Audit Report: Internal Control, Risk, and Fraud at DHL (2019)

This report presents an internal control audit of Dudley Health Limited (DHL), encompassing its subsidiaries: St Neville's hospital, Acuity Vision clinics, and Pellegrino Shores retirement village. The audit, conducted by Samway Baker Fitzgerald (SBF), addresses a recent fraud at Pellegrino Shores, analyzing its financial and operational impacts, including loss of revenue, damage to reputation, and increased audit costs. The report examines affected accounts and audit assertions, such as revenue, cash, and retained earnings, and assesses risks associated with a new revenue system at St. Neville's. It evaluates internal controls, identifies potential fraudulent activities, and recommends a "top-down risk assessment" approach. Furthermore, the report analyzes key account balances and risk assertions for commission expenses and cash, proposes improvements to DHL's environment control, and critiques the testing methods used by Jek Prokins, suggesting additional audit steps. The report also includes a detailed assessment of audit tests, highlighting assertions, conclusions, and additional audit processes.

Running Head: INTERNAL CONTROL AUDIT
Internal Control Audit
Student Name:
University Name:

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Table of Contents
Question Number 1..........................................................................................................................3
Question No 2..................................................................................................................................5
a)..................................................................................................................................................5
b)..................................................................................................................................................6
c)..................................................................................................................................................6
Question No. 3.................................................................................................................................7
a)..................................................................................................................................................7
b)..................................................................................................................................................9
c)..................................................................................................................................................9
Question No. 4...............................................................................................................................10
Question No. 5...............................................................................................................................15
References......................................................................................................................................17

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A memo to JekPorkins, the audit senior on the DHL assignment
Question Number 1
The risk of business affect the fraudulent affair will have various level impacts to Pellegrino
Shores. Some of these are as follows.
Loss Related to Finance: On the occurrence of a fraud, this is the first risk that happens to take
place. Thus, in this paper, the loss of qualification is not a fact on account which an appropriate
estimate of potential (Abbott et al., 2016). This is based on the feedback of the resident, which is
honest as well as other records include time and dates of check-in and checkout. Therefore, in the
particular case, the people appear to be a fraction of mix. Hence, it is doubtful to drop previous
on this type of technique.
Common Image: For the benefit of the customers, who all are busy with such unethical deeds,
the fraud may appear. Therefore, this is preparing a mentality regarding the business where it is
convinced that the people of village can be exploited easily (Ali, Ahmi & Ahmad, 2018).
Inside Morale: If the employees believe that the same is a pride of matter for them, they seek to
coordinate with a specific institution. This happens because employees have been coordinated
with a dishonest institution (Al-Matari et al., 2014). Hence, this will negatively affect their
profession growth in the succeeding period.
Overhead of Higher Audit Cost: This is a general grasp related to the occurrence of the
dishonest activities. The cost associated to audit will rise; due to this, the auditor will have to
scrutinize financial statements of each account in association with the fraud. This happens in
respect to the transaction history. People involved in this transaction as well as large due
diligence related to the whole effect that this type of transactions have on an organization. For
the organization on a general basis, high work budgets, high fees, will lead to higher overhead
cost for the Pellegrino shores (Burton et al., 2014).
Following are the accounts that this fraudulent affair will affect as well as its assertions
associated with audit:
Affected Accounts Assertions Related to Audit
Revenue generation from Operations Under the category of general class i.e.

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‘Transaction Classification’, the assertions of audit
will fall. Furthermore, it will separately fall in the
sub class named ‘Completeness’ as well as
‘Accuracy’. Here, we appear to search in case the
completeness of generation of revenue. There is
nothing missing in the item or transactions
including sub transaction also. On the other hand,
with the help of accuracy, we can see the
correctness of the recorded revenue (Alzeban &
Sawan, 2015).
Cash, Bank as well as Retained The assertion of audit in cash, bank and
retained will be categorized under the ‘Account
Balances’ general class category as well as in
the sub class of ‘Valuation’ as well as
‘Completeness’. We want to appear to check in
case recorded values in accounts of cash as
well as bank reflect totality. In addition, not
anything has been eliminating (Carcello et al.,
2018). Finally, the revenue will maintain the
company’s retained earnings, therefore all
value that adjust this liability head have been
recorded appropriately as well as correctly.

