ACT 380.

02
Mohammad Istiaq Azim

Group Assignment – 01

Prepared By: Group 08

NAME ID
RAHBAR KARIM CHOWDHURY 1611 399 030

RAKTIM DAS 1611 637 030

SHAIKAT SAHADAT HOSSAIN 1612 067 630

AZMAIN BIN MAHABUB 1621 862 030

Total Word Count: Approximately 1450.

Introduction: About the Company

Kacha Bazar Limited (KB) is operates a chain of 30 superstores for groceries and daily food item;
both fresh and frozen. KB hires a manager for each outlet who has unlimited control over the outlet.
He is responsible for all activities regarding the outlet and is instructed to report only financials to
the Head Office.

KB ensures product quality and handles customer complains.

It also collects payment from customers and monitors the quantity of stock coming moving in and
out by suppliers to finally pay for net items sold.
The company maintains an ERP system to track all its transactions, inventory records and customer
loyalty points to analyze sales, expense and profits.

KB eliminates costs of storage and delivery by authorizing local suppliers to remove obsolete items,
track demand, monitor stock and replenish shelves.

Requirement 1 – Fraud Risk Analysis and Audit Procedures

The managers at KB are assigned with multiple responsibilities with very little supervision from the
head office. The head office only collets financial reports from managers, which can be easily
manipulated to hide unethical activities. Over long term negligence from head office managers are
likely to engage in multiple fraudulent activities. Audit Fraud ISA 240: Inadequate management
supervision of employees responsible for assets of remote location. Auditors can check the ERP
system and conduct a sample analysis with a physical count of inventory and price.

Managers are responsible for carrying out promotional activities by targeting customers in the area
of their respective outlets according to their own preference. They can often end up creating offers,
package or discount systems that boost revenue and store traffic in the short term at the expense of
lower profits. However, these policies can lead to disasters and permanent damage to the brand in
the long term due to lack of proper planning and supervision. Offers like free buy samples or sell at
cost can be misused by customers who will never return while store employees can stock buy from
the outlet and resell to other shops.

Auditors can ask for detailed plans, expenses and budgets for promotional campaigns. Check the
frequency of such campaigns and the ultimate outcome from it to decide if promotions are effective
or should be discontinued. They should also check the store employees’ bank account to see if there
are any deposits during the campaign for items they resold.

Managers depend upon suppliers for restocking, ensuring supply and maintaining quality. The over
reliance on 3rd party to act ethically can be taken advantage of by the suppliers who can restock
shelf in low quantity or with lower quality substitutes to meet demand. Moreover, managers are also
likely to work with suppliers to gain a small share of the profit. Moreover, managers might also take
a cut from the salary of staff by recruiting their own people. Auditors can check bank records of
supplier and manager to find transfer payments and other links of fraud from compromising quality.

Managers and other employees risk misappropriation of assets where they end up using company
assets like pen, paper and inventory for personal use, which can degrade the life to the assets and
increase company costs. A physical stock counting against inventory record can warn them from
further crimes. Managers can negotiate lower prices from suppliers or accept alternate products as
well and record a higher cost price to company accounts, which would be their direct gain. The
head office must maintain updated market prices of supplies to cross check against manager price
quotes.
The ERP system is faulty and has failed to automate the business transactions; due to lack of
integration between suppliers, payments and point redemption. Manual reduction from sales price
to adjust loyalty points can lead to material misstatements, which can have adverse, affects.
Auditors’ need to question employees about input variables and check for material misstatement to
correct misleading financial statements.

Finally, the company has allowed its branch to recruit its own staff. This can have damaging results
since managers are likely to take people of their preference for money or personal incentive who are
unqualified to work for the brand. KB should at least send a team to assess candidates before
recruiting them for any branch despite managers’ recommendations. Kb documents have a lot of
chance for fraud. As per the assessment above it is clear that auditors should focus on observation
and inspection. The company business model is based on their supplier and manager must be
changed.

Moreover, reliance on suppliers and managers can lead to fraud regularly. Information in their
documents may not represent the true view of the company. EPR system of KB may represent
inaccurate data, which must be assessed as well.

Requirement 2 – Suggest Appropriate controls to address the risks identified

As we have seen before, that KB’s business model has a lot of scope for fraud; due to their poor
internal control mechanism. We have three suggestions for them to make their internal control
mechanism more effective and efficient.

 Rules: KB’s rules regarding operation and quality control should have been more detailed while
being focused towards a performance-based pay for employees to persuade customers toward
impulse buying.

