Auditing and Assurance 1 Report: Jertsy Ltd and Sweet Sounds Ltd

This report provides a comprehensive analysis of auditing and assurance principles through the examination of two case studies: Jertsy Ltd and Sweet Sounds Ltd. The Jertsy Ltd section identifies weaknesses in the company's human resource management, particularly the high staff turnover and employment practices, and in its stock control processes. The report suggests improvements such as offering incentives to reduce staff turnover, revising employment modes, and implementing an effective inventory system. The Sweet Sounds Ltd portion focuses on audit assertions, including accuracy, classification, and cutoff, related to the company's warranty provisions following changes in its manufacturing processes. It discusses substantive procedures and special risks associated with auditing the warranty provisions. The report aims to provide a detailed understanding of the auditing process and its application in real-world business scenarios.

Auditing and Assurance 1
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Auditing & Assurance
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Auditing and Assurance 2
Question 1
Just like any other business, owning a range of fashion clothing stores in Australia state capital is
a strategic venture for Jertsy Ltd as far as achievement of desirable business outcomes is
concerned. The above is evidenced by the fact that the entity’s structure utilizes its human
resources such as store managers, accountants and other employees to execute its day to day
operations at various clothing stores. There is high degree of flexibility at Jertsy Ltd attributed to
the fact that the entity makes use of younger staff who work on part time basis to execute its
various projects. In spite of the high incidences of staff turnover, the entity has been in position
to maintain its business and trade on booming trending due to customer loyalty. In addition, an
organized way of controlling financial resources is one of the basic factors that can help an entity
to realize steady progress in its attempts to achieve desirable business outcomes. In this regard,
Jertsy Ltd makes use of its accountant to make monthly return consolidations and monthly
management reports which are used for and decision planning purposes (Bill & Charan 2011).
Currently, the operation and planning approaches of Jertsy Ltd are leading to desirable business
goals in form of sales and business growth through opening up of new stores. Therefore, the
paper will identify and explain weaknesses in the existing system as well as possible
improvements that could be included into any new system that senior management might choose
to introduce.
Weaknesses in the existing system of Jertsy Ltd
There exist weaknesses in human resource management approach at Jertsy Ltd as evidenced by
the high staff turnover. In most cases, high staff turnover within a company is one of the main
indicators of employee dissatisfaction at workplace. In this regard, it can be seen that Jertsy Ltd

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has opted to hire and employee younger staff to execute its day to day operations to achieve the
set business goals. The above approach to human resource management has so far yielded
desirable outcomes as evidenced by continued business growth in spite of high turnover among
the staff. More so, younger staff tends to be more productive and flexible given that they are still
physically and mentally strong to handle the pressure of working at the company’s various
stores. Although employment of younger staff has so far yielded desirable business outcomes, it
is likely to affect the company’s sales in the long run (Shenoy & Zabelle 2016 p.15). The above
is likely to arise from the fact that customer experience and loyalty may be affected due to high
staff turnover in the short and long run. Moreover, clients may get attracted to a company’s
services when they feel the staff offer much client care unto them when they come to purchase
its goods at various stores. Given that characters vary from individual to individual in relation to
customer care, continuous turnover of clients is likely to distort customer experience and loyalty
as well. For example, departing employees may have created a sound customer experience for
clients and so replacing them with newer employees may lead to distortions in client experience.
The above can be attributed to the fact that newer employees may be characterized with
unethical characters like rudeness which may not effectively help to handle client complaints
(Saxena 2009 p.24). In the long run, clients may opt to buy their cloths from rival firms who
probably may offer better client care through prioritization of needs of clients which may not
only reduce competitiveness of Jertsy Ltd, but also sales and customer base.
In addition to the above, employment approach is another weakness in human resource
management that is likely to pose a great threat to survival and competitiveness of Jertsy Ltd in
the long run. Majority of the staff at Jertsy Ltd are employed under part time mode of
employment implying that they are only available on a short term basis. Moreover, Jertsy Ltd has

