Detailed Report on Auditing Issues in DHL Assignment

This auditing memo addresses various auditing issues encountered in a DHL assignment. It begins by examining the impact of fraud at Pellegrino Shores, where a senior staff member engaged in deceptive activities, leading to financial and control risks. The memo then analyzes the audit strategy related to the switchover to a new patient revenue system at St Neville, highlighting potential risks associated with billing complexities, data reentry, and patient complaints. Further, the memo explores issues related to Acuity Vision's sale of medical supplies, focusing on weaknesses in internal control and the potential for inflated sales figures due to commission-based compensation. The report also includes an assessment of tests undertaken in relation to accounts payable, detailing both tests of control and substantive procedures. Finally, the memo addresses key assertions related to overtime payments at Pellegrino Shores, pointing out risks associated with overtime payments and employee attendance. The memo provides recommendations for auditors to mitigate risks and ensure the accuracy of financial statements.

AUDITING

MEMO
To: Jet Porkins (Audit Senior)
From: Audit Manager
Date: 16-09-2019
Subject: Advice on variety of auditing issues in relation with DHL assignment
Impact on business risk due to fraud at Pellegrino shores
At Pellegrino Shores it was identified that senior staff member was removed because she was
involved in deception activity. She decreases the payments of several residents and in return
receives secret payment. Resident database can be access by senior staff members only. At this
location, she was only responsible for any updating in the database, therefore she decrease the
staying period and also value of other services. By which fraud taken place at Pellegrino shores.
Any activity by which capability of organization is adversely affected to achieve its objective or
financial targets is referred as business risk. Audit risk means risk that auditor might state
unqualified opinion on the financial statement, even there is material misstatement are present in
report either intentionally or by mistake (Cohen,Krishnamoorthy, & Wright, 2017). By
considering the above analysis, it has been observed that due to fraud, company may face with
financial risk. Financial risk is concerned with financial parameters stated in financial statement
money. Since, in the given case senior staff lowering the rates of resident and generating secret
profit, it assist to the loss to company. Further, another risk associated with fraud is the control
risk (Wright, 2016).In this case, company fails to apply the proper system of control, which
assists in the material misstatement in the financial statement. Further, this fraud also impacts the

profit and loss account of company, because it assists in reduction of revenue by decreasing the
fee, which also leads to reduction in profit. Moreover, Account receivable as well as cash
account also materially misstated due to this fraud. Along with above aspect, audit risk would
also enhanced by this fraud. Audit risk model is the methodology which should be used by
auditor to understand links among several risk by which overall audit risk can be minimized
(Bhattacharjee, Maletta, &Moreno, 2015). Audit risk arises due to inherent risk, control risk, and
detection risk. In this case, there is risk of material misstatement because secret profit making by
senior staff would impact the several accounts which are already described. Therefore, auditor
should assess that if risk or material misstatement on accounts is high, then he/she should lower
the detection risk by which overall audit risk within an acceptable level can be achieved
(LópezPuertas‐Lamy, Desender, &Epure, 2017).
Audit strategy in relation to the switchover of new patient revenue system
In the revenue of system at St Neville, the billing system is very complex as it is calculated after
considering government subsidy, private insurance benefit, any other medical insurance benefit.
In this auditor may have to deal with risk relating to possibility that staff may reduce the fee by
entering into any benefit, which cannot be recognized by auditor because the bill is developed
after all benefits. Further, there is probability of reentry of patient invoice, as it is given that due
to the power surge, staff reentered the processed invoice previously. It may assist in significant
audit risk because there is chance that double entry of same invoice may done, as it is not
possible for auditor to check each and every entry. It may lead to inherent risk as because of the
nature of transaction misstatement may arise (Mayes Jr, Landes, & Hasty, 2018). Along with
this, company also received several criticisms from the patient because bills are not as per the
acceptable medical fund and pensioner subsidy rates. This might result in existence of control

