CONTENT Introduction................................................................................................................2 I.

II.

The duties, status and liability of the external auditor and also describe the relationship between internal and external audit...................................................2 Plan an audit with reference to scope, materiality and risk...................................3 appropriate manner as per requirements..............................................................8

III. Identify and use appropriate audit tests and also record the audit process in an

IV. Explain the purpose and content of a statutory audit report related to Jolie

Company.............................................................................................................12
V.

Explain and illustrate different types of qualification within an audit report.........13 Company.............................................................................................................14

VI. Draft suitable management letters in relation to a statutory audit for Jolie

Conclusion...............................................................................................................16 References...............................................................................................................17

1

Introduction I am a manager in Jen & Co. The law of tort is more likely to be a remedy for third parties. The following audit report will show my analysis in auditting process Jolie Co accounts for the year ended 30 November 2010. The effect of law of tort is to impose upon auditors a duty of care over what is imposed by statute or contract. In the Company Act 1985. My rights and duties are enshrined in law. I. • Proper accounting records have been kept and proper returns adequate for the audit received from branches not visited. there are some factors that an audit like me has to consider. The auditors have responsibility for loss which has occurred through the failure of them to carry out their duties imposed by the contract with the clients. status and liability of the external auditor and also describe the relationship between internal and external audit Being an auditor. accounts and vouchers. • The accounts agree with the accounting records and returns. responsible for the audit of Jolie Co as their external auditor. auditors have to face potential liability to the clients under the law of contract. • Particular of loans and other transactions in favour of directors and others have been correctly disclosed in the financial statements. The relationship between internal and external audit 2 . First. • The information given in the directors’ report is consistent with the accounts. The duties. the auditors may have the liability under the law of tort. I also have liabilities for professional negligence. I also have to give my opinion on the truth and fairness of these documents. Beside that. I have to check all balance sheet and profit and loss account. I have to report whether these accounts have been properly prepared in accordance with the Company Act 1985. As an auditor. • All information and explanations have been received as the auditor think necessary and they have had access at all times to Jolie Co’s books. • Details of directors’ emoluments and other benefits have been correctly disclosed in the financial statements.

timing and extent of audit procedures should be based on the most recent and reliable financial information and will help to determine an effective and efficient audit approach. methods and terminology The external auditor must control and assess the work of the internal auditor. The internal audit work should not be so distorted in order to fit with external audit needs that its own function is lost. I am a manager in Jen & Co. materiality and risk  Scope Jolie Co is a large company. 3 . operating in the retail industry. from which customers can place an order on-line. II. Materiality considerations will differ depending on the aspect of the financial statements being considered. Most sales are made instore. I will focus on sales and collection department of Jolie Co. or over the phone. but there is also a very popular catalogue. The internal audit is not always a cheaper way of carrying out an external audit function because the internal role can extend into many other areas. Plan an audit with reference to scope. The assessment of materiality when determining the nature. The cooperation will be developed through: • • • • • Periodic meetings to plan the overall audit to ensure adequate coverage.  Materiality Materiality is an expression of the relative significance or importance of a particular matter in the context of financial statements as a whole.The cooperation between Jolie Co (JLC) internal auditor and Jen & Co external auditor will minimize the duplication of work and encourage a wide coverage of audit issues and areas. or of individual financial statements. responsible for the audit of Jolie Co. Periodic meetings to discuss matters of mutual interest. Although the reliability of records and adequacy of the reporting and accounting systems are interests shared by both types of auditor. Exchange of audit reports and management letters Common development of audit techniques. Materiality assessment in conjunction with risk assessment will help the auditors to make a number of decisions. Besides. Mutual access to audit reports and management letters. the special position of the external auditors makes them more effective and appropriate in some cases. In this audit plan. A matter is material if its omissions or misstatement would reasonably influence the decisions of an addressee of the audit’s report. Internal audit must not be seen as a service to the external audit.

