Advice on Business Fraud, Audit Risks, Key Account Balance, Accounts Payable Test, and Internal Control

This memorandum provides advice on business fraud, audit risks, key account balance, accounts payable test, and internal control. It includes information on the impact of fraud on a business, types of audit risks, additional information required for the sale of medicine, types of tests for accounts payable, and types of internal control.

Memorandum
To: Jek Porkin
From: xxxxxxx, audit manager, Samway Baker Fitzgerald
Subject: Advice on the mentioned issues
Issue 1
Business fraud or corporate fraud basically consists of illegal activities, misappropriation of
assets, fraudulent of financial reporting and dishonesty by an individual towards a company
which will provide financial gain. It consists of all activities that can disrupt the activities of any
business (Adler et al.,2018). While sometime fraud can put question on the survival of the business
by limiting partners and clients confidence or creating mistrust inside the business. So the impact
of fraud in a business is as follows:
 Financial loss – Any type of fraud mainly effect the financial statement first. Whenever
there is misappropriation of company asset or cash it creates fraud in financial reporting
which is harder to determine. In big companies it is harder to track these types of fraud
and it creates a bad impact on the companies’ goodwill. Investors would not be willing to
invest their money in such types of company where there is a chance of risk (DeFond &
Zhang,2014).
 External confidence – If once a company faces fraud then it hampers the public trusts on
the organization. While if a small company faces fraud they might never be the victim as
their existence will be on stack. The bad effect of facing fraud by a company has many

consequences like they may get credit at higher price and they may be refused for
membership in trade association.
 Internal confidence – Fraud not only affects the moral of external but also affects the
internal of the company by disrupting their normal momentum. Especially in small
company they rely on stable growth and cultivate (Furnham & Gunter, 2015).
 Company morale – Fraud’s shatters the moral and culture of the company and the persons
who are attached to it as it create embarrassments and trouble for the person who works
there. Even when an employee leaves a job and joins another it carries the tag of fraud
with him even if they were not associated with it.
 Effect on audit – Fraud makes business audit more complicated and tough. After fraud
auditor has to closely look after the company’s books of account minutely. Even
sometime external auditor has to appoint to double check the data’s. Auditor sometime
has to use some other procedures to reach at the final decisions which make the audit
procedure costly.
Issue 2
Audit risks are those risk which arise when an auditor expresses an inappropriate opinion
on the financial statement even if the financial statement is free from any misstatement. Audit
risk is considered as the risk of various products but to keep this risk at limit the auditor has to
check each component at all level ( Griffiths,2016). The main purpose of audit is to reduce the
audit risk by making adequate tests and procedures as the investors and stakeholders rely on the
financial statement audited by the auditor. There are mainly three types of risk which are as
follows:

 Inherent risk – This is a type of audit risk which cannot be identified by the internal
auditor during audit. To detect this risk different series of procedure is required to be
applied to have a clear idea about audit plan, audit strategy and audit approach. Audit
plan consist of guidelines to be strictly followed which list the evidence that need to
gather while an internal audit. Audit strategy is also used to develop the audit plan by
applying different methods of audit risk (Groomer & Murthy, 2018).
 Detection risk – It is a type of audit risk that occurs from poor planning. This risk cannot
be identified and corrected as it occurs when the financial team gather all material in one
place either with missing information or faulty calculation. Identifying this risk requires
deep knowledge and understanding of the nature and business of the company operations
and its financial statements.
 Control risk – This risk arises due to absence or failure in the operation controls of the
entity which create the risk of material misstatement. To detect this type of risk an
organization must have a proper internal control to detect and prevent this type of risk to
arise. So proper planning for every department in every step is required to exercise proper
internal control over financial statements (Hall, 2015).
Asking question to an internal audit is the most critical part of the inquiry which allows to
understand the process, function and objectivity of the audit. So the two key question that must
be asked to an internal audit are what the process involved are and how to improve this process.
Audit strategy are the process that determines the direction, timing and scope of an audit as it
provide the guideline for developing the audit plan. It contains some statements of key decision
that is needed to plan the audit which includes the characteristics of the entity, reporting
objectives, timing of audit, nature of communication, factors required team effort, preliminary

