Bright House Strategic Audit Report

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Student

Course

University

Semester

Introduction

For an entity and organization the financial or annual reports play a very important role

because everything depends on the financial audit. To ensure that there is no issue in the

financial report or annual report of the organization, there is need of such person or entity

that can make sure the same, that is called as the external auditors. External auditors are

independent audit professionals who audit the company, legal entity’s or organizations’

financial report. The external auditors have the permission to explain all about the

financial report that there is no material misstatement or free from any misstatement and

the details are true and fair representation of the actual financial transactions in the

company or organizations. The basic responsibilities of the external auditor are such as to

identify the items that have a reasonable possibility of causing the organizations’ or

company’s financial statement or annual report, designing and execution of the tests to

know whether the misstatements have occurred or not and in case of the public company

audits also test the effectiveness of the internal process over the annual reports of the

company.

This report aims the same as to analyse the strategic audit of the Bright House. Bright

House provides high-quality, branded products to credit-constrained customers, through

affordable weekly payments and has its turnover more than £352.7. As being a Furniture,

Consumer electronics and Household appliances, to overcome any kind of financial fraud

or material misstatement there is highly need of the external auditors to ensure that the

financial statements are free of the material misstatement. In this report the six areas

where the audit risk can be analysed is discussed with the facts and figures. The financial

report of the company is for the latest year 2011 and complies with the other related

information to that is necessary in auditing risk analysis.

1. Select SIX areas which you consider to be audit risks. At least one of these six areas

must be obtained from the NOTES to the accounts.

Audit risk basically comprises of the three kinds of risks such as inherent risk, control risk

and detection risk. For linear technology the audit risk may be defined in the areas where

there are chances of having the material misstatement. Based on these three kinds of audit

risks the following area comes under to be audit risk as follows.

COMPLEX TRANSACTIONS

Every transaction in the organization is needed to record and verify to avoid any

misstatement. One transaction can create issue for the whole financial statement. In

Bright House organization which deals in furniture, home appliances and consumer

electronics means that there are regular operations and transactions too where money

comes and goes out may be on hourly basis as well. In this case it is mandatory to keep all

the transaction record happening in each hour for better evaluation of the final budget and

the financial strength of the organization.

According to the accounting standards or elements, there are some terms that relates to

the accounting elements such as withdrawals, expenses, revenues, investments, etc. In

theory of the accounting these activities are referred as transactions. These activities need

to monitor for each and every transaction happening in the organization. These

transactions can be documented either in hard copy form or in soft copy form through the

help of the computer. The transactions can be record in standard form so that there should

not be any confusion. The assets can be checked with using the following equations so

that the assets valuations can be done correctly.

Assets = Liabilities + Owner's Equity

Cash + Accounts Receivable + Supplies = Notes Payable +

Accounts Payable + Capital

Cash account:

In case of cash accounts the positive amount need to track whether it is entered

electronically in the system or not. The physical currency either that is in cash or

electronic form need to be controlled by the account department. The information need to

include for what the transaction happened so that the audit can be done correctly. For

example if a client pays either in electronic form or physical form, or for the earlier debt

as loan, the transaction is entered as cash.

Equipment Account:

For the Bright House retail company that deals in home appliances, furniture and

consumer electronics, there are number of items which are sold every day and there is a

huge transaction every day. The amount that is used for buying the items and the amount

spent for the infrastructure considered under the equipment account as all spent or

generated through the selling of the equipments. For Bright House there are high chances

of having mistakes in the selling of the equipments so for that the account department

need to control all the equipment details with the rice description.

Supplies Account:

Supplies account is also as similar as the equipment account. For the Bright House as

there is lot of need of the furniture, electronic equipments, and home appliances from the

different suppliers and manufactures to sell. Here there is some chance of having the

fraud of account or transactions because the supplier can make misstatement of the

transactions with the help of the firm’s management person. In this case there is need to

have the complete control by the account department and there should be review

committee for the purchases account statement and most of the transactions should be

electronically not physically.

Accounts Receivable:

This is very important category in the financial statement of the firm. This describes the

cash flows of the firm. As the Bright House is a retail firm where the accounts receivables

activities are more because this company allows its customers to pay the amount after

some time as mainly allows on credit basis. The all furniture, home appliances and

consumer electronics are sold on credit to the consumers. The money comes to the firm

through the receivable accounts and is the cash flow of the company. It works like after

buying the product the customer will pay that comes as the accounts receivables and the

only source of income for the Bright House retail firm.

