The usage of fiscal ratios assists the hearer in analysing any unusual divergences form the expected consequences, ( Gupta, 2004 ) . The fiscal ratios are so compared with the entity ‘s ratios for anterior periods every bit good as with ratios for other concerns in the same industry.
A comparing with the industry ratios would hold warned BDO of some abnormalities in Leslie Fay ‘s fiscal statements. BDO Seidman should hold been interested some of import ratios that would assist in finding the truth of the fiscal statements that had been prepared by Polishan and his staff.The of import ratios include the liquidness ratios, the profitableness ratios and the operating ratios, the leveraging ratios and the solvency ratios. Of higher importance should hold been the profitableness apart from the gross profitableness ratio.
An illustration would be the assets turnover ratio which provides information on the efficiency on how the assets that have been purchased are being utilized. The liquidness ratios would hold assisted in cognizing if and how the entity was traveling to refund its liabilities particularly in the short term.An of import ratio to investors and one that BDO Seidman should hold considered is the price/cash flow ratio. This indicates the relationship between the stock monetary value and the operating hard currency flow.
This is considered as the best manner to find the entity ‘s net incomes. The capital turnover ratio is an of import ratio to compare the gross revenues and the capital employed. A alteration in the capital turnover ratio would intend a use of gross revenues or one or more of the elements that make portion of the capital employed, that is, fixed assets, hard currency, debitors or stock list.The usage of ratios by the hearers is an of import but it requires accomplishments and experience in order to acquire the right analytical consequences.
Other fiscal information required during the audit The hearers should hold done more testing in the controls of the fiscal procedure by a program to scrutinize other of import fiscal statements such as the hard currency flow statement and the bank rapprochement statement. The hearers should hold besides followed the fiscal minutess that had resulted to the balances in Leslie Fay ‘s balance sheets and the income statement.This would include carry oning trials of control in the dealing rhythm. The hearers should hold audited Leslie Fay ‘s gross revenues system, the purchases system, the stock list system, the hard currency system and the paysheet system.
In add-on to this the hearer should hold asked inquiries about ant subsequent events. Subsequent events are those events that occur in the period between the fiscal period shutting day of the month and the day of the month that the hearers conduct the hearer, both the adjusting and the non-adjusting events.In add-on to the balance sheet, the income statement and the ratios, the hearer should hold besides asked for the period ‘s hard currency flow statement. The hard currency flow statement is an of import tool to investors and the direction as it assists them in cognizing the fiscal wellness of the organisation.
It is a statement that supports the income statements as there must be a connexion between hard currency gross revenues and recognition gross revenues particularly if they have non been paid by the terminal of the fiscal period.Huge gross revenues in the income statement without matching immense hard currency flow from the organisations operations should raise inquiries and should be explained by rapprochement. It has a nexus with the balance sheet as it records ay new hard currency gross revenues and purchases and other payments. The hard currency and bank balances can so be verified by a physical hard currency count for the hard currency balances and verification by the bank through a bank missive that is sent by the hearer.
The hearer should besides bespeak for the bank rapprochements and accounts for all the check shown in the bank rapprochement. A comparing of the ratios by the competing houses would hold been of import to the hearer in detecting the irregular discrepancies. The hearer would hold asked for an account for the discrepancy every bit good as the grounds for the account figures. A qualified hearer should do wise judgement when be aftering an audit.
The hearer should be speculative and should be speedy to detect some abnormality in the fiscal statements.This curiousness should hold guided the hearer to understand why Leslie Fay gross revenues increasing while gross revenues in the overall garment industry had been traveling down. This would hold led to the querying by the hearers as to how Leslie Fay was the lone garment industry that had non suffered a diminution in gross revenues during the late eightiess and early 1990s recessive period. This in bend would hold led to a demand to be after an audit on the gross rhythm and trials on the internal controls in relation to the gross rhythm.
The hearer should hold verified the truth and the being of the figures that were looking in the income statement as gross. The confirmation of the gross revenues system should include mandate of the gross revenues and the histories recording of these gross revenues ( Rittenbergm Et al. , 2009 ) . An audit on the sale systems involves guaranting that there is proper mandate of the gross revenues orders, proper matching of clients to these orders, payments and the bills and the records of goods outwards.
