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Ernst & Old

Auditing Report



Document properties
Date, Issue, Rev September 17th 2014, Issue 1, Rev1
Department, Area Finance
Prepared by Mitchell James (12604940) and Clement Donovan (12476351)
Reviewed by Darren Thamm
Status Approved
Document No. BUS-ANL-ASS-001
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Table of Contents
1. EXECTUTIVE SUMMARY ...................................................................................... 3
2. INTRODUCTION ..................................................................................................... 3
3. SECTION A: PLANNING ....................................................................................... 3
3.1 INTRODUCTION TO PLANNING .................................................................................................. 3
3.2 EXPECTED SALES PROCESS ........................................................................................................... 3
3.3 RISK OF MATERIAL MISSTATEMENT EXPECTED PROCEDURE (ASA 315; P3) .............. 4
3.4 RISK PREVENTION ............................................................................................................................ 4
4. SECTION B: TESTING ............................................................................................. 5
4.1 INTRODUCTION TO TESTING ....................................................................................................... 5
4.2 TIMING ................................................................................................................................................. 5
4.3 SALES PROCESS OBSERVATIONS GATHERING EVIDENCE (ASA 500; PA1) ................... 5
4.4 APPROPRIATENESS OF AUDIT EVIDENCE (ASA 500; PA5) .................................................... 6
5. SECTION C: DISCUSSION AND REFLECTION ................................................ 7
6. RECOMMENDATIONS .......................................................................................... 7
7. 6.1 APPENDICIES .................................................................................................... 7


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1. EXECTUTIVE SUMMARY
This report analyses the possible misappropriation of assets taking place at the McDonalds family
restaurant situated in Fairfield Waters. The primary focus of the report is the testing of the cash
sales process of McDonalds using a visual/observational auditing procedure. The McDonalds store
we inspected, from the informational available visually, appeared to have strong internal controls.
There appeared to be a strong segregation of duties, physical safeguards, independent checks and
appropriate authorization. These strong internal controls will help to deter and prevent asset
misappropriation schemes from occurring within the McDonalds outlet. Through cross examining
our observations with our expected outcomes, it is clear McDonalds procedures are thoroughly
designed to eliminate or minimise any errors or fraud.

2. INTRODUCTION
The following report will analyse the financial performance of Omega Pty Ltd.s existing stores in
Cairns, Townsville, Gold Coast and Brisbane for the years 2010-2012 inclusive. To do this, it will
comment on various financial analysis conducted in the business model that was constructed for
the company. These include; store performance, product profitability, sales target performance and
sales staff performance. This report will also comment on the forecasted performance for the year
2013 for each store, including scenarios at differing percentage growths/declines in revenue.
However, the primary focus of the report is to use this information to form conclusions and
recommendations on the possible opening of a new store in the Maroochydore area. This store is
expected to have very similar costs and revenues to that of the Gold Coast store. With this in mind,
the forecasted income statement for the Maroochydore store is modelled off the Gold Coasts
forecasted income statement for 2013. This report will discuss the results of this analysis and will
provide recommendations as to how to proceed in regards to opening the new store.

