By: Ahsan Naeem Lone M. Zubair Nasir Waqar Nadeem

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.

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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

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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.

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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.