Internal Audit and Control Evaluation

This assignment focuses on the importance of internal audit in assessing organizational control environments. It requires students to analyze provided case studies related to internal audits and their impact on organizations. The analysis should delve into the specific role of auditors in determining the nature, timing, and extent of substantive tests based on the control environment's strength. Additionally, students are expected to explore the significance of the control environment for independent auditors in performing their duties effectively.

FINANCIAL SYSTEM AND AUDITING

TABLE OF CONTENTS
INTRODUCTION...............................................................................................................1
TASK 1 ...............................................................................................................................1
1.1 Explaining the purpose and use of the different accounting records.........................1
1.2 Assessing the importance and meaning of the fundamental accounting concepts....1
1.3 Evaluating the factors which influence the nature and structure of accounting
system..............................................................................................................................2
TASK 2................................................................................................................................3
2.1 Identifying the different component of business risk................................................3
2.2 Analyse the control system in place in a business.....................................................4
2.3 Evaluation of the risk of fraud within a business , and suggest method for
detection..........................................................................................................................5
Task 3...................................................................................................................................6
3.1 Audit plan for minty Cola in reference to its scope, materiality and risk.................6
3.2 Identification and application of appropriate audit test procedure............................7
3.3 Recording of appropriate audit procedure for Minty Cola........................................8
TASK 4............................................................................................................................9
4.1 Preparing the draft audit report of the Minty Cola....................................................9
4.2 Suitable management letter in the relation to a statutory audit of the Minty Cola..10
CONCLUSION..................................................................................................................11
REFERENCES..................................................................................................................12

INTRODUCTION
Financial system and auditing of financial system is essential for any company in
order to form a successive management. Accounting helps in measuring the success by
measuring the outcomes of the business and in alignment to the goals and objectives of
the organisation. Every business entity is required to maintain its accounting records on
the basis of accounting policies and theories. Various standards like IFRS and IASB are
their that helps the company in maintaining and reporting their financial reports.
Financial system involves the need of auditing to the company. Auditing can be internal
as well as external that helps in determining business risks and control system and also
includes audit planning and preparation of audit report. The present report is based on the
audit planning and reporting of Minty Cola Company that is indulged in the
manufacturing of fizzy drinks and soft drinks. The report explains the purpose of using
accounting records and different accounting concepts along with identifying different
components of business risk present in the given scenario.
TASK 1
1.1 Explaining the purpose and use of the different accounting records for Minty Cola
Co.
Accounting records are all those kinds of documentation and source of information
that are used to prepare and verify and then to do the audit of all those. These all are the
financial statements and the prove for the ownership of liabilities and proof of monetary
and non monetary transactions (Richard, 2017). The main purpose or aim of accounting
records is to accumulate and then report on financial information about the performance
in all terms of business. Al these informations collected are then used to make the right
decision about where and how to invest the profits and how to set off the losses of the
business organization. All the documents which are included in accounting record are
income statements, Balance sheet, Statements of cash flows, Statements of retained
earnings and disclosures that would accompany the financial statements.

 Journals: it is the recording of the transactions of the business and it is the books
of genuine entry where the transactions are firstly recorded. The Minty Cola
company does its primary books entry such as sale book, purchase book, cash
book.
 Ledger: it is helpful in maintaining the trail balance so as to check the accuracy of
the arithmetical accuracy of the ledgers. It is helpful in making the final accounts
and financials statements.
 Final account: it is used by various stakeholders so that they can take the decision
in a better way. Final accounts cover all the information about the company.
 Income statements: all the income generated and expenses incurred by Minty Cola
are recorded in the income statements. it helps the management to overview the
basic overview about the company.
These all accounting records are very essential for the company and are basically two
types of accounting records namely ledger and journals. Both of them are having
different purpose like:
 To know the date of transactions- it is very important for the company to know
the date on which the transactions was taken place (Terama and Ekins, 2016). The
date of transactions are important to know so that company can identify when did
the fraud take place if any.
 Recording the right amount of money- accounting record also help the company
to know what was the amount which was paid to a debtor or the creditor.
 Controlling the accounts- if the company is going into losses then they need to
control the accounts so that they can recover the losses. And if not then also
controlling the accounts and recovering the loss are also needs to be done.

