Q 4 You are a partner with a firm of Chartered Certified Accountants that has been invited, by the board of directors, to accept nomination as external auditors to BAH, a publicly owned incorporated business. BAH operates a number of car dealerships and has grown rapidly over the past two years through an aggressive take-over strategy.

You are aware that the companys existing auditors, a much smaller firm, qualified their last auditors report. Over lunch with a number of your firms partners, the companys chief financial officer maintained that their existing auditors could not cope with the audit of a company their size and, in particular, were not equipped to audit the recently installed sophisticated computer accounting program. He also suggests that they need a firm of your reputation in order to reassure the market as they intend to seek a public listing within two years.

The existing auditors, in response to your inquiry, advise against accepting the audit on the following grounds:

Insufficient consideration has been devoted by management to developing the accounting system in line with the expanding business. In particular there is a lack of concern as to control. They detected a number of petty employee frauds as a result of control weaknesses. No action was taken against the employees identified as engaged in fraud. The attitude seems to be to encourage risk taking employees who, if they make money on the side whilst securing good deals for the company, that is seen as a legitimate bonus.

The newly installed computer accounting system is unreasonably complicated. BAH claims this is necessary because of the need to maintain records to justify the companys claims for volume rebates, and bonuses under the complex incentive schemes by which car manufacturers reward dealers.

They have no evidence of deliberate misrepresentation by the directors but audit staff were hindered in their audit work by a less than helpful attitude by senior management who adopted an aggressive stance whenever a query was raised. The chief financial officer was constantly on the phone to the partner claiming the audit staff were incompetent and accusing them of wasting his time asking unnecessary questions.

At a partners meeting a majority of partners accepted the story that the existing auditors were out of their depth and that their complaints were merely an attempt to cover up their own shortcomings. Your firm accepted nomination and was duly appointed as auditors.

REQUIRED

State factors you should consider for and against accepting nomination.

Q 5 Day-to-day internal controls are important for all businesses to maximise the efficient use of resources and profitability.

Your firm has recently been appointed as auditor to Cliff, a private company that runs a chain of small supermarkets selling fresh and frozen food, and canned and dry food. Cliff has very 4 few controls over inventory because the company trusts local managers to make good decisions regarding the purchase, sale and control of inventory, all of which is done locally. Pricing is generally performed on a cost-plus basis.

Each supermarket has a stand-alone computer system on which monthly accounts are prepared. These accounts are mailed to head office every quarter. There is no integrated inventory control, sale or purchasing system and no regular system for inventory counting. Management accounts are produced twice a year.

Trade at the supermarkets has increased in recent years and the number of supermarkets has increased. However, the quality of staff that has been recruited has fallen. Senior management at Cliff are now prepared to invest in more up-to-date systems.

REQUIRED

(a). Describe the problems that you might expect to find at Cliff resulting from poor internal controls.

(b). Make FOUR recommendations to the senior management of Cliff for the improvement of internal controls, and explain the advantages and disadvantages of each recommendation.