During the planning stage of this audit and by utilising the latest in Generalised Audit Software (GAS) we have been able to identify potential risks within Roblox Pty Ltd. We can gain insight into how their transactions are structured, the activities undertaken and the processes used. This helps us build a holistic profile of the company and shows us the flow of purchases and trade payables. Roblox Pty Ltd is experiencing strong growth from capitalising on its competitive advantage of engineering and manufacturing expertise to assist start-up companies. From successfully crowdfunding campaigns and potential new contracts still being negotiated, combined with more debt financing through a bank loan, there is a risk of Roblox potentially understating trade payables in order to make the financial statements look favourable. Therefore, this audit will analyse the purchases and trade payables accounts to help identify any risks of material misstatement on the financial reports, along with possible liquidity concerns.
Based on the information we have collected and preliminary discussion with Roblox Pty ltd staff it is clear there are some issues when processing a ‘Material Requisition’ form. The current system in place of requiring only the financial controller to approve all orders over $5000 is not effective. As can be seen from the graph above the financial controller is only approving 91.1% of all transactions. The other 8.9% of approvals coming from other employees including people in non-managerial roles, we have even found evidence of 2 orders with no managerial approval whatsoever. This creates a significant risk for the accuracy and occurrence assertions for the purchases and trade payables account.
The financial controller is also responsible for approving payments to creditors above $3000. For the financial year ended 2017, Roblox's average order price was $32233 whilst having a low $3000 benchmark. During the year, total payments above $3000 were 553 out of the 599 invoices. This in turn creates a higher degree of potential risk due to human error accuracy as the financial controller would have to go through a large number of invoices to approve.
Roblox source their materials from a mix of domestic suppliers around Australia and international suppliers primarily based in Singapore and China. With 20.4% of materials coming from overseas and due to the large distances they must travel, it is crucial that all deliveries received are error-free. Delays caused from lost or damaged materials, or materials sent to the wrong location, could cause mistakes to be made in recording the receipt of inventory. The centralised payables department is also located in Sydney and payments are not made until a completed ‘goods received report’ is received. This could cause payables to be misstated by failures to send accurate reports. There is also a risk that fluctuations in the currency exchange rate could cause the payables account to be over or understated.
According to the purchase order data, Roblox Pty Ltd experienced over 78 errors in total, in terms of errors in delivery of purchase orders, of which 11.1% were incorrect items, 34.5% were incorrect quantities, 54.4% were undelivered orders. In terms of dollar value, Roblox Pty Ltd lost $854,800 for purchase order errors.
Total purchase orders made during the year amounted to $21,210,000 of which the purchase order errors amounted to approximately 3% of total value.
The graph above represents a comparison between the errors between the errors that were noted during receiving purchase orders, and the subsequent procedures taken to address the errors. Procedures were only applicable to purchases that had incorrect quantities and items, whilst no action was taken for undelivered items. Follow-up procedures were not applicable to undelivered items, as they were not subsequently charged to Roblox Pty Ltd, however no procedures were undertaken to rectify the problem of preventing undelivered orders.
Roblox also has had movements in the accounts department during the year with a new accounts supervisor hired in February, 2017. This creates a risk that the controls of Roblox are ineffective as she is not familiar with company’s procedures and the company has no formal documentation on policies. instead she relies on staff to learn through day-to-day work and informal handovers.
With payments, the payables clerk has numerous responsibilities. They have to divide inventory and non-inventory items into separate groups, match details on each invoice to the relevant goods received note and purchase report, then complete the weekly payment run. This creates a risk of greater human error and a chance that payments made are incorrect due to inputting the wrong amounts. To prevent this, additional segregation of duties would limit the risk of human errors.
Accounts supervisor is the responsible employee to add and modify supplier account details in the system. The Roblox’s trade payables system allows for suppliers to be set up for trading terms, payee details, and general ledger account coding. As the graph above indicates, there are unauthorized staff which have been able to access the system and potentially could add or modify the supplier’s details. There is a potential risk for accounts payable fraud, by creating fictitious suppliers in the supplier master file. By examining the auditing supplier master files, it is generally the best practice to quickly locate and assess risk and where the issues might lie.
B. Account at Risk
B. Explanation of risk
Assertion at Risk
C. Substantive test of detail and audit evidence
Purchases
Purchases may potentially be misstated (either overstated or understated). This is due to the change in the accounts department that occurred during the last financial period, of which saw the departure of a senior accounts supervisor. The new accounts supervisor is not thoroughly familiar with the entity’s procedures. This could potentially cause amounts entered in purchases to be incorrect.
