The paper "Lack of Proper Accounting Records, Incompetent Employees, Detection Risks" is a great example of a fiance and accounting assignment. There are a number of approaches that the audit can adopt in order to perform the audit engagement. One of the ways includes the business risk approach (Eilifsen, Aasmund, Knechel, W.Robert, Wallage, Philip, 2001). Business risks are the factors that affect the company’ s ability to meet its goals and obligations and can either be internal or external within its operations. (Knechel, Salterio and Ballou, 2007) and is classified as financial risk, operational risk and compliance risk.
According to Nice On the following are the business risk that could be facing the entity: 1. Competition. The company is likely to face a lot of competition in future. This may affect the sales which may result in high losses in the future. Already there is a fall in the profit. This may affect its future performance and the directors are not keen since they are busy doing the marketing business development. This element posses a big threat to the business operation as when they start reporting losses, the directors may not be able to bring it on track and given the fact that there are other branches still in operational, the growth and expansion may weaken the strategic plans given by the management. 2.
Lack of proper Accounting Records. Recording of financial data is one of the requirements of the IFRS, 2009, whereby the entity is supposed to comply with the underlying standards and its requirement. Nice On has been keeping their records poorly. Their records accumulate, even the supplier records where no authorization has been involved for control purpose.
This indicates errors of omission can occur. Also stocks there no formal policies to show how goods on transit are recorded. (Swanson D, 2006) 3. Incompetent employees. Qualified personal is an asset to the organization (Armstrong M, 2003) and every employer ensures they have the best personnel. Nice On has employed twenty staff with only two technical staff and who also are unable to cope with the volume of the work. Some staff may not be knowledgeable enough to pass correct entry to the books of accounts, an example is where Nice ON has a fleet of 12 trucks used daily yet they are not properly recorded in the books of accounts. 4.
Foreign Currency changes. Since Nice On operates many branches, Sydney, Melbourne and the rest the company is exposed to the risk of currency fluctuation. This may bring to the auditor the inherent risk as the currency might fluctuation any time and also the business can lose heavily due to currency is devaluation. This may bring to the auditor the inherent risk as the currency fluctuation may affect some entries at the end of the period 5.
Technology and Security Controls Technological changes might affect the operations of the Nice On business in the sense that management is still ignorant to use passwords and there seems to be little to be done as the management insists they do not need a password on accounts transactions whenever they want to access. Question 1.B With regard to the accounts payable systems, the controls are bad. Fiona is the only staff handling the supplies invoicing. This might mean that requisition notes for purchases have not been authorized for control purpose.
The records of the order level are not kept since Melbourne seemed to cater for short supply which is very costly. No record has been made to show supplier names and quantity ordered and also suppliers document are exposed to anybody. Luck of proper controls may lead to material misstatement due to errors of omission and commission. A notable issue is where Fiona Li had kept a big pile of supplier invoices which means most of them or all had not been entered into the system, which can bring a big variance in the financial statement.
Eilifsen, Aasmund, Knechel, W.Robert, Wallage, Philip, Application of business risks audit. A field study, 2001, vol.15
Swanson D, Business Risks vs. audit risks, internal auditing 2006.
Janet L. Colbert, Michael S. Luehlfing, and C. Wayne Alderman, Engagement Risk, the CPA Journal, 2009,
Clickeman .M, Financial statement assertions, the Internal Auditor journal article, 2004
International Standard on Auditing 315 Understanding the Entity and its Environment and Assessing the Risks of Misstatement
Knechel, Salterio and Ballou, Auditing: Assurance & Risk (3rd Ed.). Thompson South-Western, 2007.
International Financial Reporting Standardes, 2009, guidelines
Armstrong M, Human Resource Management Practice, 9th Edition,2003.