An audit program on gross and gross revenues system should include confirmation of any gross revenues figure that appears at the terminal of the fiscal period as in most instances, there is a possible hazard of fraud or incorrect accommodation of figures. It would besides include an audit on the gross revenues ledger control history. The gross revenues gross rhythm would affect confirmation of the price reductions to the clients. Had these steps been taken by the BDO Seidman audit house, the fraud by Kenia would hold been discovered earlier.
The hearer should hold planned to scrutinize the stock list of the organisation.Inventory audit is of import as it may organize significant and material sums in the fiscal statements. This was the instance at Leslie Fay where stock list was more than 30 % of entire assets in all the old ages within 1987 to 1991. A program for stock list audit should stress on the being of the stock list, truth and proper revelation.
This should include verifying the cut off whereby the stock list is recorded in the right fiscal period. An hearer should be after to go to the client ‘s stock list physical count which provides the hearer with dependable audit grounds about the being of this stock list.When be aftering for the attending, the hearer should take into consideration the old twelvemonth ‘s physical count processs, the value of the stock list in comparing with the entire assets, and the processs involved during the numeration procedure. An attending by BDO Siedman hearers during the stock list physical count at Leslie Fay would hold revealed a deficit in the physical count as compared to the recorded figures.
The physical count would hold detected the abnormalities that had been created when Kenia and his co-workers forged stock list tickets.Physical stock list numbering includes a comparing and recording of the purchase orders, good received notes and bringing notes. This ensures that the goods that are recorded as gross revenues have really been sold. Sing the goods in theodolite, the hearer should be after to acquire 3rd party verification that these goods are in being and that they are in their premises.
The stock list numeration should be taken by conducted by forces who are non daily involved in the stock list. In obtaining the paysheet system the hearer would hold identified how the wages for the executives at Leslie Fay were being calculated.A confirmation of the paysheet system includes the certification and mandate of the salary alterations, the computation of the wages and tax write-offs, the payments. The payments should be compared with the hard currency sent to the bank and money debited to Leslie Fay ‘s bank histories.
This would hold led to the hearers query on the high inducements by the executives. Another of import country that should hold been audited is the purchases system. This should stress on the mandate of the purchasing procedure, the detention and being of the received goods and the recording of these minutess in the accounting books.Close to the purchases system is the accrual control history.
To scrutinize the accumulations the hearer should hold asked for after shuting day of the month bills. This would guarantee that all goods received have been recorded decently. Non-financial variables or factors that an hearer should see when Planing an audit and the Audit deductions When fixing for an audit, there are some factors that an hearer should take into consideration. This should include the nature of the concern, the timing of the audit, and the extent of the hazard appraisal processs which is equal for placing the hazard of material misstatement.
After the assignment the hearer should acquire to cognize the operations of the client ‘s concern that is being audited. This includes the concern operations, the investings and funding, and the fiscal coverage day of the months and methods. The hearer should measure the client ‘s internal controls, the control procedures every bit good as taking a hazard appraisal trials. The initial planning should get down with the strength and dependability of the internal controls that are in being.
Internal controls aid in the safeguarding of the company assets and investors investings, bar and sensing of fraud. Internal controls are meant to better efficiency in running a concern as hazards are identified. The internal controls besides do assist in guaranting the truth and dependability of the one-year studies as the control systems guarantee that the coverage is in conformity with the bing ordinances. In measuring the dependability of the internal controls, the hearer will be able to find the sum of proving that should be taken on the fiscal statements.
This trust on the internal controls is stipulated in ISA 315 Understanding the entity and its environment and measuring the hazards of material misstatement. This involves understanding all the five elements of internal control the control environment, the hazard appraisal procedure, the information system, control activities and the monitoring of the controls ( IAASB, 2010 ) . The hearers should measure the adequateness and the effectivity of the hazard appraisal policy. These would assist in placing the any possible hazards of stuff misstatements.
