Internal control risk
The auditor should first obtain an understanding of the internal control system of Biltrite. This can be performed through walk-through tests, among other measures (Hightower, 2009). Understanding the system is essential in assessing the risk. Secondly, the auditor should make a preliminary evaluation of the internal control risk. The preliminary assessment of control risk is important since it influences the amount of compliance tests for the controls (Hightower, 2009). He should then conduct compliance tests through tests of control to assess the application of the internal controls. The auditor should then evaluate the reliability of the controls and document his findings (Johnstone, Gramling & Rittenberg, 2015). Assessing the reliability is important since it determines the reliance the auditor will place on the internal controls.
Internal control weaknesses
Biltrite’s internal control system is deficient in ensuring the completeness of the firm’s records. There are several unrecorded liabilities, besides, the projected misstatement in the financial statements is high. Audit papers also indicate several general ledger adjustments and reclassifications.
Sales processing
The control risk for sales processing is high. This is indicated by the several audit adjustments. The audit adjustments were to reverse sales recorded in 2009 but for which goods were delivered in 2010. The amounts were included in the inventory for the year 2009. This indicates the control system for sales processing is not effective in ensuring transactions are recorded in the correct accounting period.
Cash receipts
The control risk for cash receipts is high. The tests indicate inaccuracies in the entries of dollar bank deposits. For instance, a bank deposit of $642,752 was recorded as $651,752. There were also incorrect entries for dollar deposits relating to notes receivable leading to several audit reclassifications.
Purchases
The control risk for purchases is low. Among the sample tested, there were only two adjustments for cut-off, one of which related to goods on transit.
Vendor payments
The control risk for vendor payments is low. Among the accounts receivables audited, there was only one reclassification adjustment. Most of the confirmation requests were returned with no exceptions.
Payroll
The control risk for payroll is low. There were no audit adjustments in relation to payroll entries. Payroll payments were made through inter-bank transfers.
References
Hightower, R. (2009). Internal controls policies and procedures. Hoboken, N.J.: Wiley.
Johnstone, K., Gramling, A., & Rittenberg, L. (2015). Auditing: A Risk Based-Approach to Conducting a Quality Audit (with ACL CD). New York: Cengage Learning.
