You are an internal auditr at Dream Clothes LtdThe president has asked you how you would approach the development of a longterm audit plan for the organization. Prior to your employment with the company, the president, in consultation with some of the senior staff, had put together a preliminary list of potential audit areas: a cash and banking b travel expenses c purchasing d Payroll e Inventory fstaff social committee g petty cash h computer security i corporate reporting j accounts payable k Treasury l company logo design m annual financial statements n budgeting

The president has asked you to prepare a preliminary longterm plan, using some rational method, showing which areas are most important for audit. Dream Clothes Ltd was formed years ago, and has grown rapidly from one store to stores, plus a head office, in a growing international city.

Sales last fiscal year cash and credit card were $ million: gross profit $ million and net profit $ million. The total number of employees for all stores is  Each store has a manager, sales staff, and one assistant manageraccountant who is responsible for entering all financial and accounting data into a PC based accounting system, used in all stores. All weekly totals are emailed to head office, where a small accounting staff load the data and prepare quarterly financial statements for management information and control. The vicepresident of finance and other senior managers seem generally satisfied with the quarterly statements, but there have been large errors in some of the statements. You saw a memo written last year to the computing staff, asking for monthly instead of quarterly statements, with the response that this could not be done due to the carryforward of monthly figures. There was no additional correspondence.

You note that the emphasis on computing has been to streamline operations, and such issues as backup, use of passwords, and confidentiality of company data have not been addressed to date. The accounting staff report to the vicepresident of finance, who is retiring in two years. The company is privately owned, with all shares owned by the president and her family. The company has an annual external audit of its financial statements, primarily to meet the loan conditions of the bank, the major creditor. The company is in strong financial condition, with profits improving each year, and a low debttoequity ratio. Each store deposits into its own local bank account, and the assistant manager does all banking except payroll at the store. This includes deposits, making payments to suppliers, reconciling the account, and clearing all excess cash to the head office account monthly. Store cheques require one signature, and all banking records are kept at each store. Payroll is done at head office, mainly for efficiency.

It is done by a payroll clerk, using a popular payroll package, under the supervision of the accountant. You have discussed the payroll in detail with the accountant, and controls appear to be strong. The process appears to be efficient, and staff members have no complaints. Each store keeps a large quantity of all the companys offerings to avoid stockouts and keep customers happy. Some of the managers have had to rent additional warehouse space, which is becoming very expensive, especially in the shopping mall locations. Head office has noticed some problems with obsolescence developing last year. After extensive discussions and input from all store managers and head office staff, the vice president of finance prepares an annual sales budget, an operating budget, a capital budget, and a cash flow statement. The budget process starts with careful sales projections, and works from there. The president approves all budgets at the beginning of each year, and each store then gets a monthly budget to monitor sales and control costs. An accounts clerk at head office prepares monthly actualtobudget reports, and highlights significant variances for the accountant and other management attention.

The president travels extensively, visiting trade shows and potential sources of merchandise. She flies first class on all air travel, rents luxury cars, and stays in fivestar hotels. Major receipts are attached to the travel vouchers, but there are no approvals. Travel for all other staff is insignificant. From discussions with suppliers, you noted that they are very complimentary about your companys accounting system: the invoices seem to get paid much faster by your company than other companies, sometimes even before the invoice is sent out. You asked the accountant about this, who indicated that this is probably due to each store making its own payments. 

 

a Which of the audit areas supplied by the president should be subject to an internal audit?

Provide reasons for each area you identify.