Financial System and Auditing Report: Minty Coca Cola Case Study

This report provides a comprehensive analysis of the financial system and auditing practices within the context of Minty Coca Cola. The report begins by examining the purpose and use of different accounting records, including prime entry books, ledgers, trial balances, and final accounts. It then delves into the meaning and purpose of various accounting concepts such as accrual, going concern, business entity, historical cost, and consistency, highlighting their importance in maintaining uniformity and accuracy in financial reporting. The report further explores the factors influencing the nature and structure of an accounting system, including the nature of the business, quality of information, skills of the accountant, and timeliness of information. The analysis extends to different components of business risk, including strategic, financial, and product risks. The report also covers the analysis of the control system, evaluation of fraud risks, and methods to detect fraud within Minty Coca Cola. Furthermore, it details the planning of an audit, the identification and use of appropriate audit tests, and the audit process for the proposed audit plan. Finally, the report concludes with the preparation of a draft audit report and suitable management letters, providing a thorough overview of the financial and auditing aspects of the case study.

Financial system and
Auditing

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Purpose and use of different accounting records..................................................................3
1.2 Meaning and purpose of different accounting concepts.......................................................4
1.c Factors that influence the nature and structure of accounting system...................................5
TASK 2............................................................................................................................................6
2.1 Different components of business risk..................................................................................6
2.2 Analysing the control system in Minty Coca cola...............................................................7
2.3 Evaluating the risk of fraud and methods to detect fraud.....................................................8
TASK 3............................................................................................................................................9
3.1 Planning an auditing for the Minty Coca cola......................................................................9
3.2 Identify and use appropriate audit tests.................................................................................9
3.3 Audit process for proposed audit plan................................................................................10
TASK 4..........................................................................................................................................11
4.1 Preparation of the draft audit report....................................................................................11
4.2 Drafting the suitable management letters in relation to the statutory audit report..............12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Accounting is the process of reporting and analyzing business transactions which help to
form a successful management. It is the way through which the company can measure its success
and can confirm that whether business is in line with the target goals of company or not.
Accounting theories and policies form the basis to maintain and record financial transaction. The
international financial reporting standards are designed in such a way that they keep the
accounting practices effective, efficient and correct (Vogel, 2014). This report is based on the
case study of Minty Cola Co. that manufactures fizzy drinks. It evaluates the importance of
keeping effective accounting system and evaluates the management control system of a business.
TASK 1
1.1 Purpose and use of different accounting records
Accounting records means all the documents which help in preparing financial statements
and record the transactions that are related to financial reviews and audits (Loughran and
McDonald, 2016). It includes recording of assets and liabilities, ledgers, journals and any other
documents to record the business transactions. It is important for Minty Coca Cola to record
transactions to evaluate the financial position of the company. Being an auditor, working for
Parsley & co. explains the purpose and use of different accounting records which the company is
required to prepare: Prime entry books or journals: Transactions are firstly recorded in the prime entry books
as and when they are occurred. It helps the firm to maintain date wise records of all
transactions along with the details of accounts and amount (Horngrenand and et.al.,
2013). It also includes short explanation of transactions which is known as narration.
Since Minty Coca Cola has expanded its business and dealing at a large scale so, it needs
to maintain special journals such as purchase books, sales books, bills book, etc. Ledgers: Journal is not sufficient as it cannot provide entire information regarding
particular account at one place. Thus, it is important for Minty Coca Cola to prepare the
ledger. It can record warehouse expenses, wages and salaries as well as machinery repair
expenses in the ledger. For instance, if manufacturing unit wants to determine the amount
due to a particular supplier or figures that is required to be recovered from customer, he is
not required to go through the whole journal which is a quite tedious task. They can

