The Impact of Fraud on Audit Quality

This assignment delves into the crucial relationship between fraud and audit quality. It examines how fraud risks influence audit procedures and outcomes, exploring concepts like internal control systems, fraud detection methods, and the role of auditors in mitigating these risks. The analysis draws upon academic literature and practical guidelines to shed light on the challenges and best practices associated with assessing and managing fraud risk within an auditing context.

FINANCIAL SYSTEM AND
AUDITING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1................................................................................................................................................1
1.2................................................................................................................................................2
1.3................................................................................................................................................3
TASK 2 ...........................................................................................................................................4
2.1................................................................................................................................................4
2.2................................................................................................................................................5
2.3................................................................................................................................................6
TASK 3............................................................................................................................................6
3.1................................................................................................................................................6
3.2................................................................................................................................................7
3.3................................................................................................................................................8
TASK 4............................................................................................................................................9
4.1................................................................................................................................................9
4.2..............................................................................................................................................10
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial resources of a company play a very critical role in its success and therefore, it is
imperative for every enterprise to undertake appropriate measures for the management the
financial aspect. Strategic and tactical objectives shall be set in place for better utilization of the
resources. Fundamentally, financial system of a company is comprised of transactions and
dealing of money with various stakeholders of the company (Gelinas, Dull and Wheeler, 2011).
Some of the measures such as recording, in time reporting of transactions, verification etc. are
included within the system.
The effectiveness of the system can be further enhanced by conducting auditing of the
internal controls, which are vital for the success of an organization. In effect, it shall produce
dependable financial reporting, prevent the occurrence of frauds and misappropriation of the
resources of a business unit (Zadek, Evans and Pruzan, 2013). In furtherance to this, the report
shall elaborate on the importance of keeping accounting systems particularly in the context of
Minty Cola Co. (Minty Cola), which is involved in manufacturing of soft drinks. It then analyses
the management control system of the company. Further, audit report of Minty Cola shall be
presented which is planned and prepared by interim audit supervisor of Parsley & Co.
TASK 1
1.1
The financial performance and position of a business unit is reflected by the accounting
records, which documents the assets, liabilities, cash flow etc. of the organization. To comply
with the laws, Minty Cola shall adhere to the requirement of maintaining the accounting records,
which otherwise would also prove beneficial for the company.
Balance Sheet shows the financial position of the company, by demonstrating the assets
and liabilities of the company
Income Statement is the summarized record of the revenues and expenses. It is in the
form of profit and loss account, which determines the net profit and loss of the company and
Trading account, which ascertains the gross profit of the company (Norman, Rose and Rose,
2010).

Ledger is a complete record reflecting all the elements of finance such as equity, revenue,
expenses, assets etc. It provides account information of all these elements for the life of the
company.
Trial Balance is the combination of balance amount of all the ledgers and is useful in the
ascertainment of arithmetical correctness of the varied transactions documented.
Prime Entry Books are utilized for the purpose of primary recording of the data before
entering it in the double-entry book keeping system (Knechel and et. al., 2012).
 Cash Book illustrates all the cash transactions in the form of receipts as well as
payments in a chronological order and is used as a tool for internal auditing.
 Sales Book is the record of credit sale transactions of the whole day and is further
used to prepare the sales ledger of the specific day.
 Purchase Book contains all the original entries of only credit purchases and is
aggregated on a monthly basis. The resulting outstanding figures are credited in the
respective account of the suppliers.
1.2
The postulates or conditions which constitute the basis of recording the accounts and
preparing various financial statements is termed as Accounting concepts. Some of the concepts
which shall prove useful for Minty Cola have been described herein under:
Accrual refers to recording of the earned revenues in income statement, even if not
actually realized. This is termed as accrual-based accounting and determines the economic
condition of the company by recording events irrespective of their actual realization (Mennicken,
2010).
Going concern implies that the specific firm is functioning with no threat of liquidation
in the coming time duration and can be assumed to operate in the market at least in the
foreseeable future.
Business entity is a body which is administered by the commercial laws of the nation and
has come into existence to carry out business activities or any other ascertained work. It can be in
the form of corporations, partnerships, sole proprietary firms, limited liability companies etc. For
instance, Minty Cola is a company, incorporated under the commercial law of the nation, for
manufacturing soft drinks.

