Tutti Fruity Limited: Auditing Process Case Study

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Table of Contents

Audit Planning and the components of audit plan
The Audit Risk Model
Risk Assessment and Audit Procedures
References

Audit Planning and the components of audit plan

Audit planning involves coming up with the overall audit strategy to be used in carrying out the audit engagement. An audit strategy needs to be set where the firm will identify the scope and timing of the audit. This is done by referring to the terms of engagement. The plan includes the objectives of the audit. The audit plan should contain the audit procedures that will be used to assess the risk in the organisation. The nature, extent and timing of the procedures should be stated. They should also be sufficient and effective to assess the risk. It should also document further audit procedures to be carried out at the assertion level for the different material classes of transactions.

Thirdly it should include details on how the work of other auditors or experts. The plan should have information such the nature of the business and its operations. The auditors need to identify the risk areas. Any complex aspect of the business should also be highlighted. There will be a budget of the resources expected to be used for example staff, time and money for administrative purposes. Audit planning is important as it ensures that attention is paid to the critical areas (Collings, 2010).

The materiality level is set during the planning stage. The areas which are more prone to material misstatements are identified. The audit manager also determines the audit team that will handle the assignment. He will need the right number of people with the appropriate skills, experience and knowledge. The auditors also on how the review of the audit work of the audit staff will be carried out. The complexity of the audit and the risk in financial misstatements will determine the nature, timing and extent of the reviews. If the auditors have never audited the company before they will need to get an understanding of the entity and the environment in which the company operates in.

Planning also assists the team to create adequate time to work, coordinate and consult with the former auditors, internal auditors and experts in technical areas. The previous audit reports done will be analysed to see the key issues that emerged during the last audit. Where it is an initial audit for the auditors they will need to verify the opening balances of the financial statements. Overall the audit plan assists the audit team manage the audit assignment and do it in an effective and efficient manner. The audit plan and strategy is not static and may at times change due to unforeseen circumstances.

The Audit Risk Model

The audit risk refers to where an auditor states the financial statements are free from financial misstatements yet that is not true. It can also happen when the auditor rejects financial statements that are free from misstatements. The risk model however ignores this error though. It can happen due to auditor performing tests on an unrepresentative sample (Woodhead, 1997). The audit risk model includes three levels of risk.

There is control risk where in a company the misstatements in the financial statements will not be detected by the internal controls of the company. In planning the audit, the internal controls of the company will be assessed to see whether they are adequate and sufficient to prevent errors and frauds in the company. On determining level of assurance to place on internal controls may involve examining the documents used to perform transactions to see whether internal controls are being adhered to and recalculating various transactions to see whether the system is calculating them correctly. The management in setting internal controls should be performing continuous risk assessments on the company operations. This process should be credible and receive positive reviews from regulatory bodies (Busby & Hughes, 2009).

Can the internal controls be circumvented thru collusion or abused by management? Where there are indicators of fraud, it will have an impact on the audit planning and fraud risk assessment procedures (Graham & Bedard, 2003). There is detection risk which measures the probability that the auditor will not detect errors and misstatements in the financial statements when performing the audit. In planning, this will be tackled by the audit company ensuring that there is proper audit planning, collection of sufficient audit evidence and having proper working papers. There is also inherent risk which is the probability of material misstatements in financial statements due to the nature of the company operations and its environment.

This involves looking at the nature of business and factors affecting it for example technology, complexity, economic and competitive factors and any undue pressure on management. The formulae for the audit risk model is the multiplicative model of Detection Risk *Control Risk*Inherent risk (Pine, 2008)

Risk Assessment and Audit Procedures

In auditing the Tutti Fruity Limited I will identify the risk areas and the factors that highlight these areas as critical. There are audit activities that will be carried out in these areas as follows:

