Responsibilities of Auditors in Fraud Detection and Internal Control Weaknesses in a Restaurant

This report discusses the responsibilities of auditors in detecting fraud and identifying internal control weaknesses in a restaurant. It also provides recommendations for improving the control environment and reducing fraud risks.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

1AUDITING
Table of Contents
Introduction................................................................................................................................2
Requirement [a]..........................................................................................................................2
Requirement [b].........................................................................................................................3
Requirement [c]..........................................................................................................................3
Requirement [d].........................................................................................................................4
Requirement [e]..........................................................................................................................4
Requirement [f]..........................................................................................................................5
Requirement [g].........................................................................................................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................7

2AUDITING
Introduction
Auditing is the process of methodical examination as well as inspection of the
financial statements of the companies with the aim ensure that they are free from material
misstatements. It needs to be mentioned that the auditors have a key responsibility of
detecting errors and fraudulent activities in the financial statements of the companies that can
lead to material misstatements in them (William Jr, Glover and Prawitt 2016). It puts the
obligation on the auditors to examine the internal control of their clients in order to identify
the loopholes in them that can be a major reason for frauds. The main aim of this report is to
discuss about the responsibility of the auditors in the detection of fraud through the
consideration of the provided case. This report also takes into consideration the identification
of the weakness of the internal control in the restaurant.
Requirement [a]
The auditors have certain responsibilities towards the financial frauds in their clients’
businesses. According to ASA 240, it is the responsibility of the auditors to obtain the
reasonable as well as adequate assurance that the financial statements are free from material
misstatements whether caused by errors or frauds. In this process, the auditors are needed to
maintain the professional scepticism (legislation.gov.au 2019). In this process, the auditors
are needed to obtain sufficient undertaking about the business activities and environment of
the audit client. After that, the auditors would involve in the identification of the risks of
material misstatements due to fraud. After that, on the basis of the evaluation of the obtained
audit evidence, the auditors would apply the suitable analytical procedures for the reduction
of audit risk due to fraud. Lastly, they are needed to document them through written
presentation (Othman et al. 2015).

3AUDITING
After identification of the issues in the Sea Beach Restaurant, the auditors of Smart &
Associates are needed to obtain the needed audit evidences while maintaining the required
professional scepticism. In case the obtained audit evidences indicate towards the presence of
material misstatements in the financial statements due to fraud, they are needed to apply the
appropriate audit procedures for the reduction of these detected fraud risks. After that, the
auditors are needed to provide the appropriate audit opinion based on the whole audit and
they are needed to provide the written presentation through the process of documentation
(Chui and Pike 2013). These processes are needed to be followed by the auditors of Hangout.
Requirement [b]
Audit evidence can be considered as the information used by the auditors to arrive at a
conclusion and to form the audit opinion. Good audit evidences must have five
characteristics; they are sufficiency, reliability, source, nature and relevance. The video
provides the evidence of the manipulation in the sales coupon, but it does not show the
impact of this fraud on the financial statements of Hangout (Yoon, Hoogduin and Zhang
2015). The auditors are needed to apply different audit procedures to know the impact on
financial statements. Since, the auditors themselves were not involved in the development of
this video, they are not 100% reliable to them. This evidence is visual in nature and relevant
since it unfolds the sales coupon fraud in the restaurant. In spite of nature and relevance, the
auditors cannot use the video as the audit evidence since both sufficiency as well as reliability
is missing in this case (Yoon, Hoogduin and Zhang 2015).
Requirement [c]
Control environment can be considered as the set of standards, processes and
structures that help the companies in providing the basis to carry out internal control across
the organization (Staicu, Tatomir and Lincă 2018). It is the responsibility of the board of

4AUDITING
directors of the companies to set the tone at the top regarding the significance of internal
control that includes expected standards for business conduct. The control environment plays
a crucial role in establishing the tone of the organizations for influencing the integrity as well
as honesty of the employees. For this reason, it is considered as the base for all other
components of internal control that provides disciplines and structure. It is also applicable for
Hangout Restaurant Company. An effective control environment in this restaurant will take
into account various aspects like human resource policies and practices; organizational
structure; management philosophy, appropriate assignment of responsibilities, controlling the
business activities and effective segregation of duties which will develop a culture of honesty
and integrity in the restaurant (Finn 2015).
Requirement [d]
It can be seen from the provided case study and the video that Seal Beach uses a
particular process to accept and deal with the coupons; and there is a specific internal control
behind this process (De Simone, Ege and Stomberg 2014). They distribute the coupons
through the receipts of the grocery store. At the time to bill a customer who has brought a
coupon, the service person takes the coupon to the manager and the manager uses his
authentication card to redeem the coupon money from the bill and the customer pays the
remainder of money. After this process, the manager attaches the copy of the coupon with the
bill so that they can be easily traced for further reference. This is the whole internal control
process regarding accepting and dealing with the sales coupons (Newton et al. 2015).
Requirement [e]
It can be observed from the provided situation as well as the video that there are
certain loopholes in the internal control of Seal Beach related to accept and deal with the
sales coupons. The first weakness in the frequent absence of the manager from the restaurant

