Firstly, Forest Ltd. owned an automated machine used in creditor's ledger. The machine is programmed to use two currency units, United States dollar and Australian dollar. It appeared that there was no distinction between the rates of the two currencies, resulting in inaccurate creditor balances.
Secondly, End month turnover have proved challenging, with creditor balances mistakenly re-set at zero at the beginning of every month. This has required each creditor's history to be re-entered manually each month, a time-consuming process that is taking accounting staff away from their normal duties.
Thirdly, Forest Ltd. relies on automated technology to collect, maintain and communicate data to support accomplishment of their objectives. Nevertheless, there is a significant correlation in risk between the creditors and Forest Ltd., implying that systems with security problems also produce less useful management information. In order to have a strong secured program when developing their Information Technology system, Forest Ltd. should seek qualified professionals. Additionally, they should also recognize the need to understand and manage the associated risks.
There need to be qualified personnel charged with the responsibility to handle the security and information system. In most technical cases, auditors should assess level of risk within each area, and use the test as part of the overall audit plan. Sometime the company auditor can depend on client's control in order to minimize audit risk. Unfortunately, the client's controls cannot be trusted to some extent or may be inefficient to determine whether they can be trusted. In this case, the auditor may bypass the client's control system and apply direct substantive tests to the account balances.
Unauthorized employees should not be allowed to access the company's confidential data related to cash or other assets. Records susceptible to breach may motivate some employees to mismatch inventory records. Finally, Forest Ltd. should be aware, that the greater the reliance on Information Technology for managing and controlling key business operations, the greater the likelihood that inadequate systems will prevent business goals from its achievement.
Forest Ltd. acquires timber from U.S. firms, which demands payment in $U.S. before the timber being cut. The U.S. firm may dictate terms or conditions of payment after receiving the money. This may automatically result in inappropriate or unsecured transactions, which may again elevate audit risk.
The auditor should secretly inquire more about U.S. firms offering timber to be aware of unexpected fraud, which may arise from the money paid for timber. The auditor should use professional judgment to determine whether there is transparency and accountability before the payment. Most importantly, payment should be carried out during the exchange of commodity (timber).
Forest Ltd. deferred most shipments of woodchips, irritating the Japanese customers who were threatening to take away 20% from amount owed as compensation for time lost in production. This 20% deduction will automatically land Forest Ltd. into financial problems, which may again increase the audit risk.
The Forest Ltd. customer (Wood Ltd.) claimed to have received a product contaminated with microbe. Wood Ltd. complains that microbe affects the physical structure of the chips, reducing the pressure the chips can withstand. This made them not to pay their dept that is already five months overdue.
Forest Ltd. should learn to manage their time of business operation. The company should deliver its order in a timely manner .Timely delivery avoids unnecessary inconveniences that may be encountered by the customer. Forest Ltd. should comply with the contractual capacity signed on the order form to avoid misinterpretation of the scheduled delivery time.
Auditor should thoroughly screen complains arising from Forest Ltd. customers before making a conclusive decision. This is to enable the company to know whether the grievance is considerable and significance for audit plan. This must be in line with the prescribed business law.
Attention should be paid to the creditors' payments schedules to avoid unnecessary overdue as in the case of Wood Ltd. The agreed cost should be kept under control and between the quality of public service production and effectiveness. All business operations should rely on information and payment policy as part of the state's financial regulation.
The employees in Forest Ltd. should maintain their job ethics to avoid issues related to contaminations, which may result from unknown grudge. The external security from Forest Ltd. should be strengthened to protect the company from external harm, which may damage its products.
Commitments and Contingencies
A protester suffered a broken leg, allegedly because a timber truck hit him. He then claimed that the contractor was indeed an employee of Forest Ltd. At the time of the accident. The protestor is now suing Forest Ltd. For damages. This case may adversely influence the company's financial plan resulting into unexpected audit risk.
Forest Ltd. is eager to acquire massive conveyor belt that mitigates the transportation of woodchips from the mill to the stockpile. Unfortunately, Chipper Ltd., the company's competitors is ready to offer the conveyor belt at a high price doubling-up the normal price. The high price declared by the Chipper Ltd. is due to business grudge in the industry.
The auditor should perform analytical procedures relating to purchases. Analytical procedure is to be performed with the objective of identifying unusual or unexpected issues from the company's competitors. The instance of analytical procedures that addresses the company objective is comparison of commodity prices from different firms before the purchase. This should be done prior before the financial planning. To promote the effectiveness of the statutory business and activities policy, Wood Ltd. should ensure that the cost of conveyor belt falls within the scope of external audit and market regulation. Attempting to buy the conveyor belt at a cost that was not included in the audit and financial plan may lead the company into liquidity.
Company should systematically investigate issues arising from individual before making a conclusive decision. This is to enable the auditor to know whether the protest is considerable and necessary for audit plan. This is highly recommended to be considered under the statutory related law.
Factors That Indicate Forest Ltd. May Encounter Problems in the Futures
It is likely that Forest limited may encounter auditing and other business problems in the future based on the current problems the company is facing. Future risks the corporation face include losses resulting from failed business ventures, management systems, inefficient human performance and other related external factors. Such problems may be due to the competitive business environment, ineffective business plans. The major indicators of the imminent problems the company is likely to face include customer complaints, frequency of unmatched trades, and the number of audit points. Reducing business operations and financial instability of the company are also the indicators of future problems the company may face.
The foremost indicator of future problems is the number of audit points. Forest limited has no known auditor in managing the inventories and the company's accountants use an old manual system in data entry. In determining the procedures to be performed for either an audit or proposed business acquisition, the audit committee and management should generally be concerned with matters that could be materially beneficial to the financial statements (Smith, Omar, Sayd Idris, & Baharuddin, 2005). Certain aspects of auditing of the company are usually subject to greater level of inherent risk than other areas. Given that the company cannot audit their financial statements is an indicator of future financial problems the company may experience.
The subsequent indicator of future problems is the number of customer complaints. One of Forest Ltd.'s customers, Wood Ltd., is claiming that the latest batch of woodchips it received was contaminated with a microbe. Complaints such as the ones from this Japanese client could damage the company's reputation thus affecting business revenues and profit. Increasing customer complaints leads to the rise of organisational mistakes and errors in managerial issues. The rising number of mistakes in the management of business is a major barrier to profits which may cause future problems to the company. Customer complaints ranging from delays, poor product qualities and hiking of prices may draw customers away from the company. As such, changes in customer preferences are indicators of slow business growth and loss of operational value by the company. The number of customer complaints is a common indicator of future risks the company may face in the future (Davies, Finlay, McLenaghen, & Wilson, 2006).
The next indicator of future problems for the company is frequency of unmatched trades. The company lacks unrivalled products; the competitors produce better and quality products that Forest limited. The available better products lead to low frequency of unmatched trades for the company. This is a good indicator of incoming losses arising from the lack of clients and increasing competition within the market. In addition, the infrequency of unmatched trades is an indicator of the organisation's poor performance within the market. Poor performance in the future is likely to bring low profit margins and revenue for the company.
The additional indicator of future problems the company is lack of clear…