Question

Your firm is the external auditor of Downe Ltd (Downe). It has accepted a non-audit engagement to review and report on the internal controls over sales, purchases and cash at Downe. Downe operates a chain of sandwich shops and has a head office. The following internal control deficiencies were identified during the engagement: (1) Managers at the shops regularly used cash from the cash register to pay local suppliers for ad hoc purchases. On several occasions the managers did not adhere to company policy to record the purchase on an expense form and then put the form in the cash register.

Answer 1

To review and report on internal controls over sales, purchasing and cash at Downe, your external audit firm should develop points for inclusion in your firm's report on identified internal control deficiencies at Downe.

In the cases described, the central deficiency is in the use of money not specifically allocated for payments and lack of adherence to company policy.

The consequences of these actions at Downe can mean a lack of control, organization and coordination of the flow of income and expenses, leaving businesses without correct records of capital utilization, legal compliance and inventory control.

It will therefore be necessary to restructure Downe's processes in order to implement a new policy that is passed on to all employees to be strictly enforced. In addition to greater control by managers and redesign of the organizational and work structure.

In this way, the company will guarantee that the processes occur in a planned, focused and strategic way, generating an improvement in the organizational culture and better positioning for the company in the market.

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