Accounting – Auditing

Audit Report

During the planning and conduct of the audit in Tubular Bells p/c, a number of audit risks are likely to be taken into account.

One of the risks in the planning of the audit is that the company has got other subsidiaries hence the risk that most of its accounts may not be audited. The team will have to plant its audit by ensuring that the team is enough to handle all the task required. [1]

Secondly, there is the risk that errors and/or frauds may not be adequately detected in the company as a result of some managers having moved from the auditing company to join Tubular Bells p/c. [2]

The Deputy Finance Director has been manager of the audit partner. Having known the approach of the audit firm, he is likely to conceal material facts necessary for the audit. Having worked with the audit partner that audits Tubular Bells accounts, the internal auditor would likely collude with the auditors thus affecting the reliability of the audit report on the financial statements. The fact that Tubular Bells has been assessed as medium to low risk should not make the audit team to reduce testing of both control systems and year end balances. Tests of details should always be done in an audit companies regardless of the riskness of the company. To mitigate this risk, the audit team will have to assign re- evaluated the numerical value of risk that has been attached to the firm and whether it is indeed in the brackets of medium to low risk.

Accounting – auditing

They can rely on analytical review techniques.

There could also be a possibility that the financial records of Tubular Bells have not been properly prepared thus exaggerating their turnover rates and profits. This has the effect on the financial statements as they would not reflect a true and fair view of the state of affairs of the company. To mitigate this risk the audit team should incorporate and audit program in their plan.

This audit program should entail testing of numerical continuity, clerical accuracy, authorization physical inspection etc. The aim would be to ensure that all recorded transactions are complete, occurred and were properly authorized.

The introduction of an on-line computer system for the UK manufacturing division is likely to cause certain risks. These include the unauthorized accessibility to the files containing inventory records or the fraudulent alterations of records. A user may alter a master file incorrectly and the erroneous alteration may not be checked by a second person.

Corrupted, it will lead to inaccurate processing and faulty accounting records to being generated. But these risks can be mitigated, the management of Tubular Bells should establish a secure system of internal control covering users, hardware and software. For the users, specific authority should be given to those persons entitled to alter any file. Access to the terminal should be restricted to authorized users. This can be done through the use of terminal keys and passwords. Terminal logging can also be employed as a form of control. The online system also does everything right a way from ordering, production flow and accounting for inventory from purchase of raw materials to finished goods. The risk here is that is does not all for segregation of duties and chances of errors and/or frauds being committed are high. [3]

Accounting – auditing

In an inventory audit carried out by Tubular Bell’s internal auditors, it was found out that some inventories were misappropriated. The area of risk regarding stocks is that some of the stocks like the medical equipments are too small, portable and valuable. This can easily lead to pilferages and deterioration either intentional or accidental.

Also the number of items involves is very large and therefore verification problems are to be expected as far as existence and condition is concerned. The audit team should conduct its audit in a way to incorporate a stock- taking exercise especially for the affected areas.

Another risk inherent in the audit lies on the suitability of the financing approach it uses to finance its assets. It should focus more on the UK division that is currently using the hedging approach. It must be established whether the company is indeed making a loss. This is a risk area because the company may be avoiding payment of taxes by reflecting fictitious losses. [4]

On the other hand the Australian division intends to use a more aggressive position. This uses short- tem capital to finance long term projects. The classification of capital into short-term Tubular Bells p/c is faced with the various pasts of a multi-national corporation. Differences in interest rates across border arise due to the market’s expectations about future interest rates. To mitigate this risk with regard to variations in the price of input commodities the management ought to consider adjusting contract price to forward rates. They should not invoice using the spot rates. If a contract is being quoted in the home currency, the price in the home currency can be based on the forward rate of exchange rather that on the spot rate. This incorporates into the contract price the expected rise or fall in the exchange rates between the date the contract is designed and the settlement date.

Another area of risk that the audit team needs to take into account is that of quality control. The company may be supplying defective or low quality aviation electronic. This might have caused the plane to crash as opposed to the chief executive’s sentiments that the plane crashed due to the pilot’s error. Tubular Bells might be employing incompetent staff who are not conversant wit

Accounting – auditing

the specification of aviation electronic goods. There is also a risk in specializing in supplying electronic goods to only one customer as any defect will be wholly blamed on the supplier (Tubular Bells in this case). Additionally, if the aeroplane ceases its operations, this would adversely affect Tubular’s profitability. To mitigate this risk, the company should employ both competent staff and at the same time diversify its business to encompass more clients.


Lawrence Robert (1976) Auditing: A Practical Manual for Auditors, Ayer Publishing, US

R. Kumar and V. Sharma (2006) Auditing: Principles and Practices, Prentice Hall, India

Ray Whittington (1992) Principles of Auditing, Irwin publishers, US

Douglas R. and John Willingham (1979) Auditing Concepts and Methods McGraw-Hill publishers, UK

Tubular Bells case study (2007) auditing and accounting in the Tubular Bells Company

John Francis Nash and Martin Roberts (1984) Accounting Information Systems, Collier Macmillan publishers, US

[1] Robert (1976)

Accounting – auditing

[2] Robert (1976)

[3] Sharma (2006)

[4] Sharma (2006)