Bookstore Company Limited is a 100% subsidiary of Bryan's Publishing and specializes in the publication and distribution of business textbooks. Bookstore employs on average 50 employees and sales for the financial year December 2011 exceeded $20 million. Bryan periodically sends a member of its Internal Audit Department to audit the operations of its subsidiaries. Phillip Smith is an external auditor assigned to Bryan's Publishing. He previously worked at Baker's Press Limited for over 3 years as an Internal Auditor. Phillip recently completed his probation and was sent two assignments to conduct fieldwork for the annual financial audit for Bookstore Company Limited.

Assignment #1

Phillip's first assignment was to commence planning process for an audit of the revenue cycle - accounts receivables department at BookStore Company Limited. Phillip as a part of this process carried out a preliminary survey. The preliminary survey indicated that severe staff reductions at the audit location had resulted in extensive amount of overtime among accounting staff. Department members are visibly stressed and very vocal about the effects of cutbacks. Accounting payrolls are nearly equal to prior years, and many key controls such as segregation of duties, are no longer in place. The accounting supervisor now performs all operations within the cash receipts and posting process, and has no time to review transactions generated by the remaining members of the department. Journal entries for the last six months since the staff reductions show increasing numbers of prior month adjustments and corrections, including revenues, cost of sales, and accrual that had been misstated or forgotten during the month-end closing activity.

Assignment #2

Phillip's second assignment was to conduct a review on the BookStore Investment cycle. In conducting his review Phillip primarily worked with Roger Russell the treasurer of BookStore. The following information was contained in Phillip's report.

General

Throughout the year, BC has made short term and long-term investments in securities; all securities are registered in the company's name. According to Bookstore's bylaws, long term investment activities must be approved by its Board of Directors, while short-term investment activity may be approved by the president or the treasurer.

Transactions

All purchases and sale of short-term securities in 2010 were made by the treasurer. Two long term purchases and one long-term sale were executed by the treasurer, the purchases were approved by the Board and the sale was approved by the president. The treasurer is listed with the broker as the company contacts and receives all revenues from related investments. The cheques are then forwarded to accounting for processing.

Documentation

Purchase and self-authorizations along with broker's advices, are maintained in a file by the treasurer. The certificates for all long-term investments are kept in a safe deposit box at Jamaica Homeland Bank and only the president of BC had access. An inventory of this box was made and all certificates were accounted for. Certificates for short-term investments are kept in a locked metal box in the accounting office along with long-term contracts and legal agreement. The keys to this box are kept by the president, treasurer and the accounting manager. All accounting staff use the accounting manager's key to gain access to the box when required. Documentation for two of the current short-term investments could not be located in this box. The accounting manager explained that some of the investments are for short periods of time and that formal documentation is not always provided by the broker.

Accounting records

Deposits of cheques for interest and dividends made by the accounting department are not traceable to the cash receipts journal maintained by the person who opens the incoming mail. Cheques drawn for investment purchases for amounts in excess of $250,000 are authorized by the treasurer and the president. However, cheques for $275,000 and $255,000 drawn during the period under review was signed by the treasurer only. Each month the accounting manager and the treasurer prepare the journal entries required to adjust the short-term investment account. There was insufficient back-up documentation attached to the journal entries reviewed to trace all transactions, however the balance was closely approximates the amount on the statement received from the broker. The treasurer also has the responsibility to reconcile the accounts.

Questions

1.    To achieve Bryan's publishing's objective of sound internal control, the company believes the controls of transaction authorization, accurate record keeping, physical control and internal verification are important. ?

a. For the controls outlined identify an area in Bookstore investment procedures that    violates each control. b. For each of the violations identified in a. give an example of how Bookstore can correct each weakness

2.    What are the financial statement assertions that apply to the sales and accounts receivables and Investment cycles in this case? Outline the assertions, general and specific transaction and balance related audit objectives in a table format.

3.    What is the potential for fraud and what are the red flags based on the elements of the fraud Triangle?

4.    Explain whether in proceeding to phase two (2) of the audit which type of test will be more appropriate, the effects on evidence and the types of evidence to be obtained for testing.

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