FINANCIAL SYSTEMS AND AUDITING

TASK 1:
i).
GALA Restaurant Ltd is a private company. This company is going
through audit for the year ending 30 September 2010. Before starting
audit, it is necessary to develop an audit plan.
According to ISA 300, Audit is planned through developing and
establishing a complete and composite strategy, then a plan id
developed, and measure are taken to reduce audit risk. (Picket, 2008)
An audit plan is a mix of specific activities and guidelines that are to be
followed while conducting audit whether it is internal or external audit.
Internal audit is conducted by the companys accounting staff and
management use it for the review of accounting processes, While
external audit is conducted by some external public accounting firm or
private certified accountants (CPA).
There are different phases in an audit plan. These are:
1. Planning fieldwork
2. Follow up meetings
3. And remedial audit
According to ISA 620 that, audit plan inherits the audit procedures
through which the audit is to be carried out. (Picket, 2008)
During the planning phase external auditors meet the management to
determine which areas and accounting processes needs to be audited.
The depth and breadth of the audit is also decided at this phase.

FINANCIAL SYSTEMS AND AUDITING

In the case of Gala Restaurant Ltd following areas needs to be audited
as can be seen from the information in the case study:
1.
2.
3.
4.
5.
6.
7.

Personnel audit
Sales audit
Payroll audit
Accounts audit
Inherent and control Risk audit
Invoices audit (both sales and purchases)
Fixed assets audit

During the fieldwork phase of an audit plan companys accounting

functions are observed. The employees who handle the accounting
information are interviewed and audit sample is tested against critical
accounting principles and guidelines. During this testing phase the
irregularities in the accounting information is judged. A final report is
prepared to cater all the function and accounting information.
This report is then presented and discussed in the follow up
management meeting. All the material weaknesses are discussed.
Other regularities are also discussed to strengthen the internal control.
A remedial audit can also be done if company fails the initial audit.
Cushing in his book says that For more than 20 years, audit practice
has been guided by a risk-based approach in which the nature, timing,
and extent of testing is determined by assessing the risk that financial
statement assertions are materially misstated. (Cushing et al. 1995)
According to ISA 315,Understanding the Entity and its Environment
and Assessing the Risk of Material Misstatement. (Picket, 2008)

FINANCIAL SYSTEMS AND AUDITING

Inherent risk factors that need to be seen and audited in Gala
Restaurant are following:
Three risk factors at management level:
1. Personnel turnover in accounting and finance and operation is
high.
2. At Gala Restaurant, Personnel are inexperienced or inadequate in
number
3. At Gala Restaurant, Managements operating and financing
decisions are dominated by a single individual or few persons
acting in the concert.
Six risk factors at operating and industry level:
1. Gala Restaurant is Hotel and this Industry is under strict
environmental control
2. Single product or few products
3. Hotels are usually sensitive to economic factors
4. Quality fluctuations on suppliers part
5. Physical location of the client
Six risk factors at accounting and auditing characteristics:
1.
2.
3.
4.

Presence of material, complex accounting estimates

Accounts required adjustments in prior period
Significant and unusual related party transactions
Considerable manual intervention required in capturing,
processing and summarizing data
5. Foreign operations
6. Tax problems
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FINANCIAL SYSTEMS AND AUDITING

These are three audit areas which have high inherent risk in the Gala
restaurant Ltds case.
1. Personnel turnover in accounting and finance and operation is
high
2. Managements operating and financing decisions are dominated
by a single individual or few persons acting in the concert.
3. Accounts required adjustments in prior period
The Gala restaurant Ltd goes through high turnover in sales and profits.
So the there are large number of casual workers. Further company
employs a single bookkeeper who provides a few days in month for her
services. Edward, who is co-owner and husband of Diana, the other
partner, holds the power to decide upon the future of company. There
are problems in the accounts as everything is not backed by the
invoices.
The risk of fraud is present in all the organizations. These frauds can
result in investment losses and legal costs. (Coenen, 2008)
There is a risk of fraud in the Gala restaurants Ltd. First of all, there are
many workers who are hired for only a small period of time. There is no
protection to computer that holds Sage software. It is kept in the office
that is also used as rest room for the staff. Sales are recorded and then
compared the amount with till rolls. These differences are noted but
not followed or little followed unless the difference is significant.
ii)
The four weaknesses that are present in the system are following:
1. The monthly accounts are prepared in only a few hours
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FINANCIAL SYSTEMS AND AUDITING

