Weaknesses in Inventory Control

Table of Contents
Answer to Question 1............................................................................................................................2
Answer to Question 2............................................................................................................................3
Answer to Question 3............................................................................................................................3
Answer to Question 4............................................................................................................................4
Answer to Question 5............................................................................................................................5
References.............................................................................................................................................7

Answer to Question 1
a. Audit independence refers to the independence of the internal and external auditor when
they are auditing the financials of the clients from the parties who may be financially interest
in the business. The same has been defined in APES 110 on Code of Ethics for Professional
Accountants. The concept warrants integrity and objectivity from the auditor who is
performing the audit such that there is no biasness and he/she may express his opinion
freely. There are 2 aspects to it namely real independence (independence in fact) and
perceived independence (independence in appearance). Both must be achieved in order to
achieve the goals of independence. The real independence is independence in the mind of
the auditor and how he deals in the specific situation during audit (Alexander, 2016). There
may be various difficulties in determining whether the auditor is truly independent in a given
situation as it is deals with mental attitude and integrity of person and there might also be a
compromising situation by directors of the company. Nobody can guarantee and measure
independence and so even though the auditor is independent, and has one or two factors
which suggest otherwise, then the same could lead to a conclusion in the eyes of the public
that the audit report is not giving true and fair view and therefore independence in
appearance is equally important as it adds to the credibility of the audit report.
b. The following are answers to independent situations
i. In the given case, Bob who is the audit assistant working on the audit of Club Casino
has used some of the client financial information in his university assignment
without prior intimation to the client. This is against the principle of confidentiality
(Para 140 of APES 110 on Code of Ethics for Professional Accountants) as per which
none of the client data should be disclosed to the third party, nor should the same
be used for the personal advantage or of any third party (Choy, 2018). Here, the
possible alternative course of action is not to use the client information without his
prior permission and discuss the same with the client if Bob wants to use it for
university assignment purposes.
ii. In this case, Wendy is the audit engagement partners for the company ACE limited
however, due to unavailability of company secretary at the client place, he managed
the internal role of company secretary for these 6 months. This may lead to loss of
independence of auditor due to conflict of interest. The ideal course of action should
have been to inform to the management and should not have accepted this role or
should have withdrawn from Audit engagement (Para 290.146.1)
iii. Since Leo is the eldest son of one of the factory foreman of Precision machinery
Limited and he has been assigned the audit duties of testing the internal control of
cash payment system, he should either be removed from this particular audit or
excluded from key decision areas or his work should be reviewed by another
member as the personal relationship with entity may give rise to self-interest threat
(Para 291.110).
iv. In the given case, the auditor Chan and Associates has not received the fees from
client for last 3 years due to client facing financial difficulties and on threatening by
the auditor for resigning from the audit, the client offered new furniture for
auditors’ office worth 50% of audit fees and 25% shareholding in an unrelated listed

company worth $1000 (Dichev, 2017). This is leading to self-interest threat
compromising the independence and therefore Chan and Associates should take
suggestion or advice from Member who is not part of the engagement or assurance
team.
Answer to Question 2
In the given case, the audit partner has been approached to accept the audit engagement for Games
Limited for which the auditor has been doing audit in the past. However, post the re-appointment in
current financial year, the managing director of Games Limited is unhappy as the audit partner who
was previously assigned has been changed. Furthermore, the company is going under legal review as
it has been named in a recent anti-corruption enquiry to offer incentive to state government to
support the proposed bill which would indirectly help in increasing revenues. The charge has not yet
been laid against the company or any of its employees (Werner, 2017). The condition can be
mentioned as a potential threat under Section 310 of APES 110 as here there is a threat to the
fundamental responsibilities of the Member in charge as there is a relationship or circumstance
which creates the threat on the fundamental principles to be followed. It creates a pressure on the
auditor here which may be implicit or explicit. He may be required by the director here to work or
act contrary to the law or regulation or in an unethical manner or to suppress the facts and hide the
true facts from the anti-corruption inquiry committee, which is an unethical issue and may give rise
to legal issues later on.
Therefore the auditor should apply necessary safeguards in order to minimize the risk to acceptable
level or to eliminate them altogether. He should discuss the unhappiness of Director of company
with his audit partner or probably take some professional or legal advice on the issue. Since the
auditor independence is utmost important and should not be compromised at any cost, the same
should be reported to some dispute resolution panel or expert before acceptance of the
engagement. Here Section 210 on “Professional Engagement” of APES 110 applies whereby auditor
should obtain knowledge and understanding of the client’s business, its owners, management and
those charged in governance and then secure the client’s commitment to improve the internal
control, business practices and the corporate governance practices as a whole (Visinescu, et al.,
2017).
Answer to Question 3
In the given case, Everyday Supplies Pty is one of the single store retailer who sells a variety of tools
including garden supplies, lumber, small appliances, and electrical fixtures but almost half of its sales
are on credit to the construction contractors. The company has an in-house receivables
management system but there are a number of internal control weaknesses in the system of cash
receipts and billing functions. Some of the major ones are highlighted below:
1. Retail customers are paying in cash or credit card on the purchases whereas the contractors
do purchase on credit and the same is being approved by credit manager merely on the
basis of manager’s familiarity with the contractor’s reputation. This is a huge risk of the