Manufacturing Service Operations Management -Myassignmenthelp.Com

Question: Discuss About The Manufacturing Service Operations Management? Answer: Introduction: Andy, a well known auditor in the present case due to the personal and professional competencies has failed to bring a considerable customer base for its firm which has two other auditors. In order to secure his position in the firm of auditors, Andy is in search of potential clients to provide auditing and assurance services. For the same purpose, the auditor has responded to the tender of a large company named as Office Supplies Ltd. The company was a supplier of products such as office furniture and technologies and has already appointed an auditor to carry the overall audit of the company. While undertaking any auditing engagement, the engagement member must comply with the fundamental principles of auditor such objectivity, independence, professional competency, professional behaviour and integrity (Whittington Pany, 2010). There principles are necessary to be maintained by the auditor to respect the profession of auditing and to gain the trust of general public in auditing profession. In complying with these basic principles the auditor may have to face various threats such as threat of self-interest (APESB, 2010). Ethical issues: The ethical issues that are involved in the present case are as follows: First of all, while responding to the tenders the auditor must make efforts to communicate with the existing auditor of the proposed company to identify the reasons for which the existing auditor is withdrawing from the audit engagement of the company. Without communicating with the current auditor, the auditor would be held guilty of professional misconduct if he accepts the audit in such case (Rossouw, Prozesky, du Plessis, Prinsloo, 2010). Moreover, charging an unreasonable fees excessively higher than that of the competing auditing firms is also not an ethical practice on part of auditor. The auditor must also not solicit the clients using the modes that are not generally open to the professional auditors. In the current case, the relatives of the auditors i.e. his wife and the sister of his wife are manipulating the employee (Silvya) in the organisation of proposed company to make arrangements for the auditors appointment, which is not as per the ethical standards of the profess ional auditors. Further, the auditor might take the help of Silvya to obtain the appointment as the auditor in OS Ltd. by using unethical ways such as manipulation, bribing, undue influence etc. whereas adoption of such ways is not ethical in any sense. In order to secure the safe partnership in the firm of auditor, Andy might accept certain conditions of the management of the company which are not ethically or professionally acceptable under the professional and ethical standards of auditing profession (Jackling, Cooper, Leung Dellaportas, 2007). The wife of the auditor and her sister are under no obligation to comply with the ethical and professional ethical standards of the auditing profession that are applied to Andy, being the member in practice of institute. Therefore, their acts of interacting with Silvya and demanding the memo of evaluation of managing director of the company are not professionally unethical. However, Silvyas act of communicating the important and sensitive information regarding her managing directors decision is not morally and professionally correct due to the fact that the confidentiality of the company is getting affected through Silvyas actions. It might also be possible that the independence of the firm of auditors will also be affected if the appointment as the auditors of OS Ltd is accepted because the management of the company may offer such appointment on certain conditions (Jackling, Cooper, Leung Dellaportas, 2007). The managing director may instruct the firm not to provide adverse or qualified opinion on the true and fair view of financial statements of the company. Courses of actions: In the present case, the auditor must first of all communicate with the existing auditor with the permission of the proposed company. The auditor must ask the existing auditor to provide all the necessary information and facts which have become the grounds for his resignation from the place of auditor. Further, the auditor must also disclose his relationship with the employees of the company before being appointed as the auditor. The auditor must also ensure that there is no ambiguity or confusion of work responsibilities between the auditor and management of the company. For this purpose, the auditor make proper documentation of everything that is being discussed between the company and auditor. Moreover, the auditor must not charge any unreasonable fees for the provision of auditing services. Also, the auditor must ensure that the only such service that the auditors are competent and eligible to provide, are provided by them to the new client. Furthermore, the auditor must ensure t hat the principle of independence is not adversely affected by such appointment (Hoffman Zimbelman, 2009). The auditor must also not take his family relationships in between his professional engagements. The company can sue the auditor and the assistant of the managing director for indulging in the practices that are not in the interest of the company. Moreover, if the auditor gains the appointment through the inappropriate modes or ways, the company and other person who is affected by his behaviour can sue the auditor for which the regulatory bodies can impose heavy penalties and fines (Brown, Stocks Wilder, 2007). Inventories are the integral part of any business and hence they requires to be properly valued in the financial statements of the company. The undervaluation and overvaluation of inventory can adversely affect the true picture of companys profitability and hence it can be used as a tool to manipulate the profits of the company so as to mislead the users of financial reports. Audit of the company is undertaken with the objective of providing the correct opinion on the truthfulness and fairness of the financial statements. During the auditing