directly review the ledger and find out the amount (Floyd and List., 2016). It is
considered as the king of all books of accounts as it alone discloses the position of each
account head. Minty Coca Cola can determine the complete picture of accounts as it
records debit and credit side in different margins in each account. Trial balance: Once ledger accounts have been prepared, company records each
transaction with both the balances that is debit and credit side (Verver., 201). After
posting the accounts in ledger, accountant prepares the statement to show debit and credit
balance separately. It helps the company to ascertain the arithmetical accuracy and to
prepare the final accounts. Accountant can easily detect the errors through this statement
and can easily provide summary information of financial results and position.
 Final accounts: These are the statements that give rough idea about the profitability and
financial position of a business. It includes the preparation of cash flow, profit and loss
account as well as the balance sheet (Brief and Peasnell., 2013). It helps management of
Minty Coca Cola to determine the financial soundness of business.
1.2 Meaning and purpose of different accounting concepts
Accounting concepts are designed to maintain uniformity and consistency in preparing
and maintaining different books of accounts. Minty Coca Cola is required to comply with all
accounting concepts for recording and preparation of financial statements. So, the meaning and
purpose of different concepts are: Accrual concept: This concept states that incomes and expenses must be recognized in
the accounting period to which they relate rather than on cash basis. So, Minty Coca Cola
needs to record all transactions that arise in the accounting period rather than in the
subsequent period in which it will be received (Kaplan and Atkinson, 2015.). It ensures
that expenses are matched with the revenues earned within an accounting period. It helps
management to determine the accurate profits and losses of current year by taking into
account only current year's income and expenditure. For instance, if Minty Coca Cola has
sold products to the dealer and dealer has not made payment of it in the year in which it
was supplied, but this transaction is required to be recorded by the accountant in the
books as outstanding income. Going concern: It is based on the assumption that business will continue to run in the
predictable future. Therefore, it is deemed that Minty Coca Cola will realize its assets and

settle its liability in the normal course of business. It is an important concept of
accounting as it provides a basis for showing the value of assets in business (Christensen
and et.al., 2015). It is useful for investors as it assures that they will get consistent income
on their investments and the business is judged for its capacity to earn profits in the
future. Business entity: This concept is based on the concept that business entity and owners are
considered as separate entity for recording the transaction. It helps the firm to determine
accurate profits and losses of business (Trujillo‐Ponce, 2013). For instance, if owner of
Minty Coca Cola draws money for its personal use from business, it will be recorded as
drawings. It assists the management to record business transactions from the point of
view of business. Historical cost: This concept refers that transactions are recorded at the cost when they
occur and not at the market price. Under this case scenario, where the Minty Coca Cola
replaces machinery, it needs to record the transactions with purchasing cost of machinery
and not at the market price. Consistency: As per this concept, Minty Coca Cola is required to follow the consistent
method to record the transactions (Loughran and McDonald, 2016). For example, if
Minty Coca Cola is following straight line method for calculating depreciation of
machinery, accountant will follow the same method over the year unless the business
benefited from written down method and have to state the reason to change the
depreciation method
1.3 Factors that influence the nature and structure of accounting system
Well functioning accounting system plays crucial role in making the business successful.
There are many factors that affect the nature and structure of accounting system of Minty Coca
cola which are discussed below:
 Nature of business: The nature and operation of business influences the functions of
accounting system. In accounting system, different types of systems and features are
required by various industries (Benson, Faff, and Smith, 2014). Thus, it is important for
Minty Coca cola to follow industry-appropriate accounting system that helps the unit to
meet specific goals of a business. In this case, nature of the business of Minty Coca cola

is manufacturing so it needs to record client information, create invoices. It may be one
of the reasons that employees are found stealing cash and inventories of the company so
Minty Coca cola is taking action to improve its accounting system (DRURY, 2013).
 Quality of information: When an accountant creates and maintains an accounting system,
it should be provided with information that is accurate and related to company's
operations. Accounting is assembling and recording of financial information in the
systematic manner so information proves out to be important source through which
accounts are prepared.
 Skills and abilities of accountant: Accountant should have good knowledge of accounting
principles, its concepts and convention. Accountant should be skilled so that he can
prepare the accounts which can give true and fair view of the company (Brief and
Peasnell, 2013). Minty Coca cola should provide training to department to introduce new
journal general ledger accounting system in a business environment. If the accountants
are not qualified and skilled, it makes accounting system to be a problem rather than
solution to financial management (Mala and Chand, 2012). If the accountant does not
have much knowledge related to preparation of accounting statements then it will create
confusion and mismanagement of accounting system.
 Timeliness of Information: If the organisation maintains daily or weekly accounting
system, information will be more useful (Loughran and McDonald., 2016). It will impact
the accounting system by providing timely feedback so that firm can take proactive
responses and plan effectively.
TASK 2
2.1 Different components of business risk
Every business faces different kinds of risk and all does not cause loss. It is well said that
return depends on risk of the business. Higher risk generates higher returns for the firm. It might
also results in serious loss of profit and even bankruptcy. There are different types of risk faced
by Minty Coca cola that are discussed below:
 Strategic risk: Minty Coca Cola designs strategy to attain goals and objective of the
organisation. Due to ever-changing environment, strategies seem to look very outdated
quickly. It is the risk that makes the strategy less effective and creates problem for the