1.2 Assessing the importance and meaning of the fundamental accounting concepts.
The fundamental accounting concepts are the set of rules & principles which are
implemented to manage the individual as well as business accounts (Rossi and Brusca,
2016). It includes following concepts:
a) Accruals Concept:
It means that business recognize its sales, purchase, profit & loss different from that of a
customer. Auditors verify the transactions prepared according to Accrual Concept. This
concept is regarded as if the entity has not received the cash or not paid the expenses but
then also they have even purchased or sold any item an accounting period then they
should mention it when the transaction has occurred not on the bases of the payment
made. All the expense made and income accrued should be mentioned in the books of
accounts at that time only.
Importance:
a) all the revenues which are earned are yet to be recorded in the books of accounts.
b) all the expenses that are incurred but are not yet recorded in the books of accounts.
b) Economic entity concept:
The transaction of businesses are been kept different from that of the owner to avoid any
confusion in company's financial statements. The owner and the enterprise are both
different form each other as they can not be connected or linked by each other. The
owners' transaction can not be mixed up by that of the organisations.
Importance:
a) it keeps both of them separate and enterprise income can not be confused by that of
owner.

b) this restricts the accountants from recording the personal expense with that of
organisation.
c) Going concern concept:
This sort of financial statement is been prepared keeping in mind that business will be
continued operational in near future too. Revenue & expenses are referred in future (Gusc
and Veen-Dirks, 2017). Other then that, all other transactions are to be made in current
period. The entrepreneur will not consider that the company will be closed soon but it
should set up the company keeping in mind that they will continue to do the work.
Importance:
a) enable the company to prepare the financial accounts on regular bases.
b) if this is not considered then the fixed cost would be treated as an expense.
d) Matching Concepts:
Unlike Going concern concept, in matching concept, the expenses of revenues are been
considered to be made in current period of time. this avoids the deferral of expenses in
future period. It assures that all the details of financial transactions of a business are been
recorded in a given current time.
e) Materiality Concept:
Transactions should recorded to avoid any alteration in decisions made by auditor of the
financial statements of the businesses of a company. It helps in recording the small
transactions made and helps in showing financial results, position & cash flows.
Importance:
It is important because it helps auditors to analyze, summarize, record, report &
interpretation of the financial transaction of businesses of a company.

1.3 Evaluating the factors which influence the nature and structure of accounting system
To maintain the accounting system organisation can use manual and computer
based accounting systems (Makarenko, 2017). And there are many factors which are
influencing the nature and structure of accounting system like complexity of business
process, system cost, data access and resistance to change.
Complexity Of Business Process- if the business is very complex and there are many
departments or many stages of the business then surely the company can not maintain the
manual based accounting system. And thus the company need to do the computerised
accounting which would be easy for company to maintain. And if the company is not too
much complex and can be easy to maintaining then it can to some extent do the manual
work as well.
System Cost- all the cost including the cost of purchase of raw material and machinery
are also to be taken into consideration while computing the accounting systems (Frawley
and Tyler, 2016). If these are very high in any of the company then they can not use the
computer based system.
Data Access- the company need to assess the importance of the information that can be
used while considering the accounting information system
TASK 2
2.1 Identifying the different component of business risk.
` There are many risks which are involved at every level of the company and the
business which are need to be assessed and then improved. And the consequence risk also
have the adverse effect on the global businesses and can take a long duration to recover
the risk and loss (Amaliah, 2017). The businesses risk have many components and they
and they are having a strong influence on the business.

