Auditing Principles & Practice

Acct 401

1.     Case Study

Situation

You are an audit manager for Alder Auditing Bureau, a firm that has recently gained two new audit clients of a similar size. Your audit staff have completed their preliminary investigations of the two clients. You are reviewing their notes which can be summarized as follows:

Client 1 – Feyaty-Al-Madinah

Feyaty-Al-Madinah is an old-fashioned family company which has been in business for over a thirty years and trades as wholesalers of fruit and vegetables. Its management structure is divided into five layers ranging from supervisor, deputy manager, manager, senior manager and director. The senior managers and directors have been with the company for many years. Each level of management has clear authority limits set down in the company manual, which also sets out detailed written procedures for every job. Management at all levels generally has an unforgiving attitude to errors and inefficiencies. Most of the systems are paper-based, although the accounting ledgers are maintained on a computer and there are rigid systems of authorisation before transactions can be processed. Staff turnover in clerical posts and at supervisor and deputy manager level is high.

Client 2 - Alkhalij Agency For Advertising

Alkhalij Agency for Advertising is a new company set up six months ago. It trades as a website design business and as an advertising agency. Alkhalij Agency for Advertising is run by two brothers who manage the business jointly. Alkhalij Agency for Advertising mostly employs creative people but it does have a small clerical staff to deal with billing and time recording. The approach to work is casual, spontaneous and rather uncontrolled. Error detection is not seen as a priority. The management’s view is that they will deal with errors and problems when they arise. Staff are happy and so staff turnover is low.

Required

In your review of the control environment for each of these clients, what conclusions would you draw about the risk of error arising in the accounts?