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ACC00718 Audit and Assurance of Australian Company Assessment 2 Answer

ACC00718 - Assessment Task Two – Session One 2019

Scenario “A”

A major Australian Public Company ran promotions advertising for a number of its products through a promotions company. The promotions company falsely inflated the number of responses it received from purchasers of the company’s product. The false number of respondents was invoiced by the promotions company to the public company resulting in the overpayment of thousands of dollars. The records kept by the promotions company were those on its computer database as well as manual batch numbers of responses to the promotions.

REQUIRED  

Identify five (5) procedures and checks that would have reduced the risk to the victim company?

Scenario “B”

You were engaged to conduct an examination on an Australian subsidiary of an American company following a discovery by the financial controller that freight and travel expenses were too high during a certain period. You have found the following:

 The entries posted to the general ledger were examined and it was found that whereas normal expenses would be $10,000 to $12,000 for a particular month, they were in fact $33,442.19. Entries posted to the freight account were checked and in some cases there were no corresponding invoices.

 Staff were frustrated in their efforts because the trade payables clerk, who was responsible for the payment of accounts and cashing of wages cheques, was either off sick or evasive when questioned.

 The system for the payment of accounts was that the trade payables clerk would prepare a cheque to pay an invoice and would then present the cheque with the invoice and relevant documents for signing by two authorised signatories.

 All company accounts were paid by cheque; the only cheques used to obtain cash were wages cheques. This would be done by stamping the reverse of the cheque with the words, ‘Please pay cash’; the trade payables clerk would then present the cheque to the bank and obtain the cash. Specimen signatures were, of course, held at the bank but they were rarely checked as the trade payables clerk was so well known to bank staff.

 Duplicate cheques had been issued for payment of accounts already paid by the company and cashed at the bank by the trade payables clerk. The signatures on the cheques were, in some cases, forgeries and, in other cases, genuine (obviously people were signing things without due care). A payment of $6,217.60 was used to pay a travel company for a trip for two to Tahiti — the clerk had cancelled this entry with the words, ‘OK paid by me’.

When questioned, the trade payables clerk said that she had used her own cheque to pay for the travel. You checked with the travel company and found that, in fact, a company cheque had been used for the trip. You and officials of the company called in local detectives and all parties adjourned to the local police station. By this time, it was outside office hours and police were unable to contact the travel agent themselves and had no documentation to rely on to negate the clerk’s story. The clerk was released for further investigation by them, but the clerk left the country and is now living happily in Greece, $164,000 richer.

Required

1) Identify and discuss which internal control could have prevented this fraud and give five (5) examples

2) Identify and discuss five (5) procedures could have alerted the auditor to the fraud? 



Assessment Task Two - Marking Criteria

Marks will be awarded for:

1.         Understanding and discussion of the topic (30 marks).

You are expected to answer each of the questions contained in the assignment. You’re answer should fully address the requirements of each question and be in your own words.

Simply restating the contents of the text book, study guide or PowerPoint slides does not show individual understanding of the topic.

Your answers should contain enough discussion on the question so as to clearly demonstrate your understanding of the topic area and provide sufficient detail which answers the questions to a satisfactory level.

There are no minimum word limits placed on assignment questions, however it is expected that most questions will require approximately 50 to 100 words of readable, logical and verifiable information.

2.         The extent and depth of research undertaken (-2 marks)

Your answers should show wide reading related to the question being answered. This would extend beyond the textbook to other texts, newspaper and magazines. Specific resources from the Internet could also be used. The Harvard Referencing style is the required referencing style for this assessment. (refer http://scu.edu.au/library/index.php/14). Your assignment should also include a Reference List / Bibliography identifying the extent of the research undertaken. Failure to demonstrate extended research or provide a Reference list can result in the loss of up to 2 marks.

3.         Presentation: overall look, format (including page breaks between questions), written content and the inclusion of title page stating your name, student ID, Assessment identification, and due date. (-3 marks)

Your assignment should have a professional presentation with appropriate use of headings and sections and appropriate use of spelling, grammar and referencing. Marks may be deducted for excessive incorrect grammar, spelling and failing to have a page break between questions. Failing to include a Cover Sheet will result in lost marks. 


AssessmentGroup/
individual
Learning outcomesGrading indicatorMin ScoreWeightLength/
duration
DueProfessional accreditation
Short written responseIndividual4, 5GradedN/A30%Individually determined


Answer

Audit and assurance

Introduction

This report reveals the key understanding on the audit procedure and key steps which could be used by company to lower down its procedural discrepancies in the process. In the starting of this report, procedures and checks that would have reduced the risk to Australian company has been discussed. In this proper checks have been given which reveals the key assertions to control the risk associated with the business promotion transactions. After that, in the second scenario, several internal control system which could be used by the company to reduce the fraud and errors in the process have been discussed.

Answer to the Scenario-1

There are five (5) procedures and checks that would have reduced the risk to the victim company given as below. 

  1. Calculations on Return on Marketing Investments. – This is related to the profit for advertising venture which standout amongst the most troublesome hierarchical check program to reduce the risk of the victim Australian Public Company. ROMI, a generally new measurement, is considered to be advertising commitment inferable and determine the estimated budget for the cash inflow and outflow.  It is kept isolated by the promoting "contributed" or gambled.  It helps Australian Public Company to set estimations to record the financial transactions recorded in the books of account. Along these lines, issues in ROMI can be utilized to decide different less unmistakable parts of advertising viability (Auditing and Assurance Standards Board, 2015).

