Analyzing Auditing Practice: Seal Beach Restaurant Case Study

This case study delves into the auditing practices applied to a Seal Beach restaurant experiencing a decline in sales, potentially due to fraudulent activities. The assignment explores the role of an internal auditor, the significance of independence, and the use of evidence, such as video recordings, in detecting fraud. It examines the importance of a strong control environment and weaknesses in internal controls over sales and cash receipts. The study emphasizes the auditor's responsibility in recognizing fraud, assessing risks, and implementing audit procedures. It also proposes improvements to internal controls to reduce the incidence of fraud, such as segregating duties and enhancing physical control over assets. The conclusion highlights the importance of auditor's recommendations in enhancing the management system and ensuring future business performance.

Running head: AUDITING PRACTICE
Auditing Practice
Name of the student:
Name of the university:
Author Note:

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Answer to Question................................................................................................................3
Conclusion..................................................................................................................................8

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Introduction:
The aim of the assignment deals with the case study of the restaurant in Seal Beach
and where Aaron entered into an agreement with a Californian grocery business whereby he
agreed to pay the grocery business to advertise his Seal Beach restaurant on the back the
receipts distributed by the grocery store. Such types of marketing strategies are common and
are best described as coupon advertising. Later it is found that advertising to be a very cost-
effective marketing strategy which increased the sales in the business over the first 12
months. The turnaround point in the case study is that Aaron has noticed a significant fall in
sales at the Seal Beach restaurant which is further a matter of great concern for him. Then
Aaron conducted a covert operation by hiring Maxwell Smart as an internal auditor to solve
the relevant case related to fraud and error.

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Discussion:
Answer to Question
A)
An auditor is hired in order to find the fraudulent act and also the reason behind it. In
order to detect the fraud, the auditor needs to find out the appropriate reason behind such
decrease in the sales of the Seal beach Restaurant. Analyzing the covert operation in a
detailed manner which happened inside the restaurant is significant in case of the auditor. In
case the duty of the internal auditor it is further required to check the fraud and circumstances
of such kind of decline in the sales of the Seal Beach Restaurant (Krishnan, Krishnan and
Song 2016).
The responsibility of the auditors is to check the receipt of the sales and cashes
associated with the business. The detailed report of the financial statement must be analyzed
thoroughly in order to find out the internal glitches in the system. The reasonable assurance
must be gathered from the financial statements and further it is needed to check that the
statements are free from material misstatements or any kind of frauds. When a fraud is
detected, then the risk assessment procedures are conducted in order to identify the risk
associated with such fraudulent act. Detailed documentation and further testing the internal
audit controls plays significant role in the audit procedure techniques (Lennox, Wu and
Zhang 2016).
B)
In case of performing audit the auditor must be independent and apply techniques
which are associated in the audit process. The internal auditor must contain relevant
knowledge regarding the actual or suspected fraud. Independence plays significant part in the
truth and an objective approach in the audit process. Independence in the internal auditor

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means that parties whose potential interest might be harmed by the results of an audit
(Tepalagul and Lin 2015).
The video acts as an evidence and it will come to great use by the internal auditor in
order to detect the fraud in the system. Supporting evidence might reduce the overall audit
cost as the detection of such kind of frauds will be more transparent. Hence as per the
discussed facts, it is quite possible for the audit team to use the video supplied by Aaron
which basically works as evidence (Krarti 2016).
C)
The term control environment in audit is defined as the foundation on which the
effective system of the internal control is built which is further operated within the
organization striving to accomplish the strategic objectives, provides reliable financial
reporting to the internal and the external stakeholders, operates the business effectively and
efficiently complied with all the riles and regulation and further to safeguard the assets
(Goodwin and Wu 2016).
The key significance behind the implication of the strong internal control environment
is that the business of the restaurant no longer wants to be a part of the Enron, WorldCom and
much other scandal like this. This is some of the examples of the failures to have strong
internal control within the system of the organization. Honesty and integrity in the system are
the key principles of the strong internal control environment (Christensen et al. 2016).
Having stung internal control environment can further provide the management and
stakeholder’s reasonable assurance that the organization is operating on the basis of the
company policies, industry standards and regulatory requirements. In case of the Hangout
restaurant company it is required to enhance the internal control of the system and further