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Question No 2
a)
The related revenue risks with the new revenue system are as follows:
- Transitional Risks:
Generally there are two categories of risk of transition i.e. first risk is the risk of audit associated
with revelation of this transitions. Thus, the second one is the risks of audit related with the
adaptation, which may be needed to make the statement of finance with such transitions. Here
transition refers to transition from old to new system of revenue. Audit risk of transition related
with revelation focuses at the auditor needing to be especially industrious regarding the
implementation of the updated revenue system. Furthermore, as what will be the upcoming
impacts on the last statements of finance. Therefore, this will need the auditor to take into
consideration any interval disclosure (Chan, 2018). Furthermore, it will require reconciliation of
these types of disclosure with reports of management. With the help of the adjustments of
transition, the auditor require to be aware of related to some kind of accounts changes that is
related to quantum which may occur because of updated system of revenue.
- Risk of Internal Control:
The system has received a sharp change, hence the auditor want to be needed to adjust the
validity as well as reality of the inside controls in the newer process of revenue which replaced
the old system of revenue (Crossman, 2018). Therefore, modification and complete over view of
this type of internal controls may be needed. However, the auditor also requires identifying
appropriately any manual controls.
- Fraudulent Activity Risk:
Frauds may happen due to change in revenue system. It happens when it comes to the
identification of the main performance obligations as well as the time, when the financial
statement are recorded (Coetzee & Lubbe, 2014). Therefore, the auditor requires finding out that
the revenues are identified appropriately.
- Risk of Non- Compliance:

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When any changes in revenue mechanism takes place, risk occurs, therefore, the auditor should
be considering the same. This is the updated system in track to the related applicable of standards
of accounting to the organization (D'Onza & Sarens, 2018).
b)
During the internal audit, the following two questions must be asked:
1. What correction has been put into place to find out that the system of billing is not
compromised to provide a proper result?
2. What are the various backup facilities followed by St. Neville’s for the whole
information which provides as the main thing for the system of billing?
c)
For finding the system of revenue of St. Neville’s, the strategy of audit would take an approach
of “top- down risk assessment”. With the help of this top-down approach, the auditor detects as
well as minimizes any kind of risks that may survive at the completely organizational level or
process levels. There is a need to follow the approach of risk assessment due to transition from
St. Neville’s own system of revenue to DHL’s off the revenue system, as the transition may be
difficult. Furthermore, there may be some errors related with invoicing or maintenance of
records that may create issues (Davidson, Desai & Gerard, 2018). Therefore, the approaches of
“top- down risk assessment” will appear to enclose the overall system of revenue for removing
all the possible gaps.

INTERNAL CONTROL AUDIT
Question No. 3
a)
Following are the Balances of Key Account and risk assertions:
Balances of Key Account Risk Assertions
Expenses of Commission Here, the expense being part of income
statement falls in the assertion category of
‘Transaction Class’ related to classification.
It is also may occur that the expenses of
commission here rather of being separately
jot down may be adjusted in the account of
“Cost of Goods Sold" (COGS). Thus, the
company claim that expenses from their
whole cost. Furthermore, it may occur the
expenses may be note in the “Selling and
Expenses” account based on the reality that
this cost from sales. So, the final net sales
may be calculated. Therefore, this kind of
accounting is best for the companies, which
have their revenue parts allocable based on
commission. Hence, this is not good for
Vision of Acuity because the overall sales
portion of the clinic of day of surgery
settle to commission based on only sales.
Here this starts an liability of offsetting to
the preliminary item of statement of
income, herein the assertion are in the
Account Balances category as well as
under valuation head specifically. Because
this is stated in the question-, the Acuity

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Vision succeeds its team of sales
immediately at the time of revenue
generation (Ege, 2014). To put in this place
there are various types of mechanisms.
Therefore, the company rather
appropriately the value of liability jot
downing may consider it from credit to
account of cash (Eulerich, Kremin &
Wood, 2019).
Cash Here, in this, the account of cash will
maintain the Valuation head as well as
Account Balances same category. This is
because, its pass through the account of
commission payable. By the company, the
credit made to cash incorrectly at the time
of when sales commission to team of sales
is not payable instantly that would
minimize the whole head of cash (Jokipii &
Di Meo, 2019).