risk. There is possibility that internal control established by company for safeguarding, detection,
and correction of misstatement fails, by which financial statement may be misstated
significantly. Further, sometimes invoice are prepared on lower rate as rates prescribed in the
database, it may lead to wrong recording of revenue (Brasel, Doxey, Grenier, &Reffett, 2016).
By considering all above analysis, it has been observed that there while swap over to the new
patient revenue system, there is existence of risk.
For this, auditor should discuss issues with internal auditor of company. With this aspect, auditor
should question the regulatory or management for updating of billing system and it is verified by
any senior authority. Further, in case of reentry of database, how it is ascertained that all data has
been correctly entered into the system.
Moreover for addressing audit risk, audit should adopt strategy by which risk can be reduced to
an acceptable level (Mubako, & O'Donnell, 2018). At the time of development of audit plan,
audit strategy used by auditor as a guideline. Auditor should analyze the inherent risk connected
with billing system. Further, by performing some test he can determine whether financial
statements consist error or fraud or not regarding transactions stated in financial statements. As
per the Auditing and Assurance Standard 406, auditor should develop and proceed with further
audit procedures, consisting of test of the operating effectiveness of control, in case needed.
Further, substantive procedure should also be performed by auditor, as per the risk of material
misstatement.
Additional information in relation to acuity vision’s sale of medical supplies
It has been observed that Acuity Vision released its own medical supplies. It sells directly by
sales team which is appointed by Acuity. By considering the new system, it has been observed

that there is no adequate internal control within the entity. In revenue system, it has been
ascertained that there is variation in the rates of invoice, amount of medical benefits, reentry of
system and many others, which shows entities weakness in internal control and existence of
misstatement in the financial statement of organization. Further, in Acuity vision, the worker
receives salary and bonus amount on the sales. However, the payment of salary was low. By this
arrangement, there is possibility that workers may reflect the inflated sales due to receiving high
bonus, as it is based on salary. Further, amount of bonus is properly evaluated and it is provided
on fixed rate. There is no responsible person who has charged with duty relating to the
maintenance of accounts of sales, computation of bonus, specific rate and many others. It is
possible that sale team by giving additional credit period to customers may enhance sales, which
affect the account payable account. By considering the above analysis, management should
implement proper software for computation of bill, so that there should be no difference in
amount. Along with, surprise check of database, analysis of terms of credit period, imposition of
interest in case of delay and many other steps should be taken by management. Further on the
basis of amount of bonus or sales, management can identify whether payment from customer is
received in cash or credit, by considering the cash book and debtor account.
For the ascertainment of total amount of risk linked with audit, auditor can use audit risk model.
It also assists the auditor, manner in which risk can be managed (Mock, Srivastava, & Wright,
2017). There are three component of audit risk model, which are control risk, detection risk, and
inherent risk. In the given case, there is high inherent risk and detection risk; therefore auditor
should lower the detection risk, so that overall risk can be decreased. Along with this, for
minimizing the risk, auditor should take following steps –

 Total sales can be reassessed through comparing the commission figure regarding sales.
It will assist in ascertaining whether total sales have been recorded or not.
 Further, information is also required relating to customer balance, the same can be
reconciled through attaining balance confirmation statement from major customers
(Popova, 2018).
 In case any discount have been provided to customers, than it is required to assess
whether same is as per the provisions of company or not.
 In order to assess that whether same sale receipts have been entered twice or not, a
random assessment on sale receipt no. can be done.
 The controls applied by management in order to assess existing risk relating to fraud are
required to assess the efficiency of internal control of the organization. (Mubako, &
O'Donnell, 2018).
Table presenting assessment of test undertaken in relation with accounts payables:
Test 1: Assessment of 15 suppliers selected from list of trade creditors at year end
The specified test is test of control. In accordance with Para 4 of ASA 330 ‘The Auditor’s
Response to Assessed Risk’; test of control can be specified as audit procedure which are
designed to assess the operating effective of control in order to prevent, detect and correct
material misstatement at assertion level. In present case the initial test of control applied by
selecting fifteen suppliers at the yearend in order to ensure goods received prior to end or not
will assist in ascertaining misstatement relating to receipt of goods. However, auditor has
ascertained that two creditors balance is overstated; thus substantive procedures will be applied
to assess the materiality level.
Additional audit procedures will be applied in relation with account payables in following

