Case 2.1: Jack Greenberg, Inc.

Question 1

Control risk

Family businesses are likely to experience fights among the family members, and this may lead to circumventing of controls in order to deal with family conflicts. The family members chosen in critical positions may also lack the relevant competence to execute their duties appropriately.

Inherent risk

Family businesses are likely to experience numerous financial misstatements since the management tends to employ more family members in place of professional managers. These family members may lack the required experience to fill these positions.

Detection risk

In most family-owned businesses, independent auditors tend to act as business advisors, and this works to compromise their objectivity. There is also the probability that the business will go for the lowest-cost auditor due to limited resources, and the auditor might not particularly be that good.

-If an auditor wants to minimize these risk factors, there is a need of varying the audit procedures that are going to be used. The same thing should be done to the depth and timing of these procedures. An auditor should also resign and recommend the client to another auditor if they believe their independence has been compromised.

Question 2

a). Prepaid Inventory account

The primary objective here is to manifest the existence of the million dollars inventory that has been included in the year-balance account. There was a need of ascertaining whether JGI management had attained a proper “cutoff” for prepaid inventory transactions at the end of every financial year.

b).Merchandise Inventory account

The objective here would have been to ascertain both the valuation and existence assertions. The inventory involved perishable products and this made it important for the auditors to pay close attention to the year-end counting in the warehouse.

Question 3

Grant Thornton had identified that prepaid inventory was the largest asset for JGI and had allocated disproportionate audit resources for that area. However, the reliability and relevance of audit evidence derived from the company were not considered.  There was a heavy reliance on the delivery receipts, which had already been manipulated. Despite the existence of segregation of duties between the accounting and receiving function, there was no consideration whether the segregation was adequate and sufficient. Fred Greenberg had the ability to override the existing control. AU section 500 asserts that evidence prepared internally can be relied upon if the controls involved are effective. Grand Thornton relied heavily on the delivery receipts and failed to test the controls available, something which was not a wise decision.

Question 4

A “walk-through” audit procedure is meant to trace transactions step-by-step along the accounting system. This starts from the inception of a transaction to the final disposition. This helps in tracing how a company records, authorizes, processes and reports transactions to help verify whether the process can be relied upon for audit purposes. The procedure entails inspection, observation, inquiry and re-performance of procedures.

A walk-through audit procedure is not required by professional auditing standards. However, it is usually recommended to help in efficient audit performance.

Question 5

Another audit procedure that would have aided Grant Thornton in discovering the tempering of delivery receipts by Fred Greenberg would have been matching all the corresponding delivery receipts with the relevant supporting documents. Making employees to take a mandatory vacation every year would be helpful in this case.

Question 6

To some extent, I think the auditor has a responsibility. An audit firm should take the responsibility of producing a report that details the recommendations regarding the internal controls. In case the client fails to cooperate, the audit firm would inform the client that it would not be feasible to work for them unless the internal control deficiencies are addressed. The presence of strong internal controls helps to reduce the audit risk involved.

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