company to reach out its goals as a result (Trompeter and et.al., 2014). Minty Coca cola
have framed objective to attain revenue of £5 million. To put this into action,
management have drafted strategy to reduce its cost. It may involve some business risk
like price of petrol rise, cost of raw material hike. Manufacturing considers these as
business risk and should keep the margin of increase or decrease at the time of framing
strategies.
 Finance risk: It is the risk which is commonly faced by all companies as every units need
finance to start new operations or expand the current operations (Weirich and Reinstein.,
2014). The level of production of Minty Coca cola increases and it needs to raise funds
from bank or credit lines to finance their operation. Manufacturing units have to make
monthly payment of interest to the bank which will increase the financial risk of business.
It can also take shares as a source of finance but will result in dilution of ownership of the
company.
 Product risk: It is the biggest risk that is faced by Minty Coca cola to offer fizzy drinks to
the customer. If the organization offers product that consumer do not want, it will create
negative impact on image of the company (Loughran and McDonald, 2016). The main of
aim of Minty Coca cola is the satisfaction of customers which can be attained by
manufacturing products as per the taste and preference of the customer (Floyd and List,
2016). Business needs to be updated with the taste and preference of the user as well as
with the feedback of customers.
2.2 Analysing the control system in Minty Coca cola
In order to monitor and control the activities of Minty Coca cola, Parsley & Co has been
appointed for the internal audit. Minty Coca Cola have arranged the meeting with the internal
audit firm to discuss about the operations of the manufacturing unit. Internal audit is an
independent evaluation of operation of risk management, governance and internal control
processes of organisation (Benson, Faff, and Smith, 2014). It performs various roles and
responsibilities to remove discrepancies’ from the management. It verifies the existence of assets
and recommends proper safeguards for their protection. Auditor evaluates the effectiveness of
internal control system and recommends ways to improve the control system. It assesses that the
management complies with the policies and procedures and follows sound business practices
(Brief and Peasnell, 2013). The main task performed by internal auditor is to review the

operations and to determine whether the results are consistent with established objectives and
implemented as per plan designed by the Minty Coca cola. It investigates the reported
occurrences of fraud, theft that is taken place in the work place. Employees are found stealing
cash and inventories from the company.
Management of Minty Coca cola has designed its organisation structure in such a way
that work of one person can be checked by another (Horngrenand and et.al., 2013). It helps the
firm to detect the errors as soon as possible and can soon take corrective action.
To chase outstanding receivables, minty has recruited a new credit controller. The finance
director of Minty Coca cola thinks that it is not necessary to maintain an allowance for
receivables and so has released the opening allowance of £500000.
2.3 Evaluating the risk of fraud and methods to detect fraud
Minty Coca cola faces some risk of fraud within the organisation. In the current scenario,
senior management notices that the employees have been found stealing cash and inventories
from the company (DRURY, 2013). Management of Minty Coca cola can design its organisation
structure in such a way that work of one person is checked by another. It helps the firm to detect
the frauds as soon as possible and take corrective actions against it. Organisation can employ the
whistle blower policy in the working environment (Flamholtz, 2012.). Under this, any person can
report to the top level management with regards to the fraud taking place in the working
environment. Manufacturing unit will provide appropriate safeguard to the person who reports
fraud. It helps the organisation to detect fraud within the management.
Along with this fraud, Minty Coca cola can face other frauds like misinterpretation of
accounts of the company. Key employee's interest is conflicting with the business interest. Thus,
firm can appoint the separate team to monitor the performance of accounting department and all
the other department (Sikka., 2015). Auditor collects information by interacting with the
employees of the organisation and critically reviews the accounts of the company. Minty Coca
cola conducts pre-employment background check to identify past records of the employees. If
any workers are found indulged in any type of fraud then he should be kept under observation so
that person does not repeat the same.