In Jolie co. from which customers can place an order on-line.700.  Risk We should consider the level of audit risk. I think it is 30%.316. The internal control of Jolie co has just 3 members. I think auditor should concentrate on the sales and collection department. This type of risk can be reduced by increasing the extent of test of details. there is only Lindsay “who reports to the finance director. or over the phone. there are four types of risk: audit risk. Because Jolie Co uses order on-line system.667 (2009) to 1. Thus. The number of phone and on-line orders increased from 1. a) Audit risk Audit risk is the risk that auditors may give an inappropriate opinion on the financial statements. misstatements in order process are unavoidable. such as the fact they are estimates or that they are important items in the accounts. c) Control risk Control risk is the risk that client controls fail to detect material misstatements. It indicates the auditor’s agreement to accept that the financial statements may be materially mistaken after the auditing is finished and unqualified opinion is issued. However. but there is also a very popular catalogue. so I select a acceptable audit risk is 5%. We can see that Jolie Co has stable development in 2009 but it changed in 2010. inherent risk isn’t high. The other two internal auditors are currently studying 4 . Maybe some misstatements has been occurred in sales and collection department.000 (2010). At Jolie Co “most sales are made in-store. However the Profit before tax of 2009 is $253 million and higher than of 2010 is $220 million. Being an auditor of Jolie Co and wanting to have a low audit risk. b) Inherent risk Inherent risk is the risk that items will be misstated due to characteristics of those items.+ What items to examine + Whether to use sampling techniques + What level of error is likely to lead to an opinion that the account do not give a true and fair view After observing and documenting an understanding of the sales and collection process of Jolie Co. The new on-line sales system has allowed overseas sales for the first time. The system for phone ordering has recently been outsourced”. This is a important process which Jolie Co needs to control and supervise carefully. over the phone and the new on-line sales system has allowed overseas sales for the first time. inherent risk. control risk and detection risk.

Thus.316. d) Detection risk Detection risk is the risk that the auditors’ substantive procedures do not detect a misstatement that exists in an account balance or class of transactions that could be material. Base on the formula: AR = CR x IR x DR. I think control risk of Jolie Co will be 70%. we can find out more evidences about problems and errors in sales and collection process. It can be seen that the internal control of Jolie Co is poor and weak. phone ordering services. To identify the complexity problems. income and cash-flow statements).700. auditors also need to use the following techniques: + Questionnaires: auditor uses these questions to collection information about sales systems of Jolie Co: “ a) Are supplies examined on arrival as to quantity and quality ? b) Is such an examination evidenced in some way ? c) Is the receipt of supplies recorded. so we will have: 5% = 70% x 30% x DR  DR = 5% = 23.Ordering functions 5 . so audit department has to carry out many processes and tests. The team was set up two years ago.  Plan By analysing the draft statement of comprehensive income of Jolie Co.8% 70% x 30% Because detection risk is low (23. The number of phone and on-line orders in 2010 is 1. auditors should visit each business area relevant what they have accessed above such as on-line ordering computer system. It can be seen that the internal control of Jolie Co didn’t operate effectively. and initially focused on introducing financial controls across all of Jolie Co’s offices”. Besides that.8%) so auditors will work many things and try their best to keep this ratio.for their professional examinations. collect more information about financial statements (balance sheet.000 and higher than of 2009 (1. perhaps by means of goods inward notes ? d) Are receipts records prepared by a person independent of those responsible for: i.667) but the Profit before tax of 2010 is $220 million and less than of 2009 ($253 million). either individually or when aggregated with misstatements in other balances or classes.

The processing and recording of invoices e) Are goods inward records controlled to ensure that invoices are obtained for all goods received and to enable the liability for unbilled goods to be determined ? f) Are goods inward records regularly reviewed for items for which no invoices have been received ? g) Are any such items investigated ? h) Are these records reviewed by a person independent of those responsible for the receipt and control of goods ? ” (source: financial systems and auditing course book. The internal audit team of Jolie Co has just three member. the remaining two members are currently studying for their professional examinations. junior audit’s opinion is internal control has a lot of deficiencies. 556) + Evaluating questionnaires (ICEQs): auditor use this type of questionnaire for staffs of Jolie Co to evaluating about internal control of this company “ a) Sales are properly authorised ? b) Sales are made to reliable payers ? c) All goods despatched are invoiced ? d) All invoices are properly prepared ? e) All invoices are recorded ? f) Invoices are properly supported ? g) Cash and cheques received are properly recorded and deposited ?” (Source: financial systems and auditing course book. pg. pg. Thus.ii. pg. the internal audit team didn’t have enough time to finish their task and “Lindsay finds many instances 6 . company has only Lindsay who works and reports to the finance director. In fact. There are two aspects of the relevant parts of the accounting and internal control systems about which auditors should seek to obtain audit evidence: “ a) Design: the accounting and internal control systems are designed so as to be capable of preventing or detecting material misstatements. 557) + Test of control: carrying out test of control will help auditor to evaluate company’s control is effective or not. 564) As we can see that. b) Operation: the systems exist and have operated effectively throughout the relevant period” (Source: financial systems and auditing course book.

