The Bullseye, our CPA firm’s long-standing client and a public business entity, has requested that our company commit to completing an audit of their finances. I have the honor of leading a panel consisting of four of my professional partners in completing the annual audit. As the auditor leading the team, it is my duty to institute an overall approach that sets the extent, timing, and direction of the audit, and guides the development of the audit plan. The purpose of conducting an integrated audit is to obtain adequate proof to support the auditor’s opinion on internal control over financial reporting as the year ends, and to get sufficient evidence to support the control risk evaluation for purposes of the audit of financial statements. My team developed a comprehensive audit plan to present to Bullseye for the upcoming audit as follows.
Scope of Engagement
The purpose of this engagement is to complete an annual financial audit of the Bullseye corporate office, as well as the branch locations in other areas. A significant portion of the work will take place at the corporate office, but if any further clarifications or confirmations are needed in the course of the audit, then I may choose to send my staff to all the stores countrywide. My engagement partners are mainly in charge of the performance of the audit commitment and the auditor’s report issued on behalf of our company. The audit program and audit plan must at least include specific procedures to test the Bullseye’s internal controls over the inventory, payroll, record keeping, and other financial issues at the store and corporate level. The adopted procedures during the audit should include a review and validation of the management’s processes for determining the adequacy of the relevant accounts (Cohen & Wright, 2008). During our scope of auditing Bullseye Corporation, we paid particular attention to the following accounts:
The Inventory Account
While carrying out an audit of the inventory, there was a need to send some staff from our firm to a sampled number of stores to attend and observe whether the stock taking instructions are followed. The employees were also able to get familiar with the nature and volume of stock held on specific high-value stock items. Our particular attention to audit the stock account was to ensure that the stock is properly valued by ascertaining the prices from the cost accounts, purchases invoices, receipts, and the core principles of the stock valuation are followed. Because Bullseye maintained a record of the purchases and sales in quantity, our audit team had to check the sales and purchases made and compare the same with the balances, which are shown in the store ledger for completeness.
Internal Controls on Stock
Additionally, we carried out an audit to find out whether the internal control systems in connection with the stock taking is efficient to present any manipulations. There was a need to ensure the company has set out controls to safeguard the stock from theft and destruction. This can be achieved through the physical lock up of the stores and limit access to authorized persons only, for instance, the store managers. To test on the application of such internal controls, we sent some of our firm’s staff members to the stores to ensure the controls were adhered to accordingly.
Record keeping is of greater significance than all other accounts at Bullseye Corporation. The company’s store managers have ensured that each of their respective stores has a bookkeeping staff to record all the operations that take place in the stores. We discovered that the bookkeepers played a significant role in the creation of relevant information used in the company. There was an increasing need to recruit competent personnel in the position of the store bookkeeping to give accurate and validated information. The records kept at the store were reviewed and approved by the store manager before they were transferred to the headquarters to reduce the chances of giving misstated information. The cash from sales and other financial transactions were first recorded at the store and later sent to the executive directors at the corporate headquarter.
Internal Controls in Relation to Record Keeping
The company needs to put in place measures to ensure the records kept are safe and valid. The company could achieve this by ensuring there is the use of passwords on the computers. Where the records are recorded in a paper, there is a need to keep the files under lock and key (Porter & Hatherly, 2014). We discovered, through the assistance of our IT professional, that the computers were not highly secured and the information kept could easily be tampered with by outside users. It was also important to delegate the duty of verifying the store records before they are sent to the company’s head office because the store manager could easily give misstated information due to self-interest.
During our audit engagement, we realized that the payroll was managed at the headquarters. We recommended to the management that a system should be introduced where the staff register is marked at the store to ensure there are no ghost workers.
Internal Controls Regarding Payroll
The management should put measures to ensure only the available employees are in the register. The management should incorporate a login machine, which scans the fingerprint to give the full employment details of the staff. This reduces the chances of having ghost workers in the corporation
Most of the transactions of Bullseye Corporation were in cash. During our engagement, we were able to find out that the company had a poor way of managing cash. There was a need to assign the duty of purchasing to one department and every store manager was given the authority to withdraw cash for daily store expenditure. There was a need to create a cash office where all the cash transactions were to be settled by the qualified accountants and financial analysts. Additionally, all the cash disbursements paid by the bank to the store managers should be recorded in the books of accounts.
Internal Controls On Cash
There was a need to implement effective internal control systems on cash to ensure cash is safeguarded from theft and misappropriation. There was a need to keep all the bank slips for both deposits and withdrawals with the finance and accounting department to ensure they are properly recorded in the books of accounts to give a true and fair view of the financial statements. The cash stated in the reconciliation should exist and is duly recorded and accurate as reported in the reconciliation statement. Additionally, the controls should ensure that cash receipts and payout transactions are recorded in the proper accounting period. The support team in our engagement ensured the internal controls on cash were efficient by performing extended tests of the year- end bank reconciliation where in our opinion we believe that the year-end bank reconciliation is misstated
Risks Relevant to Bullseye Company and My Audit
It is the risk that the controls established are not able to detect, prevent, and correct omissions or misstatements existing promptly. During our audit engagement, we ensured that we had a full understanding of the systems by performing the war through tests to make sure that we understand the accounting systems of the client adequately. We were able to carry out substantive tests on the balances to assess the accuracy and completeness of the stated balances of Bullseye.
Detection risk is the risk that the substantive auditor procedures and analytical review procedures performed will not detect misstatements that exist in the account balances or class of transactions that could be material to the financial information. It could relate to our inability as the audit team to examine all the items or having an influence on the evidence gathered. Since the audit evidence is persuasive rather than conclusive, the detection risk is usually present (Cohen & Wright, 2008). This will require our audit team to seek reasonable evidence on all material transactions in the store of Bullseye by designing proper procedures to assist in the detection of misstatements, such as on stock taking and record keeping by Bullseye store bookkeepers. We were able to reduce the detection risk by ensuring that we sent some staff in many stores of Bullseye to achieve adequate sample size for examination of inventory.
To give a true and fair view of the financial statements of Bullseye Corporation, it is important for our audit team to carry out adequate procedures. The comprehensive audit plan should cover all areas of operation in the company to ensure that the final audit report presented to the board of directors give a true and fair view and not misstatements in the statements of financial statements. As the audit team performing the engagement, we had a duty to perform our task with a lot of professional ethics to ensure we keep the professional goodwill between the client and our audit firm.
Cohen, J. R., Krishnamoorthy, G., & Wright, A. M. (2008). Form versus substance: The implications for auditing practice and research of alternative perspectives on corporate governance. Auditing: A Journal of Practice & Theory, 27(2), 181-198.
Porter, B., Simon, J., & Hatherly, D. (2014). Principles of external auditing. John Wiley & Sons.