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take certain measures in order to increase the potential growth of the business ascertained
with the mission, vision and objective (Gerakos and Syverson 2015).
D)
The current internal policies of Seal Beach associated with the accepting and dealing
with the coupons are rather needed for some of the major improvements which are like
analyzing the current policies and business strategies of the organization. There are some of
the changes which are required in the internal control process of the organization is order to
rectify or rather decrease the risk associated with such internal fraud in the business of the
Seal Beach. The detailed knowledge regarding the current policies and procedures of the
business must be known by the auditor along with the goals of the business. As per the rules
and regulations of the audit, it is hence required by the auditor of the company to analyze the
internal controls over financial reporting (Chen et al. 2016).
If the Seal Beach business establishes the effective internal control environment can
further improve the efficiency in delivering the value and further achieving the strategic
objectives associated. As per audit framework, if the current process has a fraud within the
system then the auditor may be able to provide relevant solution to decrease the chances of
getting too much corrupted and later end up like the Enron case (Aobdia, Lin, and Petacchi
2015).
E)
The weakness in the internal control over the sales and cash receipts of the business is
that there is a functional problem in the system. The internal function or the application of
advertising is not effective and is the reason behind such decrease in sales in the system. The
method of advertising of the company is cost effective which further led to an increase in

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sales at the beginning (Cameran, Campa and Francis 2018). There is a problem in the internal
operation of the business and thus the upper level managers associated in the Seal Beach
business needs to take certain measures in order to rectify such internal fraud within the
system.
F)
It is significant for the auditors to in order to recognize the fraud associated with such
internal control environment of the business. The risk must be addressed through the policies
and the procedures of the control activities which are further put into place in order to address
those risks. Detection of the risks is significant in order to find the material misstatement or
fraud existing in the financial statement of the company. The auditors use the audit
procedures in order to detect the fraud or error in the system. During the process of detection
risk is also associated in that case. Detection of risks is one of the key elements which
comprise the inherent risks, audit risk and control risks (Cahan and Sun 2015).
The decision taken by the auditors in that case plays a significant role in order to
mitigate the risk associated with the fraud or the material misstatement. Detection of the
material misstatement is a risk which falls under the responsibility of the auditors. In that
case, the audit procedures and techniques associated with it must be effective and efficient.
Apart from these, there are various types of techniques associated with the detection of the
risks like the classification testing, completeness testing, valuation testing and occurrence
testing (Farrugia 2016).
G)
The improvements related to the internal control over the sales and the cash receipts
which will decrease the incidence of the frauds is that duties must be segregated which

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definitely decrease the chances of the innocent fraud in the business. If a single person carries
out the entire cash and the sales and cash receipt operation, then there will be chances of
fraud in the system which happened in the case of Seal Beach. Then on the other hand it is
required by the management system to develop the physical control over the underlying
assets of the business (Gaynor et al. 2016).
Control over the asset such as the cash, inventories and equipments is significant in
order to mitigate such kind of risk in the business. Then it is needed to identify the risks along
with the chances of failures in such cases. However the errors detected at any stage of the
process must be corrected by taking certain action and measures by the top level management
of the company.
It is needed to develop the current policies and procedures associated with the
business process. The process or the transaction must be reviewed in order to check the errors
associated with it. Then it is required to maintain the necessary documentation in that case
and further training to the old and new staffs are hence mandatory. The final stage is to self
evaluate the effectiveness of the self evaluate system of the company. These methods help the
business to prevent the frauds and errors in the organizational process (Cameran, Prencipe
and Trombetta 2016).

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Conclusion
From the above discussion it can be concluded that the main fraud is regarding the
improper operations system of the restaurant. This is the main reason behind such of fraud
and the appointed auditor in that case must take relevant measures discussed in the above
discussion in order to rectify the equivalent frauds or errors in the system. In order to make
the business error free it is needed to make some of the important changes in the overall rules
and regulation of the company. From the study it can be said that the auditors need to take
risks in order to find out the exact reason behind such kind of material misatatement or fraud
in the process. The business performance in the future always depends on the verdict of the
auditor and further recommendation made by them in order to enhance the management
system of the company.

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