Accounts Payable:

This shows the liabilities of the firm. Bright House needs lots of products on credit basis

from the suppliers and manufacturers so accounts payable activity comes in the picture.

This activity is a source of high fraud as the accountant and the suppliers can make fraud

of the financial amount and create the problem for the firm.

There are some more activities where are chances of having the external fraud in the

financial cash flow for the Bright House.

MANAGEMENT CONTROL

For every organization management of the organization is the important part of the

organization as all operations and final decisions are based on the management of the

organization. If the management of the organization is linked with some outer activities

where the management of the organization getting the benefits for own then there might

be a case of the external financial fraud. There are many other problems existing in the

management of the organization where there are chances of having the financial fraud.

This management control area for Bright House is very important because most of the

financial fraud occurred in the past was due to the weak management control and

inspection. The previous research states that either it is in Rebook (Happened recently in

2012 according to the news of Hindustan Times) or in Lloyds where the main victim of

the frauds were the management person. Therefore it is necessary to have the external

review committee for all the transactions, related activities in the Bright House to avoid

any problem in future for the financial fraud. Management is the key part of the firm and

if the management develops such kind of situations then it is mandatory

FINANCIAL INVESTMENT

Financial investment is the key growth of the Bright House. Not only for this firm but

also for every firm financial investment shows the growth of the firm and its stability in

the market. Investment is done for expansion of the business and other operational

activities. It is important aspect of a firm to control the financial investment in the

operations and in expanding its businesses. For Bright House it is necessary to ensure that

any new store operation need to be control and should review the process and accounts

statement frequently by the internal team as well by the external team. Every investment

needs to cross check before investing fund in to the operations and expansion and other

related activities.

There are high chances of having the fraud in this activity as the external people are more

involved in this process of expansion and dealing so it might be possible to have the

financial fraud in this activity. It is more important for Bright House as this firm need to

open new retail stores in different places so have to control on the financial related

activities to avoid any fraud in future. According to the previous researches done for the

financial fraud explains that the financial investment is much risky activity to have the

misstatement.

OPERATIONAL ACTIVITY

Operations are the backbone of a firm because everything depends on the operations

activities. If the firm’s operational activities are not good enough then the growth of the

firm is not possible. In case of Bright House operations is the most important factor in

deciding its growth and potential customers. The firm deals in consumer electronics,

home appliances and furniture which require high end operations to deliver and supply of

the products safely to the customers. The operations are not only handled by the internal

structure of the firm but also need the external structure to handle the operations. In this

case there are chances of having the misstatement in the operational activities. It is

needed to review or audit the operational activities and budget so that the control can be

made on the activities of the external structure. There have been a number of frauds in

operational activities in the past to this is also highly fraud activity concern. The person

who is dealing in this needs to give updates and reviews to the executive member of the

firm so that this issue can be minimized.

MERGER & ACQUISITION

Each firm either big or small or medium size want to acquire or merger itself to other

firms for better growth and huge customer board on side because the growth of the firm

depends on the customers and its reach to the customers. While having the merger and

acquisition the firm need to evaluate the process very carefully and also the evaluation of

the market whether it is in benefit or not. In this merger and acquisition it is important to

value or audit the financial activities by the external people as this is the activity where

the fraud may be much higher and can create a situation for the firm to be involved in

financial fraud and the financial stability of the firm will be weak. It is very high risky

activity where chances of misstatement are more. The auditor of the firm may wrongly

evaluate the valuation of the firm and the acquitting firm may be in loss. This should be

noted that the financial exchange must be electronically so that the firm can avoid the

misuse of the financial fraud.

CORPORATE SOCIAL RESPONSIBILITY

Many firms have their own rules and regulations and business strategies for the external

and internal people. Corporate social responsibility is very important activity of the firm

to raise the living standards of the firm and the benefits of the societies and its employees.

Bright House also has its own corporate social responsibility activities for the welfare of

its employees and societies. The firm also provide fund to enhance the services and

policies. There are many external people who are involved in the corporate social

responsibilities might cause the misstatement problem by not using the fund in the right

directions. This is also an area of the financial report where there are chances of audit risk

so this activity also need to control and review time to time to avoid any kind of misuse of

the fund.

