Comprehensive Auditing and Control Report: Jertsy and Sweet Sound Ltd

This report, titled "Auditing and Control in Jertsy Ltd and Sweet Sound Ltd," examines the auditing and control aspects of two Australian companies: Jertsy Ltd, a fashion clothing retailer, and Sweet Sound Ltd, a manufacturer of mini hi-fi systems. For Jertsy Ltd, the report identifies weaknesses in its current system, such as difficulties in controlling multiple retail outlets and the need for head office to manage accounting records. It suggests improvements including improving conversion rates, implementing AI in shops, optimizing inventory management, and implementing POS systems. Regarding Sweet Sound Ltd, the report addresses audit assertions, substantive procedures, and the risks associated with auditing the provision for warranty, especially given the recent increase in warranty period from three to five years and a 20% decrease in warranty claims. The report concludes with recommendations for both companies, providing a comprehensive overview of their auditing and control environments.

Running head: AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
Name of the Student:
Name of the University:
Author Note

1AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
Table of Contents
Introduction................................................................................................................................2
Jertsy Ltd....................................................................................................................................2
Weakness in the existing system............................................................................................3
Improvements that should be included..................................................................................5
Sweet Sound Ltd........................................................................................................................7
Main Audit assertions............................................................................................................7
Substantive procedure for assertions......................................................................................8
Risks in auditing provision for warranty..............................................................................10
Recommendations....................................................................................................................11
Recommendation for Jertsy Ltd...........................................................................................11
Recommendation for Sweet Sound Ltd...............................................................................11
Conclusion................................................................................................................................11
References................................................................................................................................13

2AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
Introduction
The report titled “Auditing and Control in Jertsy Ltd and Sweet Sound Ltd” is
prepared to analyse the case study of both the stated company in the auditing point of view.
The Jertsy Ltd is fashion clothing company of Australia. The firm owns the range of fashion
clothing stores in the capitals of Australian States. The each store of the firm operates with a
degree of autonomy with regard to the types and quantities of clothes that they buy and sell.
While, the Sweet Sound Ltd is also an Australian based firm which operate in the electronic
sound systems. The firm is known for its mini hi – fi systems.
The senior management of Jertsy limited observe the recent success in the operations
of the firm and adopted a strategy of growth by opening the new store along with the they are
worried that maintaining controls as the business expands. Hence, the report is prepared to
analyse the business and to determine the weaknesses present in the existing system of the
firm. Further, the report also suggests improvements that should be included in any system
that senior management can choose to introduce. On the other hand, the Sweet Sound Ltd
decided to increase the warranty on its product from three years to five years. In this part the
report identifies the main audit assertions for the successful audit of the firm. Further, the
report also describes the types of the substantive procedures to cover the identified assertions.
The report also discuss the special risks in auditing provisions for warranty. Lastly, in the
basis of the above analysis of the business and other relevant information, this report draw the
conclusion for the case of both the firm and provide the appropriate as well as effective
conclusion to both the firm.
Jertsy Ltd
Jertsy Ltd is an Australian fashion clothing firm. The firm has several store in the
Australian state capitals. Every store manager operates the store autonomously along with the

3AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
regards of the quantities of clothes that they buy and sell. The head office provides the
standards mark – up of the cost which is followed by the each manager to determine the
selling price of the products. The staff turnover in the firm is significant as the most of the
employees of the firm is young and work part time and leave the job within one or two years.
The accounting records are maintain by the stores itself which is send to the head office of
the firm to report the purchase, sales and other sundry expenses. The Jertsy Ltd reported a
success in the recent time which motivates the management of the firm to adopt a new
strategy for the growth of the firm by opening the new store. This new expansion of the
business also make the management of the firm worry of the control as the business of the
firm expands.
Weakness in the existing system
Though, the business reported success in the recent time, the existing system of the
Jertsy Ltd have various issue that can affect the business operation of the firm or the
profitability of the firm. Some of those weakness are followed: -
 Does not able to attract many customers
This type of business system also focus in the single product and become fail to attract
more customers. Jertsy Ltd also operates only with the fashion clothing and deals only with
those customers who are looking for the clothing (Bumgarner and Vasarhelyi 2018). This is
one of the major weakness of this system that this system fails to attract more customers and
only work with the limited customers. This also limit the profitability of the firm as firm does
not have any alternative sources of generating the profit.
 Difficult to perform control over a number of retail outlets
In this type of business system in which Jertsy Ltd operates found the difficulties to
perform its control in the retail stores. As per the provided case study, Jertsy Ltd have a range

4AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
of the clothing stores in the Australian state capitals and the number of the stores is high that
increases the difficulties of performing the control over the each and every store (Chou
2015). The head office does not be capable anymore to control the each and every store as the
number of stores is high and each is located in the different location.
 Head office needs to maintain accounts
As discussed in the case study that each store maintain their own accounting records and
then return and then sent to the head office to inform about the purchases, sales and other
sundry expenses. Further, in the basis of the accounting information provided by the stores
the head office again prepare the accounting report of each store. Hence, this is the biggest
weakness of this system that both the store and the head office need to prepare and maintain
the accounting report. Actually, this consumes double effect, time as well as funds.
 Head office take decisions regarding the products
Another weakness of this system is that all the product related decisions are taken by the
head office and every needs to follow them. This is also mentioned in the case study that the
head office establish a standard mark – up on cost which is used by the each store to arrive at
the selling price of the firm (Christensen et al 2016). Here, the retail stores which directly
deal with the customers cannot act as per situation or the requirement of the customers as
they need to follow the instruction of the head office. This can affect the firm’s sale as well as
customer’s satisfaction.
 Two much store may result in loss
In this system of operating business, the main objective of the management is to open as
many stores as possible. This was also mentioned in the given case study that the
management is planning to open a new store by adopting the strategy for the growth of the
firm. Though, opening too much stores without considering the area and potentials in the

5AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
target market may lead the firm towards loss. As the cost of maintaining the store will
increase but the customers base for the firm remain same which means firm expends higher
to generate the same level of profit.
Improvements that should be included
As discussed above the Jertsy Ltd have several weaknesses in their business operation
regarding the retail shops of fashion clothing across Australia. The management of the firm is
planning to adopt new strategy for the growth of the firm by opening the new retail store. As
discussed in the case study the management of the firm is highly concern with the
management issues in the firm as the business of the firm is expending and they are facing
difficulties to control it (Dinwiddie et al 2019). Hence, the following are the firm some
suggestion for improving the business in the new store: -
 Improve conversion rate
As we all know, customers are the key to success for every business. Hence, taking the
record of the customer is important for every business to report the growth and success.
Hence, this is the important suggestion for the Jertsy Ltd to important their conversion rate as
these is one of the great performance indicator (Dritsas and Petrakos 2018). Conversion rate
nothing but the percentage of the visitor in the retail store for the given time frame. Hence, if
the total 100 persons visited to the store out of them 5 person buy the products from the store
then the conversion rate of the store for those period of time is 5 %.
To increase the sale as well as the profitability of the firm the management need to
record, analyse and improve the conversion rate. The high conversion rate means the high
customers satisfactions which also means the growth in sale of the store.
 AI in shops

6AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
As discussed above, the firm is concerned about the management of the business as the
size of the firm as well as the numbers of the stores is increasing. Apart from the head office
also faces several issues regarding the control of the shops. This is mainly because of the lack
in communication between the stores and the head offices (Furnham and Gunter 2015).
Hence, this suggested to the Jertsy Ltd to install artificial intelligent in their store as much as
possible. In today’s world, the AI is the important part of the any firm which directly as well
as indirectly improve the management and other operation efficiency of the firm which
directly affects the profitability of the firm.
In the case of Jertsy Ltd, AI can reduces several cost of the store as well as increase the
efficiency of the operation by saving the time and money. This also help the head office to
control the business of the retail shop in real time basis. Not only data, this will also help the
shop to share the all business related information to head office in the real time without
occurring additional cost.
 Optimize inventory management
The third thing that is suggested to Jertsy Ltd for improving the business in their new
store is to optimize their inventory management. The inventory management is the centre of
all the management process in the retail store management (Gaynor et al 2016). Hence, this is
important for Jertsy Ltd is to choose the right tools for the inventory management.
It is suggests to Jertsy Ltd to implement a retail management system or a POS system.
This system will help the firm with the key areas of the inventory management those includes
sale performance of the firm, gross profit margin as well as the cost of the product and likes.
This tools also helps the firm with the critical inventory management task like adjustment of
inventories, level of stocks and like which make help the firm to always have the sufficient
units of those inventory which has higher demand in the market.

7AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
 Implementation of POS System
This is also suggested to Jertsy Ltd to implement the POS System in their new store this
will help the firm in the several aspects. This help the firm to achieve the tremendous
efficiency in the operation of the firm. The biggest advantage of a developed POS System is
that it does not require high IT cost as it can works in tablets and even in the mobiles
(Griffiths 2016). This also help the head office to communicate and observe the performance
as well as transaction in the real basis of time. This also help the customers by providing the
faster checkout. This also help the management by providing the staff training in less time.
Lastly, this also help the management by doing the marketing of the firm.
Sweet Sound Ltd.
Sweet Sound Ltd is Australian manufacturer of the mini hi – fi systems. Last year
firm changes its manufacturing process to improve the quality of the products to become
more reliable as well as firm also decided to increase the warranty of its products from 3
years to 5 years for those products which is manufactured in the basis of the new
manufacturing process. Further, the firm notices that the claims for the warranty is decreases
by 20 % compare to the old products (Jones 2018). In this basis, firm made the estimation of
the provision of warranty of $ 4000000 in current year which is higher than the provision for
the warranty of the last year by $ 500000.
Main Audit assertions
Before, identifying main assertions of provision of warranties, it is important to
understand the concept of warranty and provision of warranty first. In simple words, warranty
is the promises made by the firm to its customers that the firm will repair or replace the sold
product if the product encounters certain type of damage or issue within a predetermined
period following the date of sale (Jones 2017). While, the firm calculate and estimates the

8AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
number of claims and set aside an estimated fund for providing the warranty to their
customers this is known as the provision for warranty. As per the provided case study of the
Sweet Sound Ltd, the following are the some major audit assertions for the provision of
warranties: -
 Existence
The first audit assertions in the case of the warranty expenses as well as the provision for
warranty is that existence. In this, the auditors must examine that the warranty expenses must
be present in the profit statement of the firm as well as the provision of the frim in the
liability side of the balance sheet of the frim at the end of the reporting period.
 Rights and Obligations
The second audit assertion for the given case study of Sweet Sound Ltd is the rights and
obligations. It is important for the auditor to collect the evidence regarding the rights and
obligations of the assets and liabilities shown by the firm in their financial reporting. Hence,
in this regards, it is important that provision for warranty shown by the firm in their financial
report really have the obligation to the firm or not.
 Valuation
The last audit assertion in this regard is the valuation. Every firm need to report the
valuation of assets and liability in an appropriately manner in their annual report. Hence, the
audit also need to assert that the value shown by the Sweet Sound Ltd in their financial report
of provision for the warranty is shown properly and the balance really exists.
Substantive procedure for assertions
Substantive procedure is the process of collecting evidence which is used by the
auditors to support the support their result that there is no material misstatement in terms of

9AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
the value, existence and accuracy of the financial records of an entity (Knechel and Salterio
2016). Hence, this performed by the auditors to identify whether there is any material
misstatement is the financial transaction or not. For the previously identified assertions, the
following substantive procedure is followed: -
 Testing classes of transactions: - The first regarding the above identified assertion,
the auditor needs to test the class of transaction. In this auditor need to analyse all the
related information reported by the firm in the books of account to identify the class
of the account ting transaction. The class of transaction is very important for the
auditor to successfully audit the transaction and financial report of the firm.
 Testing account balances: - Secondly, auditor need to test the balance of the
transaction shown by the firm in their financial report. This is done by analysing each
and every transaction perform by the firm in regarding the related terms
(LópezPuertas‐Lamy, Desender and Epure 2017). Reporting the true balance is
important for the firm as well as it is also important to examine whether is true or not
for auditors. Here, the auditor need to calculate the true balances related to the
warranty by analysing the each transaction performed by the firm in relation to the
warranty.
 Testing disclosures: - After that, the auditor needs to examine the disclosure made by
the firm in their financial statement. In simple words, after analysing nature and the
balance of the warranty, auditor need to analyse the financial report of the firm to
identify that the warranty is reported in the final account of the firm in the basis of
their nature and with their appropriate balance (Mališ and Novak 2016). If firm fails
to do the same then there is material misstatement and if the firm reported this items
properly then it is fair and free from the material misstatement.

10AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
 Accompanying notes: - After this the auditor also needs to follow the notes to the
financial report which states the accomplices of the relevant accounting standards.
The auditor also need to analyse the note to the financial statement to ascertain the
firm properly follow the accounting standards which is related to the account or not.
This is also important because every company have to prepare their accounting report
as per the accounting standards and consider all the accounting transaction in the
financial report as per the relevant accounting standards.
 Examining journal entries: - Last but most important, that the firm needs examining
the relevant journal entries passed by the firm in the books of accounting in regards of
warranty (Rezaee et al 2018). This provide the clear view of the nature, balance and
type of the transaction. This also help the auditor to detect the material misstatement
in the financial report of the firm if any.
Risks in auditing provision for warranty
The provision for warranty is mainly the liability for the firm. It is nothing but the
estimated amount which the firm kept aside to meet the warranty claimed by the customers.
Hence, the provision for warranty is shown in the liability side of the balance sheet of the
financial report. Later on, it the provision made of the less than one year’s warranty then it
should be classified under current liability and if the provision is created for more than one
year’s warranty then it should be classified under the non – current liability. As the
calculation and the classification of the provision for the warranty is very complex, hence this
have the following auditing risk: -
 Control risk: - The control risk of audit is those risk in which the current internal
control of the firm fails to detect or protect the important errors or the material
misstatement in the financial report of the firm. This is the most important risk in the
auditing the provision of warranties of Sweet Sound Ltd (Senft, Gallegos and Davis

11AUDITING AND CONTROL IN JERTSY LTD AND SWEET SOUND LTD
2016). As there is high chances that the internal control of Sweet Sound Ltd can fail
in identifying the material misstatement attached with it because the calculation
related to provision of warranty is very complex and it is very difficult to detect the
errors.
 Detection Risk: - This is the risk in which the auditor of the financial statement is
failed to detect the material misstatement and present the wrong opinion regarding
the financial statement. This is also an important audit risk which is related to the
provision of warranty for the Sweet Sound Ltd (Yang et al 2019). The reason of
considering this audit risk in the provided case study is because of the high
complexity in calculating and reporting the balance of provision of the warranty.
Recommendations
Recommendation for Jertsy Ltd.
As per the analysis of the business of Jertsy Ltd, this report recommends the firm to
work in their current business system and try to eliminate the highlighted weaknesses. The
report also suggests to adopt AI, POS, and inventory management system in their business
system along with the conversion rate based plans. This can be implemented by the firm in
their new stores business system.
Recommendation for Sweet Sound Ltd
The report recommends the Sweet Sound Ltd to properly adopt the related accounting
standards for the warranty and for the provision for the warranty. As well as the firm must
report their expenses regarding the warranty in the profit statement of the firm as per the
requirement of the relevant accounting standards and the provision for warranty in the
liability again in the basis of the accounting standards. Further, this information must be free