TASK 3
3.1 Planning an auditing for the Minty Coca cola
The objective of the internal audit is to conduct a thorough program audit in relation to all
aspects of organisation (Vogel, 2014). It can examine all the activities related to all the
operations and management. In auditing, scope, materiality and risk are the main factors that
impact on the business organisation. Scope of auditing refers to the time and document that are
consumed by the auditor to assess and detect the fraudulent activities.
Minty Coca cola's senior management notices that the employees have been found
stealing the goods and cash from the company (Koonce, 2013). So, auditor can compare the
voucher records with the inventory of the management to identify the mismatch and can identify
the reason. For that, auditor is required to evaluate the financial records of the company and can
interact with the other employees to come out with right outcome. On the other hand, materiality
refers to the impact of mistake and omission on the financial statements such as incomes
statement, balance sheet as well as cash flow statement of the company (Mala and Chand, 2012).
This stealing will affect the ledger of purchase account and the debit and credit side of the
accounts will not match. Also, there will be shortfall of cash that is stolen by the employee in
cash flow statement. Auditing also involves some percent of risk as if the management provides
wrong information to the auditor. Auditor will prepare audit report that depicts false picture of
the organisation.
3.2 Identify and use appropriate audit tests
The primary aim of the audit tests or audit procedures is allowed to collect sufficient and
appropriate audit evidence to form true and fair view on the authenticity of financial statements
of Minty Cola. The rationale behind forming an opinion is reasonable assurance that the financial
statements are free from any material misstatement (Trujillo‐Ponce, 2013). There are different
types of audit tests and audit procedures used by an auditor in judging the internal performance
and finding out the suspicious area of the business are:
Risk assessment approach- It is one of the important tools used to verify the financial
statements on the core purpose of finding out the fraud areas (Anandarajan, Anandarajan and
Srinivasan, 2012). It is performed to obtain an understanding of the entity and its overall

environment. It involves application of risk management techniques to avoid the risky areas and
monitor the performance of those areas which are under suspect.
Tests of control- The auditor's understanding of different internal controls of the business
is to determine the weakness of control and recommend appropriate system to take place of an
existing system (Kaplan and Atkinson, 2015). It includes verification of each and every
transaction to identify the risky areas. Test of controls are of various kinds which may include
Enquiry and confirmation from all the employees and customers of Minty Cola to found out the
culprit (Bebbington, Unerman and O'Dwyer, 2014). Another method is Inspection; an auditor
can physically observe the inventory of the business to know the exact number of inventories of
Minty cola. He can manually count the cash available with the business and cross verify it with
the entry passed in the day books and cash books to find out the truth and modify the audit report
accordingly.
3.3 Audit process for proposed audit plan
Following is the Audit process that is followed by Minty Coca Cola:
 Collecting documents: - All the relevant documents that is receipts, journal, ledger shall
be submitted by the company and the reports regarding previous audit shall also be
submitted (Zadek, Evans and Pruzan, 2013 ). Along with it, the copies of by-laws and
minutes shall also be submitted by the company.
 Preparation of audit plan: - After the collection of all the relevant documents, the senior
manager of the company shall look that how the audit shall be planned (Weirich and
Reinstein, 2014). Then all the possible problems shall be identified and discussed out
with the staff. Finally, the audit plan is drafted.
 Conducting meeting: - The auditor then conducts an open meeting. Here the scope of
audit is discussed (Christensen and et.al., 2015). All the relevant staff of the minty cola
will be asked to join the same. Various issues regarding the inventory management shall
also be discussed upon (Vogel, 2014).
 Fieldwork: - The information gathered from the meeting shall be used to finalize the
audit plan. The auditor then may review all the processes and procedures of how the
company caries its operations. He may even discuss with the staffs the problems that
arise by giving an opportunity to the organisation to respond and correct (Weirich and
Reinstein, 2014).