3. SECTION A: PLANNING
3.1 INTRODUCTION TO PLANNING
Audit risk is the risk that an auditor issues an unmodified or clean audit opinion when the
financial statements are in fact materially misstated. The planning stage involves determining the
audit strategy as well as identifying the nature and the timing of the procedures to be performed.
This is done to optimize efficiency and effectiveness when conducting an audit. The planning stage
involves gaining an understanding of the client, identifying factors that may impact the risk of a
material misstatement in the financial statements, performing a risk and materiality assessment,
and developing an audit strategy. In any transaction that involves a constant exchange of money
there are risks that could ultimately lead to asset misappropriation and ultimately a misstated
financial valuation. McDonalds is a well reputed company and we feel that it is worth analysing
their sales process in order to get an understanding of such risks and ways to control it.
3.2 EXPECTED SALES PROCESS
Being a fast food outlet, we would expect that the McDonalds sales process would be fairly
standardised. The customer goes up to the register where the McDonalds employee serves them.
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The customer makes their order; the employee listens and then puts the order into the electronic
register. The employee then takes the payment either in cash or via EFTPOS. If in cash the money
gets placed in a register till and the change is given to the customer. If via EFTPOS the customer
swipes or taps their card and the payment is then confirmed. The employee then gives the
customer a receipt and goes on to get the order together. Once the order is complete, the employee
calls out the order number and gives the food to the customer. The sales process is now complete.
We would expect that there would be a manager present in the service area to ensure that service
is fast, smooth and procedures are carried out correctly.
3.3 RISK OF MATERIAL MISSTATEMENT EXPECTED PROCEDURE (ASA 315; p3)
As our expected procedure for McDonalds sales process depicts a transaction that has some form
of money handling, and money exchanging there is definitely going to be some form of systematic
risk that could lead to a misstatement in their financial statements. These include;
An employee accidentally gives the wrong amount of change to customer. If the employee
gives more change then they should have, their till would be understated. There would be
less money than there should be, and thus is regarded as an improper asset value and
would ultimately be misstated in their financial reports.
The employee could accidentally or purposely give the customer the wrong amount of food
that they ordered. The customer mightve ordered two burgers but the employee gives
them four burgers. When the time comes for valuing stock, there might be less of the
materials then there should, and will again result in an improper asset valuation.
The employee could be stealing money. The employee could sneakily pocket money and
therefore will again result in an understated till, and again would be reflected in their
financial reports.
IT risks. The registers and EFTPOS machines could suffer some form of technical
malfunction and thus cause incorrect valuations. This could affect financial statements in
many ways.
3.4 RISK PREVENTION
In order to prevent such risks from happening, here are some steps that we think the organisation
should consider if they have not already done so;
The register should only be registered to one employee and that employee should be only
one to use that register. This way any discrepancies with the till, they would be accountable
for.
The till should be counted twice. Firstly by the employee then by the manager to ensure
that there is no error in counting cash which would lead to a misstatement.
Segregation of duties. The employee who serves the customer shouldnt get the food as
well. Rather a second employee should get the order together. The first employee then
checks the order before giving it out to the customer. This way, not only is the order
checked to be correct, but also eliminates employees giving away free food.
To avoid IT risks, the company should get the software reviewed on a daily or weekly basis
so that any malfunction is recognised and eliminated before it becomes a major concern.
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Constant check-ups by the duty manager on the employee so that all policies and
procedures are being adhered to.

4. SECTION B: TESTING
4.1 INTRODUCTION TO TESTING
ASA 315 (ISA 315) requires auditors to use assertions when assessing the risk of material
misstatement and designing audit procedures. This means that as auditors we need to gather
sufficient appropriate evidence about each assertion for each transaction and account balance, or
disclosure. Most of the auditors work in forming the auditors opinion consists of obtaining and
evaluating audit evidence and as such, audit procedures to obtain audit evidence can include an
observation (ASA 500; para A2). We have thus applied an observation to the McDonalds sales
process in order to obtain sufficient appropriate evidence on which to base conclusions on the risks
of asset misappropriation (ASA 500). Observations provides audit evidence about the performance
of a process or procedure, but is limited to the point in time at which the observation takes place,
and by the fact that the act of being observed may affect how the process or procedure is
performed (ASA 500; para A17).

4.2 TIMING
The testing/observation of the McDonalds sales process was conducted on the 14th September, at
the front counter of McDonalds Fairfield from 7pm til 8pm.

4.3 SALES PROCESS OBSERVATIONS GATHERING EVIDENCE (ASA 500; pA1)
Upon entry we noted that there were not one but two employees ultimately serving customers on
the front counter. One employee served the customer and was in charge of the actual transaction
and the second employee was in charge of getting the food together it seemed. Firstly the customer
entered the restaurant and went up to the front counter. The first employee whom we noticed was
quite young, welcomed them and asked to take their order. The customer then placed their order
whilst the employee entered the order into an electronic register. When the order was complete the
employee then gave the customer the total cost of the order, and then proceeded to ask whether
they were paying with cash or with EFTPOS. The customer in which we had made our primary
observation seemed to indicate their intent to pay with cash. The employee then took the cash
payment and put it in the register till below the register. They then gave the customer their change
along with a receipt, and asked the customer to stand to the side to wait for their food. The second
employee collected the customers food, and when it was ready, the customers order number and
name seemed to appear on a big screen where the customer had been told to wait. The first
employee who served the customer then grabbed the food and seemed to check it to make sure it
matched what the customer ordered and then went on to call the customers name out. The
customer then took their order and exited the restaurant.

