Answered Essay: You are the audit senior on the audit of Bar Hound Ltd – a licenced venue which also has dining facilities an

Question 3

You are the audit senior on the audit of Bar Hound Ltd – a licenced venue which also has dining facilities and accommodation catering for around 100 guests. Your initial review of the business has highlighted the following significant risks.

1. Payroll expense. Bar Hound employs, in additional to its full-time staff, a significant number of casual, cleaning, waiting, bar and administrative staff. Overtime is often worked on weekends and night shifts due to a shortage of staff. However, payment at overtime rates for standard weekend and night shifts has been a common occurrence.
2. Accounts payable. Bar Hound has large number of suppliers for various supplies, including liquor, food and hotel supplies. Paying the supplier twice for the same purchase has been a common problem.

Required:

For each of the accounts identified (1 and 2 above):

a) Determine the key assertion at risk. Justify why this assertion is the most important. (2 marks)
b) Describe a practical internal control that would prevent the risk. Justify your choice of control. (4 marks)
c) Describe a practical internal control that would detect the risk. Justify your choice of control. (4 marks)

Please present your answer in the form of a table as follows:

Account at risk Key assertions at risk and justification Preventative internal control and justification Detective internal control and justification
A. Payroll expense: overpayment of overtime
B. Accounts payable: payments made twice to the same supplier

Expert Answer

 

Determine the key assertion at risk. Justify why this assertion is the most important
A) Payroll Expense
The key assertion at risk here is “Acccuracy”. This refers to whether transactions have been recorded accurately at their appropriate amounts. In the given question, payment is made for standard weekend and night shifts at overtime rates thus leading to inaccurate reporting of payroll expense amounts. This can have an adverse effect on the accuracy of the financial statements and results in the risk of a material misstatement in the financial statements.
B) Accounts Payable
The key assertion at risk here is “Occurance”. This refers to whether transactions have been occurred and whether assets and liabilities at the end of year actually exist. In the given question, payments are made to suppliers twice for the same purchase. This can have an adverse effect on the accuracy of the financial statements and results in the risk of a material misstatement in the financial statements.
Describe a practical internal control that would prevent the risk. Justify your choice of control. (4 marks)
A) Payroll Expense
Have a payroll system where casual workers are paid immediately after the end of their shift and only permanent employees are paid at the month end.
Doing so will reduce the chances of inaccurate accural calculations.
B) Accounts Payable
Have vendors confirm receipt of payment against bills and record the same in the books of accounts. Persons recording entries of purchase and persons processing payments to vendors should be different.
Describe a practical internal control that would detect the risk. Justify your choice of control
A) Payroll Expense
Have calculation verification of payroll expenses. If one person is calculating the payroll expenses, the same must be audited by another person before making payments of the same. This will detect erronous payments being made.
B) Accounts Payable
Have calculation verification of accounts payable. If one person is calculating the accounts payable, the same must be audited by another person before making payments of the same. This will detect erronous payments being made.
Account at risk Key assertions at risk and justification Preventative internal control and justification Detective internal control and justification
A. Payroll expense: overpayment of overtime The key assertion at risk here is “Acccuracy”. This refers to whether transactions have been recorded accurately at their appropriate amounts. Have a payroll system where casual workers are paid immediately after the end of their shift and only permanent employees are paid at the month end. Have calculation verification of payroll expenses. If one person is calculating the payroll expenses, the same must be audited by another person before making payments of the same. This will detect erronous payments being made.
B. Accounts payable: payments made twice to the same supplier The key assertion at risk here is “Occurance”. This refers to whether transactions have been occurred and whether assets and liabilities at the end of year actually exist. Have vendors confirm receipt of payment against bills and record the same in the books of accounts. Persons recording entries of purchase and persons processing payments to vendors should be different. Have calculation verification of accounts payable. If one person is calculating the accounts payable, the same must be audited by another person before making payments of the same. This will detect erronous payments being made.
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