The hearer should asses the adequateness of the accounting system, place any possible countries where misstatement could be material and come up with appropriate audit processs. After placing the dependability of the internal control and taking the hazard appraisal, the hearer should prove the controls to happen out to what extent the controls can be relied upon. The trials include walk through trials on a sample of minutess and take trials of controls. This is meant to prove if the minutess are recorded as awaited.
Any failing found will be communicated to the direction.Deductions of Domination by Paul Polishan for the company ‘s independent hearers and how hearers should take this into consideration when planning for an audit Paul Polishan dominated the accounting and fiscal study. He had rigorous instructions that he used to discourage entree and hence questions on the fiscal studies. Merely his chosen and trusted junior staff could freely entree any accounting information.
This has an impact on the external hearer as there is a possibility that the hearers could non entree all the records and paperss that they wanted as grounds to the fiscal minutess.Again a CFO is a senior individual and the audit staff may experience intimidated which would impact their independency in carry oning the audit. For the external hearer the being of a ascendant executive should be a mark on deficiency of a proper control environment. Control environment refers to the administration and the direction maps and attitudes of those that have been given the duty of pull offing the internal control system.
This includes the senior executives. If they do non follow the internal controls they should be guarding that means there are hapless controls in the entity.Segregation of responsibilities aids in preventing of deceitful minutess in accounting as this would hold to affect a big figure of people to conspire. This is the sort of control that was losing at Leslie Fay.
Segregation means that the people that are involved in the transporting out of the minutess are different from those making the recording and those who are in the detention of the assets and those making the rapprochements. This means there is more cheques from different people at different. The hearer should take into consideration on how the accounting responsibilities are segregated.Harmonizing to Stone ( 2009 ) , segregation of responsibilities is one of the chief ways to better an entity ‘s internal controls.
In be aftering for an audit where there is an executive ruling a section, the external hearer should look into the mandates of any big sums by the executive. The hearer should acquire verify the processs with the internal audit section and with other senior forces in order to happen out if the domineering CFO possibly making things in a mode that is against the entity ‘s set out policy.How BDO ‘s independency was jeopardized The hearer ‘s independency is really of import as it makes the audit study to be dependable. The hearer should be impartial and independent of the direction in giving a true and just position of the fiscal statements.
This is because the populace and the stakeholders rely on the audit study and the demand to unwrap any of import information on a public organisation. The hearer ‘s independency can be jeopardized by self involvement, self review, protagonism, acquaintance or bullying.BOD Siedman ‘s objectiveness and independency may hold been threatened by acquaintance and perchance self involvement. In add-on to this the audit has a duty and a responsibility to give an sentiment on the province of the fiscal statements.
The sentiment should be true and just and in conformity with the Torahs and ordinances. Therefore BDO Siedman had a responsibility to the shareholders to verify the truth and equity of the histories and BDO failed in this responsibility, as such the stallholders truly included BDO Siedman in the case.BDO Siedman had been the audit house for excessively long. It had been the audit house since the mid 1970ss, which would hold led to a acquaintance between the hearers and the accounting staff which jeopardized the independency of the audit house.
A acquaintance menace occurs when an audit has had a close relationship with the client either after a long-run relationship or otherwise and where this relationship affects the hearer ‘s objectiveness and loss of professional incredulity.After being the hearers for over 10 old ages, Polishan and the BDO Siedman ‘s staff might hold developed a acquaintance and therefore the hearers may hold become sympathetic to Polishman and his staff. The hazard of objectiveness and independency reduces after an hearer has been engaged with a client for five old ages or more ( Strohm, 2006 ) . Self-interest happens when the hearer has an involvement in the profitableness of the organisation and where the fees paid to the house are dependent on the consequences in the fiscal statements, ( Strohm, 2006 ) .
The hearer is at the hazard of being nonsubjective and this would hold been the instance for BDO Siedman. Self involvement is in close relation with bullying where the hearer can be intimidated by a possible loss for the opportunity to scrutinize that peculiar entity in future. The fright of losing a major client can be a menace to the hearer ‘s independency. There is a possibility that BDO Siedman were intimidated by Polishan which led to the hearers giving unqualified studies.