Historical Cost represents the original cost incurred by the company at the time of
acquisition of a specific asset and is stated in the balance sheet as the measurement value. Hence,
it is the nominal value which the company had to pay for buying the particular economic item.
Consistency is the practice which is recommended to be followed by every enterprise
including Minty Cola, which requires the company to follow same accounting policies and
standards throughout their existence. It shall assist them in easily comparing data of past
yearsand further removing ambiguity or confusions (Power, 2013).
Prudence is the quality which is required to be maintained while documenting the
financial data. It mandates the business enterprises to prepare the statements in a corrective and
unambiguous manner so as to avoid future confusions and problems. It can prove to be an
effective risk management strategy as all the records shall be approached with utmost caution.
Materiality generally implies to the attribute of relevancy of a particular data to the
required information. Particularly, in accounting it refers to the significance of errors and
misstatements on any economic decisions. Hence, the information contained in the records shall
be true, fair and relevant to the respective statement (Hayes, Wallage and Gortemaker, 2014).
1.3
Accounting systems can be adopted in various forms by Minty Cola, either in the form of
manual or computerized accounting systems. The latter is also termed as ERP Model, which has
proved to be beneficial for various firms. The following factors influence the accounting system
of Minty Cola.
Size and type of the company has a determining influence on the decision of adoption of
accounting systems. Minty Cola being a large company has adopted the ERP Model of
accounting as it is difficult to maintain manual data at such an extensive level. The company is
currently expecting a revenue of 5 million pounds which reflects the size at which it is operating
and also the data which is required to be documented.
Complexity of Business Processes is another factor which assists in determining the type
of accounting system i.e. manual or computerized system. Organizations with complex internal
and external operations highly benefit from the computerized system (Internal Control and
Accounting System, 2016). It can be supported by the fact that computers simplify the complex
data and present in a categorized manner, thereby also breaking the departmental barriers.

Level of Training poses another challenge for the management of the companies.
Maintenance of accounts is a technical job and requires skilled employees, especially if the
accounting system is computerised in nature (Khalifa, 2013.). Therefore, Minty Cola shall recruit
individuals who are acquainted with the computerised system of accounting, for maintaining the
immense amount of data in an efficient and effective manner.
System Cost is also a major determinant for accounting systems as the cost incurred by a
company shall vary with the variance in the method. For instance, maintaining accounts
manually is a cheaper method as compared to the computerized system. The latter comes with a
cost of acquisition, execution and also purchasing of related software. However, it is
compensated in the manner in which it benefits the company and deters the risk it may have to
face (Davies and Crawford, 2012). Minty Cola is earning great revenues; hence adoption of the
computerized system does not pose any difficulty for them.
TASK 2
2.1
Business Risk is the uncertainty a company is facing, which reflects the possibility of
earning lower profits or losses as against the anticipated revenues for a firm. Numerous factors
are responsible for such an ambiguous condition being faced by any entity and is constituted of
the following components:
Operational Risk: This kind of risk is the consequence of redundant and failed internal
processes or system failures. It poses a great obstacle in the smooth functioning of business
processes. It may also be a result of human or employee errors. Minty Cola is currently facing
Operational Risks as some of the employees of the company have been observed to practice the
habit of stealing cash and inventory.
Liquidity Risk: It arises due to unexpected decrease in the available cash to meet
contingencies or short-term financial requirements of the company (Peters and et. al., 2014). If
the company is unable to transform its hard assets into cash at an optimum time, then the
probability of facing this risk arises.
Strategic Risk: Minty Cola can also face strategic risk in the event it undertakes
inefficient business plans which are substandard or inadequate for the given situation. The
decision of the company to run both the old and new accounting general ledger may pose a

strategic risk as the strategy may cause confusion in data. Also the decision to buy as well as opt
for rented warehouses, though is currently beneficial for the company, may require amendments
in future.
Regulatory Risk: All the business entities are incorporated under the prevalent company
laws of the nation and hence are governed by all the commercial laws at all times (McNeil, Frey
and Embrechts, 2015). Therefore, Minty Cola shall assure compliance with all the rules and
regulations while operating in the market.
2.2
Control System is a business tool which regulates the operations of the company and
indicate the quality of performance. The managers of the company are enabled to have an
enhanced control over the corporate, keep a track of the performance and adherence with the
aims and objectives of the company. Establishing an efficient system also assists in managing
risks as well as accountability of the internal system. In furtherance to the same Minty Cola has
established the following systems:
Inventory Management: The corporation in pursuance to escalated production has
increased the warehouses for storage. In addition to its own places, the company has also taken
storages from other parties on rent. Thus, the inventory is stored at various places and in huge
amounts. The company has adopted the practice of cross-checking the number of inventory
stored at all the sites. However, there seems to be a breach in this system as some of the staff
members have been reported to flick away inventories.
Segregation of duties: This constitutes to be an important constituent of the control
system at Minty Cola The operation of the company are spread over a vast area and hence this
mechanism is very helpful for the company. Each personnel are assigned his/her responsibilities
and is liable to be accountable for it. For instance, the company in order to chase the outstanding
receivables has appointed a credit controller, who is solely responsible for this task and is
accountable to the management for it.
Establishment of Internal Audit department: This initiative of the company shall enable
them to monitor and control the the internal operations of the company and also keep a track of
the exact situation. This is a potential risk assessment technique in the sense that a proper
mechanism of internal audit shall foresee situations and make the company prepared to face the
same.

