Evaluate the audit and business risks

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Reference no: EM131034805 , Length: word count:2500

Case Study - the information below applies to Questions 1, 2 and 3.

You are the senior in charge on the audit of Fine Chem Pty Ltd (FCPL), a private company controlled by three pharmacists; Janine Cole, Peter Davis and Warren Banks, who form the Board of the company. You firm has just been appointed to complete this audit. FCPL operates 10 pharmacies in the Sydney region. Each of these pharmacies employs one or more pharmacists and a number of sales staff. Janine Cole, Peter Davis and Warren Banks work in each pharmacy on a rotational basis and fill in when there are staff absences. FCPL is looking to expand its operations to Melbourne, and is currently negotiating the finance for and purchase of two additional pharmacies.

As part of the planning stage you have calculated following financial ratios:

Ratio

Industry Average

Audited 2015

Unaudited 2016

Quick asset ratio

1.13

1.45

1.45

Invenory turnover (days)

21

25

30

Debt to equity ratio

2.1

1.5

1.5

Gross Profit ratio

0.35

0.45

0.45

Times interest earned ratio

5

6.8

7.2

As you continue in your work on this company you discover the following information about the purchases, accounts payable, sales, cash and inventory systems.

FCPL has a centralised buying operation, managed by Eva Thomson, and a climate controlled storage area attached to the shop at Parramatta. Each week the chemist/store manager at each of the pharmacies provides details of stock required to Eva Thomson. Eva checks if the goods are in the storage area. If they are not currently available she then logs in to the appropriate supplier web site and orders the required goods. Eva emails a copy of the online order to all pharmacies indicating the amount ordered for each pharmacy.

Some goods are delivered directly to the individual pharmacies. On receipt, they are checked against the online order copy sent by Eva and entered into the inventory system by one of the shop sales staff.

Other goods such as cosmetics, perfumes, vitamins and other supplements are only directly delivered to the Parramatta pharmacy and later distributed to the individual pharmacies. Eva checks all goods received at the Parramatta pharmacy against the order that she has placed, enters the goods into the perpetual inventory system and files the order alphabetically. Once a week, FCPL uses a contract courier with a climate controlled van to deliver this stock to the other pharmacies. Eva receives all the invoices and enters them into the accounting software, a comprehensive cloud based accounting system.

The company accountant, David Wells, is a contractor working 2 or 3 days as required. He approves the invoices for payment and loads the payment batch file up to the bank. This triggers a record of the payments being made in the accounting system. David reconciles the bank account each week. When David is unavailable to approve payments Warren Banks approves the payments. The payment system records who approves the payments based on the login identification used to access the system. Access to the system can be from any computer connected to the internet. Login is through a login identification and password system. There is no automated system to regularly change the passwords. You noted that last year this cloud based system was hacked. Tax file details were stolen from a number of clients of the cloud based system, false tax returns were lodged and tax refunds stolen by the hackers. Fortunately FCPL employees were not targeted by these hackers.

All sales are either cash or EFTPOS transactions. The cash registers are linked to the accounting software updating the perpetual inventory system and cash at the end of each day's trading. As a perpetual inventory system is used no physical stocktakes are undertaken.

Cash is banked daily by the pharmacist at each pharmacy. As part of the weekly bank reconciliation process David reconciles the daily banking to the cash register/accounting system records. David downloads a balance sheet and profit and loss statement each month and provides these to the Board for their monthly meetings. The accounting system includes a dashboard which can be customised by David to meet the needs of the Board. David has not customised the dashboard as only Warren has expressed an interest in it. Although all Board members have access to the accounting system Warren is the only Board member who regularly accesses the system.

You have noted that one of FCPL's major suppliers is Banks Supplements Ltd. You have further discovered that the CEO of this company is Melinda Banks, the wife of Warren Banks. Banks Supplements Ltd is a large organisation supplying supplements to a growing Asian market.

Question 1 - Analyse the ratios in conjunction with the additional information and identify from your analysis, implications for the audit and any particular audit steps that need to be undertaken to reduce audit risk. For example if there was a worsening debtor's turnover, one of the audit steps would include a review of the provision for doubtful debts. Ensure that you also identify any potential weaknesses in this ratio analysis and any additional information that you will need to make a judgement about the business risk facing the company.

Question 2 - Identify the strengths and weaknesses in the internal control system described above. For each control weakness, identify the financial report assertions that may not be met. Suggest a control to correct any of the deficiencies identified. Identify how this weakness will affect your audit, indicating the additional audit steps and audit evidence that you will need to collect to reduce audit risk.

Question 3 - The COBIT framework identifies seven categories of threats to the computer information system. Consider each of these categories to evaluate the audit and business risks that arise from the information system. Suggest changes that could be made to minimise these risks and identify how these risks will impact on the audit that you will undertake.

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