So as being an external auditor it is necessary to ensure on the activities where there are

high chances of having the fraud while transacting the fund for use. These six areas are

highly risky based on the financial report for the year 2011 for Bright House. On all these

activities there is need of the review and control committees so that the fraud can be

avoided or stopped in future.

b) Explain clearly why you selected each of the above areas.

The above selected areas as highly audit risk including complex transactions, corporate social

responsibility, merger and acquisition, operational activity, financial investment and

management control are very important activities of a firm where there are chances of having

the misstatement. These areas are very much sensitive in case of the financial transactions. It

should be noted that most of the financial transactions are used in operational activities,

merger and acquisitions, and corporate social responsibilities and to ensure the activities are

good and working fine the management control is responsible for that. Complex transactions

for the Bright House is most important part as this firm deals in consumer electronics, home

appliances and furniture where the daily transactions happens and more than this the

company allows the sell on credit basis so in that case the complex transactions are possible.

That’s why in case of complex transactions the chances of misstatement are higher. Therefore

this activity comes under the highly risk audit.

Management control and financial investment both the more risky audit areas because as

observed from the past financial fraud activities that most of times this happened because of

the poor management and lack of control over the top executive of the firm. Therefore it is

necessary to examine this management and the financial investment by the management

because most of or can say 80 percent financial fraud happened because of these two areas of

the firm. In most cases, the fraudulent handling of financial resources will lead to substantial

losses for an investor or a corporation. The financial loss is sometimes carefully hidden in the

accounting records that are used to track activity involving the resources, allowing it to

continue until a great deal of money and other assets are siphoned off and no longer in the

control of the owner. Business fraud of this type may be conducted by any company officer

or employee who has access to corporate resources, and may continue for an extended length

of time before becoming apparent.

Merger and Acquisitions are also comes under the high risk audit area because here the huge

financial transactions are done and also here external structure of the firm is involved so it

must be a risky area for the firm. As for this Bright House firm based on the financial

summary it can be said that merger and acquisitions is very risky. The firm opens news retail

stores each year and also do the merger and acquisitions. Based on this it can be said that the

merger and acquisitions are also a chance of more financial fraud. That’s why this area is

considered as the high audit risk area. Operational activities are important for any firm either

it is retail or manufacturing because the business activities of the firm depends on the

operational activities.

Operation is done internally as well externally. So in case of external operations the member

of the firm or outside member of the firm can have misstatement and the firm can go in loss.

For example Bright House opens a new retail store in other state then the operation of that

store is handled by the people or managing unit in that state. If the external person who is

involved in operation with the help of the auditor of the firm for that retail store do some

misstatement like can show the operational cost higher or can show the total sell lower then it

will cause the fraud of financial statement. In these operational activities the management is

also important part as this fraud can’t be executed with the help of the firm member or can

say as the top executive member of the firm for that retail store. Therefore it is important to

include this two areas operational activities and management control as being the high risk

audit area.

Corporate social responsibility also comes under the high risk audit area because in this

activity mostly the external members are involved. The external members may make a false

financial statement and cause the fraud for the firm. It has been reported in number of

newspapers, research papers that corporate social responsibility is the activity where other

member can lead the financial fraud with the help of the management executive. Thus it can

be examined that these six areas of the Bright House comes under the high risk financial

fraud.

c) Assuming that the internal control system on these areas is weak, design an audit

programme using substantive tests for each of the six areas.

The internal control system is the important part of the firm because each activities of the

firm is run by the internal control system and also every business related decisions are

governed by the internal control system. In case of complex transactions is the internal

system is weak then it will very difficult to track the record of the exact and correct financial

transactions. In this area there is need to design a audit program because as being a external

auditor it is necessary to take control the internal complex transactions activities for the firm.

Complex Transactions: There is need to design an audit program so that the financial

transactions can be control easily. First of all there is need to review of all the transactions

happened on daily basis, this should include how much amount deposited cash and how much

amount is on credit and there should be the record of the total products so that it can be easily

identified that how many products have been sold for what value.

Corporate social responsibility: In this case it is necessary to take care of the entire

outgoing fund for the welfare of the employee and to the societies. To ensure whether this

fund is using correctly or not there is need to have the surveys in the areas and among the

employees whether they have been got the benefit or not. After this it is important to audit the

budget send on the people and to the employees and the allotted budget. This will make the

audit process very transparent and the chances will be low of financial fraud. The other aspect

that also can be used as the transfer of the fund electronically to the person and the spend

amount to the employee can be traced by the employees and can check the allotted and spend

budget.

