Bukidnon State University

Malaybalay City, Bukidnon

College of Business
Accountancy Department

Auditing Problems II Mrs. Elizabeth A. Proel

Case Study

Situation
You are an audit manager for Alder Auditing Bureau, a firm that has recently gained two new audit
clients of a similar size. Your audit staff have completed their preliminary investigations of the two
clients. You are reviewing their notes which can be summarized as follows:

Client 1 – Feyaty-Al-Madinah
Feyaty-Al-Madinah is an old-fashioned family company which has been in business for over a thirty
years and trades as wholesalers of fruit and vegetables. Its management structure is divided into five
layers ranging from supervisor, deputy manager, manager, senior manager and director. The senior
managers and directors have been with the company for many years. Each level of management has clear
authority limits set down in the company manual, which also sets out detailed written procedures for
every job. Management at all levels generally has an unforgiving attitude to errors and inefficiencies.
Most of the systems are paper-based, although the accounting ledgers are maintained on a computer and
there are rigid systems of authorisation before transactions can be processed. Staff turnover in clerical
posts and at supervisor and deputy manager level is high.
Client 2 - Alkhalij Agency For Advertising
Alkhalij Agency for Advertising is a new company set up six months ago. It trades as a website design
business and as an advertising agency. Alkhalij Agency for Advertising is run by two brothers who
manage the business jointly. Alkhalij Agency for Advertising mostly employs creative people but it does
have a small clerical staff to deal with billing and time recording. The approach to work is casual,
spontaneous and rather uncontrolled. Error detection is not seen as a priority. The management’s view is
that they will deal with errors and problems when they arise. Staff are happy and so staff turnover is low.
Required
In your review of the control environment for each of these clients, what conclusions would you draw
about the risk of error arising in the accounts?

Answers:
1. Details to the Case Study
CLIENT 1
 Audit staff of Alder Auditing Bureau completed their preliminary investigations of the
two clients
 Client 1 – Feyaty-Al-Madinah’s management structure is divided into five layers
ranging from supervisor, deputy manager, manager, senior manager and director.
 Bukidnon State University
Malaybalay City, Bukidnon
College of Business
Accountancy Department

 Each level of management has clear authority limits set down in the company manual,
which also sets out detailed written procedures for every job.
 The management has a strict and unforgiving attitude towards errors and inefficiencies.
 Systems are paper-based, but accounting ledgers are kept in a computer and has a rigid
authorization before transactions are processed.
 Staff turnover on clerical posts at supervisor and deputy manager level is high.

CLIENT 2

 Alkhalij Agency for Advertising is a new company set up six months ago
 The company employs creative people but it does have a small clerical staff to deal with billing
and time recording.
 The approach to work is casual, spontaneous and rather uncontrolled.
 Error detection is not seen as a priority.

 The management’s view is that they will deal with errors and problems when they arise. Staff are
happy and so staff turnover is low.

2. Issues
Feyaty-Al-Madinah Alkhalij Agency For Advertising
Management structure is divided into five Management is run by two brothers who
layers ranging from supervisor, deputy manage the business jointly
manager, manager, senior manager and
director.
Clear authority limits Employs creative people but it does have a
small clerical staff to deal with billing and
time recording
Sets out detailed written procedures for every Approach to work is casual, spontaneous
job and rather uncontrolled
Management at all levels generally has an Error detection is not seen as a priority
unforgiving attitude to errors and
inefficiencies
Paper-based, although the accounting ledgers The management’s view is that they will
are maintained on a computer deal with errors and problems when they
arise
Rigid systems of authorisation Staff are happy
Staff turnover in clerical posts and at Staff turnover is low
supervisor and deputy manager level is high.
 Bukidnon State University
Malaybalay City, Bukidnon
College of Business
Accountancy Department

Operating for Years Operating for only 6 Months

3. Opinion
 Feyaty-Al-Madinah is a company, already operating for yeras, thus, they already
have an established management structure. Their operations are already complex,
thus needing more staff and proper oraganization.
 Alkhalij Agency For Advertising on the other hand, is a new company with
simple operations, thus needing less people to manage and less levels of
authorization.
 Both companies have different businesses, thus different uses of operating
systems. Feyaty-Al-Madinah deals with vegetables and fruits, thus needing
paper-based records. But for the advertising company, the business deals with
computers, thus records are kept in a system, which enables operations to flow
smoothly.
 They have different ways in athorization. Control environment for Feyaty-Al-
Madinah is strict, needing proper authorization with proper authorities. The
advertising agency’s control environment is weak, thus needing more
authorization for auditing purposes.
 For clerical posts, staff turnover for Feyaty-Al-Madinah is high, thus documents
are fast-paced, while the advertising agency’s staff turnover is low. Documents
are slow-paced, meaning, they need more time in approving documents and
transactions.
 Error detection os important in these aspects. For Feyaty-Al-Madinah, they can
easily detect errors and correct them before it goes out of control, whereas in the
advertising agency, they dont pay attention with error detection- which increases
the possibility of errors going out of hand if not corrected immediately.

Submitted By:

Arcaya Fuentes

Barber Loria

Cabunoc Oyam BSA - 4

Cañete Sasuman

Emeterio Zita