Auditing and Assurance 4
prioritized employment of only younger persons to execute its day to day operations implying
that experience element has been ignored by the company’s senior management team. More so,
majority of the successful companies always rely on using experience persons to execute their
day to day operations so as to achieve the set business objectives. Experienced persons always
hold technical knowhow that can help an entity to effectively handle and address any critical
concerns regarding strategic planning per say unlike the younger persons who may not hold such
expertise. In this regard, younger staff employed particularly on a short term basis is an approach
that may distort the planning strategies of Jertsy Ltd in the long run as they may not have needed
decision making expertise (Ralph 2013 p.29). Therefore, employing younger people
accompanied by short term employment contracts is an approach that is likely to distort decision
making processes at Jertsy Ltd in the long run since these persons do not hold the much needed
experience.
Furthermore, poor processes that are involved in stock control across Jertsy Ltd's
ventures may result into overstocking or under-stocking in some of its stores. Overstocking may
lead to marking down of the stock so that it can be sold off to the clients which may negatively
impact its revenues and profit maximization objective. The above process of marking down the
stock may be evidenced when a drop in prices of Jertsy Ltd’s goods is realized due to increase in
the stock. In such a case, the company may be required to reduce on its prices so as to increase
client demand for its goods which may lead to the dispose off excess stock. In the due course, the
entity will not realize significant revenue increases and profits as the stock may be sold at a
lower unexpected price. In case, shortage occurs at some of its outlets due to poor stock control
practices, clients may opt for rival entities since its goods are highly substitutable (Jang 2010

Auditing and Assurance 5
p.136). As a result, the entity will be at risk of losing significant revenues and clients to rival
entities when under stocking takes place at some of its locations.
Possible improvements that could be included into any new system that senior management
might choose to introduce
Improvements in human resource management could be included into a new system that senior
management might choose to introduce. These improvements may be aimed at addressing the
issue of high staff turnover by incorporating mechanisms such as offering allowances for extra
workload and salary increments as a way of boosting staff motivation and satisfaction. In the due
course, the staff may be enticed to renew their contracts and thus staff turnover may significantly
be reduced in the short and long run (Saxena 2009 p.24). As such, the younger staff will be able
to gain more experience regarding day to day operations of Jertsy ltd's fashion clothing stores so
as to achieve the set goals and objectives. Moreover, an experienced staff is likely to be more
productive given that they hold relevant expertise regarding critical decision making and
planning processes particularly when they work with a company for significantly longer period
of time. Also, Jertsy Ltd is likely to revise its employment mode by incorporating full time
employment mode for its clients so as to maintain customer loyalty and experience. The above
approach is likely to ensure that client needs are effectively addressed by experienced and full
time employees and thus desirable revenues and profits may be achieved over a period of time.
Furthermore, an inventory system may be adapted to address all issues relating to supply chain
management particularly incidences of overstocking and under-stocking of the stores (Shenoy &
Zabelle 2016 p.17). Therefore, a new inventory system is likely to ensure that all clothing stores
of Jertsy Ltd are effectively stocked to address the demand needs of their clients.

Auditing and Assurance 6
Question 2
Audit assertions are categorized as either explicit or implicit claims that are made by
management of a given company relating to preparation of financial statements as far as
appropriateness of elements in disclosures and financial statements are concerned. As such,
auditors mainly focus on investigating validity of such claims by the management of a company
a part of their procedures in auditing. From the case study, the management of Sweet Sounds Ltd
has made a number of claims regarding information on its financial statements in the fiscal year
2014/15. The major driving force for the claims made by Sweet Sounds Ltd management is the
change in the manufacturing processes in its mini hi-fi systems as a way of enhancing their
reliability. The above approach by Sweet Sounds Ltd management can be viewed as a feasible
way that was intended to boost the clients' demand for its products so as to achieve desirable
business goals (Kfknowledgebank.kaplan.co.uk 2019). Most significantly, the decision to
undertake to increase on warranty on its mini hi-fi systems from three to five years was aimed at
increasing sales for Sweet Sounds Ltd. It was particularly made basing on the sales that the
company had made on first day of the opening month of 2015. As such, warranty claims on the
new products fell to about 20% as compared to those on the older products after the company