Underestimating Cash flow- if the company certainly underestimate the cash inflow and
outflow then they are likely to get affected by the risk and that too for the longer duration
of time.
Poor cash collection- if the cash collection is very poor and the company is not able to
invest in proper way then they can face the problem of poor cash collection.
Risk of execution- all the ideas and strategies which are set and planned should be
executed in a better and a good manner so that the risk are controlled and there are no risk
of financing and marketing for the company.
Risk of product and market- what ever the product the company is about to launch in
the market need to be first researched and then bring it into the market.
2.2 Analyse the control system in place in a business
In the context of Minty cola company it is very important to manage and control
the business activities and function. Controlling is very significant activities in the
company which assist to company in arising problems in the company (Ax and Greve,
2016). In the business enterprise, there are various kinds of the control system which are
as follows-
Prevent control- It is one of the most significant control system in an organisation which
protect the business enterprise from the theft. It is a designed error or irregulation from
occurring.
Detective control-It is another one of the mots significant control in the business under
which individual can find the error and irregularities after they have occurred in the
business enterprise.
In a simple word it can be said that internal control system are the policies and the
procedure which is designed to ensure things like reliability, compliances and assurance
etc. The main aim of the internal control system of the accounting are as follows-

 Segregation of the responsibility and duties- The major benefit of the control
system is to proper segregation of the duties and responsibility of each member
who are working in the Minty cola company (Brown and et.al., 2016).
 Proper authorization of management-It is another major benefit of the control
system which assist in proper authorization of management within the company.
In the Minty cola company with help of several tools and techniques of control
system company can effectively manage the business activities and functions
(Daskalakis, Devanur and Weinberg, 2015).
 Proper documentation of the accounting- It is another significant benefit of control
system under which company can easily prepare the documentation of the
accounting.
There are various key factors of the internal control for the purchase which are as
follows-
 Proper management of the cash management on the monthly basis
 Documentation of the all transactions
In the context of business, there are various kinds of the strategies which assist in
overcome the fraud identification in the Minty cola company which are as follows-
 Implement control system- This is another one of the most significant
strategy to overcome the fraud and thefts from the business enterprise.
Internal control are plan and program which is implemented to the
safeguard the company assets. Segregation of the responsibility is
significant element of internal control that assist in integrity of its
accounting record and detect the thefts and fraud (Giri and Sharma, 2014).
 Making employees awareness-This is one of the most significant strategy
by which company can protect its business from the fraud and theft. In
order to protect its business and survive its operation in effective manner, it
is very important for the management to provide effective education,

knowledge and awareness about the business protect and relevant thefts and
fraud which can occurs within the business (Guinea, 2016). With assistance
of this strategy company can keep secure its business from thefts and
frauds.
 Hiring experts- This is the best strategy for the fraud identification in this
company can protect its business from fraud and theft. In this company
should hire the experts such as certified fraud examiners, certified public
accountants, CPA etc. These professionals can give the varieties of services
to the company through which it can protect its business enterprise (Taylor
and Scapens, 2016).
2.3 Evaluation of the risk of fraud within a business , and suggest method for detection
In the organisation fraud detection is the clarification of actual and potential fraud. It
applies the improvement for an appropriate method and the procedure to identify the
early warning signs of fraud. It is very important to evaluation of the risk within the
business so as company can easily protect its business activities and functions.
Fraud detection involves the interrelation of the following techniques:
 Proactive( e.g. Risk assessments) and reactive(e.g. responding to reports of fraud).
 Manual (e.g. spot audits) and automated (e.g. responding to report of fraud).
In an organisation it should the form part of overall anti-fraud strategy covering the
prevention , investigation, detection of fraud (Järvinen, 2016). All organisation are get
affected to fraud. According to the size and the nature of the organisation and the sector
in which it operates by the different fraud risk. The appropriate method of fraud detection
saves the money and protects organisation and their shareholders employees and their
customers. The organisational promotional detection activities can also act as a deterrent
to would -be fraudsters.
Some other advantage are:
-Classification of vulnerable employees at risk to fraud.

