Neon Case Study

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1. Opal Pty Ltd
a) Inherent risk should be assessed as high because there is a possibility of misappropriation of assets since the company processes large amounts of sales transactions in cash. This situation may lead to an increase in fraud risk because the person may steal the money, embezzling receipts, or using company’s assets for personal use. Moreover, Opal Pty Ltd claims that they already have strong policies and procedures in place to monitor their employees when handling and safeguarding the cash, but the proper implementation of those policies have brought the previous auditor into questioned. It means that the policies and procedures that they have been implemented may not be effective and it may indicates possible misstatement …show more content…

If the senior executives refuse to set up such a division, the company will probably have a weak and ineffective internal control. This will trigger fraud risk to occur because if the internal control is not operating effectively, there is a chance of fraudulent financial reporting such as manipulation of records or documents and omission of the effects of transactions from records or documents to happen. Although Neon is a proprietary company and it is not compulsory to have an internal audit division, it will be beneficial to the company itself to have an internal auditor to ensure that the internal, governance control and risk management are operating effectively. The fact that the company using bank loan for the last five years to open four new factories is likely to bring a possibility of going concern issue to arise as if the company is no longer profitable, they may not be able to pay the …show more content…

The impact of installing the new system affects major accounts such as cost of good sold, sales revenue, and inventory account. The auditor needs to perform more tests of details on major accounts of routine transactions (sales revenue, inventory). Audit procedures that should be undertaken to check for inventory account are observation of physical inventory and taking samples to verify cost of inventory. In order to perform observation, the auditor can conduct a combination of observation, inquiry, and physical examination (test counts). Besides, taking samples can be done by selecting purchases and vouching cost price back to supplier’s invoice or cost accounting records. The auditor may also check for subsequent sales prices and compare it with cost. The major issue of sales revenue is overstatement; therefore as an auditor, it is possible to perform vouching from entries in sales journal to supporting documents of sale (invoice or cheque). Another procedure is checking last sales invoice before balance date and first sales invoice recorded after balance date are recorded in the correct period. In addition, auditor may also perform less test of control for routine transactions (sales and inventory) such as taking samples of sales transactions in sales journal and review evidence that comparison with sales invoice undertaken and those prices

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