Accuracy, valuation & allocation
Obtain sample from previous yearly financial reports, in particular the balance sheet, to compare and test the accuracy of current year’s balances for purchases. During testing, ensure that the procedures and policies used during the current and previous financial year are consistent and accurate. Where applicable and appropriate, obtain financial advice from previous accounts supervisor to provide an assessment of the purchases account to ensure accuracy and consistency.
Audit evidence to be used during the audit procedure are prior year’s balance sheet statement.
Purchases
Purchases are likely to be materially overstated. This is due to a number of payments that have been approved by unauthorised personnel. Purchases should be duly recorded until given proper authority by authorised personnel.
Existence
Ensure the existence of unauthorised purchases by selecting a sample of purchase invoices and checking against the goods receiving report document.
Audit evidence to be used during the audit procedure are purchase invoices and the goods receiving report for inventory (materials).
Inventory (materials)
Materials may potentially be overstated. This is due a portion entity’s supplies being sourced from overseas, mainly China and Singapore. Materials sourced from oversea suppliers are subject to foreign exchange risk because they are to be converted to Australian dollars at the spot rate existing at balance date.
Accuracy, valuation and allocation
Perform a check conversion of Singapore and China dollar amounts into Australian dollars. Subsequently correlate these amounts to determine accurate amounts for materials using an inventory master file (where applicable).
Audit evidence to be used during audit procedure are inventory master file and currency check conversion software.
D. Nature of Procedures
Level of Procedures
Audit Approach
Substantive Approach
Test of Controls
None
Substantive Analytical Procedures
Small
Substantive Test of Details
Extensive
A Substantive Test of Details is recommended for the audit of occurrence Assertion in Purchase account.
In the view of the fact that, the controls that the company has in place are unreliable, as policy documentation is out of data, procedures for purchase authorisation are not being followed, and the payments clerk is performing too many duties. As such the controls are unreliable and a Substantive Test of Details for Audit Approach is appropriate.
The tests of controls will be small, as the control are unreliable and the audit is not relying on them for the occurrence assertion of purchasing.
As controls are unreliable, the auditor will need to obtain their own audit evidence to test the occurrence assertion with respect the purchases. Because of this, Substantive Analytical Procedures should be small. Furthermore, the pressure to understate payables means that purchases should be checked extensively for misstatement.
A level of Extensive Substantive Test of Details will undertaken, because of significant risk in occurrence of Purchases. Tests of transactions is important because the underlying documentation related to purchases is vital to test, Documents such as purchase orders, and good received notes are helpful with establishing purchases have not been fabricated.
E. Control
F. Test of Control
Payments to single creditors over $3000 require approval from the financial controller after checking the supporting documentation.
Select a sample of payments made to creditors by examining documented evidence for correct approval and authorization.
Purchase orders are issued by the purchasing officer and any exceeding $5000 requires the approval by the financial controller.
Select a sample of purchase orders to verify that all appropriate procedures including correct authorization to order inventory were observed in processing and recording.
Received goods are counted by the warehouse and total quantity received recorded in the system, creating a goods received record.
Inquire about the purchase acquisition procedure and check the records by referencing the invoices with the goods received.
G.
Assessment of Effectiveness
Data Limitations
Further Evidence Required
Purchase Orders over $5000
The financial controller is meant to approve all orders for more than $5000. The data shows that they approved 91.1% for the year under audit. The control is ineffective as they should be approving all of these orders.
Two orders have no member of staff as having approved the order. While this provides further proof that the control does not work, it shows that the data is incomplete and could be inaccurate.
A sample of these purchase orders should be compared to the physical purchase order documentation, to ensure the accuracy of the data.
Goods Received
The data indicates a solid record of orders that are incorrect, however the success of the purchasing officer in following up these problems is ambiguous. Additionally orders that are received could be flagged as not being received to understate payables.
The data does not indicate the outcome of follow ups to orders that are not delivered, or are less than actually ordered.
The actions of the purchasing officer in following up incorrect receipts need to be recorded, and properly documented. The purchasing officer needs to continue working on these problems until a satisfactory outcome is achieved.
H.
After further analyses in ‘G’ that looks at the effectiveness of 2 tests of controls and comparing this to the findings in ‘D’, the justification that controls at Roblox Pty Ltd are unreliable it reinforced. As 8.9% of all purchases over $5000 have not been approved by the financial controller and no follow-up reports by the purchasing officer for non-delivered orders (93 total) are available. The risk of misstatement is a concern for the assertion of occurrence.
Therefore, using our own substantive test of details to review these transactions, balances and accompanying documentation is still recommended. Due to the risk of over/understatement in the purchasing account. Testing these transactions by inspecting the purchase orders, then matching it with the goods received reports and confirming payments of these order with the appropriate suppliers will help identify discrepancies.