 Draft a report: - The auditor prepares the report. It includes mathematical errors,
discrepancies that has been occurred in the absent of management such as the stolen cash
and inventory, posting error, accounting and principle errors etc. based on this a written
report is prepared listing solutions to the problems and comments on the position of the
company (Verver., 2015). Corrective actions regarding old and new system that has been
running parallel for two months shall be taken and only one policy should be followed at
a time. One should read the draft report very carefully so that if errors are detected they
may correct it.
 Closing meeting: - At closing meeting of the head of the minty cola, all the other relevant
member of the company will come and discuss the report. The auditor shall seek response
from the members of minty cola whether they agree with the perspective report and shall
discuss upon the problems if it arises (Trompeter and et.al., 2014).
 Distribution: - Finally, the reports are distributed to all relevant members of the company
that are entitled to know about the audit.
TASK 4
4.1 Preparation of the draft audit report
Audit reports contain the finding of audit program which they have identified through the
proper investigation.
Internal Audit Report for the Financial Year of 2013
To
Minty Coca cola
January 30, 2013
After critically evaluating the accounting records of the manufacturing unit, it has been found
that expenses recorded in the accounting department do not comply with the actual expenses
that are incurred by the firm. There is a slight difference between recording of wages and
salaries expense and actual received by the employees. In addition to this, it has been identified

that there is a significant variations in taxable amount as company has taken excess tax
deduction of interest expenses which are not paid by the Minty Coca cola to its creditors.
Further, on examining profit and loss account, auditor is recording higher profits as compared
to actually earned by the company. It will give false picture of financial conditions to the
investors of the company. As per companies act, manufacturing unit is required to spend
certain amount of profit on the corporate social responsibility. Apart from them, errors and
mistakes are detected in the ledger as the workers have stolen material from the workplace and
try to record it as consumption in the inventory account of ledger. All these elements indicates
that Minty Coca cola is prone to fraudulent activities that are taken place in business operations
and accounting practices within the business entity. So it is recommended that the firm should
take corrective steps to prevent these unethical practices. Minty Coca cola have to give reason
for its non spending in the CSR activity.
4.2 Drafting the suitable management letters in relation to the statutory audit report
Management Letter for the Financial Year of 2013
To
Minty Coca cola
January 30, 2013
On auditing the management practices, it has been found out that management is required to
follow stringent rules and regulation to control unethical practices which is found within the
organisation. It is recommended that the manufacturing unit is required to take measures to
restrict unfair accounting practices in the accounts' department. Management should disclose
fair information with the help of financial statements to the stakeholder to ensure reliability and

appropriateness of business transaction and accounting data. This method can be proved as
effective to present good image of the company and it will attract wide range of investors to
invest in the company. In addition to these, firm is required to conduct internal audit of the
operation of company on a consistent basis so that they can identify fraudulent activities and
can take corrective actions. These measures will prove out to be effective as it can determine
the deviations without any delay and management can take corrective measures to control
unethical practices in business operation. HR department of Minty Coca cola is required to
provide motivation to employees so that they can become loyal and work hard for the company
resulting in ethical behaviour in the organisation. This approach will help the management for
building good brand image of firm.
CONCLUSION
It can be concluded that it is important for Minty Coca cola to record the transaction of
the business in the systematic manner to evaluate the financial position of the company (Sikka,
201.). There are different accounting records that are required to be maintained by the
organization such as journal, ledger, trial balance and final accounts to record the accounting
transaction. In order to maintain consistency in the records, accountant should have knowledge
and comply with different accounting concepts such as accrual, going concern, business entity,
etc. Minty Coca cola is facing fraudulent activities such as stealing of cash and inventories which
can be controlled by appointing internal auditor. Auditor after evaluating accounting and
management policies is required to prepare the report.

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