Merger and acquisition: In a weak internal control system for the firm, it is needed to plan

for the acquisition and merger with the help of the external auditor. The external auditor need

to evaluate the firm secretly and also the final decision should be done the entire management

committee not by the single person. There should be need of the cross check of the evaluation

of the firm by the governance or outer committee so that the internal and external evaluations

can be matched and the decision can be made. This will reduce the financial fraud for the

merger and acquisition case.

Operational activity: Every operational activity should be reviewed weekly so that the

problem will not occur of financial fraud if the reviewed will be done on the end of year. As

seen in the past that few companies who did not go for the weekly review for the operational

activities caught under financial fraud because the people then used their own way of

showing the expenses to the audit team of the firm.

Financial investment: Investment in any business or for any kind of operations or other

related activities that are out of the merger and acquisitions and also out of the operational

activities need to be very careful because this is the most risky area as the control over the

people who does this activity is limited in many organizations. For this there should be the

corporate governance who should review the activities of the top executives of the firm on

monthly basis and also cross check in between the process. Also each activity of the top

executives should be monitored on daily basis.

Management control: The important part of the organization which have all the powers in

the firm to decide what to do or what not. The past study shows that more than 80 percent

financial frauds are because of the management involvement in the activities. In this situation

there need to have the meeting of the management committee on each week to ensure that all

is going fine. The meeting should also review the financial statement for each week so that

the future problem can be avoided.

The external auditor should review of all these meetings discussion for the financial related

activities and also the entire history of transactions either in case of acquisitions or in case of

the operations. Every activity must be monitored for the entire year by the external auditor or

external committee under the guidance of the corporate governance. The external committee

will ensure the transparency in the financial report or annual report of the firm for the current

year.

Financial fraud also takes place when bribes or kickbacks are accepted in order to manipulate

a business decision. In situations where an employee is found to be involved with a

competitor, a conflict of interest usually exists and could involve the sale of proprietary

information for personal gain. With both situations, the receptions of monetary gains by the

individual are likely to hurt the company financially and result in a loss that would not have

occurred otherwise. In this case the internal control system should give the access to the

corporate governance and to the external auditor for the control and monitor of the external

and internal activities. The substantial auditing methods should be used for the firm’s

financial report and annual report with transparency and without any financial fraud. The

external auditor should be assigned without the information to the top executive of the

company by the corporate governance so that the work can be monitored without ant issue

perfectly.

In case of Bright House Retail firm, the audit must be monitored by the firm which has

presence in most of the retail stores of the firm so that each activity can be ensured

effectively. The most important role is of the external auditor because external auditor audits

the financial activities of the firm transparently and there is less chances of having the

financial fraud.

d) Explain the type of audit opinion you, as external auditor, would give if, as a result of

your audit, you have not obtained sufficient and appropriate evidence for any THREE

(of your choosing) of the six areas you selected.

Financial fraud is a situation in which the legal and ethical management of financial resources

does not take place. In most countries around the world, this type of fraud occurs due to

deliberate decisions and actions made by people who handle money and other assets on

behalf of employers or clients. However, there are a few places around the world where the

unintentional mishandling of funds is also classified as fraud and is subject to the same legal

censure as any deliberate action. The sufficient information is necessary for the auditing of a

firm correctly. Financial fraud depends on the many factors. Suppose there are three areas

where there is not much evidence and support available for the audit. The three areas include

corporate social responsibility, management control and operations. These three areas are

highly risk audit and may have chance of not getting the enough support or evidences to

analyse the financial fraud and do the legal action.

In case of management control, not availability of the enough support the opinion will be to

execute the all transaction of the management in case of personal or public and also all the

expenses done by the management executives. This will be the only way to collect the

information for the correct financial statement and financial fraud analysis. The operations is

also such area where it is no possible to get all the correct information, in this case the

complete operational activities need to recheck with the key person who was involved in that

operational activities. Corporate social responsibility support only depends on the surveys

done for the employees and to the local public to know what has been done for the

corresponding year as their welfare and growth. This is how the audit can be supported in

absence of the exact evidence and support available for the firm in these three areas.

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