Auditing

By:
Ahsan Naeem Lone
M. Zubair Nasir
Waqar Nadeem
 Case
• Jubilee Chocolates employs 46 people each with a defined
geographical area to cover. Each salesman is supplied with
a new car, changed every three years. At the end of each
week, each salesman submits a claim on a preprinted form
for expenses with supporting vouchers. Expenditures is on
petrol, repairs and servicing of the car, hotel, lunches and
entertaining. Each claim is scrutinized by Mr Imran who is
deputy chief accountant. He verifies that claims are
supported by vouchers. He clears any inconsistencies with
the salesman concerned and make out cheques for
signatures by 2 directors of the company. The total amount
paid out by the co. in the year is Rs. 320,000. the co. made
a profit in that year is Rs. 1.5 million.
•
 Shortcomings of the system
• Sales each person is generating
• Budgeting process
• No target sales per person is provided
• No performance evaluation system
• No control over monitoring
• Justification of expense not provided
• Still full expenses being claimed
• What type of geographical area being
covered by each salesperson
• No proper distribution system
• Rubbish hiring policies
• Verification of signs by the 2 directors
• Relation with industry


•
•
 Test of controls
• Only one control has been placed
• Also ineffective
• Accountant only verifies the accuracy of
the vouchers against the claims
submitted
• Justification of expenses not considered
• Recommended that expenses should first
be recognized and justified by head of
sales department
 Substantive procedures
• Proper and complete financial statements
not provided.
• Evaluation of what is given
• Profit: Rs. 1.5 million
• Amount paid out: Rs. 320,000

 Break up
• Considering profit was 10% of total sales
Total sales: (1.5M/10) x 100= Rs 15M

Sales per month: 15M/12= Rs. 1.25M

No. of salesperson= 46

Individual sales per month= 1.25M/46

 ≈Rs. 27,174

 Break up contd
• Expenses
• Rs. 320,000
• Monthly: 320,000/12≈ Rs. 27,000
• Individual expense: 27000/46≈ Rs. 590
• Weekly cheques
• Individual expense per week: Rs. 138

• Jubilee Chocolates employs 46 people each with a defined
geographical area to cover. Each salesman is supplied
with a new car, changed every three years. At the end of
each week, each salesman submits a claim on a preprinted
form for expenses with supporting vouchers. Expenditures
is on petrol, repairs and servicing of the car, hotel,
lunches and entertaining. Each claim is scrutinized by Mr
Imran who is deputy chief accountant. He verifies that
claims are supported by vouchers. He clears any
inconsistencies with the salesman concerned and make
out cheques for signatures by 2 directors of the company.
The total amount paid out by the co. in the year is Rs.
320,000. the co. made a profit in that year is Rs. 1.5
million.
•
 Substantive procedures
• Biased/misleading/false financial figures
provided.
• Unrealistic expenses
• Transaction costs more than actual
expense
• No proper hiring policies
 ROMM
• Inherent risk x Control risk
• 100% x 95%
• ROMM is aggressively high

 Qualification Matrix
Circumstances Material but not Perverse
perverse

Disagreement Except for Adverse

Limitation of scope Except for Disclaimer

 False claims
• Depends whether it is an external or
internal audit
• Internal auditor will check the transactions
in detail and report the irregularities to
the management
• External auditor will give opinion on the
financial statements, whether they
represent true and fair view of the
company.
 False claims
• Matter will be provided in audit report and
it would be addressed to the
members(shareholders) of the company.
• Internal control letter will also be provided
after audit.
• Specifies the weaknesses of the system.
 Conclusion
• Auditor will give a qualified opinion that
financial statements do not reflect true
and fair view of the company.