2. Sales are recorded but the differences are not noted or followed
3. The small purchases of small items are paid directly from tills but
receipts are not always attached to daily sheet
4. There are no P45, P46, addresses, NI Numbers, and dates of birth
of casual workers.
5. Fixed assets are more likely to be posted in repairs and renewals
accounts. (Coenen, 2008)
The accounts should be prepared perpetually every day. The
differences between tills and amounts should be followed. Every
purchase must be against receipt and there must be a separate account
for petty expenses. These should not be paid from tills. Every worker
should be on payroll with all the information.
TASK 2:
Audit program for sales:
An audit program is set of policies and procedures that provide
guidance on how the audit should be conducted. In the audit program
of sales of Gala restaurant Ltd following things needs to be collected
and evaluated:
1.
2.
3.
4.
5.

Structure of the organization

The size and nature of business that is Restaurant
Identify the products that company sells
Bookkeeping patterns
Record of sales and notes of differences between tills and
amounts.
6. Petty expenses paid from tills and their receipts
Tests of Controls
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FINANCIAL SYSTEMS AND AUDITING

1. Auditor should observe and question about functions and duties
in sales department.
2. A sample of sales invoices is taken and the evidence is examined.
3. Select a sample of sales transactions and examine evidence of
credit approval.
4. The accounting process is reconciled with samples.
Transaction Tests:
The transaction test is an accounting procedure in which a transaction
is examined with supported documentations. The internal controls
reliability is checked through this process. In transaction tests, a
selected number of specific transactions are tested to see if controls
are performing properly. A resulting error rate for complying with the
procedures is established. Based on the rate of error, auditors
determine if they can rely on the information developed from posting
or recording transactions. The test helps auditors determine the scope
of audit work.
Analytical procedures:
According to SAS No. 56, the analytical procedures are the "evaluation
of financial information made by a study of plausible relationships
among both financial and nonfinancial data" (AICPA, 1998, 56 p. 1).
Hirst and Koonce (1996) describe the performance of analytical
procedures as consisting of five components:
1. Expectation development: In this an expected balance for the
sales account of Gala restaurant is developed.
2. Explanation generation: In this, the actual balance of sales is
compared with expected balance.
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FINANCIAL SYSTEMS AND AUDITING

3. Information search and explanation evaluation: It depends on the
type of analytical procedures being performed. Hirst and Koonce
(1996) found that during the planning phase of analytical
procedures, auditors do little if any follow-up work to evaluate an
explanation.
4. Decision making: after gathering information, the professional
judgment in determining by the auditor whether the evidence
adequately supports the explanation.
5. Documentation: The extent of written documentation will vary
depending on the materiality of the unexpected difference. (Hirst
and Koonce, 1996, P 457-486)
iii)
Auditors use sampling for:
1. Test controls (compliance tests) for assessing control risk
2. Test balances (substantive tests) for determining whether
balances are materially misstated.
Population from which a sample is drawn:
1. Class of transactions in compliance test
2. Items in an account balance in substantive tests
When testing any balance sheet item or profit and loss account item for
understatement, the population will be account balances. When the
purchases for under statement is tested in Gala restaurants Ltds case,
the account balance of this item will be taken as population and sample
will drawn on credit purchases or purchases returns. The supplier from
whom the purchases are taken or purchases are returned can be taken
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FINANCIAL SYSTEMS AND AUDITING

as sample. This sample can be tested by confirming purchases directly
from these suppliers.
TASK 3:
i)
As the case study professes, The Gala restaurant Ltd employs a
bookkeeper for a few hours in a month to prepare monthly accounts
and payroll. So this was very difficult to deal with bookkeeper as she is
not available there all the times. Here are four guidelines points that I
will advise to my junior so he can complete audit.
1. Preliminary meeting with the management so that the areas of
audit can be fully understood.
2. Plan early about what information you need before heading for an
audit
3. Complete your field work completely.
4. After completion of audit, present preliminary report in
management meeting and ask for questions. The bookkeeper can
be taken into confidence in that meeting.
At Gala Restaurant, This is also necessary to note that auditor has
certain duties and liabilities towards audit and management. The
auditors at Gala Restaurant have to fulfill following duties:
1.
2.
3.
4.

