Petty Shops Ltd. operates a large number of small retail outlets selling newspapers, sweets, cigarettes and sundry items. The internal control system provides for...

      

Petty Shops Ltd. operates a large number of small retail outlets selling newspapers, sweets, cigarettes and sundry items. The internal control system provides for all books to be kept at head office with a branch stock account at selling price. Each outlet is required to bank receipts daily and intact; and to make a weekly stock report. All stock other than newspapers and magazines required by an outlet must ordered from the company’s central warehouse and is delivered twice weekly. Each outlet receives daily deliveries of newspapers and magazines direct from the supplier.

There are usually two members of staff on duty at each outlet at any one time with a considerable number of the staff being employed on a part-time basis. Petty Shops Ltd. employs a small internal audit department who visit each outlet at least twice each year.

Required:
a) State and explain four criteria which should be employed in assessing the effectiveness and the relevance of an internal audit function.
b) Identify three types of fraud to which Petty Shops Ltd. may be particularly vulnerable in operating a large number of small outlets. In circumstances where the auditors have identified high risk areas within an audit, give five keyelements which should exist in the general audit approach to these areas.
c) State with reasons whether the external auditors would be expected to visit outlets every year.

  

Answers


Peter
a) Criteria for assessing effectiveness and relevance of an internal audit function.
• Independence.
• Competence.
• Due professional care.
• Staffing.
• Evidence.
• Reporting.

b) Three types of frauds.

• Sabotage of goods/stock during delivery to the outlets.
• Collusion between the suppliers manager and the supplier to overstate the value of
newspapers and magazines.
• Misappropriation of cash receipts.



c) Five key elements which should exist in the general audit approach of high
risk areas.
• Sceptical.
• Use high calibre audit staff.
• Collection of wide range of audit evidence in each area.
• Meticulous preparation of audit working papers.
• Extreme care in drafting audit report.

The external auditor does not have to visit outlets every year. For example if he does not to do a stock take he must certify himself on the stock take by:
• Using rotational verification methods.
• Intensifying other verification methods
• Using perpetual inventory records more thoroughly
• Appointing agents.

Musyoxx answered the question on March 14, 2018 at 16:29


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