Solve Case Study on Internal Control of a Motel and Cafe

Auditing case 1

Answer A

An organization's methodical approach is to identify and mitigating business risks, in addition to the outcomes that are obtained from this process, is referred to as the risk assessment process of the organization. The process of risk assessment for financial reporting for the entity entails management identifying risks that are pertinent to the compilation of financial statements that are presented truthfully and in accordance with the appropriate financial reporting framework for the entity. The calculation of the significance of these risks, the evaluation of the likelihood of their occurrence, and the choice of effective steps to manage them are all included in this process (Chen et al. 2019).

Francisco is concerned about his lack of power, which makes it difficult for him to monitor the day-to-day operations of the motel and the café. The person has inquired about receiving aid in determining probable means by which the company may be vulnerable to fraudulent activities and in conceiving novel methods of internal control to prevent such fraudulent conduct. Additionally, the individual has inquired about receiving assistance in determining how to avoid such fraudulent activity.

When management is responsible for monitoring controls, one of their responsibilities is to assess whether or not those controls are able to remain flexible in the face of shifting conditions and achieve the goals for which they were designed. The monitoring of controls encompasses a variety of activities, such as the assessment by internal auditors of sales personnel's adherence to the entity's policies regarding sales contract terms, the supervision by the legal department to ensure compliance with the entity's ethical or business practice policies, and the examination by management of the timely preparation of bank reconciliations (Mexmonov 2020)

The individuals in issue have sole access to information regarding the precision of the numbers, which enables them to make adjustments to the data without fear of being discovered by anyone other than themselves. It is possible for someone to modify numerical quantities in order to disguise any monies that they may have withdrawn, creating the illusion of an unblemished deposit transaction in the process. This might be done by someone who has access to the account. Since Francisco's house is located in such a remote area compared to where the couple is currently located, it would be very easy for the two of them to make their getaway without leaving their possessions behind. By the time Joseph arrives to carry out an investigation, the two individuals will have already left, which will make it more difficult for Francisco to locate them and bring legal action against them. Additionally, any potentially incriminating evidence may have been removed at this point. It is recommended that Joseph hire an additional person to supervise the process of making deposits, as well as to check the correctness of financial reports and other responsibilities that are related to such deposits, so that he can reduce the risk of being a victim of fraud (Chen et al. 2019).

Answer B

It is suggested that the café establish a complete set of policies and procedures that prioritize accurate record keeping and plainly explain the appropriate ways to make use of the café's resources. A monthly inventory can be taken and compared with purchase records and estimated usage, both of which are derived from records of meals that have been delivered, in order to identify any inventory that may have been improperly distributed.

There is never a guarantee that a financial account will not contain significant errors of some kind. This type of risk is known as an intrinsic risk. Another form of risk is known as "control risk," and it refers to the possibility that the internal control measures that are now in place may not be able to prevent or discover a significant misstatement. Lastly, but most importantly, detection risk refers to the possibility that an auditor will overlook a significant misrepresentation while doing the audit (Hilorme et al 2019).

To be able to give a good opinion on the financial statements, the auditor needs to plan and carry out the audit process with the goal of gaining a reasonable amount of confidence that the financial statements are not significantly inaccurate, either as a result of mistakes made by accident or as a result of someone trying to trick the auditor. This is necessary in order for the auditor to be able to give a good opinion on the financial statements. It is feasible to obtain reasonable assurance by reducing the audit risk to a good level through cautious professional judgment, which involves obtaining sufficient and relevant audit proof. This makes it possible to obtain reasonable assurance. Controls applied within a company, including its systems, procedures, and rules, are what are often referred to as "internal controls." It is essential to put in place a framework for internal control in order to protect the integrity of financial and accounting information, with the primary goal of preventing fraudulent acts and promoting accountability. The accuracy and timeliness of financial reporting are both significantly improved thanks to the implementation of internal controls, which play a critical part in the overall improvement of operational efficiency.

Audits of an organization's own internal controls have become an increasingly important component of every business's daily operations. It is vital to have an efficient internal control system in place over financial reporting in order to guarantee the credibility of financial reporting and the preparation of financial statements for use in external contexts. It is possible for the efficiency of the company's internal control over financial reporting to be jeopardized if one or more material vulnerabilities are present in the system. The implementation of preventative controls paves the way for the creation of control measures that are targeted at reducing the likelihood of errors occurring in later iterations of the process. It is vital to assign unique tasks to diverse individuals for the purpose of authorizing and recording transactions. This is necessary in order to maintain effective error control and minimize the number of mistakes that occur.

Auditing case 2

Answer A

The demand from consumers for scooters has been hampered by a number of issues, including the fall in the price of gasoline and the slowdown in the growth of jobs. It is anticipated that the availability of consumer financing options for the purchase of scooters would have an effect on customer demand. It is anticipated that the altered economic circumstances will result in a detrimental impact on Scooter Ltd.'s capacity to obtain financial resources.

When auditors look at the relationship between the audit client and its customers, they are very interested because this relationship could affect the reliability of cash flow by making it harder to collect bills from customers. People who have a bad relationship with a business may decide not to pay, which will cause the accounts receivable to have a longer settlement term (Appelbaum et al. 2020).