engagement, the auditor are required to obtain sufficient and appropriate audit evidences to provide the reasonable level of assurance to the audit report users. Inventory audit is an important element of overall audit process of the company which requires significant attention of the auditor. Following are some of the key assertions of inventory audit: Key Audit Assertions: Completeness of the inventory records: Auditor of the company carries the audit of the inventory held by the company to ensure that all the inventory units are recognised in its financial statements. Auditor must also check that any portion of inventory if held by the third party, is actually recorded in the entitys books of accounts of the client entity (Quizlet, 2018). Accuracy of inventory data maintained by the company: The data maintained regarding inventory must be accurate enough to serve the auditor a base to draw conclusions for the purpose of forming an audit opinion (DeHoratius Raman, 2008). The auditor must ensure that inventory is correctly recorded in the financial statements and there are no errors in its measurement and valuation (Accounting Simplified, 2013). This is necessary to be ensured by the auditor so as to conclude that financial statements of the company are free from any material misstatements (Karacaer, Gohar, Aygn Sayin, 2009). Valuation of inventory: The inventories must be valued appropriately using the reasonable method of stock valuation so that the financial statements of the company depicts the true state of companys profitability. The auditor must carefully identify the method that is employed by the entitys management and check its reasonability looking at the nature of inventories (Prasad, 2017). Rights and obligations regarding the inventory: Only those inventories must be recorded in entitys stock registers that are owned by the entity. The auditor undertakes the audit procedures to confirm that the financial statements of the company carries only such inventory that is possessed by it. The recording of inventory that is in possession of third party in the companys financial statement would affect the true state of entitys profitability and liquidity position (AS 2510). Existence of inventory with the company: The inventory which is shown in the financial statements of the company must be in actual existence. An auditor performs several audit procedures to ensure that the inventory which is in true existence is only recorded by the entity. They need to ensure that the company is not making false claims of holding any inventory when in reality it does not hold any such inventory (Freedman, 2018). Audit procedures for Inventory Audit Audit procedures to be applied to achieve each of the objective that is above discussed: There can be various audit procedures that can be employed by the auditor of the company to check the appropriateness of the inventory records of the company. One of the most relevant method of inventory audit is the attendance of physical count of the inventory by the auditor himself. The personal observation of approaches used by the management of the company for the inventory count helps the auditor to ensure that the management is using the correct approach to measure and value the inventory and also the condition and quality of inventory. When the inventories of the client company is held in the warehouses or the stores of the company, the auditor must personally visit such places to ensure that the management of the company is not involved in any ill-practices of manipulating its inventory records (Low and Tan, 2011). However, they may be certain circumstances when it is not possible for the auditor to physically attend the inventory counting process due to the location or time factors. Then in such unavoidable situations the auditor must extend the audit procedures as far as possible. In the instant case of audit of GHT Ltd. it was impracticable for the auditor of the company to visit the place of actual inventory taking for the purpose of inventory audit due to the fact that there was limited time to conduct the entire audit engagement. In this situation, there could be various alternative audit procedures that might be performed by the auditor to confirm that the financial statements are not materially misstated typically in the areas of inventory. To form the opinion on the genuineness of the overall financial statements prepared and presented by the management of the company, the auditor is required to critically assess the each of the significant element of the financial statements. Therefore, the audit of inventory must be undertaken by performing the alternative procedures in the cases where it is not possible for the auditor to perform some of the necessary audit procedures. The alternative audit procedures are discussed below: Invoice reconciliation: The auditor must check the corresponding invoices of the transactions of purchase and sale of inventory so as to determine the actual inflow and outflow of inventory from the business of the clients organisation. The invoices helps the auditor to cross verify the inventory records with the evidences of the actual transactions related to inventory. The invoices also helps the auditor to determine the all the necessary elements of cost of purchase and sale of inventory such as freight, taxes and other charges (Office of auditor general of Canada, 2017). Internal controls: The auditor must carefully study the report of internal auditor in regards to the inventory held by the company. Auditor must ensure the continuous functioning of controls and their adequate monitoring by the internal auditor. The management of the company must be regular and competent enough to record and measure the inventory that is held by the company (Corporate Finance Institute, 2018). It is the professional duty of the auditor to ensure that strong internal controls are implemented by the entitys management for the inventory valuation. If during any stage of the audit engagement the auditor realises that the financial statements of the company are materially misstated due to the incorrect inventory records, he must communicate the matter with the