Complete the audit and present the report

Everything answered in negative should be qualified with reasons.
Auditor has to certify all the receipts and payment account
To exercise reasonable care and skill in carrying out his duties and
make such inquiries as considered necessary.
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FINANCIAL SYSTEMS AND AUDITING

5. Auditor should not interfere in the day to day working of the
company too.
6. Auditor should ask for information only when it is necessary to go
on with.
ii)
The audit procedure clearly manifests all the process. In the purchase
and creditors audit, the sample size is set at 15 and the sample has to
be selected on systematic basis. It means that the first item is selected
randomly but the rest are every 15th item is checked.
Auditor technique in gathering Auditing Evidence to substantiate the
reliability of the accounting records is called audit procedure. The
auditors at Gala restaurant evaluated whether the information
presented is logical and reasonable.
Here are the reviews points for audit procedures set by auditors at Gala
restaurant are:
1. If any documentation is left this must be reviewed
2. Review can only be taken after the audit is completed
3. All the differences from the management must be answered
In the case of Gala Restaurant, If we take Fixed Interval, during the
audit of Balance Sheet Items the sample is taken on a single amount
on Accounts Payable. In this a random starting point is taken that
resides between 1 and the sampling interval, and this is the first
Pound selected. The sample interval is then added every time with
audit sample. Here in the case of Gala Restaurant, we have sample
size of 15, if the cumulative value is 1385 and population is also
taken as total invoices of Accounts receivable then:
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FINANCIAL SYSTEMS AND AUDITING

Value
Cumulative Total
Invoice 1
100
100
Invoice 2
89
189
Invoice 3
77
266
Invoice 4
121
387
Invoice 5
130
517
Invoice 6
78
585
Invoice 7
65
640
Invoice 8
101
741
Invoice 9
132
873
Invoice 10
87
960
Invoice 11
93
1053
Invoice 12
111
1164
Invoice 13
108
1227
Invoice 14
54
1281
Invoice 15
104
1385
The sampling interval is calculated by dividing value by sample size that
is 1385/15 equals to 92. If first item or start point is 3 then next invoice
or invoice 2 will be 17th item. And final item would be 227.
TASK 4:
I)
A test is already made by my junior that says any item over worth of
100 pounds in the repairs and renewals account must be considered as
a fixed asset. Additional audit tests are discussed hereunder.
This is noteworthy that capital expenditure is related to all the long
term expenses that are incurred to acquire long term assets like
building, machines and equipment etc. These assets are charged
depreciation.
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FINANCIAL SYSTEMS AND AUDITING

Opposite to Capital expense, the other type of expense is Revenue
expense, which is short term and related to revenues or sales. Repairs
are revenue expense. These are undertaken to improve the functioning
of an asset.
As discussed earlier, the audit test for balance sheet items or profit and
loss account items is called sub substantive test. If the internal controls
are there and functioning well the need to have more substantive tests
is decreased. Conversely, weak internal controls result in increased
substantive testing, the need for additional audit procedures, and/or
scheduling testing at or after year-end.
Substantive tests include:
1. Tests of transactions
2. Tests of details of account balances
3. Analytical procedures
While testing transactions, the auditor is concerned with tests of:
1. Omitted transactions and account understatement
2. Invalid or unsupported transactions and account overstatement
Substantive Tests for Fixed Assets:
The financial statements are read to verify:
1.
2.
3.
4.

Discovering the historical cost

Exploring the depreciation methods under GAAP
Classifying Financial statement
Discovering restrictions

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FINANCIAL SYSTEMS AND AUDITING

The fixed assets are valuated or allocated. Invoices are examined and
lease agreements if any are inspected and given proper treatment. The
repairs and maintenance accounts are analyzed as done in this case
study. Further accumulated depreciation accounts are also analyzed.
The accounts of fixed assets must be complete. Tangible existence of
the fixed assets is also checked. All the subsidiary schedules are
examined and linked to general ledger control.
As said earlier, fixed assets must be existed. It needs to be inspected.
All the supporting documents should be checked. All the invoices, lease
agreements, insurance policies, title documents, personal property tax
returns, and minutes of board of directors all needs to be inspected.
ii)iii)
Edward is seen to be planning to invest in the business that is not doing
well. But as that very restaurant is our client too, this is our duty not to
leak out any inside information to any other person whether he is our
client or not.
This thing comes under the purview of professional confidentiality. The
auditors are responsible to take care and keep secret the information
of its clients. This is management who only has the right to publish and
make public any information that they need necessary.
TASK 5:
The unqualified opinion is the most frequently used opinion in the audit
report. It is also called clean opinion. This is like a clean bill of health for
a patient. But it is not clean enough. Rather it is reasonably clean.
When the financial statements of a company are free of material
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FINANCIAL SYSTEMS AND AUDITING