the financial costs is $25 million in 2010 and more than in 2009 ($22 million). transactions and events are recorded accurately.. and the managers of each location are generally reluctant to introduce controls as they want to avoid bureaucracy and paperwork. especially in cash-flow. classified and described in accordance with the applicate reporting framework. Lindsay’s recommendations are often ignored”. If Jolie Co wants to improve its cash-flow.. the profit of Jolie will be decreased. Thus. Maybe they sell goods on credit and collect their debtors too slow or there are a lot of bad debt. + Substantive test: auditor should use substantive test to obtain audit evidence to detect material misstatements in sales and collection. Check whether the sale invoice is numbered evidence of matching sale invoice. As a result.of management policies not being adhered to. sale order. Besides that. 565). It can be seen that Jolie Co has problem about sales and collection. 7 . Examples for analytical review method: Documents Sale ledger Sale invoice Sale order . especially analytical review method and the following assertions: “ a) Existence: an sales exists b) Rights and obligations: an sales ‘belongs’ to the client c) Occurence: a transaction or event took place which relates to the client d) Completeness: all relevant sales. Check whether orders are pre numbered in a sequence.. and there are no undisclosed items e) Valuation: an sales is recorded at an appropriate value f) Measurement: a transaction or event is measured at a proper amount and allocated to the proper period g) Presentation and disclosured: an item is disclosed. Accuracy: that all sales.. . so completeness and validity are easy to confirm. transactions and events are recorded. pg. company should collect all debtor as soon as possible..” (Source: financial systems and auditing course book.. Tested area Check the balance of the account whether clients’ account has accounting code.

After using types of questionnaires. auditor needs to evaluate. pg. check how the company report.  Test of Control that is designed to provide evidence about the operating effectiveness of various aspect of internal control. There are three common types of audit procedures:  Risks assessment procedures that are designed to help the auditor assess the risk of material misstatement in an assertion. Test of control are sometimes called compliance tests. whether performed early in the audit engagement or in the response to new information.  Substantive test that are designed to provide evidence about to fair presentation of management's assertions in the financial statements. To seek for audit evidence from tests of control. Tests of control provide evidence to support control risk assessment below the maximum. It is true or false ? After that. Identify and use appropriate audit tests and also record the audit process in an appropriate manner as per requirements Audit test is a procedure applied to a sample within a population the purpose of an audit test is to assure that no material exceptions are included in the sample Decision about the nature of audit test is related to the auditors’ choices about the type of evidence that they collect to support an opinion.” (Source: auditing 8th edition course book. auditors should consider the sufficiency and appropriateness of the audit evidence to support the assessed level of control risk. 8 . test of control and substantive test. Recall that the auditor uses risk assessment procedures to obtain evidence about inherent risks and the risk of fraud. although testing is through the medium of transaction. • Test of control “Tests of control are tests to obtain audit evidence about the effective operation of the accounting and control systems – that properly designed controls identified in the preliminary assessment of control risk exist in fact and have operated throughout the relevant period. III. 2) If the discovery is made that the system did not follow a particular way then:  He may need to review the description of his system and reevaluate its effectiveness. 105) Two points must be made on inspection and control: 1) It is the application of the system being tested is not traded. auditor summarize and draw conclusions and ways to solve misstatements or problems if it happens.

To control the sales are recorded accurately. Audit tests typically are performed on a sample basis over an existing group of similar transactions. pg. 106) Both types of tests are used in external and internal audits in order to reach established audit objectives. He will need to determine whether the failure of compliance is an isolated or a symptom. we can calculate the following ratios: Income over sale ratio of 2009 = Profit before tax x 100% 253 x 100% = = 16. Other substantive procedures. the following test could be carried out: 9 .210 x 100% ≈ 83. Sampling approaches can either be statistical or non-statistical.260 x 100% ≈ 82.535 Sales 220 x 100% Profit before tax x 100% = = 15.48% 1.1% 1.12% 1. such as test of details of transactions and balances. In Jolie Co. reviews of minutes of directors’ meeting and enquiry. Analytical procedure b. Base on scenario.535 Operating expense x 100% Sales 1.2% 1.455 = Operating expense over sales ratio of 2010 = = • Substantive tests “Substantive procedures are tests to obtain audit evidence to detect material misstatement in the financial statements. as can be outlined in audit checklists or determined based on the results of audit questionnaires. with the ultimate goal being to obtain the most representative sample of the population before testing begins. some audit tests are required to provide reassurance that sales are recorded accurately and debts are collectable. There are generally of two types: a.455 Sales Income over sale ratio of 2010 = Operating expense over sales ratio of 2009 = Operating expense x 100% Sales 1.” (Source: auditing 8th edition course book.

