Audit and Assurance, Fraud and Errors in Car Dealz - Assignment Example

TABLE OF CONTENTS Introduction ---------------------------------------------------------------------------------- 3 Going concern and auditing responsibility ----------------------------------------------- 3 Potential indicators of Car Dealz not a going concern --------------------------------- 4 Audit procedures of a going concern------------------------------------------------------ 6 Role of management and auditors in prevention and detection of fraud------------- 8 Role of auditors--------------------------------------------------------------------- 8 Role of management ------------------------------------------------------- -------- 9 Fraud and errors in Car Dealz------------------------------------------------------ -------- 9 Steps to investigate fraud and errors ---------------------------------------------- -------- 10 Securing and collecting evidence: computer forensics------------------------- 10 Gathering additional evidence through interviews ----------------------------- 11 Presentation of evidence----------------------------------------------------------- 11 Conclusion ----------------------------------------------------------------------------------- 11 References----------------------------------------------------------------------------------- 12 Running Head: Audit and Assurance Name Instructor Course Date Introduction Quality assurance and audit are two different approaches that are put in practice to attain the same goal. The main purpose of these two techniques is to check on improvement on quality, consistency and reliability in production or operations, and to gauge the overall cost versus revenue implications of the organization concerned. This paper discusses the practical application of these two concepts in relation to Car Dealz operations. Part A I. Going concern and auditing responsibility Under the going concern assumption an entity is seen as continuing with no intentions to stop its operations in the near future. This assumption helps the organizations to be able to adequately finance its liabilities, realize its assets and seek refinancing if necessary. It is the duty of management to establish whether a business is a going concern, thus an auditor has to consider this implication on every audit they perform (Messier, Glover & Prawitt, 2008). The role of the auditor is segmented by giving reliable information on the performance of the business. An auditor has to review management assessment and the risks of material misstatements which touch on the business. An auditor is mandated with the task of assessing management opinions on the business as a going concern. It is this information which will add up to the data to be used by the auditor. Further, the auditor has to seek a written report regarding the future plans of the business from a management perspective. The auditor is required to review the information used by the clients who are basically the business management organs in establishing whether the going concern basis is appropriate. The financial statements offer a reference point of liquidity risk and going concern aspects. In cases of material uncertainty the auditor will be compelled to take a stand and make a decision. The auditor will make unqualified opinion if material uncertainty exists in the financial records. However, where the doubt has not been pinpointed in the financial statements the auditor will give a qualified opinion with a concrete explanation on the same (Messier, Glover & Prawitt, 2008). Auditors in trying to assess the operation ability of the entities need to take into perspective, this factor among other numerous factors to forecast and feed management with the right information to support going concern approach of the business. Periodicity is one of the key factors which need to be perceived by both management and the auditors in coming up with quantifiable clarifications. For instance, ISA 570 adopts a framework which guarantees management a period of 12 months after the balance sheet dates to make the assessments. In the current economic situations going concern is very important for decision making especially to the auditors and the investors. An auditor would want to make decisions on a well-established business with future prospective. The role of the auditor would never be complete without a going concern assumption. It is from this perspective that an auditor will be able to make decisions on stability and instability aspects of the business. II. Potential Indicators of Car Delz not a Going Concern Car Dealz has faced major difficulties in cash flow over the past three years; this aspect depicts the company negatively as a going concern. Car Dealz incur a huge amount of costs from its lease showrooms. The fact that Car Dealz sometimes back could afford to lease the 99 leases depicts that the company was more profitable than in the present. Thus, there is a high degree of profit drawbacks which is experienced in the company. The effects on the cash flows of the company hamper the company’s performance. A going concern should illustrate a positive cash flow where it is able to comfortably offset its costs implications without eating on the profits of the company (Bagshaw, 2013). A going concern does not finance its subsidiary projects from credits which is the case of Car Dealz. The Company can no longer finance its renovation programmes as compared to the competitors in the industry. It is apparent that management of the company considered an approach to take a loan from the bank to finance its renovation programs. The 1 million dollars, which the company used for the renovation endeavours was mainly sourced from a credit collected. A going concern business must be able to adequately depict a positive flow in operating cash flows which is completely opposite in the case of Car Dealz. The case by the motor safety commission on the product quality of the company definitely calls for compensation of the victims. With the financial constraints it is very difficult for the company to be able to cover for any damages without adversely affecting the company’s position. Product quality is one very important indicators of performance in the market. If a company is not able to meet the demands of the customers then it will obviously be kicked out of the market. This can be the case in Car Dealz; its products are facing criticisms from both the regulators and the general customer base, it will be very difficult for the company to compete favourably (Messier, Glover & Prawitt, 2008). Some of the lenders of the company have voiced out their concern on the credit worthiness of the company. Particularly one of the lenders states that they are going to withdraw their financial support since the company can no longer pay its