth of business. The management and other stakeholders require accurate and reliable information about the sales trends of the business which can be calculated only from correct sales figures on the basis of invoice generated and orders received. The accuracy of sales figures is ensured by the relevancy of internal controls implemented in the business operation. The weaknesses in the sales procedures of company are as follows:
- The sales invoices are not tallied with the cash receipts.
- A proper sales register is not maintained by the company for recording the sales from the invoices and comparing it with the cash collected and orders received.
Others –The other operations of the company such as delivery and supply of goods ordered by customers on phone, maintenance of the goods and inventory and deposit of cash into the bank also consist some deficiencies which harm the business functions operating effectively and result in increase of losses. The weaknesses in other procedures are as follows:
- The Stores Manager is alone responsible for the placing of cash at night and depositing the cash into bank the next day.
- The driver alone goes for the delivery of goods to customers and collection of cash from them without any staff member (Sun, 2016).
From the above mentioned weaknesses in the sales and cash collection procedure of the company it can be concluded that the internal controls in the operating procedures are weak thereby increasing the risk of frauds and errors? It can also be concluded that the company has not adopted the required control and monitoring mechanism for efficiency of its operations.
Based on the conclusions from the weaknesses in the sales procedure of Office Two Company the following recommendations are made:
- The duties of receiving and collecting cash from driver and customer and that of issuing and generating invoice shall be assigned to different staff members of the store.
- A cash register and sales register shall be maintained by the staff member at store for recording the daily transactions of sales and cash receipts.
- Before handing over the cash collected throughout the day the entries shall be made by separate staff member either in the register maintained or pre listed on mail.
- Daily cash receipts and invoices shall be tallied with the deposit slips for deposition of cash into the bank by the Store Manager.
- The cash received from the driver shall be verified by any staff member with the invoices given to him for making delivery of products.
- A staff member shall also go with the driver for making delivery of goods and collecting cash from customers (Schniepp, 2015).
- Jones, M. J. (2011). Creative accounting, fraud and international accounting scandals .
- Martínez, J. A. (2014). The value relevance of accounting numbers under international financial reporting standards. 237-254.
- Nguyen, A. T. (2014). Measurement of formal convergence of vietnamese accounting standards with IFRS: Convergence of vietnamese accounting standards. aUSTRALIAN ACCOUNTING REVIEW , 182-197.
- Schmidt, M. (2016). Allowance for Doubtful Accounts, Bad Debt, and Bad Debt Expense Explained. Building the business case Ananlysis .
- Schniepp, S. (2015). rafting standard operating procedures. 65.
- Sun, Y. (2016). Internal control weakness disclosure and firm investment. Journal of accounting, auditing and finance , 227.
- Wines, G. &. (2015). Australian government budget balance numbers: The hybrid nature of public sector accrual accounting. Accounting research journal , 182.
- Xu, Y. C. (2013). Responses by australian auditors to the global financial crisis.