manner:
 The specific control relating to interim period and changes in same including information
system will be assessed in detail manner, as in present case new accounting system has
been accepted (Ghosh and Tang, 2015). Thus, few more samples will be taken in order to
assess whether the misstatement is due to new accounting system or not.
 Data entry control can be analyzed through reviewing management control which verifies
approval of every invoice before recording same (Euchner and Ganguly, 2015).
 Auditor can check the provided data through application of cut of test so that it could be
assessed that whether transactions have been recorded within proper recording period or
not.
 A threshold limit could be selected on the basis of professional judgment in order to
assess whether any significant transaction has mistake relating to overstatement or wrong
discount. It will provide an ease in assessing the impact to mistake in making judgment
whether financial statements provide true and fair view or not.
Test 2: Assessment of 20 suppliers invoices
The specified test is substantive procedure. After assessing the supplier’s invoice it has been
assessed that three out of twenty invoices had not been authorized. Although, it is accepted that
errors in discounts claimed were immaterial on individual basis. But it is necessary to assess the
cumulative effect of accessed mistakes in order to assess the extent of material misstatements. It
has been asserted in Para 18 of ASA 330 that irrespective of assessed risk relating to material
misstatement, it is necessary to perform substantive procedure for each material class of
transactions and disclosures. Thus, below substantive procedures will be applied in order to
assess the extent of existing material misstatement:
 Overall accounts payable will be compared to budget and unexplained variances will be

assessed in detail.
 The accounts which have been found overstated will be assessed in detail in order to
analyze whether same is intentional or by mistake.
 Balances confirmation could be attained from suppliers in order to attain sufficient
adequate evidence relating to same (DeZoort and Harrison, 2018).
 Fraud detection procedure applied by the management will be assessed in order to
ascertain the level of effectiveness of internal control.
Thus, application of test of control with subsequent procedure is believed as effective procedure
in order to assess the extent of material misstatement. The same will be applied in present case to
analyze the combine as well as individual effect of ascertained misstatement in relation with
accounts payable.
Key assertions in relation with overtime payment at Pellegrino shores
In present case employees at Pellegrino Shores were paid for overtime at weekend and night
shifts due to shortage of staff. But payments at overtimes rates has become common occurrence
which point out towards existence of risk in either accounting to payment to employees or to
volatility in attendance of employees i.e. company is dealing with issue relating to shortage of
employees or excessive work has been done on a continue basis. As an auditor ASA315 will be
applied in order to identify and ascertain risk of material misstatement in relating transactions of
payments to employees through understanding entity and its environment. Monitoring of control
can be specified as a process to analyze the efficacy of internal control performance relating to
specific transactions over time (Brasel, Doxey, Grenier, and Reffett, 2016). The judgment of an

auditor is influenced by the operational effectiveness of internal control while addressing risk of
material misstatement.
Preventative & Detective Controls
Auditor is require to assess design of controls applied by management involved in recording
payments made to employees relating to overtime in order to assess whether these control
individually or in combination are able to prevent or detect the relating to payments to
employees (Bhattacharjee, Maletta and Moreno, 2015). The auditor can check attendance
register with payment register in order to check whether overtime payments are actually made at
weekends or not. Further, procedures applied by organization to analyze whether any material
misstatement is available or not should be also assessed by auditor in order to review whether
detective measures are framed appropriately or not. Application controls are concerned with the
procedures applied to initiate, account, process and report the transaction (Hentati-Klila,
Dammak-Barkallah, and Affes, 2017). Thus, all the four variants relating to the payments to
employees should be assessed in order to ascertain the extent of availability of risk.
After considering above audit procedures, it would be appropriate to state the audit senior will be
able to provide conduct audit in appropriate manner and express appropriate opinion on financial
statement on the DHL assignment.

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