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Running head: Sample Audit Program 1

Sample Audit Program 10

Sample Audit Program

Student Name

Institution

Introduction

Newham Company is a publicly traded firm that operates in the personal product industry. The organization key products are cosmetic and body care products. Newham Company distributes its products by contracting Wal-mart and Target which are huge department chain stores. The chain stores then sell the products to the consumers who are the end-users. Newham Company faces stiff competition from rivals like Avon Products Inc and Revlon Inc. The organization has had a consistent growth for the past couple of years. Despite that recently there has been executive management change that included not only the offices of the CEO but also the office of CFO. The change was started by flawed executive management team’s bonus payment. The bonus payment was anchored on the firm’s performance. As a result, a lawsuit was documented, and the claim was that new product was inappropriately publicized consequently promoting allergic reactions from some consumers.

Business risk analysis

Any reputable company faces quite some business risks. The most prominent business risks are changing business environment, emerging competitors, and changing technology. It is thus critical for the company management to be vigilant and invest in risk management strategies to stay afloat in the industry (Vona, 2012). Newham Company will face the same various forms of business risks just like any other company. It is critical hence for the company to do a proper risk assessment to identify the risks that pose the greatest threat to the business operations. To do business risk analysis the company’s first step will be to define fraud exhaustively. Committing fraud is to intentionally conceal defects of a product or service by willfully misinterpreting facts or the truth (Trotman, 2012).A risk assessment team will be assembled where the company management will take into consideration skills, expertise, and knowledge as key factors to identify competent individuals. The risk assessment team members should have financial reporting procedures and internal controls of the organization expertise. Regular staffs that run daily operations of the company such as customer service and suppliers communication should be integrated into the team. The other employees to be considered are risk managers and criminology experts since they can quickly detect fraud as well as misconducts.

Since the risk assessment team is fully assembled, the next step will be to brainstorm the firm’s fraud risks. Regulatory, as well as legal requirements that are significantly violated by fraud and other risks that bring the company's image disrepute, must be tackled. The company risk evaluation team will then establish a list comprising of all identified business risks both external and internal .External risks for Newham Company will be: natural catastrophe, changing technology, changing the economy and emerging new make (Francis, 2011). Its internal business environment for the company will be based on company’s financial management, marketing strategies, work force risks, and operations. Newham Company will require a properly structured risk identification process to identify the most critical threats to the business. The focus will be on the Newham Company business risks that are likely to impact on each of its function of activities partially or entirely. The following will be considered:

· The sorts of occurrences that may antagonistically affect the business work

· The business function failure scenarios and risk mitigation measures

Departmental business risks

1. Safety

· Equipments security

· probable Loss of life or injury

· Probable occurrence of workplace related accidents such as spill or fire

· Environmental destruction

2. Revenues

· Reduced customer retainment

· Redeemable monetary loss

· In time marketing opportunity lost

· Irredeemable financial loss

3. Costs

· Wastage costs incurred

· Cost incurred due to Litigation

· Employee training costs

4. Legal

· New legislation compliance.

· Failure to comply with regulations

· Company lawsuits

5. Security breaches

· System breaches resulting to capital loss

· System breaches resulting to data loss

6. Related exposure

· Goodwill loss

· shareholders confidence loss

· customer loss

After exhaustively analyzing all risks affecting the company, a fraud risks report is prepared to send to either the audit committee or to the company’s board of director for review. The review will be based on Newham’s company practices that may have contributed to the business risks which include fraud risks (ACFE, n.d).

Audit program

After the business risk analysis is done, an audit program is designed which puts into consideration all business risk analysis findings. The audit program tests the internal control system of the company to ensure that the financial statements generated are accurate. A good internal control system should have efficient accounting system, properly designed control environment and effective control activities (Wells, 2011).An efficient accounting system gets rid off of any concealed fraud due to retaining of accounting records whether hidden or altered altogether.

The following procedures will be considered in the audit program:

General items

1. Obtain relevant financial information

· Monthly financial reports

· statement of the account

· balance sheet for the year ending

· Accounts listing charts

2. Evaluate relevant information related to finance for any outstanding things with regards to the field.

3. Evaluate internal auditors report and analyse and obtain their verdict.

4. Evaluate the internal controls survey:

What are detected internal control weaknesses and strengths of the field?

Are there notable weaknesses that can prompt advanced audit tests?

Cash

1. Obtain the relevant information of cash inflows and outflows procedures from the field treasurer.

· Cash sources

· Deposits Frequency

· Individuals involved in the deposits

· The amount of cash received

· Expenditure documentations.