The company in order to minimize the risk of debtors has also released an amount in
favour of receivables, from its escalated revenues. In pursuance to the same the company is not
required to deduct the number of receivables in the balance sheet.
2.3
Corporate frauds and internal misconduct poses a major threat to the trust of all the
stakeholders of a company. Though the companies strive to be in compliance with the anti-fraud
laws, however, what is actually required is to imbibe the risk management within the culture of
the organization (Risk Consulting, 2016). Minty Cola is operating on a large scale and is carrying
out diversified operations, hence, the possibility of occurrence of fraud in the company has
extensively increased. For instance, the company has 5 warehouses, each filled with tonnes of
inventory. Though the company has established control systems to avoid risks, it is not possible
for them to always keep an eye on each of the sites. Also the manufacturing occurs at a large
level and is completely dependent on the employees, therefore, any mishap at the ground level
may not reach the management but may have an impact on the operations of the company. Hence
it is strategically important for the company to establish a proper fraud protection mechanism.
 The company shall establish a fraud risk management technique for detection and
prevention of fraud within the company. The employees shall be provided proper
counselling and training to avoid the occurrence of fraud. Also the security levels shall be
tightened to minimize the scope of happening of such events. An automatic evaluation
and control mechanism shall be set up to keep a check on the activities of individual
employees, by setting fixed goals and related responsibilities for every staff member.
 An internal control system shall be executed to detect the fraud before it causes any harm
to the business. It can be in the form of internal audit system which has been adopted by
the company monitoring the financial statements and records (Salehi and Shiri, 2012).
Hence, an extensive documentation shall be maintained at all times for each and every
aspect of the company.
TASK 3
3.1
Audit Planning in essence is the designing of the manner in which an auditor wishes to
carry out the process of reviewing the financial events in order to effectively ascertain the

position and functioning of an organization. Some of the major aims to primarily undertake the
planning of audit is to prepare clear and unambiguous financial statement (Planning an Audit,
2012). Additionally, it enables the company to detect fraud in a timely fashion. Hence, the
auditor before actually undertaking the process auditing determines the aims and objectives to be
achieved. In accordance to the same it plans various steps he/she shall undertake. As an auditor
of Minty Cola, the audit plan shall begin with the procurement of relevant evidences or
documents of the company. Following the same some of the aspects which shall be ascertained
in a audit plan to review these documents are:
 Scope: Under this head the auditor determines the substance of the study it is going to
undertake (Aven, 2010). It shall contain the type of transactions undertaken by the
company which shall be reviewed or the years of the financial statements which are
required to be reviewed to fulfil the aims of conducting the audit.
 Materiality: The relevancy of figures and data is analyzed and ascertained under this
head. The provided documents are bifurcated on the basis of relevancy and it is further
checked if necessary data has been included in the provided evidences. Any fraud or
omission of data can be detected at this stage by cross checking the documents of the
company with the other evidences provided to the auditor.
 Risk: Every audit process accepts certain level of uncertainty, which tends to come
with documents in such a great amount. Hence, it is imperative to include an effective
risk assessment methodology in the audit plan to instantly detect any such happening
within the internal process of the company (Fraud and Internal Audit, 2012).
3.2
In order to determine the actual position of a business unit, audit test is applied, generally
at the end of the fiscal year. There are various types of tests which can be conducted which shall
specifically state the assertion, the audit procedure and the rationale behind the procedure. Some
of the tests which stands relevant for Minty Cola are as follows: Risk Assessment procedure: Considering the fact that the cited company is working in a
highly risky market, opting for this procedure may successfully identify the potential risk
the company may face or the misinterpretations of the accounts. It reflects a clear picture
of the internal processes of the company and also the effectiveness of the control system
(Council, 2010).