Auditing and Assurance 7
had changed its manufacturing processes. Due to changes in manufacturing, Sweet Sounds Ltd
also realized a rise in its provisions for warranty from $3,500,000 in 2014 to $4,000,000 in 2015.
Therefore, the following discussion is centered on main audit assertions for this case study, types
of substantive procedures as well as special risks in Sweet Sound Ltd’s auditing provisions for
warranty.
Main assertions that were considered for the part of audit for Sweet Sounds Ltd
Accuracy, classification, cut off and occurrence are the main audit assertions that can be
considered for this part of audit for Sweet Sounds Limited as discussed below. In regards to
accuracy assertion, I would consider finding out that all transactions that were undertaken by
company in the fiscal year 2014/15 are well documented at their exact amounts. In this case, I
would consider the claims made Sweet Sounds Ltd regarding a fall in warranty claims by about
20% on newer products and estimated increased in warranty provision over the fiscal year of
2014/15. In addition, I would as well confirm whether warranty for its products was truly
increased from 3 to 5 years as claimed. Most significantly, information containing records on all
the aforementioned elements can be attained from the company’s book keeping records and
financial statements. More so, financial statements and book keeping records of Sweet Sounds
Ltd will help to offer information regarding the transactions that the company was able to
undertake over the time period under consideration (Accountingtools.com 2019). Furthermore,
classification assertion could as well be considered for this part of audit for Sweet Sound Ltd.
Such an assertion will help to find out whether all the transactions that were under taken by the
company over the specified period were appropriately recorded in appropriate accounts in the
general ledger. Conformity would basing be focused on finding out how the Sweet Sounds Ltd
has recorded warranty provisions, claims and warranty for its products in various accounts in the

Auditing and Assurance 8
general ledger. Results from the above classification process are likely to confirm the claims
made by Sweet Sounds Ltd on its warranty period, warranty provisions and warranty claims
(Wikiaccounting.com 2019).
Additionally, cut off assertion can as well be considered for this part of audit for Sweet Sounds
Ltd. The above assertion will aim at finding out whether all the transactions that were made by
the company were recorded in specified period of reporting. From the claims made by the
company, it can be confirmed that transactions in form of sales that were made by Sweet Sounds
Ltd were done over a reporting period of 2014 and 2015. For example, Sales were made starting
from the opening day of January in 2015 after changes in manufacturing processes had been
made in December, 2014. Furthermore, occurrence assertion can be also considered for this part
of audit for Sweet Sounds Ltd. Under this kind of assertion, the focus will be confirming that all
sales transactions that were made after changes in manufacturing processes were effectively
recorded in the books of account such as a balance sheet. Also, receipts that were made on all
sales transactions will be provide evidence that sales and any other kind of transactions took
place as claimed by Sweet Sounds Ltd (Wikiaccounting.com 2019).
Types of substantive procedures that would be performed to cover the above assertions
Substantive procedures aid an auditor to formulate supportive evidence that no misstatements on
materials were made regarding accuracy, validity and completeness of Sweet Sounds Ltd's
financial records. Examinations of documents, making inquiring and re-performing procedures
are the main general substantive procedures that can cover accuracy, classification, cut off and
occurrence assertions. Examination of the documents will help to confirm that a particular
procedure was performed by the company regarding its warranty provisions and warranty claims.

