Engagement Letter
Dear President of O’Brien Corporation:
Thank you for discussing the details of our upcoming engagement. We will conduct an audit of O’Brien Corporation’s procedures related to marketing, shipping, billing, and receiving information as of March, 31 2010. Our audit work will be performed in accordance with auditing standards in the United States established by the Public Company Accounting Oversight Board, and on a test basis we will examine and assess operation of significant controls.
The objective of our engagement is the completion of the audit, and subject to our findings, to issue a report. Financial statements are the responsibility of management and board of directors of directors or the company, who are responsible for all the information therein as well as keeping up a proper internal control structure, which includes adequate accounting records, and procedures to safeguard the company’s assets. As required by the standards of the Public Company Accounting Oversight Board, our procedures will include getting written confirmation from management about the representations we rely on.
As required by auditing standards, we provide reasonable, but not absolute, assurance that the internal controls are free of material weakness. Our audit is not a guarantee that the financial statements are accurate, and is subject to risk that errors or fraud may not be detected. If during the course of the audit we have reason to believe that unusual actions may have been taken, we will bring them to your attention.
Billing for this engagement is based on our per-diem rate, plus any out of pocket expenses. This engagement is limited to the services described in this letter. Any appearances before judicial proceedings, government bodies, or any other regulatory bodies to discuss the outcome of this audit will be billed separately.
We have enclosed an explanation of our Firm’s Client Service Concepts. We have found this to help communicate our commitment to the highest level of customer service.
We look forward to carrying out the work we have outlined in this letter, as well as other future services. If a disagreement over services or fees should arise and cannot be solved amicably, we both agree that a hearing of evidence by a judge without a jury would be preferable for both parties. We both agree to waive any rights to a trial by jury in any action resulting from our services and fees. If you are in agreement with this letter, please sign and return one copy for our files. We look forward to working with you.
Sincerely,
Engagement Partner
Flowchart
Weaknesses
Weakness |
Threat |
Recommended Control Procedures |
|
Sales staff has not been checking credit histories before sales are made. |
This could lead to an increased amount of uncollectable accounts which may affect valuation of the receivables account. |
All new customers should be required to undergo a credit check preformed by the sales staff and then signed off by a supervisor before their order is put through. |
|
The bill is being sent with the goods. |
If there is an error on the bill, and the company is charged for less items than they receive it would be easy for the client’s receiving clerk to see this and they could take the item without the company or client knowing. For the company this could affect completeness and accuracy of their transactions. |
Bills should be sent separately from packages to the client’s accounts payable department, not their shipping department. |
|
Shipping and receiving clerks have access to both records and physical inventory. |
This violates segregation of duties. It would be very easy for someone to take an item and update the inventory to make it seem legitimate, or not record the item to begin with. |
Those who count and handle the inventory should not be updating records. |
|
The company has a heavy reliance on perpetual inventory, and a complete inventory list is printed out only once yearly. |
This could affect existence or valuation of inventory. By checking their inventory so infrequently they may not actually have what they think they do. |
A complete inventory list should be printed out and checked quarterly, rather than yearly so that they can be more up to date on their actual inventory amounts. |
|
The same computer is being used for the shipping and receiving departments. |
This effectively eliminates the segregation of duties they had set up since each department can access the other’s records. |
If they cannot afford to get a new computer, they should have a log in system to restrict who can access what information, and keep track of what employees access and change in the system. |
Letter of Recommendations
Dear President of O’Brien Corporation:
During the course of our audit we have found several internal control weaknesses that require attention, and areas where your system could be more efficient.
One are of concern is the lack of checking customer credit. The sales staff may be busy, but this is a key step that cannot be overlooked. It is inefficient to skip credit checks in a rush to make more sales, as an increased number of the sales you make will never be collected on. We would recommend a credit check on each potential customer and monitoring of your current customers payment histories to lower the amount of receivables that become uncollectable.
Another area that would benefit from increased internal controls in the shipping and receiving departments. As they are currently structured there is little to no segregation of duties between the two departments. They use the same computer, which gives each department access to the others records. This could be solved with by getting separate computers for each department or using a log on system that restricts what data employees can access and tracks what they change. This will restore segregation. Additionally, it would be better for employees to not take on tasks in both departments. If they truly need to work in both places it is important to have increased supervision over their actions.
We would recommend not sending bills with shipments, but instead sending them separately. By sending the bill and shipment together there is a greater chance of the customer being under billed. The client’s receiving clerks could either steal items that were not billed, or simply use the bill to record the number of items received without a physical count. By sending bills separately both of these situations can be avoided.
Finally, we would suggest that you have periodic physical counts of inventory rather than yearly. By checking inventory you will know actual inventory rather than a perpetual system that could be incorrect due to human error. This will also increase efficiency, as you will have more reliable data about what inventory you actually have on hand.
Audit Objectives
Assess control risk over sales and inventory, and determine the
accuracy of relevant assertions.
Test of Controls and Transactions
- Sample recorded sales, and vouch back to their source documents. (Existence)
- Trace sample of documents from source to shipment. (Completeness)
- Review managements monitoring systems. (Completeness)
- Reconcile preordered sales orders with shipping documents. (Completeness)
- Send out positive confirmations to sample of clients. (Valuation)
- Foot sales journal and accounts receivable balances. (Valuation)
- Review revenue recognition policies. (Presentation)
- Inquire about rights of inventory from management. (Rights)
Analytical Procedures
Compare current income statement with their prior period, evaluate
differences, and investigate significant ones.
Test of Details
- Verify computations of account balances. (Valuation)
- Match confirmations from vendors to accounts payable.(Existence, Completeness, valuation, disclosure).
- Review adequacy of allowance for doubtful accounts. (Valuation)
- Review sales journals for duplicate entries. (Existence)
- Review numbering of sales orders in journal. (Completeness)
- State conclusion about correctness of account balances.