debts. Car Dealz may be disputed to be a going concern since it cannot meet its debts. A going concern business often attracts the attention of financial institutions that ran to offer their credits and financial assistance since they are fully aware that their money will be repaid. Since Car Dealz cannot meet its debts it is on the verge of bankruptcy which is entirely not the case for a going concern business (Messier, Glove r& Prawitt, 2008). Car Dealz has adverse errors on its financial ratios. Management of the company have not taken an initiative to adequately align its operations with escorting financial statements. For instance the company’s accounting department cannot authenticate the sales and purchase of the cars. There is an instance where there is double financing and over stating of funds in the company. It is absolutely wrong for the company to have such an absurd system of financial records and remain as a going concern. A going concern business ought to have an orderly financial record whereby any investors or financiers can effectively retrieve the information and gauge the company’s performance. The fact that Car Dealz cannot correctly project its performance in the market makes it not a going concern. It can also be stated that the company cannot be able to settle its shareholders. This means that the company is not operating for the foreseeable future. With the huge costs and debt base it will be very difficult for the company to adequately pay dividends to its shareholders. This means that the only alternative left for the company is to dissolve and sell out its asset to pay the shareholders their money. Once the business stops its operations it definitely stops being a going concern. A going concern will operate to the future without ceasing its operations because of losses or huge operating costs (Bagshaw, 2013). III. Audit procedures of a going concern The first step I will take is to confirm whether there are any events or conditions which may impair the business as a going concern. I will look at the financial statements of Car Dealz keenly to establish its credit worthiness, profitability and level of services rendered. This step will be very important in the as it will assess the risks of material misstatement since the existence of such cases may affect the nature, timing and the extent of the procedures which the auditor carries out in response to the risks. The step can culminate the management’s preliminary assessment of the going concern assumption or prefer a discussion with management in order to identify any attached events or condition which may bring about a doubt or uncertainty. The second step according to the going concern assumption will be to make enquiries and examine the relevant financial information which will guide my assessment. I will take an initiative to plan and perform procedures which will indicate uncertainty about Car Dealz ability as a going concern. Since the financial records arrived at by management of the company forms a section of audit, it will be appropriate if I will consider their reasoning and the extent of the information available. However, this will depend on the nature, size and complexity of the entity in question. In my case Car Dealz is not a big organisation hence observation and analysis of the statements will be appropriate (Great Britain 2008). It means that I have to take into perspective a number of factors when assessing the financial statements. Some of the questions I will have to ask myself include: how far into the future they lie? What are management’s goals and plans? What are the implications of the financial statements on the company’s performance? Among other important questions which are geared towards ascertaining continuity of Car Dealz. The third step entails listing some of the events and conditions which will hamper Car Dealz as a going concern. My list will begin with financial factors like: costs, dividends, revenue and any other factors which are skewed towards money utilization (Messier, Glover & Prawitt, 2008). Occurrence of some events such as major losses, cash flow problems in the company and a problem in meeting its liabilities as they fall due is to be taken into consideration. Also another very important factor to observe is the operating factors which encompass the key markets, suppliers and the staff in general; however, there are also other operating perspectives which need to be addressed in the operation cycle of Car Dealz like maintenance of their infrastructure and assets (Messier, Glover & Prawitt, 2008). The fourth step is to review management plans of Car Dealz which are to be instigated to cut on costs, reduce expenses of the company, improve on liquidity and the repayment periods of the credits, cutting on borrowing so that the company can be able to stand in a position to make profits and improve on sales and tracking mechanisms of the financial utilization. This stage will allow me to reaffirm whether there will be a genuine improvement in the operations of the company and specifically whether the situation will be salvaged (Bagshaw, 2013). Lastly the final stage will be to make a conclusion and report the findings to relevant personnel. If there is some level of events which may hamper the operations of the business as a going concern I will take a stand and clarify whether the events are significant or not, if the auditor terms the events as insignificant then unqualified opinion is made on the same, this is followed by a well-documented explanation which depicts the whole process. If however, there are no uncertainties depicted in the business the auditor will make a qualified opinion and write a reference paragraph which will offer an explanation (Oakes, 2008). Part B IV. Role of Management and role of Auditors in prevention and detection of fraud a) Role of auditors Materiality and risk are some of the well versed concepts when it comes to fraud detection by auditors. It is very critical for auditors to assess the implications of these attributes and the extent by which they affect the company. For instance the two factors will determine resource allocation and considerations of fraud in the organization. The auditor has a responsibility of planning and performing audit and reasonable assurance about the financial statements to determine whether they are free from any misstatements that may arise. With the existence of the audit evidence the auditor is able to determine if there is a case of fraud with a great degree of assurance that material misstatements are detected. At the initial stages of planning the auditor should assess the risks of errors or fraud which can bring about material impacts on the financial statements of the company. The auditor should assess and formulate a procedure for identifying existence of errors or