Question

PART 2 THE COSO FRAMEWORK CASE (22 MINUTES - 29 MARKS) Wellness is nutrition supplement provider and is planning a public offering in the next two years. The CEO and CFO are close friends since high school and their spouses and children have become friends too. Wellness has an independent audit committee of board of directors that oversees the external and internal auditors. The audit committee also sets management compensation based on financial results. The company is planning an expansion by having a physical store besides the currently online business. While the audit of financial statements has not been required in the past, venture capitalists have agreed to pump in cash to support the expansion, if audited financial position and results of operation look reasonable. To show strong financial results, the CFO who is a Certified Public Accountant wants to help the company get the venture capital cash by showing strong online revenue records. As such, the CFO asked the accountant to book an entry into the shipping system now and block an invoice to be sent to a customer for now; he explained that the customer will place the order soon, and that the CEO is aware and in approval of this agreement and its impact on the financial statements. There has heen little oversight from the internal audit department because the chief internal auditor quit suddenly a few months ago and no one has replaced her yet. Please use the above information above to identify components of the COSO framework (20 minutes, 25 marks)

Answer 1

The COSO framework defines internal control as a process that is effected by board of directors and management designed to provide reasonable assurance on below :

• ensure that operations are running effectively and efficiently
• financial reporting is correct without any misstatement
• All applicable regulations are complied with

COSO framework explains the internal controls which are specifically designed for intentional or unintentional misstatements in financial reports.

1. Control Environment - These are set of standards, processes and structures which provide the basis for carrying out the internal control across the organisation.

2. Risk Assessment - Risk is possibility of an event that might occur and affect the organisation adversely.

3. Control Activities - Action established through policies and procedures.

4. Information and Communication - Communication is process of providing , sharing and obtaining information.

5. Monitoring Activities - Evaluation are put in place to check if all internal control components are present and functioning. Ongoing Evaluation built in business process provide timely information.

In the given case internal controls appears to be failing. CEO and CFO are very close friends. This does not necessarily indicates any weakness in the control. But CFO's intention to get the funding for the company which resulted in giving instruction to accountant to books an entry in online revenue in books of account needs to be verified completely.

The above facts are just an indication that financials may be "made to fit" the requirement of investors. As per normal order to cash process, customer should place the order, payment is received in case of most of online vendors and goods are dispatched. After that only revenue is booked in books of accounts.

2. In the above case Auditor should adopt audit strategy to audit the chain of all documents relating to entries posted in books of accounts. This will bring out all the entries which are entered without normal supporting documents and are just numbers and not actual transaction.