Auditing Questions Word Count: 805 (3 pages) Question In line with ASA315 complete an analysis of the supermarket industry and outline any developments that may lead to the risk of material misstatement at the financial report level. Factor affecting the supermarket industry Assurance affected e. g. valuation, occurrence, existence, completeness, accuracy Potential risk of material misstatement Competition Supermarket price wars: Coles & Woolworths decreasing prices across a range of everyday household items Valuation would probably most be affected by this decrease in prices. Material misstatement could happen due to the fact that prices are not reflecting real costs to the company. Economic conditions Turmoil in global financial markets causing a contraction in consumer sentiment The occurrence of consumer sales might not be apparent due to the economic downturn. What people buy or are not buying could reflect either a problem with management or a mismanagement of funds. Competition Entry of Costco into Australia Offering cheap bulk packaged goods. Placing pressure on industry retailers to ensure their products are competitively priced. Accuracy could be a key problem affecting the proffering of this company’s business within Australia. The inventory is recorded before SP receives it, and the lead time in receiving the raw materials may increase the risk of inventory shortage.
The inventory maybe overstated. Technology Introduction of self-serve checkouts They are weight sensitive to ensure correct items are scanned. Accuracy, is, again, a problem when humans are dealing with machines in order to check themselves out at the supermarket. Errors can occur and that is what is most troubling. Cash can be easily stolen from the automated system, payment may be made to unauthorised or non-existent persons, and the balances could be manipulated and covered up by fraudulent of bank reconciliations. Overstatement of cash receipt will occur.
Moreover, the company is not using hedging transaction; so there is a significant risk of exchange rate gain and losses. Competition Rapid use of weekly specials and other marketing initiatives To try and retain consumer interest Marketing initiatives are great but they may cause confusion inside of the organization for liabilities if certain employees don’t know what the promotions are. Also, the idea that impostor workers might show up is another problem with doing promotions and just managing the business. A fictitious employee could be included on the payroll master list, the accrued payroll maybe overstated.
There is also the potential for contingent liabilities, legal issue about unfair dismissal, would not be recognized; it may understate the accrued liabilities, which maybe material to the financial statement. Event Queensland floods Affecting fruit and vegetable availability and quality. Closure of supermarkets across flood affected regions Existence of the supermarket may be in jeopardy if quality products are not offered for purchase. There may be a very real problem with businesses struggling to stay open, because their prices have not been realistic relative to what customers can afford. Government regulation Carbon tax scheme Will increase food prices as large industry players will incur potential carbon bills worth millions of dollars The valuation of food prices may not accurately reflect the actual value of the food item(s) in question.
Here, liabilities must be taken into account. There is a significant risk of failure to record liabilities, and the potential for miscoding of accounts. And the new assistant is not familiar with SP procedures, there is an opportunity that liabilities may be omitted, therefore, trade payable may be understated. Question 2 Undertake a PEST analysis of Woolworths. In order to facilitate your analysis you may wish to review the most recent financial report on the Woolworths website at http: www. woolworthslimited. com. au.
Political—Woolworths has traditionally stayed out of the political arena, as it is mainly focused on other pursuits—such as garnering business. Economic—The economic state of Woolworths continues to thrive, although in the current economy, it is seeing slower growth in its sales departments than in the past. Social—Woolworths tends to have a very people-friendly policy at atmosphere. Technological—Woolworths has some great technology, both implemented within their stores and also for retail purposes. Question 3 Based on the following information about ProSport Pty Ltd prepare a flowchart documenting your understanding of the sales to cash receipts process for wholesale sales.
Based on your knowledge of the wholesale sales to cash receipt process: · Identify the potential misstatements that could occur in each part of the sales and cash receipts process, for example, receiving orders, obtaining inventory. · Identify for those misstatements the financial statement assertion that is affected. ProSport Pty Ltd You are the audit senior on the ProSport Pty Ltd (ProSport) audit. ProSport manufactures a wide range of sport related products.
Their product range includes athletic footwear, clothing and sporting equipment. You have made the following notes on ProSport’s sales system. • Customer orders are received at the sales order department by telephone, mail or fax or via a sales representative. • Data‐entry clerks key in the order via the computers located in that department. • Orders are subject to various edit checks on the computers. Orders that satisfy all edit criteria result in the production of a picking slip that lists the goods ordered. Orders that satisfy all edit criteria except the credit limit test are recorded on a file for review by the credit control clerk for his disposition.
Orders that fail any of the other edit criteria are not accepted by the system. Rejected orders are noted by the data entry clerk and passed to the department’s supervisor for investigation. • Packing slips are printed in the dispatch office and then forwarded to the warehouse by the dispatch supervisor. • A storeperson picks and assembles the orders. If goods are not in stock the storeperson alters the packing slip quantity to reflect actual goods picked.
The storeperson then initials the picking slip prior to forwarding it together with the goods to dispatch. • Via a computer located in dispatch, the dispatch clerk agrees the picking slip to physical goods picked, making adjustments for any stock‐outs (instances where a good is out of stock), before printing the invoice. The picking slips are filed at the end of the day numerically. • The dispatch supervisor agrees the details of the goods invoiced to the picking slip. The supervisor then initials a copy of the invoice before forwarding it to the accounts department. • Two copies of the invoice are sent with the goods.
One copy of the invoice serves as a delivery docket, signed by the customer on delivery and returned to dispatch by the delivery driver. The dispatch supervisor takes a copy of the signed returned invoice and files it numerically. The originals are sent to the accounting department at the end of the delivery runs (typically all deliveries are made in the morning and drivers return to the warehouse by 3pm). • At the end of each day, the accounts department records the sale of the goods based on the supervisor‐initialled copy of the invoice.
Issue Potential Misstatement Financial Statement Affected Customer Orders are Received via Phone, Fax, or By Post Email is not taken into consideration. Email and phone are the best ways a company can take orders. Allowing too many methods of ordering gets confusing, thus costing the company a lot of capital. Data Entry Clerks key in the orders Some of the issues with this sports establishment is its employees. Progressive Discipline should help improve employees’ performance. 1 If the Data Clerks entered the wrong information, this could wreak financial havoc on the company—especially if there were several mistakes.
Potential orders could be rejected, thus drawing down the company’s business. Slips Are Sent to the Dispatch Some slips could get lost. This would cost the company revenue if slips got lost. Packing Slips Corrected by Hand The incorrect amount of items could be put on the packing slip. This would also cost the company money and make the company liable for anything missing in the order. Dispatch via Computer Something could go wrong with the computer. A glitch could put the entire process of shipping out of business. Dispatch Agrees with Supervisor on Order A verbal agreement cannot prevent errors in orders. This is an example where the company has a faulty procedure. Orders Filed Numerically This is a major mistake, as if customers’ orders are filed with numbers only, there is nothing to ensure that the order is not fake. People could call in complaining about their fake order number not being filled and could cause the company financial loss. Accts.
Dept. Records the Number of Items on the Supervisor-Initialled Copy The department could accidentally record the wrong number on the supervisor-initialled copy. The wrong number could be provided on the copy and this could be a problem for the company financially in that case. WORKS CITED Falcone, P.
The hiring and firing question and answer book. US: AMACOM Div American Mgmt. , 2002. Assn.