-lack of costs associated with fraud.
-Refined organisational controls
-Improved the operational and financial results.
-Improved market position and shareholder confidence.
There are various aspects which are used by the organisations for the detection of fraud
area as follow as:
1.Builds a potential profile of frauds:An overall risk assessment develops fraud risk
profile as a part that include the necessary stakeholders and decision makers (Schroeder,
Clark and Cathey, 2016)
2.For possible indicators of fraud their should be a test transactional data.
3.By the implementing on continuous auditing and monitoring for the improve the
controls of fraud.
4.By the communicate the monitoring activity throughout the firm.
5.When things are going wrong they provide management with immediate notification.
6.fix any broken control immediately (Taleizadeh and et.al., 2017).
7.Enhance the scope and repeat.
Task 3
3.1 Audit plan for minty Cola in reference to its scope, materiality and risk
Audit planning is essential to determine the inherent business risks and fraud
within the company. Effective and efficient audit planning provides positive outcomes for
the business organisation. In order to have an effective audit planning, auditor of the
company is responsible to undertake internal audit and external audit as well. For
developing an audit plan, establishing a strategy for overall audit is necessary (Gregory,
Tomsett and Field, 2016). Below is the proposed audit plan for Minty Cola company in
reference to its scope, materiality and risk:
According to ISA 300, following should be included in the audit plan:

 nature and timing of audit
 extent of procedures for the assessment of planned risk
An audit plan must consider to scope of audit procedures. In case of Minty Cola,
the scope of audit plan may include checking of financial statements specially the cash
and bank book because there is the risk of fraud within the company. Further, the need of
replacing the machinery of production process as it involves huge amount of investments
(Pike And et.al., 2016). The materiality of the risk can be determined by identifying the
impact of occurrence of risk on the business operations. For example, as per the finance
director it is not necessary to maintain the allowance for receivables and so has released
£500,000. Impact of such decision will help in identifying the existence or non existence
of material risk.
It is not possible for an auditor to undertake each and every transaction of the
company under audit procedure. Therefore, only those items that are material to the
organisation will be considered in audit planning. For example, stolen cash amounted to
£50 will not be a material transaction but if there is stolen cash amounted to £5000,
would be a material transaction that is required to be included in the scope of audit
(Hayes and Hibbing, 2017).
3.2 Identification and application of appropriate audit test procedure
In order to meet the regulations and compliance requirements of the organisation,
appropriate audit tests and audit reports are required. These helps in evaluating the
following activities:
Test of Controls:
Test of control in an audit procedure enables the auditor to test the efficiency and
effectiveness of control that is used by the company in identifying, determining and
preventing frauds and misstatement in the organisation and financial statements (Dalkin

and et.al., 2016). Appropriate audit test procedure depends upon the test of internal
control of the organisation, if control within the organisation is weak, it enhances the
scope of auditor and if the control within the organisation is strong, it reduces the scope
of the audit to be undertaken by auditor (Tests of controls, 2014). It includes the
following three things:
 Ensuring that internal control of the Minty Cola is designed in an appropriate
manner.
 Implementing the system of internal control within Minty Cola.
 Measuring the efficiency of internal control system.
Substantive Testing:
This is the procedure that is required to be performed by the auditor if a material
misstatement is detected at the assertion level. It includes the examination of financial
statements of the company and other documents in order to identify if there are any
errors. This test is required to support that the financial records of the company are valid,
accurate and complete. In case of Minty Cola company, auditor can perform following
substantive tests:
 Issuing a bank statement to compare the cash balances (Uludağ, 2016).
 Physical counting of inventory at all warehouses.
 Matching of physical existence of fixed assets to the records of fixed assets.
3.3 Recording of appropriate audit procedure for Minty Cola
By considering the internal or external auditing of the accounts or financial
statements of the business procedure which are need to be followed and implement by the
accounting professionals. Hence, Minty Cola has the authenticated information relevant

with the operational activities and auditing they need to follow such procedures which are
listed below:
 In context with making the adequate auditing of the annual reports of the
business, the initial requirement is to fetch or collected the narrative notes
such as manual or documents which defines the major transactions held in
the premises during the year.
 After acquiring such informations there will be need of prepare the plans
for managing risks, management replots, audit assignments as well as
findings.
 In accordance with facilitate the graphical presentation of the accounts the
flowcharts will be fruitful in analysing the actual strength and weaknesses
of the firm.
 While processing such transactions there will be need of various documents
which are to be based on the legal or authenticated information as well as
which will specify actual financial position of business (Glover, Taylor and
Wu, 2016).
 However, after preparing such reports there is need to have the
questionnaires which are being facilitated among the internal stakeholders
of the organisation on which they will present their effective views or
thoughts to lower down the expense of the business as well as create the
effective environment on which the operational decisions will help them
(Hawkins, Keune and Saunders, 2016).
TASK 4
4.1 Preparing the draft audit report of the Minty Cola
a) An Audit report for Minty Cola