It is important to note that the second employee who was in charge of collecting the customers
food was a manager, judging by their uniform and the manager badge they were wearing. We also
noted of importance that there were security cameras placed in a corner position that seemed to
have full view of the service area. We also noticed on one occasion, the manager putting the order
together having a joke with one of the customers as if they were friends. The manager seemingly
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disappeared from the service area at times where the first employee was in charge of all duties by
themselves.

4.4 APPROPRIATENESS OF AUDIT EVIDENCE (ASA 500; pA5)
As we have been ordinary customers in many fast food outlets, it would be fair to say that we have
based our expected sales process on previous experience, and therefore our expectation and
observations are quite similar. Table 1.1 depicts what areas that we expected of the process that
was met in our observation at the store.

Expectation Observation
Structure of sales process where customer
goes to the front and gets served, pays for
their food, waits for their food and when
their order number is called out they
collect their food and leave.
Same as expectation. The only slight
difference being there was a screen in the
waiting area which displayed the
customers order and indicated when it was
ready
Manager present at the service area to
ensure policies and procedures are being
adhered to throughout the process
Manager present most of the time though
we noticed they occasionally disappeared
but was out helping the service area when
necessary.
Point of sale transaction technologically
systematic.
The registers all seemed to be computerised
forming an IT environment

However, by sitting down and observing the actual sales process at the local McDonalds store
there were a few major differences that we did observe with the process as to what was expected.
These differences are demonstrated in table 1.1.

Expectation Observation
One employee serving and also collecting
the food for the customer.
One employee in charge of the transaction
and another employee getting food together
for the customer. (segregation of duties)
Manager present but not involved with
the sales process
Manager actively involved in the sales
process by collecting the food for the
customer where possible
No segregation of duties associated with
the transaction and the collection of food
order (inventory).
Duties are segregated into 3 components
where there is a 3 way check on the food
going to the customer.

Through cross examining our observations with our expected outcomes, it is clear McDonalds
procedures are thoroughly designed to eliminate or minimize any errors or fraud. In our
expectation analysis we predicted that one employee would serve customers and also collect food
for the customer. This provides employees with ample opportunities to misappropriate assets.
However, after our observations we quickly discovered that this is not the case; one employee was
in charge of the transaction and another employee collected the food and passed it to the customer.
Another example of

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5. SECTION C: DISCUSSION AND REFLECTION
In summary, all of Omegas stores, with the exception of Gold Coast, are in satisfactory financial
positions. The Cairns store, although the smallest and most regional, out-performed all the other
stores on the basis of growth in terms of sales, revenues and profit. It also excelled in staff
performance and exceeded sales targets. The Brisbane store incurred the highest costs due to its
required staffing levels and metropolitan location. This store generated revenues far beyond the
other stores yet had similar profits due to these extra costs. Because the proposed Maroochydore
store is expected to have results similar to those of the Gold Coast, it is expected to generate an
operating loss under both proposed scenarios.

6. RECOMMENDATIONS
Scenario two (having six staff) may be profitable if sales revenue increases by 10% (as depicted in
appendix J). Because of the one off set-up fee of $500000, the Maroochydore store is forecasted to
have a loss of $479,388 under this scenario. However, because this set-up fee is incurred only in
year 1, future years will generate a profit if revenues remain 10% higher than forecast. Based on
the decision model and the resulting analysis, it is strongly advised that Omega should not open
the new store. If the store; however, were to open, it is recommended to have six staff if possible. If
the workload is too much for staff; improved communication through increased staff training
and/or the introduction of new technology that can help streamline tasks and reduce costs, are
both key ways in which Omega could help reduce Labour costs.