activities required, knowledge gained form the entity and the resources available for the entity.
Small entity requires short audit strategy in the form of memo. Audit strategy consist of different
audit approach like risk based audit or top down approach which is used by the auditor during
the process of audit. It defines and set the objectives of audit with planning required to execute
an audit (Knechel & Salterio, 2016). Audit strategy is very important for the success of an audit
engagement by following some of the key points are as follows:
 Auditor should identify and defines the scope of audit which is very important for
starting the audit process. As auditor has to follow international auditing standards and
client has to prepare his financial statement according to US GAAP.
 By identifying the objective of audit which helps the auditor to set the time required for
audit by stating the disclaimer in the audit report.
 Audit strategy helps the auditor to identify the key area of audit engagement that requires
professional judgment.
Issue 3
Additional information required in relation to the sale of medicine on the key account
balance are as follows:
 Assets – To operate successfully every business requires asset which includes cash, stock,
building, tools, land, vehicle and also the money due from the customers (Power &
Gendron, 2015).
 Inventory – Stock are the important part of the business which can be the raw material to
produce saleable items or the finished products to sell.

 Liabilities – Money that a company owes to other in the form of loan, bond credit
purchase and many others are known as liability of a company.
 Equity – Money which are invested by the investors in the company is considered to be
the equity.
It’s not possible for an auditor to detect all the misstatement in the key account balance so they
mainly focus on material misstatement (Ren et al., 2015). Material misstatement influence the
decision making of the financial statement which arises due to fraud or error. So the risk of
material misstatement can be of two type which are as stated below:
 Inherent risk – This risk are due to error or omission of financial statement due to the
factors other than internal. This risk is most likely to occur when there is complex
transaction and it represent failure of internal control.
 Control risk – This risk arises when there is material misstated due to failure of internal
control used in the business. For this a business may experience asset loss but the
financial statement shows profit instead of actual loss. Implementing control system helps
to avoid this risk but can cost high.
Control environment are set of action taken by the management that sets the day to day activities
to control the environment which comprises of policies and procedures taken by the management
to deal with issues (Sandvig et al., 2014). International institute of audit defines the control
environment as the foundation on which the internal control system operates which helps the
organization to achieve its strategic objectives, provide accurate financial statement to the
internal and external stakeholders, helps to operate business efficiently and effectively by
following all laws and regulation and safeguarding its assets. Organization that established a well

control environment are more efficient in its operation and achieve its objectives. Principles
related to control environment are as follows:
 Commitment to integrity and ethical values
 Independence to the board of directors.
 Establishing organizational authority, structure and responsibility.
 Attract, develop and maintain competent people.
 Maintaining internal control responsibilities.
Entity faces risk from both internal and external sources which are included in the control
environment (Shen et al., 2017). So a precondition risk assessment has been established with the
objective of identifying, assessing and managing risk to achieve the entity’s objective. It is
established before administration can identify the risk and take necessary steps. It shows the
effectiveness and efficiency of the operation and performance to achieve financial goals.
Identifying and analyzing the risk is a critical component of internal control system and its
effectiveness on risk at all level. Risk assessment are very important part of the internal system
as it help to create awareness for risk, identify the risk, control program for any hazard,
determining the adequacy of control measures, prevent risk especially at the planning stage,
applying control measures and meeting all legal requirements.
Customer payment testing is a payment gateway system which is an e-commerce application that
approve payment of the customers (Sookhak, 2015). It from as medium between the purchaser and
seller by encrypting sensitive information. Customer payment testing includes the following:
 Functional testing – It is the base function of the payment system which verifies the
application as per the order, calculation and tax charges country wise.