· Procedures of authorization like authority to incur expenses

2. Examine whether the amount of cash held both in the field and also in office is correct.

3. Check whether the company is keeping petty cash voucher for all petty cash transactions.

4 With regards to field checking accounts, check the number signatures per check, obtain each account’s bank statement, evaluate how the bank reconciliations are done and review their degree of accuracy. Lastly confirm whether there are reviews by a second party on monthly basis.

Expenditures

1. By evaluation of prior months of the check registers, do sampling of the checks and evaluate:

· Scrapped agreement of endorsement checks.

· Any agreement of description invoices with details of date or any other information.

· Appropriate authorization in accordance with the agency policy

2. Evaluate the check register for information about any previous abnormal entries of items such as colossal amounts and staff payments.

Revenues

After a thorough deposits evaluation reconcile both receipts and deposits in the financial reports (Trotman and Wright, 2012). The internal audit should verify the information about the funds transfers.

The Most convenient method of financial statements analysis is horizontal method analysis(Wels,2011).A quick review of the income statement shows an increase in accounts receivable for the year 2014 when sales decreased, and cost of goods decreased. Accounts receivables usually don’t increase when accounts payable, sales and cost of goods are decreasing. This shows overstated accounts receivables which translate to overstated revenue.

From the balance sheet figures, accrued liabilities were missing in areas such as taxes payable, interest payable and bonus payable. In the case where payables are registered missing from the balance sheet, net income is usually overstated (Albrecht et al., 2012). In the year 2014, there was an abnormal increase in both sales returns (over 100%) and warranty expense (over 50%) which might have been triggered by the Newham’s lawsuit. The missing reportable figures that should be reflected on the balance sheet are shown by the fact that assets are not equal to total liabilities and owners’ equity for the years 2013, 2014, and 2015.

The program focuses on the financial statements that indicated discrepancies and any other thing of interest especially the income statement as well as the balance sheet. Questionable payments to the executive payments led to change in management as earlier reported. This is because of failure to record the bonus payment in the income statement which significantly impacted on the net income given that the payments’ basis was company performance.

Report of recommendation

Several procedures should be executed to find out the level in which the management did an alteration of financial statements. First, the evaluation of daily sales invoices needs to be done which then results to the reconciliation of both batch report and regular accounts posting reports. The customer accounts should be harmonized with the general ledger control account. Also, the sales invoice should be harmonized with both sales revenues accounts and receivables.

Given that, rampant fraud occurs among the employees; customer accounts should be verified to get rid of any fictitious companies that may be associated with the employees for fictitious payments through false invoices. All the data related to company transactions and customer details should be integrated into the program. Periodic individual sorting should be carried out to comb for any information that gives a clue to red flags such as duplicate invoices. In addition to that, employees should be investigated to check whether anyone of them is linked to the queries raised.

Furthermore, long-term debts, as well as interest payments review, must be conducted. Likewise, sales agreements and contract terms of engagement review should be done to verify early revenue recognition occurrence. In the controller’s office, payroll account reconciliation with the payroll register should be evaluated. In the previous findings, there was cash missing as per the stamen of cash flows. To establish the gaps, bank statements should be accessed and compared with the duplicate deposit slips. All this information can only be gotten from the controller of the company.

Finally, the audit program focused on the financial statements manipulation that led to decreased expenses to meet bonus payment requirements. Sales returns abnormal increases should be reviewed since it is a red flag. The company needs to make it a priority, to record its business functions to enable its appropriate future plans. The management must rate any business functions failures scenarios and also prioritize any company threats (Sadgrove, 2015).

Conclusion

I obtained 180 yearly transactions as a sample whereby 15 were from each calendar month. The auditor accessed all relevant information with much ease. Thus the whole exercise was a success.

References

ACFE. Managing the Business risk of Fraud:a practical guide (n.d).Retrieved from https://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/managing-business-risk.pdf

Albrecht,W.S.,Albrecht,C.O,.Albrecht,C.C.,&zimbelman,M.F(2012).Fraud Examination.(4TH ed.).

Francis, J. R. (2011). A framework for understanding and researching audit quality.

Sadgrove, M. K. (2015). The complete guide to business risk management

Trotman, K. T., & Wright, W. F. (2012). Triangulation of audit evidence in fraud risk assessments.

Vona, L. W. (2012). Fraud risk assessment: building a fraud audit program.

Wells, Joseph T (2011).Principles of Fraud Examination 3rd Edition.