5AUDITING
while leaving his authorization card open. It provides the scope to the other staffs of the
restaurant to illegally redeem the coupons (Badara and Saidin 2013). The second weakness is
the ineffective checking of the coupons at the time of billing. The video shows that some of
the coupons do not have bills printed on the other side and the manager could easily spot this
if he properly checked the bills. The third weakness can be seen in the grocery store since one
of the staffs of the restaurant used to buy the coupons from that store in illegal manner. Both
the owner of the grocery store and the restaurant needed to implement such a system that
provides no scope for the staffs of the grocery stores to steal the coupons (Badara and Saidin
2013).
Requirement [f]
The auditors of Smart & Associates are needed to recognize certain aspects in this
case for the risk of fraud. First, the auditors are needed to recognize the faults or weaknesses
in the internal control of the restaurant regarding accepting as well as dealing the sales
coupons since these loopholes in internal control can lead to material misstatements. Second,
the auditors are needed to recognize the aspects that which parts of the financial statements of
the restaurant have been impacted by these fraudulent activities in the sales coupon. After
that, the auditors are needed to recognize the deficiencies in the control environment within
the organization that are leading towards the occurrence of these frauds related to sales
coupons (Christensen, Glover and Wood 2013). The auditors are needed to recognize these
three aspects.
Requirement [g]
Based on the above whole discussion, certain recommendations are provided to the
management of Hangout Restaurant Company and they are mentioned below:

6AUDITING
 It is recommended to Hangout to tighten their control environment where it is
necessary to ensure the appointment of an appropriate manager who will be present
all the time in the store while duty hours.
 The owner of the grocery store needs to ensure that only customers receive the
coupons behind the receipts and needs to ensure that there is not any issue of
coupons without the receipts (Chambers and Odar 2015).
 At the time of accepting the coupon, the manager is needed to check both side of the
coupon in order to make sure that the receipts is attached with the coupon.
 It is recommended to the management of Hangout to install CCTV camera in certain
places like at the billing places and others with the aim to ensure surveillance on the
activities of accepting and dealing with the coupons (Chambers and Odar 2015).
Conclusion
The above discussion shows that the auditors are needed to obtain adequate audit
evidence for the application of the appropriate audit procedures for the detection of frauds
and the auditors of Smart & Associates need to do the same in case of the audit of Hangout.
The main reason for the auditors not using the video as the audit evidence is the lack of
sufficiency and reliability. It can also be seen from the above that control environment is
crucial for the companies since it helps in establishing both honesty as well as integrity
within the employees. The above discussion shows major weaknesses in the internal control
system related to accept and deal with the coupons and certain steps are recommended that
the management of Hangout needs to follow to diminish these loopholes in the internal
control. As per the above discussion, it is the responsibility of the auditors to recognize the
necessary aspects for the detection of fraudulent activities within the organization.

7AUDITING
References
Badara, M.A.S. and Saidin, S.Z., 2013. Impact of the effective internal control system on the
internal audit effectiveness at local government level. Journal of Social and Development
Sciences, 4(1), pp.16-23.
Chambers, A.D. and Odar, M., 2015. A new vision for internal audit. Managerial Auditing
Journal, 30(1), pp.34-55.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty and
audit assurance. Current issues in auditing, 7(1), pp.P36-P42.
Chui, L. and Pike, B., 2013. Auditors' responsibility for fraud detection: New wine in old
bottles?. Journal of Forensic and Investigative Accounting.
De Simone, L., Ege, M.S. and Stomberg, B., 2014. Internal control quality: The role of
auditor-provided tax services. The Accounting Review, 90(4), pp.1469-1496.
Finn, D.W., 2015. Discussant Comment on “The Influence of Regulatory Approach on Tone
at the top” by Bradley Lail, Jason MacGregor, Marty Stuebs, Timothy Thomasson. Journal
of business ethics, 126(1), pp.39-42.
Legislation.gov.au. 2019. ASA 240 - The Auditor’s Responsibilities Relating to Fraud in an
Audit of a Financial Report - October 2009 . [online] Available at:
https://www.legislation.gov.au/Details/F2009L04075 [Accessed 15 Apr. 2019].
Newton, N.J., Persellin, J.S., Wang, D. and Wilkins, M.S., 2015. Internal control opinion
shopping and audit market competition. The Accounting Review, 91(2), pp.603-623.
Othman, R., Aris, N.A., Mardziyah, A., Zainan, N. and Amin, N.M., 2015. Fraud detection
and prevention methods in the Malaysian public sector: Accountants’ and internal auditors’
perceptions. Procedia Economics and Finance, 28, pp.59-67.

8AUDITING
Staicu, A.M., Tatomir, R.I. and Lincă, A.C., 2018. Determinants and Consequences of “Tone
at the Top”. IJAME.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.
Yoon, K., Hoogduin, L. and Zhang, L., 2015. Big Data as complementary audit
evidence. Accounting Horizons, 29(2), pp.431-438.