If customers are unhappy with the goods or services because they aren't up to par, the audit client could be responsible for guarantee claims. So, it is very important for the inspector to check if the provision made for warranty claims (liability) is correct. Auditors are also interested in the risks that come with a client's reliance on a small group of key customers. This is because if these customers stop paying or leave, it can have a big effect on the client's cash flow very quickly. Still, the audit client may have problems with the going company in the future. The fact that the audit client has tense relationships with its sellers could be a sign that the client is having trouble with its cash flow. It is possible for the seller to send out damaged goods, which could make customers unhappy and make warranty claims more difficult. When an audit client and its suppliers have a bad relationship, it could hurt the practical parts of the audit client's business, which could affect its sales and production. When an audit client signs a contract with its suppliers, it might be stuck with terms that aren't good for the business and could hurt its ability to stay in business in the long run. If clients don't pay their suppliers on time, they might lose access to those suppliers, which would make it harder for them to keep running their businesses. There are many things that can make it possible to make a major misstatement. There are both outside and inside causes for this. Outside causes include things like the industry or the environment, and inside causes include things like the nature of the business, the activities it does, or the internal controls it has in place for financial reporting. There are outside or internal factors that can affect how accounting estimates are made or give companies reasons to change their financial records to meet their own financial goals. This is because these things could make people want to change financial accounts to reach certain financial goals. The risks of material misstatement can also be caused by a number of things, such as employees who aren't skilled enough in financial reporting, computer systems that don't accurately record business transactions, or financial reporting procedures that aren't in line with the rules set out in the relevant financial reporting framework. Because of this, the audit methods needed to find and properly assess the risks of material misstatement include looking at both outside factors and factors that are unique to the company being audited (Hilorme et al 2019).

Answer B

The administrative pressure that Scooter Ltd. is under to reach performance targets raises the risk of dishonest financial reporting by increasing the likelihood that dishonest reporting will occur.

It is clear that the sphere of financial institutions is fraught with inherent dangers, as demonstrated by the fact that scooter costs have been known to be intentionally increased to an amount greater than $10,000, only to subsequently provide clients with a retroactive "allowance." Following the conclusion of the audit of the internal controls and the subsequent correction of any discrepancies that were found, it is possible to begin the process of implementing controls in order to reduce the risk of errors occurring in the future. During the period of the audit known as preparation, risk assessments are an absolutely necessary requirement. At both the level of the overall financial statement and the level of the specific assertion, the fundamental purpose of our audit is to analyse and analyse the potential risks that are connected with substantial misrepresentation, regardless of whether these misstatements are the consequence of inadvertent mistakes or fraudulent acts that were carried out intentionally. This evaluation is very important since it enables us to formulate appropriate audit processes for further investigation and verification. Obtaining complete assurance or confidence that all material deviations have been found is often not possible for auditors, and doing so would also be inefficient and wasteful. Auditors, on the other hand, work diligently to ensure that the findings and judgements they reach are established upon a reasonable level of assurance. This level of assurance is obtained by the auditors' careful execution of the audit procedures (Appelbaum et al. 2020).

The idea of audit risk can be viewed as the counterpart of audit assurance if one were to think about in that way. The term "audit risk" refers to the level of error an auditor is willing to tolerate in his or her work in the event that the auditor comes to the wrong conclusion. When it comes to actual implementation, the possibility of audit risk cannot be avoided. Establishing a strong system for quality controls within audit firms makes it easier for auditors to do their jobs, which include finding and stopping fraud during the audit process. In the process of an audit, auditors may face pressures from a variety of sources, including both inside and outside the company. Internal audit companies and engagement teams may be under pressure because they don't have enough resources or time (Eulerich and Eulerich 2020).

References

Appelbaum, D., Budnik, S. and Vasarhelyi, M., 2020. Auditing and accounting during and after the COVID-19 crisis. The CPA Journal, 90(6), pp.14-19.

Chen, H., Hua, S., Liu, Z. and Zhang, M., 2019. Audit fees, perceived audit risk, and the financial crisis of 2008. Asian Review of Accounting, 27(1), pp.97-111.

Eulerich, A.K. and Eulerich, M., 2020. What is the value of internal auditing?–A literature review on qualitative and quantitative perspectives. A Literature Review on Qualitative and Quantitative Perspectives (April 22, 2020). Maandblad Voor Accountancy en Bedrijfseconomie, 94, pp.83-92.

Hilorme, T., Zamazii, O., Judina, O., Korolenko, R. and Melnikova, Y., 2019. Formation of risk mitigating strategies for the implementation of projects of energy saving technologies. Academy of Strategic Management Journal, 18(3), pp.1-6.

Krieger, F., Drews, P. and Velte, P., 2021. Explaining the (non-) adoption of advanced data analytics in auditing: A process theory. International Journal of Accounting Information Systems, 41, p.100511.

Mexmonov, S., 2020. The role of the internal audit based international internal audit standards in Uzbekistan. Архив научных исследований, 33(1).

See Our Related Work:- Royal Flying Directors Services Assignment Sample

For More Information Read Our Blog:- What is Configuration Management

Get Your Assignment Help Here:- Management Assignment Help