For instance return on marketing investment is 15% 

Invested capital = $10, 00,000

Return would be 1, 50,000

  1. Showcasing rate of return (ROI)- It is another check that is used to estimate the Australian Public Company deals and benefits in the process. This mirrors showcasing cash inflow, invoices and assessment of the particular return from the process. For instance, evaluating the last year rate of return from the particular branch will give the idea of assessing the recorded items in the books of account. It will set the estimation for the expenses to be made by company. 

For instance 

 Rate of return is 15% 

Invested capital = $5, 00,000

Return would be 40,000

  1. Evaluating the purchase invoices and other factors of the transactions- While assessing advertising execution, organizations should gauge showcasing results from the purchasers ' perspectives, incorporate all promoting exercises, measures over a ceaseless timespan, and meet factual and specialized criteria expected of all estimation frameworks.

For instance

Bills

Invoices and other books

  1. To identify the KPI and other important factors of the business- To precisely quantify the adequacy of showcasing exercises, KPIs must be coordinated inside the business and the board of the organization.
  2. To assess the type of business scale and assertion risk of the process- To guarantee significant correlations among exercises, organizations should utilize a typical scale, and estimation mistake must be evaluated with the goal that administrators can respond to changes in conditions. This focuses on aligning the business outcomes and evaluating the audit procedure which would be based on the audit model. The audit model of the company would help in assessing the control risk, inherent risk and detention risk associated with the business cash inflows an outflow. 

Answer to the Scenario- 2

There are several internal control system which could be used by the company to reduce the fraud and errors in the process. 

  1. Bank statements are reconciled to the general ledger regularly and differences are investigated and resolved on a timely basis. New bank accounts are only opened through the direction and approval of management.  When new bank accounts are approved and opened, finance personnel create the general ledger account and prepare the journal entry to record the initial balance in the account.  Management reviews and approves the new general ledger account and journal entry, including supporting documentation, before the journal entry is recorded. (Syed Mustapha Nazri, Zolkaflil & Omar, 2019) (Srivastava, Das & Pattanayak, 2019)

For instance:-

  1. There must be automated system of approval for invoices in the entity according to level of delegation, by this the entry that have been posted in the general ledger will be authorised and approved first. This will be a preventive control in place.
  2. The person preparing the cheque must not present the cheque at the bank. Cheque must be presented to the bank in whom name it was written. So, the fraud done by the accounts payable could have avoided, because he would have written some cheque in his own name.
  3. Problem of duplicate cheques resulting to double payment. There must be a separate person in charge for the bank work, and all payments should be system authorized and updated on the same day the transaction has happened (Cordoş, & Fülöp, 2015).
  4. Printing right of cheque must be given to some responsible person. So, the cheque which is used for the trip of the clerk could have been avoided.
  5. Proper documentation must be there for every transaction that is occurring. This documentation would have helped in proving guilty to the clerk on timely basis
  6. There needs to be the proper reconciliation of the recorded items in the books of account which will strengthen the overall control process of organization.

Answer to question no-2 (b)

After evaluating the case, it have been observed that there is five procedures which could have could have alerted the auditor to the fraud.

First is related to obtain the schedule of bank accounts and the reconciliation of the schedule to the general ledger (Cordoş, & Fülöp, 2015).

  1. Agree applicable amounts from the cash accounts schedule and reconciliation to the general ledger and trace significant reconciling items, if any, to supporting documents. Make an audit sample of bank accounts. 
  2. Obtain reconciliations of the selected accounts to the general ledger. Prepare, or have the entity prepare, standard bank confirmation requests for the selected bank accounts.   Mail the confirmation requests under our control, determine that the requests are properly addressed (i.e., obtain audit evidence about the accuracy and completeness of addresses provided by the entity), and request that all replies be sent directly to our office. Send second requests for no replies (Syed Mustapha Nazri, Zolkaflil., & Omar,2019).
  3. Compare replies to the balance-per-bank in the bank reconciliations. This could be done by using the inherent, control and detention risk associated with the process. It will be helpful to develop audit risk model for the organization. Agree all other amounts reported in the replies to the general ledger or appropriate records.  Prepare, or have the entity prepare, reconciliations of exceptions. 
  4. Trace reconciling items to supporting documents. For confirmations not received, trace outstanding items listed on the bank reconciliation to the subsequent month's bank statement and, for those not traced, trace to the cash disbursements records for the period prior to the balance sheet. 
  5. Determine if there is a system or process in place that facilitates electronic confirmation between us and the confirmation respondent. If we plan to rely on such a system or process, assess the design and operating effectiveness of the electronic and manual controls with respect to such process. 

Therefore, it could be inferred that above given were the five procedure that could have altered auditor to fraud. In order to reduce these chances, company needs to align its business reporting framework effectively. An assurance trust services report or another auditors' report on such a process may assist us in assessing the design and operating effectiveness of the electronic and manual controls. Such a report would usually address risks related to the reliability of the information obtained through the confirmation process that we will use as audit evidence, including the risks that the information obtained may not be from an authentic source or a respondent may not be knowledgeable about the information to be confirmed or the integrity of the information may have been compromised or if the above risks are not adequately addressed in the report, perform additional procedures to address such risks. National Office has approved the use of Capital Confirmation Inc. (CCI), for electronic confirmations from banks that have designated CCI to process confirmation requests from auditors. (Sikka, Filling & Liew, 2009) (Porter, 2009).

Conclusion 

After assessing the details given in both the scenarios, it is inferred that company should use effective internal control system if it wants to sustain its business in long run. The first scenario reveals that company could easily mitigate the risk of losing money if it would have kept one of the given procedure. On the other hand, the one best internal control system which could be used by company would be to hire the internal auditors who would evaluate the changes and issues in the frameworks. The crux of this report is that company should focus on using the appropriate audit method and procedure to set assertion to lower down the business risk. The audit risk model could also be used by company in these two above given scenario. 

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