fraud with material impacts. This touches on huge aspects of the business until there is certainty that there are no misstatements which may give rise to fraud. According to ISA 570 it is paramount that one of the roles of the auditors is to identify fraud and assess the risks of material misstatements in a company and be able to come up with related evidence on the same (Messier, Glover & Prawitt, 2008). b) Role of management According to ISA 570 those placed on the governance seat should come up with controls that will deter fraud and errors on the financial statements of the company. It is the role of management to instigate measures that will prevent the occurrence of a crime in the company. Management can essentially do this by ensuring that it sensitizes its workforce to inculcate a culture of honesty and ethical behaviour which can be reinforced by management effectively taking their role. Basically the conditions and events that lead to fraud can be traced to gaps left in financial accounting and the internal control systems. Management is liable for any shortcomings which may be exhibited by internal controls (Bagshaw, 2013). V. Fraud and errors in Car Dealz Misstatements in the financial statements can arise from either fraud or errors. An error can be referred to as an involuntary misstatement which has occurred in the financial statements (Messier, Glover & Prawitt, 2008). Immaterial errors which are made intentionally geared towards personal gains can be termed as fraud (Bagshaw, 2013). Car Dealz exhibits these two scenarios of both errors and fraud in its financial statements if a clear audit of its records was to be done. The twelve cars worth 110,000 pounds is an instance of fraud. The disappearance of such a big number of company properties raises the questions on the integrity of the accounting department. It qualifies to be called a fraud since it is an intentional approach of misappropriation of Car Dealz properties. Misappropriation of assets of a company is a fraud because it targets to fulfil personal interests. Hence, in Car Dealz scenario the disappearance of the twelve cars is a fraud case. The long delays in reconciliation efforts in Car Dealz reveal a hidden motif of the accounting department. According to research it has been depicted that a lying person will often try to cover their trail which is exactly what the accounting department in Car Dealz is doing. Negligence of the reconciliation efforts by the concerned personnel depict that it is a fraud case as it illustrates an intentional endeavours to collect finances from the company. Overstatement of the sales is an error which can be attributed to arithmetical shortcomings in the company. It is unintentional to over project the sales of the company since after all it benefits no specific individual in the company. Thus, the sales department in Car Dealz may have entered wrong figures when calculating their sales in that period; the error was further transferred to the financial statements. Lastly is a fraud case of double financing in the company. This will never be an error since financing of assets and inventories require thorough scrutiny before endorsement. It is therefore fully known by the accounting department that double financing is taking place in the company. It is an intentional approach for the concerned individuals to siphon the company its money. VI. Steps taken to investigate fraud and errors The fact that the sales department cannot clearly account for the missing cars makes the matter a fraud. The first step to take when investigating the disappearance of the 12 cars is to summon the staff and the managers who were directly linked to the matter and interview them on the same. The second option to take is to critically analyse the recent transactions which the personnel have handled. These steps will be a direct link to the fraud case. It is apparent that the 110,000 pounds will be in the long run be transacted in the bank, the bank statements will be an evidence of a fraud (Bagshaw, 2013). Computer forensics will to a large extent help to review the recent data in the systems of the business. The auditor will take an initiative to question the accounting department why there have been such delays in recording financial transactions. Apart from the piled up files in the company, the auditor will connect with other staff members to clarify whether there is fraud in the company (Messier, Glover & Prawitt, 2008). Overstatement of the financial records arises from numerous instances and tracing the root cause will be very significant in trying to resolve the situation. The auditor will have to trace the different invoices to depict the true values of the figures which are in the financial statements. Another major consideration is the billing practice of the company, by analyzing the billing concepts of Car Dealz, these errors will manifest themselves easily. Double financing is a big tragedy to the operations of the company. Car Dealz experiences this mainly due to incoherence in the company. The auditor will have to depict the true intention of the matter by assessing the different financial reports of the two companies and the agreements signed, if the records are fully authenticated then an elaborate decision is made. Also to be assessed is the internal contracts of Car Dealz and the real signatures as signed by management (Ainapure & Ainapure, 2009). VII. Conclusion As seen from the above description, an auditor will actually never operate in a business which has no foreseeable future. Auditing to a large extent is done on those businesses which can be termed as going concern. Going concern is important in management and audit purposes. Both management and the auditors can make a number of contributions in the business; this is illustrated by the roles both parties play. For instance auditors will give professional opinions while management will do the implementation. Car Dealz has to take a positive route to ensure stabilisation of its operations. The best technique or approach to attain this is to ensure that the accounting department is committed to its mandate. Proper organization of the accounting department is the road to success. References Ainapure, V., &Ainapure, M. 2009.Auditing and assurance. Bagshaw, K. 2013. Audit and assurance: essentials for professional accountancy exams. Available at:http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=543178. [Accessed 16th Mar 2014] Great Britain.2008.Audit and assurance of MPs allowances. Norwich, Stationery Office. Messier, W. F., Glover, S. M., &Prawitt, D. F. 2008.Auditing & assurance services: A Systematic approach. Boston, McGraw-Hill Irwin. Oakes, G. 2008. Project reviews, assurance and governance. Aldershot, England, Gower. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=438855. Read More