company and request them make the required adjustments in the records (Accounting Tools, 2017). Analytical procedures: These are the key substantive audit procedures that improves the overall audit quality. Under these procedures the comparative study of companys current gross margin or the unit cost is compared with that of previous years so as to understand the significant changes also the inventory turnover ratio of the company can also be analysed to identify any irregularities in the inventory areas (Loughran, M., n.d.). Audit sampling: This is also one of the most popular audit procedure under which the auditor carries checking on the selected areas instead of carrying lengthy and comprehensive checking (Lumen, n.d.). The materiality level of the transactions is determined by the auditor and then the transactions that meets the materiality criteria are checked in detail using the above discussed audit procedures (Gay Simnett, 2005). Outcomes of the above audit procedure In the stock sheet provided by the management of GHT Ltd of 15th May, 2018 is examined by the auditors of the company and it is found that there is a vast difference between the value reflected in the financial reports of the company as on 31st March, 2018 and the value determined as per the relevant accounting standards i.e. lower of cost and net realisable value. The significant difference in the closing inventory valuation are identified to be unreasonable is casting the doubt on the authenticity of the financial reports of the company. The companys method of stock valuation is thus found to be inappropriate. Moreover, it is also observed that the data maintained in respect of inventory is not accurate as the sales quantity for certain orders is shown as negative which is not practically possible. This indicates that the internal control procedures in the areas of inventories is quite weak and hence they need to be improved. The undervalued closing inventory of the company may adv ersely affect the profitability of the position of the company. Further it is also observed that the company is dealing in a wide range of items and hence maintaining a mix of various inventory items. However, the company has not maintained the inventory record in the systematic order by categorising the inventories according to their nature and purpose. It has been identified there are certain inventory items that have reported gross loss and therefore they required significant attention of the auditor of the company. The following items have reported loss and hence they are checked with due attention and by performing extensive audit procedure such as analytical audit procedures. Also it is found that there are certain inventory items for which the first in first out method of stock valuation is not correct. There are certain inventory items for which company has executed a sales of more than $25000 which has been set out as the materiality level and hence these sales are critically cross verified with the invoices of the sales to check the genuineness of the sales figure as shown in the financial statements of the company. Further Audit implications: Once all the audit procedures that were practicable to be applied for the inventory are applied, the auditor is in the position to form an audit opinion on the true and fair view of entitys financial statements. The audit procedures enables the auditor to conclude as to whether the financial statements are free from any material misstatements or not, due to any fraud or errors on part of management or any third party. In this case, the auditor has observed that the value of closing stock as reflected in the financial statements is not in line with the value determined as per the generally accepted accounting principles. Therefore, the auditor is obliged to identify the reasons of such differences in the valuation of inventory. The auditor shall assess the reasonability of the method approach used by the management of the entity in valuing its inventory as the year end. The auditor shall communicate the differences in the opinion in valuing the closing stock of the inventory between h im and his client. It is the responsibility of the auditor to make sure that the management agrees to the auditors suggestion and incorporates the same in the financial statements. However, if the client company does not agree with the auditors recommendations, the auditor must make necessary efforts that are required in such situations (Chung Monroe, 2001). They must examine the appropriateness of withdrawing their firms name with their client organisation. However, if is not reasonable to disassociate the name of auditors firm with the name of the company, then auditor must express the audit opinion through the audit report to the readers of report. In this case, since the inventory value is significantly varying from the value as per the GAAP and relevant accounting standards, the auditor shall issue adverse audit opinion. If the difference in the inventory values as per companys method and relevant accounting standards was negligible or acceptable, the auditor could have issued qualified report (Arens, et al., 2007). Conclusion: Even if the management of GHT Ltd is contending that the inventory records of the company contains no material discrepancies, the auditor shall not conclude his audit engagement on the basis of the said contention. Rather the auditor must make necessary and appropriate efforts to identify the reasons of heavy variations between the stock record of 15th May, 2018 and the financial report of the company as on 31s March, 2018. The auditor must apply possible substantive and compliance procedures to check the authenticity of inventory records of the company. If after performing these audit procedures, the auditors does not find any satisfactory reason of such differences, he must qualify the report. References: Accounting Simplified, 2013. Assertions in the Audit of Financial Statements. Available at: https://accounting-simplified.com/audit/introduction/audit-assertions.html Accessed on 31-01-2018. Accounting Tools, 2017. Inventory audit procedures. 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