misstatements and these are represented in a fair manner with the
generally accepted accounting principles, the auditor issues such an
opinion. In other words, it means that companys financial condition, its
position, and its operations are presented fairly in the financial
statements. According to Marshal, Unqualified opinion is the best
opinion that a company can receive from an auditor. (Marshall,
McManus, Viele 2008, P47)
Here is an example of opinion section of audit report.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Gala
Restaurant Ltd, at September 30, 2010, and the consolidated results of
its operations and its cash flows for the period ended September 30,
2010, in conformity with UK generally accepted accounting principles
This opinion is called an unqualified opinion. It does not mean that
financial statements are free of any error what so ever but auditors are
saying that the financial statements, in their opinion, follow the
accounting rules and principles in all material respects. Auditor can give
this opinion even if each and every bit is not checked by him. Thats
why unqualified opinion does not provide absolute assurance.
Reasonable assurance should be used in the report but as this term is
not defined in auditing standards so it is not used. As the auditors
understand that they cannot guarantee 100 percent that there will be
no material misstatements in the financial statements, this term is
understood wrongly.
GALA RESTATRANT LTD.
Report of the Auditor for the year end 2010
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FINANCIAL SYSTEMS AND AUDITING

Annual Audit Management Letter
SUMMARY
This report puts light on accounts of Gala restaurant. This report
evaluates the business from all the angels. This provides the outcome
of Audit of Accounts of Gala restaurant for the financial year 20092010. This management letter is incorporated by external auditor of the
company.
BACKGROUND
GALA Restaurant Ltd is a private company. This company is going
through audit for the year ending 30 September 2010. This company is
no different from other restaurants. All the functions of a restaurants
are present.
RECOMMENDATIONS
This Audit report provides following recommendations for Gala
Restaurant. These are:
Accounts must be maintained on the basis of continuity and
system should be secure and only authorized personnel must be
provided access to the system.
The personnel turnover should be restricted
The Business decision making authority must be based on
dialogue rather than autocratic decision making by single person
Internal controls needs to be strengthened
Petty cash account should be maintained and all the petty
transaction in the whole day should be brought there.
Depreciation on fixed assets needs to be maintained properly
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FINANCIAL SYSTEMS AND AUDITING

All the invoices for receipts and purchases must be properly handled.

References:
1.

2.
3.
4.
5.

6.

7.

8.

9.

Picket, K. S. (2008). Audit Planning: A Risk-based Approach (IIA

(Institute of Internal Auditors) Series). New York: Institute of
Internal Auditors.
Coenen, T. (2008). Essentials of Corporate Fraud . New Jerssy:
John Willey & Sons, Inc.
"Understanding the Auditors Report" by CRF Online.org
Marshall, McManus, Viele 2008, Accounting What The Numbers
Mean, Mc Graw Hill
American Institute of Certified Public Accountants. (1988).
Statement on Auditing Standards No. 56: Analytical Procedures.
New York: Author.
Hirst, Eric D., and Koonce, Lisa. (Fall 1996). "Audit Analytical
Procedures: A Field Investigation." Contemporary Accounting
Research: 457-486
Cushing, B.E., L.E. Graham, Jr., Z.-V. Palmrose, R.S. Roussey, and I.
Solomon. 1995. Risk orientation. Auditing, Practice, Research,
and Education A Productive Collaboration. Edited by T.B. Bell and
A.M. Wright.
Pearson education, Audit Sampling Concepts-power point
presentation, companion website for auditing and other
assurance services, Canadian tenth edition August 24, 2010.
http://www.answers.com/topic/auditingprocedure#ixzz1Gu4FN77o

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10.
http://accounting-financial-tax.com/2010/05/substantivetesting-cash-receivables-inventory-and-fixed-assets/

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