The document provides an audit report for Bright House, which sells furniture, electronics, and appliances. It identifies six key areas of audit risk: 1) complex transactions, 2) cash accounts, 3) equipment accounts, 4) supplies accounts, 5) accounts receivable, and 6) accounts payable. The report explains why each area was selected, noting they involve external parties, large financial transactions, or opportunities for misstatement. It then recommends substantive audit tests for each area to address weak internal controls, such as reviewing all transactions, surveying funds usage, and using external committees to evaluate mergers.

1. Bright House Strategic Audit Report
Submitted By
Student
Course
University
Semester

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

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