Audit report
Balance Sheet
Income statement-
Retained earning statement
Note-
If other data that are included with financial statement, it should be carefully considered
by auditor in order to determine consistency of fiscal statement.
IF in case Auditor Submits financial statement with specific information. It is very
essential for Auditor to expand the report and provide opinion to read particular
information.
Unqualified Report modification
Shared responsibility:
Introductory Paragraph
The company did not Audit
the Financial statement of
Wholly owned subsidiary,
which statement represent
Total assets of 200000 as on
Dec. 30 and total revenue
for the financial year is
600000.Those auditing were
conducted by other auditors
Audit Entity name-
Amount-
Audited by other auditors-
Opinion-

whose report has been
presented to auditing
committee. According to
their opinion it relates to
the amount included for
DEF organisation that is
based on the report of other
auditors.
Scope :
The Auditing company
believes that the report
provided by them and the
other auditors provides
reasonable basis for their
decision regarding
organisation.
Opinion-
In the opinion of auditors is
based on financial statement
of organisation.
Opinion and decisions are based on various data provided
by Minty cola company.
4.2 Suitable management letter in the relation to a statutory audit of the Minty Cola
Following are systematic management letter in the relation to a statutory audit of the
Minty Cola-
To,

The board of director
Monty Cola company
UK
Dear Sir
Audit status and overall opinion
We have to conduct the statuary audit for the Minty Cola company so that we can found
the legal norms and law application of the organisation.
Independents and ethical standards
In the operation and auditing we have to follow the law and regulation oin order to
obtain an effective outcome. With assistance of this legal regulation and law, we can get
assurance that financial statement of the organisation is free from the misstatement.
Overall audit strategy
The major objective of the auditing is to conduct the business and financial system
without any theft and frauds.
Key auditing and accounting issue
It is very important for the company to maintain the issue of the employees that have
stolen cash and stock form that company that is why, company is planning to incorporate
internal and audit department in order to prevent such kind of practice.
Basis for preparation of financial statements
The financial statement are prepared under the historical cost of conversion on the
accrual basis of accounting. These statements has been developed under the provision of
the companies act 1956 as adopted consistently by the company. This financial
statement can helps top the company in managing the all financial performance of the
organisation. With assistance of this statement company can easily manage their
financial performance and take the decision of business accordingly. Income statement,
balance sheet and cash flow statement are constructed adequately and free from any

material misstatement, enumerated hereunder:
 It has been founded that there annual account ended on the 31 december have no
irregularity and omission
 It have effective fixed assets and plat machinery and it is depreciated at an
appropriate rate and disclosed in the statement to report non-current assets at
written down value.
Share capital
75% of share capital is owned by the Minty Cola. This is effective and most valuable
share of the company as compare to the other organisation.
Fixed assets
Fixed cost is stated at the cost less accumulated depreciation and impairment loss.
Company have effective fixed assets which provide effective profitability to the
company.
CONCLUSION
From this entire report it has been concluded that financial control and auditing is
very significant aspect under which company can systematically manage the financial
performance of business enterprise. It is a kind of independent examination of books,
statutory records, document and vouchers of the company for ascertain the financial as
well as non financial disclosure. It has been also concluded from this report that it is very
important to control the business financial books, accountants, statutory record,
document etc for the organisation so as it can protect from the thefts and fraud. It has
been also concluded that company should hire the experts such as certified fraud
examiners, certified public accountants, CPA etc.

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Online
Tests of controls. 2014. [Online]. [Available through]
:<https://www.accountingtools.com/articles/what-are-tests-of-controls.html>.