 Integration – It integrate test checking of all service.
 Performance – It identifies various performance check of gateways to check its
efficiency.
Issue 4
Accounts payable test is designed to enable the employer to identify the potential hiring
by evaluating the skills of working and readiness to job.
TEST TYPES OF TEST KEY ASSERTION COMCLUSION
1 Test of control This is an accounting
procedures that test the
effectiveness of controls
used by entity to prevent or
detect the material
misstatement (Reeves,
Culverwell & Wittman,
2017).
Here auditor relies on the
client control system to
perform the auditing
activities. If this test failed
to achieve its objective then
then the auditor will
This test is done
on sample
transaction that
occurred
throughout the
year which will
provide the
evidence of
reliability of the
control system in
the reporting
period.
Size of the
company does not

perform a substantive test
which will increase the cost
of auditing.
Test of control is classified
into three which are the
followings:
 Re-performance –
At this stage auditor
initiate new
transaction to see the
control that are used
by the client to
check its
effectiveness (Xia et
al., 2015).
 Observation –
Auditor also
observes the
business process
which controls the
elements of process.
 Inspection –
Business documents
matters in this test
as its main
objective is to
check the proper
functioning of
control system.
When an auditor
face error in test
of control it
further apply
testing. Further if
any error is found
then the auditor
will consider it as
a systematic
control defect
which cannot be
rectified by the
auditor.

are observed by the
auditors to give
signature and stamp
of approval after
checking which
indicates the control
that has been
performed.
2 Substantive testing It is an audit procedure that
examines the financial
statement with all
supporting documents to
check the errors. This test
requires supporting
documents as evidence to
the financial record of the
entity.
Types of Substantive test
that an auditor can use are
issuing bank confirmation
after checking the cash
balance, observing the
physical inventory at the
Substantive
testing includes
the confirmation
of all account
balance with the
third party, re-
calculating the
calculation and
transactions.
In case of further
error or
misstatement
additional audit
testing is required.
After that if any

end period, confirming the
account receivable balance
after contacting the
customers, calculating
inventory valuation,
evaluating the fair value of
assets, physical verification
of fixed assets, confirming
the account payable balance
from the suppliers,
confirming the loan balance
and reviewing the minutes
of board of directors.
error occurs it will
be stated to the
management.
Substantive
testing is
conducted by the
internal audit staff
by providing the
assurance to
perform as
planned. External
auditor conduct
test at year end
and internal audit
conduct this test
throughout the
year. If all this
test does not
eliminate the
issues then the
whole system
needs to be

improved.
Issue 5
Regulation in standard of work hour pay and overtime protect the workers who are required to
work for more than the ongoing rate. This regulation is invented to discourage the use of
overtime (Yuan & Yu, 2013). Overtime raises employment cost and forces the economic to reduce
the employment. The overtime pay regulation has little effect on the worker who work overtime.
The risk of overtime are as follows:
 Overtime reduces the employment of both skilled and unskilled people.
 Overtime worker are more skilled then other employees and their work may not be up to
the standard.
 It increases the competition for job who are employed.
 Expands the overtime pay regulation which has little effect on the shares of workers.
 Raise labor cost which can lead to reduction in overall employment.
Overtime pay can increase the hourly wage of few worker and also encourage work by
increasing employment. Overtime regulation does not stay valid when worker and employer
adjust to the regulation. Sometime this regulation fail to increase job and actually reduce
employment (Zadek, Evans & Pruzan, 2013).
Internal control consist of set of activities that are used in the normal operating procedures of the
organization by safeguarding the assets, reducing errors and ensuring proper functioning of
operation. Internal control increases with the increase in size of the entity because owner don’t
get time to maintain when the number of employee increases. Even if a company transfer itself to

public company or when a company’s share are listed in stock exchange there is always a need
of additional internal control system which tend to increase the cost only. Internal control
consist of some policies and procedure that an entity uses to protect its asset and data by
maximizing its operation. Type of internal control are as follows:
 Detective internal control – This internal control is designed to find the errors after their
occurrence which serve as a check balance system to determine the efficiency of the
policy. It finds the problem within the companies’ process. A small company can
implement this control easily through management supervision but a large firm required
more integrated system which is adequate to control companies operation.
 Preventive internal control – This internal control are kept to keep the errors and
misstatement to occur as it works on regular basis. It keeps the loss and error from
occurring by segregating duties and protecting assets. This control includes checking of
clerical works, backing up the computer data’s, checking on employees or employers,
segregating duties and approving transactions. This control is integrated in the system to
function on a continuous process (Yu et al., 2015).

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