General audit procedures

Inventory: To test for completeness and accuracy conduct

Risk of misappropriation when recording data of independence inventory checks
inventory balances that can leads to incomplete + observe on physical count on inventory and do
balances a roll back procedures to verify
Inspect on stock records and reconciliation
Payroll: A level of segregation of duties need to imposed
The payroll might have been incorrectly valued to proper record of payroll
that can leads to penalties by tax authorities Recalculation of sample payroll to verify
There is risk that payroll are paid in cash, with calculation accuracy
large amount of cash appear in business => theft Match payroll amounts with contracts and
Ghost employees leading to fraudulent payments timesheets.
Compare payroll cost to headcount trends.
Cash and bank: Discuss with manager about restricting access to
The cash may not be placed in authorized place cash drawers, only authorized staff will have
that can leads to cash theft or fraud access to these drawers.
There is a risk that there is no segregation of Imposed segregation of duties
duties in cash handling in cash receipt and Requiring two signatures for large disbursements
recording functions (payments)
Cash misappropriation in petty cash systems
To: New trainee auditors

From: Senior audit manager

Date: April 21, 2025

Subject: Key auditing concepts for new trainers

Dear new trainers,

Welcome to the firms, this memo aims to explain fundamental concepts you’ll encounter in your daily
work

Materiality refers to the significant of misstatement or omissions on financial statements that affect the
decisions making process of users of audited FS such as shareholders, managers, public investors,… If
there is high risk area, auditors must set low materiality and investigate further. Materiality also based
on the size and nature of the entity being audited. Materiality can be based on both qualitative and
quantitative information to judge. Some transaction are material in nature such as cash, tax,…

Sampling is a application procedures for auditor to able to access the accuracy and completeness of
transactions and balances without investigate 100% of items with FS. Sampling can be determined based
on professional subjective judgement of auditors and based on firm situation or high risk area. We use
sampling because examining every transactions would be impractical and inefficient. Results from
samples are extrapolated to draw conclusions about the entire population.

Detection risk is the risk that out audit procedures will fail to detect a material misstatement that exist in
FS. It is components of total audit risk. This is the only risk that auditor can control through planning and
execution, and it can never be eliminated entirely, only reduced to an acceptable level.

Reasonable assurance is assurance from auditors that FS are free from material misstatement, whether
due to fraud or error. It acknowledges that due to inherent limitations in auditing, we cannot guarantee
the absolute absence of misstatements due to costly and time limited. It recognizes that an audit has
limitations, including the use of judgement and the nature of evidence, and the fact that we do not test
every transactions
Essay question
1. The future of auditing and the auditing profession has been under
a lot of scrutiny lately. Explain how the auditing process and the
auditing profession might develop in the next ten year
Auditing profession: rules for auditors is to be independence =>
discuss problem associated with long association and intimidation =>
there need to be stricter rules and certain guideline subject to
situations
Audit process: Obtain engagement letter => Planning=> Perform the
audit => Review and reporting
 In future, use more technology to gather information and
evidence, use more expert for compute auditing
 Conclude on more things other than just financial statement
 More regulations
 Do more KAMs for other company as well, what have auditor
done to verify transparency
7. The latest trend in auditing is the use of technology in audit work.
Explain the benefits and potential pitfalls of using technology.
What is auditing though, with, round the computer?
Technology benefits vs cost
Benefits: efficiency and accuracy
Broad, reliable and consistent, date base, remote working, collaboration
across geographic location
Question 13:

Weakness:

1. Chris rewards his staff through bonus scheme and competitions. This can promote unethical
behaviors through conflict of interest, the staff may have incentives to manipulated accounting
transactions to overstate revenue and understated expenses so that store’s performance appear
favorable
 Manager might use these records to provide favorable financial positions for the company
2. The stock level of each store is not managed properly as the staff are not permitted to call
another store to deliver stock resulting in overdue stock in one store and out of stock in another
store. Moreover, the company does not have a system for customer to do online ordering. This
will significantly delay sales process as they customers have to wait for ordering stock. This might
eventually lead to loss of sales.
 The stock level at each store is independently manage, hence the discrepancies are harder to
notices. This would allow the assistant manager to steal stock without immediate detection
3. Anyone in the store can raise a purchase requisition, and the store manager authorizes these.
However, there is no system to check if the requisition is necessary or valid.
 Manager could raise falsify purchase orders, as no one will check the purchases and stock level,
manager can use this to steal the orders or cash outflows from the orders
4. There is lack of segregation of duties as the accounts staff process payments without additional
authorization or oversight, leaving room for fraudulent invoices to be paid. This might promote
incentives for committing fraud activities.
5. When goods are delivered, there is no signed that qualified staff are appointed to verify the
quality and quantity of stock inventory. This reduces accountability and increases the risk of
unwanted stock going unnoticed.
 The assistant manager could deliberately accept incorrect or inflated deliveries and later
misappropriate the excess stock without anyone questioning the discrepancies.
6. There is no secondary review of invoices before payment. This lack of dual control creates an
opportunity to submit fraudulent invoices and ensure payment. The manager depends on his
store managers and account staff experience rather than implementing systematic controls. This
can lead to lack of accountability and monitoring.
7. Review cash flow and stock reports monthly is not timely enough to detect anomalies quickly.
Quarterly management accounts prepared externally may not highlight smaller, ongoing
fraudulent activities.
8. There assistant manager exploited the lack of control over purchase requisition amendments.
There is no safeguards to prevent modifications, which allowed her to add unauthorized items.
9. GRNs were sent directly to head office without cross checking against the original, authorized
purchase requisitions. This lack of verification allowed false or manipulated GRNs to pass
unnoticed.
10. The accounts team processed invoices without secondary authorization or matching them to the
original purchase requisitions. This allowed payments for fraudulent goods to proceed without
raising alarms.
  The assistant manager could submit fraudulent invoices for goods that were never ordered or
received, and the accounts team would process them without detecting the fraud.