Risk Area 1. Stock of Ice-creams	Risk Factor Expired/spoilt ice-cream is destroyed by one person only.	Audit activities to be undertaken Interview the management on the internal controls on destruction of the ice-cream
Why Important	Why each factor (or factors) is (are) important The van driver could say they destroyed a certain stock of expired ice-cream yet it was in good condition and he sold the ice-cream and pocketed the cash.	Why these activities are to be undertaken To understand the internal control in the company to prevent theft of goods. To recommend certain controls if the controls in place are inadequate.
Risk Area Internal Audit processes	Risk Factor Inefficient auditing of the risk areas of the organisation due to understaffing of audit organisation and lack of adequate audit skills in the current staff.	Audit activities to be undertaken Get to understand the experience of the only audit staff by obtaining documentary evidence.
Why Important	Why each factor (or factors) is (are) important Internal audit role is to provide assurance that the internal controls are in existence and are adequate. With a weak audit department the level of assurance on the adequacy of internal controls is low.	Why these activities are to be undertaken Confirm on the experience of the auditor. Recommend expansion of department with qualified audit staff.
Risk Area Recruitment and Job placement	Risk Factor (or factors) Delays in recruitment of van drivers when vacancies arise.	Audit activity (or activities) to be undertaken Find out what causes the process delays by studying the recruitment process beginning to end.
Why Important	Why each factor (or factors) is (are) important The company sales may decline due to understaffing of van drivers.	Why these activities are to be undertaken Recommend to the company on the controls to put in place to hasten the recruitment and job placement process.
Risk Area Interview Process	Risk Factor (or factors) Subjectivity in interview process since sales manager interviews the prospective employees on her own.	Audit activity (or activities) to be undertaken Check for the presence of interview notes and other documentary evidence showing why selected candidates were superior than the others.
Why Important	Why each factor (or factors) is (are) important The wrong candidates may be selected for the job and the company loses out on recruiting the best candidates. The sales manager may only employ her friends/relatives.	Why these activities are to be undertaken Recommend that the interview process be carried out by more personnel to increase objectivity.
Risk Area Staff working hours	Risk Factor (or factors) Van drivers certify their own timesheets, holidays and sickness returns. The payroll system does not hold any sickness information or leave data and no certificates are actually returned to the company	Audit activity (or activities) to be undertaken Examine the records to check for suspicious information for example excess leave days taken per year, too many sick offs and holidays for any staff. Confirm with third parties for example hospitals to verify on the hospital visits actually taken.
Why Important	Why each factor (or factors) is (are) important Misuse of working hours by staff through not reporting for work yet they are not sick. Staff lying on the time they report and leave work.	Why these activities are to be undertaken Check on the integrity of the information submitted by the drivers. Recommend an independent staff to be filling in the timesheets, holidays and sick offs.
Risk Area Operating equipment	Risk Factor (or factors) Frequent breakdowns of the old refrigeration equipment resulting in the write off of stock	Audit activity (or activities) to be undertaken Examine the servicing of the equipment. Check the the maintenance of fixed assets in terms of depreciation. Get the amount of goods lost due to the breakdowns.
Why Important	Why each factor (or factors) is (are) important Decrease in goods available for sale and therefore low sales due to loss of goods through spoilage.	Why these activities are to be undertaken Recommend depreciation of equipment to avoid using old equipment. Recommend buying of new equipment.
Risk Area Job Specification	Risk Factor (or factors) Vague job specifications used in recruitment and job placement	Audit activity (or activities) to be undertaken Examine the job specifications and various job roles to check for appropriateness of the job specification.
Why Important	Why each factor (or factors) is (are) important Inadequate skills, knowledge and experience in people recruited for various jobs.	Why these activities are to be undertaken To recommend the right process to be adhered to in drafting the appropriate job specifications.
Risk Area Cash	Risk Factor (or factors) The van sales are on a purely cash basis and each van driver is responsible for banking the takings on a daily basis	Audit activity (or activities) to be undertaken Perform reconciliations of the stock logged in system as sold with the daily cash banking. Get explanations on any cash differences/excesses.
Why Important	Why each factor (or factors) is (are) important Theft by gangsters or misuse of cash by staff.	Why these activities are to be undertaken Highlight the risks in handling cash payments and recommend payments in cheque or internal bank transfers.
Risk Area Credit	Risk Factor (or factors) Over-extending of credit to supermarket due to its buying power.	Audit activity (or activities) to be undertaken Analyse the credit aging processes at the company and collection of credit payments.
Why Important	Why each factor (or factors) is (are) important Risk of loss of funds in case the supermarket business faces financial problems or bankruptcy.	Why these activities are to be undertaken Recommend set credit period for customers to limit overdue debtor accounts.
Risk Area Segregation of duties	Risk Factor (or factors) The van drivers sell the ice cream, bank the cash, input sale details in the computer and are in-charge of stock counts.	Audit activity (or activities) to be undertaken Check on the end to end processes and perform stock and cash reconciliations. Investigate any cash differences and excesses.
Why Important	Why each factor (or factors) is (are) important Misuse of cash and stock of ice-cream by staff.	Why these activities are to be undertaken To recommend the segregation of duties to mitigate risk of theft.
Risk Area Yearly stock counts	Risk Factors No yearly stock counts conducted	Audit activity (or activities) to be undertaken Carry out an end of year stock count to verify physical balances against stock reflected in the system.
Why Important	Why each factor (or factors) is (are) important Inaccuracies in the end of year stock recorded on the balance sheet.	Why these activities are to be undertaken Recommend end of year stock counts.
Risk Area Payroll	Risk Factor (or factors) Payment of several staff through cash instead of the computerised payroll system.	Audit activity (or activities) to be undertaken Enquire on the records maintained and signed by staff paid through cash. Confirm on the accuracy of calculations using the time sheets and the staff paid whether they are on HR employee list.
Why Important	Why each factor (or factors) is (are) important Payment to ghost workers. Difficulty in resolving disputes over cash payments.	Why these activities are to be undertaken Recommend all employees to be paid through the computerised payroll system.

References

Busby, G. & Hughes, E. (2009). Credibility in Risk Assessment: A Normative Approach. International Journal of Accounting, Auditing and Performance Management, vol 6, no 4, pg 508-527.

Collings, S. (2010). The Importance of Audit Planning (Online). Accountancy Students. Web.

Graham, L. & Bedard J. (2003). Fraud Risk and Audit Planning. International Journal of Auditing, volume 7, issue 1, pg 55-70.

Pine, B. (2008) A Risk-Based Approach to Auditing Financial Statements. Acca. Web.

Woodhead, A. (1997). The Other Audit Risk: Impact of False Rejection on Audit Planning. Managerial Auditing Journal, vol. 12, issue 1, pg 4-8.

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