INTERNAL CONTROL AUDIT
b)
The upcoming suggestions on environment control of DHL taking into account, deliberation of
some issues are as follows:
 Proper reconciliation of the notes of commission of this member of sales with the
sales note recorded into by this team of sales.
 Experience a logic check to look that the parts of sales recorded into by team of
sales is correct as well as not fake (for manipulating commission because high
sales would results in increases in commission) (Lisic et al., 2019).
 Seeing to the commission payment made to the sales team at the time of actual
amount received by the customers to find out any chances of bad debts.
c)
The testing method of customer payments betrothed into by Jek Prokins is less than adequate.
There is a requirement to take additional steps. Following are they:
o In addition, for checking the customers balances in accounts related invoice
examination must be done. This examination is done to find out that the
mentioned record of the customer’s account is correct as well as true (Mat Zain,
Zaman & Mohamed, 2015).
o Furthermore, there is also a need to Jek Porkins to see continuity in invoice sales
numbering maintained. Therefore, missing numbers are identifiable, hence
reasons for this can be asked to the management. Because it is conventional for
each invoice, sales must be figured (Mihret & Grant, 2017).

INTERNAL CONTROL AUDIT
Question No. 4
Test Test Type Main Assertion Moderateness
of conclusion
Additional
Audit Process
1
Substantive
Test
The assertions
this test appears
to highlight is
the cut –off
assertion under
Transaction
Classes to find
whether the
payable of
accounts has
been
appropriately
recorded for
the time frame
under the
preview of this
particular audit.
Same class the
assertion based
on accuracy to
find out that the
payable account
reconcile with
the balances and
invoices of
supplier as well
Here it is stated
that not less than
85% of the
sample were
recorded. In
terms of the
quantum as well
as period, this
two had
mistakes
pertaining to
values involved
that are mini
scale. Therefore,
the conclusion
of the audit
reached is
acceptable
(Oussii, &
Boulila Taktak,
2018).
The additional
audit process
includes finding
that such
balances of
accounts
payable comply
with ‘Generally
Accepted
Accounting
Principles’
(GAAP). This
will be searched
with the help of
audit trail of this
type of
balances.
Furthermore,
the auditor can
experience a
lawful search of
suppliers to find
out, this has not
been prepared
any kind of fake
amounts

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as the Good
Received Notes
(GRNs)
payable of
accounts by
DHL. Finally,
With the help of
auditor, any
types of open
files having
paper trail or
paperwork,
which says
reconciled, must
be again
checked.
Therefore, audit
processes must
be designed
involving this
type of
searches.
2 Test of Control
The assertion
highlight with
this test involves
to correctness in
the head of
‘Transaction
Classes. Here, in
all the values
associated with
the discounts as
well as
amounting has
The conclusion
of audit so
extended cannot
be consider to be
acceptable due
to reality that 15
percent of the
whole sample of
test had
mistakes (three
from twenty ),
this errors are
Considering, the
conclusion of
audit so
extended is
unacceptable,
further audit
processes would
include
searching out
the main eras of
deficiency in
the process of

INTERNAL CONTROL AUDIT
been properly
quantified.
Therefore, there
is non-existence
of any errors
with respect to
the correctness
as well as
appropriateness
related to the
same (Pizzini,
Lin, &
Ziegenfuss,
2014).
material.
Appeal of
misleading rates
of deduction
will
correspondingly
over state as
well as
understate the
account of
indirect income.
"Discount
received" as
well as it will
affect the
balances of
accounts
payable.
Furthermore, if
with the help of
purchase
manager if such
type of invoices
are not
authorized, it
may like that
DHL want to
enter a system
where there are
fictitious bills of
suppliers. This
inside or
internal control.
Furthermore,
the department
as well as the
person who all
are responsible
for fulfill this
invoices must
be brought
under audit
preview. Hence,
they can see
how the
invoices are
prepared with
the incorrect
rates of
discounts at the
time when these
statements were
not sanction
with the help of
the Manager of
Purchase.

