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  1. 1. Bright House Strategic Audit Report Submitted By Student Course University Semester
  2. 2. 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.
  3. 3. 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 Cash + Accounts Receivable + Accounts Payable + + Capital Owner's Equity Supplies = Notes Payable +
  4. 4. 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:
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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.
  9. 9. 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.
  10. 10. 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
  11. 11. 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.
  12. 12. 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.
  13. 13. 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.
  14. 14. 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.
  15. 15. References: 1. Srivastava R.P. & Shafer G.R. (1992) " Belief function Formula for audit risk " Review: Accounting Review, Vol. 67 n° 2, pp. 249–283, for evidence theory applied on audit risk. 2. Lesage (1999)" Evaluation du risque d'audit : proposition d'un modele linguistique " Review: Comptabilite, Controle, Audit, Tome 5, Vol. 2, September 1999, pp. 107– 126, for fuzzy audit risk. 3. Fendri-Kharrat et al. (2005)"Logique floue appliquee a l'inference du risque inherent en audit financier ", Review: RNTI : Revue des Nouvelles Technologies de l'Information, n° RNTI-E-5, (extraction des connaissances: etats et perspectives), November 2005, pp. 37–49 4. Jean de Maillard, Un monde sans loi : La criminalité financière en images, 1999, Éditions Stock, ISBN 2-234-04827-3, page 28. 5. Financial Services - Information Sharing and Analysis Center (FS-ISAC). "Financial Services - Information Sharing and Analysis Center". Financial Services - Information Sharing and Analysis Center. FS-ISAC. Retrieved 14 July 2011. 6. Zip Codes Draw Fire", Wall Street Journal, February 22, 2011, page C7 7. Roth, John, et al. (20 August 2004). "Monograph on Terrorist Financing". National Commission on Terrorist Attacks Upon the United States. pp. 54–56 8. Larry Harris, Trading & Exchanges, Oxford Press, Oxford, 2003. Chapter 29 "Insider Trading" p. 584 9. Shapiro, Susan P. (1990). "Collaring the Crime, not the Criminal: Reconsidering the Concept of White-collar Crime", American Sociological Review 55: 346–65. 10. Journal of Financial Economics, Volume 86, Issue 2, November 2007, Pages 306-336 Eliezer M. Fich, Anil Shivdasani 11. Critical Perspectives on Accounting, Volume 16, Issue 3, April 2005, Pages 277-298
  16. 16. Zabihollah Rezaee 12. Australian Bureau of Statistics (ABS) 2010. The labour market during recent economic downturns, in Australian social trends. cat. no. 4102.0 Canberra: ABS 13. Levi M & Burrows J 2008. Measuring the impact of fraud: a conceptual and empirical journey. British Journal of Criminology 48(3): 293–318 14. Levi M 2008. The phantom capitalists: The organisation and control of long-firm fraud, 2nded. Andover: Ashgate 15. Deflem M (ed) 2011. Economic crisis and crime (Sociology of crime, law and deviance). New York: Emerald 16. Nguyen T & Pontell H 2010. Mortgage origination fraud and the global economic crisis: A criminological analysis. Criminology & Public Policy 9(3) (Aug): 591–612

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