Weakness Audit test

Chris rewards his staff through bonus scheme and Compare the financial ratios of the firms with
competitions. This can promote unethical previous years or with other firm in similar
behaviors through conflict of interest, the staff industry to detect any discrepancies in FS
may have incentives to manipulated accounting Test for the accuracy and completeness of
transactions to overstate revenue and revenue and expenses by observe the accounting
understated expenses so that store’s records of staff.
performance appear favorable Perform recalculation of records where
 Manager might use these records to necessaries
provide favorable financial positions for
the company
The stock level of each store is not managed Physical inspect on the inventory level of each
properly as the staff are not permitted to call store and test whether there are discrepancies
another store to deliver stock resulting in overdue between stores with excessive stock levels and
stock in one store and out of stock in another those with shortages.
store. Moreover, the company does not have a Analyze stock movements reports to identify
system for customer to do online ordering. This delayed sales or stock wastage due to uneven
will significantly delay sales process as they distribution.
customers have to wait for ordering stock. This
might eventually lead to loss of sales.
 The stock level at each store is
independently manage, hence the
discrepancies are harder to notices. This
would allow the assistant manager to
steal stock without immediate detection
Anyone in the store can raise a purchase Inspect a sample of purchase requisitions to see if
requisition, and the store manager authorizes purchases were necessaries compare to stock
these. However, there is no system to check if the level to confirm whether they were properly
requisition is necessary or valid. authorized by the store manager. Compare
 Manager could raise falsify purchase amended purchase requisitions to the original
orders, as no one will check the versions to identify unauthorized changes
purchases and stock level, manager can
use this to steal the orders or cash
outflows from the orders
There is lack of segregation of duties as the Perform walkthrough test by document the flow
accounts staff process payments without of transactions from invoice receipt to payment,
additional authorization or oversight, leaving noting who performs each step
room for fraudulent invoices to be paid. This Verify whether appropriate authorization was
might promote incentives for committing fraud obtained prior to payments and whether the
activities. approver was independent of the preparer
Perform data analytics to identify duplicate
invoices or unusual payment patterns
When goods are delivered, there is no signed that Identify whether there are any standard
qualified staff are appointed to verify the quality procedures for inspecting and verifying deliveries
and quantity of stock inventory. This reduces Review GRN, delivery notes and supplier invoices
accountability and increases the risk of unwanted for a sample of recent inventory deliveries and
stock going unnoticed. check for evidence of verification such as
 The assistant manager could deliberately signatures, inspection checklists, or quality
accept incorrect or inflated deliveries and control stamps.
later misappropriate the excess stock Observe the delivered process to see if quantities
without anyone questioning the and qualities are match the purchase orders and
discrepancies. whether any notes were made if there is
damaged or incorrect goods
There is no secondary review of invoices before Select a sample of invoices to examine evidence
payment. This lack of dual control creates an of independent review or approval before
opportunity to submit fraudulent invoices and payment
ensure payment. The manager depends on his Review any documented policies regarding
store managers and account staff experience invoice approval limits, authorized signatories
rather than implementing systematic controls. and approval hierarchies.
This can lead to lack of accountability and Assess the degree of reliance on managerial
monitoring. discretion and informal checks by store managers
or account staff
Review cash flow and stock reports monthly is Obtain copies of monthly cash flow and stock
not timely enough to detect anomalies quickly. reports and review the dates they were
Quarterly management accounts prepared generated and reviewed.
externally may not highlight smaller, ongoing Identify any inconsistencies or gaps in
fraudulent activities. information that might prevent detection of
smaller anomalies.
Use analytical procedures to identify unusual
trends or spikes in stock or cash flow data that
could indicate fraud.
Investigate any prior incidents of fraud or
misstatements that went undetected due to
untimely reporting.

There assistant manager exploited the lack of Identify who has access to amend PRs and
control over purchase requisition amendments. whether the person have enough expertise to
There is no safeguards to prevent modifications, order or approve for PRs
which allowed her to add unauthorized items. Identify unauthorized or questionable additions,
such as items not aligned with operational needs.
GRNs were sent directly to head office without Document the full process from purchase
cross checking against the original, authorized requisition to goods receipt and GRN issuance.
purchase requisitions. This lack of verification Select a sample of GRNs sent to head office and
allowed false or manipulated GRNs to pass trace each GRN back to its original, authorized PR
unnoticed. and matching purchase order.
Check for discrepancies in items descriptions,
quantities, or pricing and whether any these were
flagged or corrected
The accounts team processed invoices without Analyze payment patterns to identify anomalies
secondary authorization or matching them to the like frequent payments to new or unknown
original purchase requisitions. This allowed suppliers, duplicate invoices, or unusually high
payments for fraudulent goods to proceed quantities or values.
without raising alarms. Review company policies to assess whether
 The assistant manager could submit segregation of duties exists in the accounts
fraudulent invoices for goods that were payable process (e.g., one person preparing and
never ordered or received, and the another approving invoices).
accounts team would process them Discuss with the procurement team to assess
without detecting the fraud. how they ensure the authenticity of purchase
requisitions and whether they communicate with
accounts about goods ordered and received.