 Procedures: KB has not set up a proper chain of command or guideline for its operational
procedures, which can keep employees in track. They completely depend upon their managers
who have too much power. KB must monitor store activities regularly where each store
manager is randomly assessed from the head quarter every week.

 Safeguard: Lack of contingencies and safeguards make the business dependant on its managers.
Assigning a few more permanent positions to divide work can reduce dependency, while
installing a digital attendance and surveillance system could help to monitor store activity. It
also needs to create an autonomous check and balance system so every one is alert about their
peer at work.
We can suggest several direct suggestive control system for KB Ltd.

KB is totally depended on their EPR system for supplies and inventory, which has lead to their
weaker control system. A pre-numbered purchase requisition along with their EPR system will
make it difficult to get away with fraud. It should have segregation of duties and needs to authorize
the purchases. Managers should execute the purchase, receiving the goods in outlet should be under
expert custody and an accounts department will record the transactions. KB should conduct a
quality check. Local suppliers will supply and KB will inspect them before displaying for
customers. They can hire an expert who bulk buys for multiple outlets in same region to ensure
quality and good price.

Promotional activities should be taken and adequately monitored by the higher authority. Managers
might not be skilled enough to carry out all promotional activities effectively. KB’s higher authority
can arrange mystery shoppers. The mystery shopper will provide customer service reviews and
conform to company policies and procedures. They need to use surveillance tools and cameras for
CCTV. For big shop dummy cameras can be used to cut costs along with real ones; all of which
will alert possible perpetrators. Last but not the least, KB must continue control over the years of
operation so that they can have more reliance from the employees and less chance for fraud activity.

Auditors Control Procedures:

Auditors need to check the reliability of the control mechanism through a test of control. Since KB
seems to have poor control mechanisms, so a substantive test is also required to get the actual
situation of KB.

Requirement – 3 Procedures For Loyalty Point Audit

Auditor needs to follow several procedures to audit KB’s loyalty points.

1. Inspection: The auditor may follow inspection procedures. The reliability of inspection of
records or documents depends on the effectiveness of internal control over KB’s processing.
Auditor may inspect employees of KB accruing points by using their own cards when a non-
member makes a purchase or if they are making unauthorized manual point corrections or point
transfers or taking over a membership card which is an act of identity theft. Inspect whether
managers utilize an inactive card with points. Also check if points suddenly had been used from
long-term inactive accounts by internal stakeholders. It is also important to assessing the
effectiveness of current loyalty initiatives. Sold products returned or transaction capsized or
misconfiguration of points refunds can lead to money being refunded to a member without correctly
deducting their loyalty points against products sold to them.

2. External Confirmation: Auditor may use the external confirmation procedures to know the
reality between KB with their loyalty program. They can do one to one session with a sample
number of customer group including of Membership customer and non-membership customers to
verify the points of the internal stakeholders. They can create sample groups of KB’s customer and
collect written data whether they agree with the redeem amount listed in their membership account.
Also check if they received the loyalty points and discounts against them. Then finally verify
through calls if customers used their points or not.

3. Recalculation: Auditor may check several calculations and do recalculation of them since KB is
not clear about their redeemed loyalty points. They need to check if is KB correctly allocating
redemptions to actual point earnings or not and whether they are showing up to date financial effect
of redeemed points in their financial reports. Then, recalculate Loyalty Program Penetration and
Percentage of Earning Members. Interpretation of sales data can help to differentiate sales achieved
through normal operation, discounts and loyalty programs. Moreover, a recalculation of the
discount amount which is manually reduced from the sales price at the KB checkout counters
should be cross checked with a reassessed total addition of ERP listing.

4. Enquiry: The auditor must ask many question during audit. The question and answer process
includes interviewing and obtaining written statements from management and employees.
Interviewing key internal stakeholders to understand how loyalty program works. Ask question to
KB’s manager about the adequacy of the discounted amounts for doubtful accounts.
Reference :
Loyalty frauds exposed. (n.d.). Comarch - Global IT Business Products
Provider. https://www.comarch.com/trade-and-services/loyalty-marketing/blog/loyalty-fraud/
How to audit your loyalty marketing strategies. (2009, August 6). Share and Discover Knowledge
on SlideShare. https://www.slideshare.net/sallieburnett/loyalty-audit
Measuring customer engagement & loyalty with a loyalty audit. (2020, March 11).
CCG. https://www.customer.com/blog/retail-marketing/measuring-customer-engagement-with-a-
loyalty-audit/