7. 6.1 APPENDICIES
Appendix A



Appendix B
44.3%
36.0%
-3.2%
22.9%
% of Profit Contribution
Brisbane
Cains
Gold Coast
Townsville
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Appendix C


Appendix D






Appendix E
Location
10% Decrease 10% Increase 20% Increase
2010 2011 2012 2013 % of Growth 2013 2013 2013
Revenue 7,200,320 6,704,770 5,688,700 5,019,643 -11.76% 4,517,679 5,521,608 6,023,572
Less COGS 5,497,360 5,131,710 4,357,940 3,856,250 -11.51% 3,470,625 4,241,875 4,627,500
Gross Margin 1,702,960 1,573,060 1,330,760 1,163,393 -12.58% 1,047,054 1,279,733 1,396,072
Less Operating Cost
Labour cost 677,000 700,000 731,000 756,667 3.51% 756,667 756,667 756,667
FAOC 285,000 285,000 285,000 285,000 0.00% 285,000 285,000 285,000
APC 90,000 85,000 85,000 81,667 -3.92% 81,667 81,667 81,667
VUAOC 498,132 505,404 501,768 505,404 0.72% 505,404 505,404 505,404
1,550,132 1,575,404 1,602,768 1,628,737 1.62% 1,628,737 1,628,737 1,628,737
Operating Income(Profit) 152,828 -2,344 -272,008 -465,344 71.08% -581,683 -349,005 -232,665
Gold Coast
Actual Forecast
Income Statement by Year
Total operating costs
Washing
Machines
10%
Fridges
15%
Freezers
8%
Microwaves
11%
TVs
15%
Hi-Fi Systems
27%
DVDs
14%
Product profit %
$0 $1,000,000 $2,000,000 $3,000,000
DVDs
Freezers
Fridges
Hi-Fi Systems
Microwaves
TVs
Washing Machines
Product profitability
Townsville
Gold Coast
Cairns
Brisbane
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Average Sales Target Performance (2010-
2012)

I tem Brisbane Gold Coast Townsville Cairns
Washing Machines 0.1% -13.5% -0.4% 6.0%
Fridges 9.6% 1.6% 3.9% 16.8%
Freezers 3.1% -18.3% 4.8% 65.5%
Microwaves 7.1% -2.8% 4.2% 13.0%
TVs 21.0% -1.5% -1.3% 41.8%
Hi-Fi Systems 22.6% -0.6% 8.6% 29.9%
DVDs 22.8% -2.5% 11.2% 24.8%

Appendix F


Appendix G


Appendix H



Appendix I
Staff Performance
Year Brisbane Gold Coast Townsville Cairns Total
2010 941,633.00 800,035.56 907,216.00 1,005,667.50 3,654,552
2011 936,487.00 744,974.44 1,009,446.00 1,138,942.50 3,829,850
2012 1,083,355.00 632,077.78 1,222,542.00 1,570,827.50 4,508,802
Average 987,158.33 725,695.93 1,046,401.33 1,238,479.17 3,997,734.76
Location
10% Decrease 10% Increase 20% Increase
2010 2011 2012 2013 % of Growth 2013 2013 2013
Revenue 9,416,330 9,364,870 10,833,550 11,288,803 4.20% 10,159,923 12,417,684 13,546,564
Less COGS 7,187,875 7,127,170 8,252,900 8,587,673 4.06% 7,728,906 9,446,441 10,305,208
Gross Margin 2,228,455 2,237,700 2,580,650 2,701,130 4.67% 2,431,017 2,971,243 3,241,356
Less Operating Cost
Labour cost 735,000 760,000 794,000 822,000 3.53% 822,000 822,000 822,000
FAOC 300,000 300,000 300,000 300,000 0.00% 300,000 300,000 300,000
APC 95,000 95,000 100,000 101,667 1.67% 101,667 101,667 101,667
VUAOC 595,040 572,726 717,767 751,238 4.66% 751,238 751,238 751,238
1,725,040 1,727,726 1,911,767 1,974,905 3.30% 1,974,905 1,974,905 1,974,905
Operating Income(Profit) 503,415 509,974 668,883 726,225 8.57% 456,112 996,338 1,266,451
Brisbane
Actual Forecast
Income Statement by Year
Total operating costs
Location
10% Decrease 10% Increase 20% Increase
2010 2011 2012 2013 % of Growth 2013 2013 2013
Revenue 4,536,080 5,047,230 6,112,710 6,808,637 11.38% 6,127,773 7,489,500 8,170,364
Less COGS 3,461,355 3,863,560 4,680,620 5,221,110 11.55% 4,698,999 5,743,221 6,265,332
Gross Margin 1,074,725 1,183,670 1,432,090 1,587,527 10.85% 1,428,774 1,746,279 1,905,032
Less Operating Cost
Labour cost 405,000 419,000 437,000 452,333 3.51% 452,333 452,333 452,333
FAOC 130,000 130,000 130,000 130,000 0.00% 130,000 130,000 130,000
APC 60,000 70,000 75,000 83,333 11.11% 83,333 83,333 83,333
VUAOC 280,084 271,510 411,552 452,517 9.95% 452,517 452,517 452,517
875,084 890,510 1,053,552 1,118,183 6.13% 1,118,183 1,118,183 1,118,183
Operating Income(Profit) 199,641 293,160 378,538 469,343 23.99% 310,591 628,096 786,849
Townsville
Actual Forecast
Income Statement by Year
Total operating costs
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Appendix J




