the following test should be conducted:  Check for proper authorization of the write-off of uncollectible accounts  Verification of accounts written off  Check that orders are only accepted from customers who are within their credit terms and credit limits Check that all new account on the sales ledger have been authorized by senior staff  Record the audit process in an appropriate manner as per requirements Client Auditor Audit activities Transaction Audit planning Continuously obtaining information about the client’s business Continuous update of knowledge and understanding of client’s internal control structure including control environment and activities Designing of audit strategy including applying audit risk model and preliminary audit programs Accounting information system 10 .  Prepare proof of cash receipts. To control the debt collection. Check whether cash received was recorded.  Check to discover lapping of accounts receivable.

Internal control Consideration of internal control structure Continuous understanding and evaluation of internal control structure Performing electronic tests of controls Modifying audit programs Process transaction Substantive tests of detail transaction Selecting appropriate electronic audit tools and techniques Performing audit procedures Ensuring reliable means of obtaining competent and sufficient audit evidence General ledgers Substantive test of account balances Gathering sufficient and competent audit evidence Evaluating the and reliability evidence timeliness of audit Monitoring continuous audit approach Financial statements Audit report Issuing audit report Improving continuous audit approach Deciding whether to accept or continue a continuous audit engagement IV. Explain the purpose and content of a statutory audit report related to Jolie Company 11 .

It is a means of communicating all of the auditor's work to management.  the financial statements have been prepared in accordance with the Companies Act 1985. It is a formal document summarizing the work done and reports the findings and recommendations.  The Profit and Loss Account. Auditor beliefs. this gives a benchmark against which the quality of the audit may subsequently be judged in the event of any external scrutiny of the auditors work. Each finding must be provable. Therefore. V. The opinion: the auditor will give opinion on  the financial statements give a true and fair view . the important thing is what the auditor can prove. The following financial statements needs to be identified:  The Balance Sheet. Each recommendation must fit the facts of the finding and materially reduce the potential risk as indicated by the facts of the finding. Findings must be supported by sufficient evidence and be within the audit's scope and objectives. It is not important what an auditor believes. without proper documentation will not be carried to the report.  The Cash Flow Statement. Explain and illustrate different types of qualification within an audit report 12 . This is for the benefit of the shareholders and others users. Signature and date: the audit report must have signature and specific date. the auditor is under a statutory duty to report to the members of the company. which people outside the Internal Audit function get to see. The report must concisely present the total essence of the audit effort. An audit report should include: a) Title: the report is addressed to the members of the company. audit reports are always kept on public record with the financial statements.The audit report is the means which the external auditors express their opinion on the truth and fairness of a company’s financial statements. c) The basis of the opinion: this part show that the audit is conducted in accordance with auditing standards. An audit report is the only output of the auditors’ work. b) Scope: The purpose of this paragraph is to ensure that the elements of the financial statements which are subject to audit are identified (by reference to the relevant page numbers in the annual report).

There are three following types of qualification within an audit report: • Qualified opinions Qualifications with respect to an auditor's opinion may be broadly classified into two categories. the rest of the financial statements were audited and they conform GAAP. • Adverse opinions An adverse opinion is the opposite of an unqualified opinion. Reasons:  Single deviation from GAAP . but don't affect the rest of the financial statements from being fairly presented when taken as a whole. it is an opinion that the financial statements do not present fairly the financial position. and cash flows of the company.  Scope of limitation . they should disclose in a separate paragraph of the report the reasons for the adverse opinion and the principal effects on the financial statements of the matters causing the adverse opinion. All qualified reports include a separate explanatory paragraph before the opinion paragraph disclosing the reasons for the qualification. The opinion states that except for the effects of some deficiency in the financial statements. In an audit engagement.occurs when one or more areas of the financial statements don't conform to GAAP. and even though they couldn’t be verified. and those qualifications with respect to the fairness of presentation in accordance with generally accepted accounting principles consistently applied. in conformity with generally accepted accounting principles. The auditors should express an adverse opinion if the statements are so lacking in fairness that a qualified opinion would not be warning enough. Adverse opinions are used when an auditor determines the financial statements are materially misstated. or as a whole don't conform with GAAP (Generally Accepted Accounting Principles) • Disclaimer of opinion A disclaimer of opinion is no opinion. results of operations. The auditor determines the financial statements are presented fairly except for. The auditor finds 1 of 2 types of situations that don't comply with GAAP. a disclaimer is required when substantial scope restricts or other conditions preclude the auditors' compliance with generally accepted auditing standards. Whenever the auditors issue an adverse opinion. 13 . or some limitation in the scope of the auditors' examination. A qualified opinion restricts the auditors' responsibility for fair presentation in some areas of the financial statements.occurs when the auditor couldn’t audit one or more areas of the financial statements. those qualifications which relate to the scope of the examination. the financial statements are presented fairly.

