Case 1: Internal control of a motel and cafe
An entrepreneur by the name of Francisco recently entered into a new venture involving ownership and operation of a small, 26-room motel and cafe. The motel is located in a remote area of southern Utah. The area is popular for tourists, who come to hike and mountain bike through the area’s unique red rock terrain. Francisco has hired you to provide advice.
Francisco (the boss) hired a young couple to run the motel and cafe. on a day-to-day basis and plans to pay them a monthly salary. They will live for free in a small apartment behind the motel office. The couple will also be responsible for hiring and supervising the four or five part-time personnel who will help with cleaning the rooms, cooking, and waiting on customers in the cafe, etc. The couple will maintain records of rooms rented, meals served, and payments received (whether by cash, check, or credit card). They will make weekly deposits of the business’s proceeds at the local bank.
As the time approaches for the business to open, Francisco is concerned that he will have little control over the operations or records relating to the motel and cafe, given that the day-to-day control is fully in the hands of the couple. He lives almost five hours away, in northern Utah, and will only be able to visit periodically. The distance is beginning to make Francisco a bit nervous. He trusts the couple he has hired, but has been around long enough to know that it is unwise to place employees in situations where they might be tempted.
Francisco needs your help to identify possible ways his motel and cafe. could be defrauded. He especially wants your assistance to devise creative internal controls to help prevent or detect fraud.
Required:
(1) Assess effectiveness of the internal controls in this small business. You need to identify at least two problemsrelating to possible fraud from the business.
(2) For each problem that you identify, provide at least twocontrolsto reduce the potential risk. Case materials sourced from Bea Jersey:Pearson.Auditing
Case 2: Audit planning and risk assessment of a scooter trader
Ivy Bishnoi is preparing a report for the engagement partner of an existing client, Scooter Ltd., an importer of scooters and other low-powered motorcycles. Ivy has been experienced rapid growth over its first five years in operation, has slowed significantly during the last year. Initially, sales of scooters were boosted by good economicconditions and solid employment growth, coupled with rising gas prices. Consumers needed transport to get to work and the high gas prices made the relatively cheap running costs of scooters seem very attractive.
In addition, the low purchase price of a small motorcycle or scooter, at between $3,000 and $8,000, meant that almost anyone who had a job could obtain a loan to buy one. However, Ivy has found that the sales of small motorcycles and scooters have slowedsignificantly and that all importers of these products, not just Scooter Ltd., are being adversely affected.
The onset of an economic recession has restricted employment growth, and those people who still have jobs are less certain of continued employment.In addition, the slowdown in the world economy has caused oil prices to fall, further reducing demand for this type of economical transport. Ivy has also discovered that, due to the global financial crisis, the finance company used by Scooterto finance.the purchase of scooters and motorcycles has announced that it will not be continuing to provide loans for any type of vehicle with a purchase price of less than $10,000.
Required:
(1) Identify the issues that potentially have an impact on the audit of Scooter Ltd.
(2) Explain how each issue affects the audit plan by identifying the risks and the financial statement accounts that require closer examination.