Post Office Box 1898 Townsville Queensland 4811 Australia
Tel +61 7 8569 9766 Fax +61 7 3448 0550 Web www.weareproauditers.com.au
James Cook Pty Ltd ABN 21 456 456 123
Location
10% Decrease 10% Increase 20% Increase
2010 2011 2012 2013 % of Growth 2013 2013 2013
Revenue 4,022,670 4,555,770 6,283,310 7,214,557 14.82% 6,493,101 7,936,012 8,657,468
Less COGS 3,058,185 3,486,755 4,782,695 5,500,388 15.01% 4,950,349 6,050,427 6,600,466
Gross Margin 964,485 1,069,015 1,500,615 1,714,168 14.23% 1,542,751 1,885,585 2,057,002
Less Operating Cost
Labour cost 347,000 359,000 374,000 387,000 3.48% 387,000 387,000 387,000
FAOC 115,000 115,000 115,000 115,000 0.00% 115,000 115,000 115,000
APC 40,000 40,000 42,000 42,667 1.59% 42,667 42,667 42,667
VUAOC 161,568 213,180 244,596 289,476 18.35% 289,476 289,476 289,476
663,568 727,180 775,596 834,143 7.55% 834,143 834,143 834,143
Operating Income(Profit) 300,917 341,835 725,019 880,026 21.38% 708,609 1,051,442 1,222,859
Cairns
Actual Forecast
Income Statement by Year
Total operating costs
Income Statement - Maroochydore
Forecast (Gold Coast) 10% Decrease 10% Increase 20% Increase 6 staff 10% Increase 10% Increase
2013 2013 2013 2013 2013 2013 2014
Revenue $5,019,643 $4,517,679 $5,521,608 $6,023,572 $5,019,643 $5,521,608 $5,521,608
Less COGS $3,856,250 $3,470,625 $4,241,875 $4,627,500 $3,856,250 $4,241,875 $4,241,875
Gross Margin $1,163,393 $1,047,054 $1,279,733 $1,396,072 $1,163,393 $1,279,733 $1,279,733
Less Operating Cost
Labour cost $756,667 $756,667 $756,667 $756,667 $387,000 $387,000 $387,000
FAOC $285,000 $285,000 $285,000 $285,000 $285,000 $285,000 $285,000
APC $81,667 $81,667 $81,667 $81,667 $81,667 $81,667 $81,667
VUAOC $505,404 $505,404 $505,404 $505,404 $505,404 $505,404 $505,404
EST_COST $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 - $
$2,128,737 $2,128,737 $2,128,737 $2,128,737 $1,759,071 $1,759,071 $1,259,071
Operating Income(Profit) -$965,344 -$1,081,683 -$849,005 -$732,665 -$595,677 -$479,338 $20,662
Scenario 1 (12 staff)
Total Opering Costs
Scenario 2 (6 staff)
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