Auditing and Assurance 9
Confirming how Sweet Sounds Ltd matched client orders and collected funds to billed invoices
can be one of the examination procedures that can be undertaken. As a result, the above
substantive procedure will help to cover occurrence, classification and accuracy assertions of
Sweet Sounds Ltd (Accountingtools.com 2019). On the other hand, making inquiries in relation
to all the transactions that were undertaken by the company after the change in manufacturing
process can help to cover all the above assertions. In this regard, inquiries can be made through
holding interactions with the General Manager, Accountant, Director or any other member of
senior management team at Sweet Sounds Ltd concerning its transactions. In addition to the
above, re-performing a few procedures relating to the company’s transactions are another
substantive procedure that can help to cover accuracy, cut off, classification and occurrence
assertions. The above procedure can be executed by confirming accounts receivables and
computations on valuations of inventory of Sweet Sounds Ltd (Wikiaccounting.com 2019).
Therefore, executing all the above discussed substantive procedures will help to cover
occurrence, accuracy, cut off and classification assertions for this audit of Sweet Sounds Ltd.
Special risks in auditing provisions for Sweet Sounds Ltd warranty
Sweet Sounds Ltd is exposed to risks in valuation of inventory and material misstatements. In
regards to valuation of inventory risk, Sweet Sounds Ltd has based its warranty claims only on
its newer products and yet the entity might be having significantly huge volumes of older
products. More so, older inventory can significantly contribute to sales revenues when it is sold
off by the company and as such ignoring whilst making warranty provisions is likely to lead to a
poor audit report. The above is attributed to the fact that the warranty provision claims may fail
to meet occurrence, accuracy, classification as well as cut off assertions
(Kfknowledgebank.kaplan.co.uk 2019). On the other hand, Sweet Sounds Ltd is exposed to

Auditing and Assurance 10
material misstatement risks arising from the changes in manufacturing processes whereby there
might have been incidences of resource mismanagement or misallocation. Such incidences tend
to happen when a company to change manufacturing processes so as to boost reliability of its
products to meet the needs of its clients. In the due course, errors in documentation of warranty
provisions may take place implying that the audit report may fail to meet all the audit assertions.
Material misstatement risk is likely to make Sweet Sounds Ltd lack appropriate evidence to
support its claims regarding estimations on provision warranty of its products over the specified
time period (Accaglobal.com 2015). Therefore, valuation of inventory and material
misstatements risks are likely to make Sweet Sounds Ltd to fall short of evidence to support its
claims when audit assertions are utilized by the auditor.

Auditing and Assurance 11
References
Accaglobal.com., (2015). The Audit of Financial Statement Assertions: Retrieved from:
https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-
resources/f8/technical-articles/assertions.html
Accountingtools.com., (2019). Management assertions in auditing: Retrieved from:
https://www.accountingtools.com/articles/what-are-management-assertions-in-auditing.html
Accountingtools.com., (2019). Substantive procedures: Retrieved from:
https://www.accountingtools.com/articles/what-are-substantive-procedures.html
Bill, C & Charan, R., (2011). The Talent Masters: Why Smart Leaders Put People Before
Numbers. Crown Publishing Group.
Jang, R., (2010).The interaction effects of scheduling control and work-life balance programs on
job satisfaction and mental health: International Journal of Social Welfare. pp. 135–143
Kfknowledgebank.kaplan.co.uk.,( 2019). Financial Statements Assertions: Retrieved from:
https://kfknowledgebank.kaplan.co.uk/financial-statements-assertions-
Ralph, K., (2013). Motivating Technical Professionals Today: IEEE Engineering Management
Review, Vol. 41, No. 1, pp. 28-38
Saxena, R., (2009). Inventory Management: Controlling in a Fluctuating Demand Environment.
Global India Publications. pp. 24
Shenoy, R & Zabelle, T., 2016.New Era of Project Delivery – Project as Production System:
Journal of Project Production Management. 1: 13–24.

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Wikiaccounting.com., (2019). Audit evidences: Definition, Types, Procedures, and Quality:
Accessed at: https://www.wikiaccounting.com/audit-evidences-definition-types-procedures-
quality/