which hinder the auditor's work in obtaining evidence and performing procedures  There is a substantial doubt about the auditee's ability to continue as a going concern or. We would point out that the matters dealt with in this letter came to our notice during the conduct of our normal audit procedures which are designed primarily for the purpose of expressing our opinion on the financial statement of your company. The sales order form is then passed to the invoice 14 . whether intentional or not. Jolie Co June 15th. Financial statements for the year ended 31 October 2007 In accordance with our normal practice.  There are significant scope limitations. we set out in this letter certain matters which arose as a result of our review of the accounting systems and procedures operated by your company during our recent audit. Inventory • Present system The sales order form is passed to the warehouse where the goods are selected and packed and ready for despatch. continue operating.  There are significant uncertainties within the auditee. in other words. Reasons:  A lack of independence. VI. In consequence our work did not encompass a detail review of all aspects of the system and cannot be relied on necessarily to disclose defalcations or other irregular or to include all possible improvement in internal control 1. Draft suitable management letters in relation to a statutory audit for Jolie Company Management Letter Jen & Co The Board of Directors.Auditee means the person who “was or is being audited”. exist between the auditor and the auditee. 2011 Member of the board. or material conflict(s) of interest.

Lindsay’s recommendations are often ignored. 15 . Human Resources • Present system The internal audit team has three members. CFO guided the team to focus on the introduction of control activities to achieve cost savings from a cash flow problem is with the company. 3. When the internal audit department has enough staff. Nine months ago. • Recommendation Company needs to recruit staffs that have professional skills in accounting. This will directly affect the operation of Jolie Co. The relationship between internal audit team and the managers • Present system “In the course of her work. Other internal auditors are studying for their professional exams. including Lindsay who report to CFO. • Implication The internal audit department has not sufficient resources to work so they can't make an effective internal audit. and the managers of each location are generally reluctant to introduce controls as they want to avoid bureaucracy and paperwork. This will help Jolie Co to avoid financial risks. Lindsay finds many instances of management policies not being adhered to. As a result. and sales invoices are prepared in triplicate with no serial numbers.” (Source: scenario) • Implication The relationship between the internal audit team and the managers of each branch isn't good. The manager of each branch are generally reluctant to introduce control when they want to avoid bureaucracy and paperwork. they will work efficiently and reduce the pressure. • Implication There is no serial number for the triplicate sales invoices. The team did not have time to do more testing financial control or operation. This would be hard for reconciliation • Recommendation Put serial number in each invoice 2.typing section in the sales office.

the above report shows our analysis and appreciation about finance and trading operation situation of Jolie Co. References Edexcel HNC/HND business (2004) Finance specialist units 9 – 12. London: BPP Professional Education Aldine house. available from http://www. Scenario. Yours faithfully Jen & Co Conclusion In general. 2011.com/definition/auditee. please contact us immediately. It hasn't been disclosed for third party. 16 . 11 York Road. Our appreciations have been discussed with your CFO and chief accountant.html accessed on June 15th. “Auditee”. We will looking forward to receiving your reply on the points made.• Recommendation They often need to share ideas. Businessdictionary. supporting foundation degrees course book. This letter has been written for the sole use of your company. Continuum (2002) Auditing 8th edititon course book. London SE1 7NX. We provide a statistical analysis on the clarity and effectiveness of the accounting policies put in place by the company. We should take this opportunity to thank for your staff because of their cooperation and helping for our audit process. information with member of the company and listen ideals of employees for working better. we will consider these problems during the future audit. If Jolie Co needs more information or explanation.businessdictionary. Jolie Co should consider and change for trading better. Aldine place.

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