INTERNAL CONTROL AUDIT
may distended
their liabilities.
Hence, the
levels of indirect
incomes with
discount
received related
with this type of
invoices.
Furthermore, if
such invoices
payments have
been disclosed
to be made
through cash.
Therefore, this
creates the
chance of
prospective
manipulation of
book of cash. It
happens due to
non-
recognizable
pattern at the
time of these
three invoices, it
does not refer a
system of robust
invoicing or it
does not mean

INTERNAL CONTROL AUDIT
displaying of a
solid internal
control with
view to
invoicing of
supplier.

INTERNAL CONTROL AUDIT
Question No. 5
Main Risk Assertion Preventive Internal
Control
Detective Internal Control
Here, at Pellegrino Shores,
the main risk assertion
over time would be the
accuracy assertion that
falls under the head
Transaction Class. This
occurs due to the overtime
calculation is subjected to
various arithmetical as
well as the accuracy of
computational. Therefore,
after taking into
consideration some
significant factors
involving the employee’s
pay grade in question as
well as the number of over
hours worked. Therefore,
the accuracy related to this
overhead cost must be
maintained.
In this particular overtime
case, Preventive Internal
Controls includes proper
computation inline related
with the main key assertion
identified. Therefore, this
type of internal controls
includes maintaining an
automated system of
timekeeping in the
biometric fingerprint
scanners. With the help of
this system, the overtime
hours work by the
employees are calculated
correctly. Furthermore, this
system would also erase the
issue of a general
malpractice pamper by
some of the workers. This is
known as "buddy
punching". It is used in an
attempt to grow the
completely payable amount
to these employees.
Furthermore, the check of
calculation must be
prepared related to the
formulas. This formula is
followed at the time of
overhead calculation. This
incorporates the grade of
pay as well as the working
hours of the employees in
Here, Detective Internal
Control concerned to the
observation of any kind of
manipulative fraudulent
activity based on overtime.
Thus, this type of inside
controls would include the
invigoration of "change
tracking log”, this is
appears in the situation of
payroll of extra time
system. Thus, this is self-
moving. Where this
tracking log can track any
kind of changes, create to
calculation of overtime.
Then derive reports will run
at stable time points on
whole calculation of extra
time to search those entries.
These entries have a value
i.e. an outlier of severe
compared to overall extra
time ingress that happen in
the accounts. Besides, such
thing may not importantly

INTERNAL CONTROL AUDIT
the question. Then there
must be a check that each
work pampered into by the
worker has been decently
finalized with the help of
the supervisor to these
employees to avoid any
kind of unnecessary extra
timework. Hence, any type
of not needed extra time
expenditure. Lastly, an
internal or inside control
must be adjusted into place
that engages in
reconciliation of extra
expenses related with the
timesheets fulfilled in by
the workers at the last of
every month, to check out
any mistakes or any
disputes in timesheets for
increases the more number
of hours by the employees
(Zaman & Sarens, 2013).
ensure the fraud existence
substantiation. However,
the chances of existence of
error in the computation of
overtime may increase at
the time of when reports
shown several outliers.
Then an inside control must
be given into the
environment that can adjust
the payments trends prepare
under extra time. Hence, it
searches any kind of
deviation of material from
the common type of pay
scale. Lastly, considering
payments of overtime is
part to the approval of such
overtime of the employees
with the help of bothered
supervisor. However, a
command must be placed
into impact, hence that will
search crossly any type of
entry of overtime by
approval from supervisor
fixed to it. Therefore, this is
general to preventative
inside control. Therefore, in
two cases this is applicable.

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