 Test of Controls: It is important to use this test to access the control system of Minty
Cola and determine how effectively it deters or detects mishaps. On the basis of this test
the auditor shall decide if the documents provided by the company can be trusted or not.
 Substantive Tests of Control: This test measures the correctness of financial statements
and identifies misstatements mentioned therein. The test determines the authenticity and
relevancy of the transactions in relation to the objectives of the audit process.
 Analytical Procedures: The process compares the illustrated figures or data with the
expectations and it is undertaken at the stage of planing as well as at the stage of
completion of the process.
3.3
The audit process may vary with the type of audit being undertaken, which can be in the
form of operational, compliance, investigative or information system (Dart, 2011). However,
some of the fundamental steps involved in the process are: Requesting documents: After ascertainment of the fact that an audit is required to be
conducted, the auditor from Parsley & Co. shall request the management of Minty Cola
to provide all the relevant documents in accordance to the audit preliminary check list. Preparing an Audit Plan: On the basis of the provided documents, the auditor shall
draft an audit plan to cover all the identified issues and objectives of the audit process. Scheduling of a meeting: Once the audit plan is ready, the auditor would schedule a
meeting with the senior management of Minty Cola to discuss the scope, time frame etc.
of the audit process. And various other relevant aspects are discussed before the
initiation of the process. Conducting Fieldwork: The auditor then interacts with the staff members and accesses
the correctness of the internal system. Drafting of the Report: Followed by these steps the auditor shall document the findings
of the process which shall be constituted of errors, problems, trends, discrepancies
against the actual system and other realizations which the auditor must have
experienced. Also, the recommendations addressing all the issues are identified.
 Closing Meeting: This marks the end of the process which requires the auditor to meet
the management of Minty Cola to receive their feedback on the report and have a last
word in regard to the audit process.

TASK 4
4.1
DRAFT OF UNQUALIFIED AUDIT REPORT
To,
The Board of Directors of Minty Cola Co.
27th August, 2016
EXECUTIVE SUMMARY
1. The financial statements of Minty Cola Co. (hereinafter referred as 'Minty Cola') has
been audited on the date of 27th November, 2015. It is hereby stated that the auditor
along with the audit department of Parsley & Co. has undertaken the process of audit in
accordance with the national laws and International Standards of Auditing (UK and
Ireland). It is further stated that the acts of the auditor were completely in compliance
with the APB's Ethical standards for auditors.
SCOPE OF THE REPORT
2. The scope of the auditors shall inculcate the following but shall not be limited to it:
a) The process shall obtain documents or evidences from the official website to review the
authenticity of the statements of the Minty Cola.
b) Assess the policies and standards adopted and the consistency and accuracy in
implementation of the same;
c) Evaluate the control system and risks posed on the company.
MANAGEMENT RESPONSIBILITIES
3. Co-operate in providing all the documents in the checklist and also additional ones if
required;
4. Provision of misappropriated data shall be be avoided;
5. All the relevant information such as concept and principles being utilized and practices
adopted, shall be disclosed.
OPINION OF AUDITOR
6. It is opined by the auditor that the financial statements of Minty Cola reflect an authentic
and fair view of various aspects of the company. The policies being followed throughout
the accounting system is consistent and relevant. However, it has been observed that

some of the employees have posed Operational Risk by indulging in wrongful activities
of stealing cash and inventory.
RECOMMENDATIONS
7. Minty Cola shall adopt an effective control and monitoring system to keep a check on
the activities of employees.
8. Risk Management Techniques shall be adopted.
Name of the Auditor: ____________________
Signature: _____________________________
Date: _________________________________
Name of the firm: _______________________
Address: _______________________________
4.2
LETTER FOR CONDUCTING AUDIT
To,
Name: ___________
Parsley & Co.
Date: 22nd July, 2016
The present letter is written in connection to request you to conduct the process of audit for
our company, Minty Cola Co. (“Minty Cola”) and review the financial statements for the fiscal
year of 2014-15. the rationale behind conducting this audit is to ascertain the financial position
of the company and also identify redundant practices being followed by the company.
Furthermore, the accounting system has been following consistent policies and standards
and is hereby assured from our side that the financial statements are free from misstatements.
They shall provide a holistic view of the company functioning of the company. Relevant
disclosures regarding the depreciation charged, related parties etc. shall be made.
Sincere Regards,
ON BEHALF OF THE BOARD OF DIRECTORS OF THE MINTY COLA CO.
_________________________________(sign)

(Name of the Director)
CONCLUSION
The company Minty Cola has been maintaining all the required accounting records and
has been effectively applying the relevant concept of accounting. It has been observed that the
company is facing some specific business risks, for which respective control systems shall be
installed within the internal system to increase the efficacy of the performance of Minty Cola.
The company has appointed an auditor who has successfully prepared an audit plan, followed by
the execution of the process, thereby providing a clear picture of the company. Hence, it can be
concluded that the company is functioning in a good condition.

REFERENCES
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