Tax- 700 FINAL

SNHU

ACC-700

Sample Audit Report

Vlad Ashurov

06/30/19

1

Business Risk Analysis

Risk refers to a possible eventuality that could occasion losses/lower profits of a Business Entity (Leitch, 2016). Businesses will invariably experience some form of risks in the course of their operations. Risk factors may affect the entire industry or could be specific to the entity. Whatever the case may be, Business entities are obligated to develop mechanisms that will identify the risks and forestall/mitigate the effects of the Risks (Jones, 2017). Newham Company is one of the key players in the production of Cosmetics/personal care. As such, the firm needs to develop strategies that will manage risks.

Industry Related Risks

Cancer perceptions among consumers: There has been a growing concern over the quality of cosmetic products. Most people contend cosmetic products are linked to cancer, and this could affect the category’s consumption patterns.

Entity Risks

The entity risks are liability risks, reputation risks, compliance risks, and fraud risk. They are specific to the company.

Liability Risk: Consumer protection laws compel Business organizations to share and disseminate all information relating to product use with potential customers (Knechel, 2016). Consumers must be duly informed of any possible health risks that may be occasioned by product use. Newham never carried out a proper advertisement of the products, and as a result, some consumers suffered allergic reactions upon using the products. The matter has been escalated to courts, and liability fine could be imposed. Liability charges will impact negatively on the Company’s profits.

Reputation Risks: Public perception is key to the performance of any Business Entity. Newham’s image been has tarnished by the allergic reactions of the cosmetics product. A section of the firm’s customer base has lost confidence in the beauty products, and this can lead to declined sales and profitability.

Compliance Risk. Business entities should uphold legal provisions that govern their respective industries. Newham did not comply with Federal food, drug and cosmetic act, and Fair packaging and labeling act in producing the Cosmetics product. FPLA stipulates that all product labels must bear adequate information about the product contents, and Newham did not implement these legal requirements. Consequently, the business may face compliance risk implications.

Fraud Risk

Fraud risk occurs when personnel acquires financial gains through deceit or fraudulent process. The Company may suffer from fraud risk as the management allegedly sanctioned bonus payments in questionable and unclear circumstances.

PCAOB is a non-profit making entity established to audit public companies, with a view to enhance/guard the interests of investors, and generate audit reports that are accurate, valid and informative to the public (Jones, 2017). The Company should have observed the PCAOB AS No. 5, which outlines the requirements that should be applied when an auditor is tasked to undertake an evaluation of the effectiveness of internal control mechanisms over financial reporting that is integrated with financial statements review. Notably, the test of control outcome indicates that risk evaluation, risk fraud assessments, and testing sales accounts were conducted as required by PCAOB AS No. 5. Two hundred and thirteen sales transactions were reviewed, and 82 deviations were noted. Newham should undertake to expand the sample size with an aim to uncover more deviations. The internal control mechanisms have been bolstered by computer generated invoice numbers, which cannot be easily manipulated by the accounts receivable clerk. PCAOB AS No. 12 is relevant to the Newham context as it emphasizes the need to identify and evaluate risks of critical misstatement. The questionable bonuses awarded point to material misstatement. The management must have inflated the financial statements, thereby showing an inaccurate position of the business performance. Test of controls administered depicted several anomalies: lack of shipping documents for 25 select items, incorrect quantity billed for 5 sample items, and miscalculations relating to 10 select items. All these anomalies could have precipitated material misstatement.

Sample Audit Program

The Sample audit program seeks to determine whether Newham’s financial performance, as shown by the management, is accurate and reflects the correct financial position. The first control that should be evaluated is credit approval. Customer credit accounts must be monitored to ensure they do not exceed the stipulated limit (Leitch, 2016). A letter bearing the customer’s credit approval and limit must be sent to the customer. Shipping documents corresponding to 25 items could not be traced, and hence, there’s a need to institute internal control mechanisms for verifying what the customers ordered. Scrutiny of shipping documents should be undertaken to confirm that an actual order was made. The customer should dispatch a purchase order, which leads to the production of a warehouse slip. The warehouse personnel then make delivery arrangements for the items appearing on the slip. This document should then be compared with shipping slip. After the order has been delivered, the information contained in the transaction documents should be moved to accounts receivable for comparison with the sales invoice quantity and price figures. Ultimately, all the transactions captured in financial statements must reflective of what transpired (Jones, 2017).

Recommendations

Newham should strengthen the internal control mechanisms in accordance with Sarbanes Oxley Act. One of the core objectives of internal controls is to promote strict adherence to existing laws and regulations (Knechel, 2016). The advertisement that led to allergic reactions did not conform to the stipulated rules and regulations.

Internal controls enhance precise financial reporting (Knechel, 2016); The management was able to alter the financial records, and thus, wrongfully award bonuses due to lapses in the internal control mechanisms. These anomalies can also be mitigated by ensuring bonus payments are only settled once the sales are confirmed to be delivered.

In light of credit approvals, personnel should deliver any orders without the authorization and approval of the credit manager. Further, the organization should maintain the computer generated invoice numbers, which are difficult to manipulate.

References

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.

Jones, P. (2017). Statistical sampling and risk analysis in auditing. Routledge.

Leitch, M. (2016). Intelligent internal control and risk management: designing high-performance risk control systems. Routledge.