The usage of fiscal ratios assists the hearer in analysing any unusual divergences from the expected consequences. ( Gupta. 2004 ) . The fiscal ratios are so compared with the entity’s ratios for anterior periods every bit good as with ratios for other concerns in the same industry. A comparing with the industry ratios would hold warned BDO of some abnormalities in Leslie Fay’s fiscal statements. BDO Seidman should hold been interested some of import ratios that would assist in finding the truth of the fiscal statements that had been prepared by Polishan and his staff. The of import ratios include the liquidness ratios. the profitableness ratios and the operating ratios. the leveraging ratios and the solvency ratios. Of higher importance should hold been the profitableness apart from the gross profitableness ratio. An illustration would be the assets turnover ratio which provides information on the efficiency on how the assets that have been purchased are being utilized.

The liquidness ratios would hold assisted in cognizing if and how the entity was traveling to refund its liabilities particularly in the short term. An of import ratio to investors and one that BDO Seidman should hold considered is the price/cash flow ratio. This indicates the relationship between the stock monetary value and the operating hard currency flow. This is considered as the best manner to find the entity’s net incomes. The capital turnover ratio is an of import ratio to compare the gross revenues and the capital employed. A alteration in the capital turnover ratio would intend a use of gross revenues or one or more of the elements that make portion of the capital employed. that is. fixed assets. hard currency. debitors or stock list. The usage of ratios by the hearers is an of import but it requires accomplishments and experience in order to acquire the right analytical consequences. Other fiscal information required during the audit

The hearers should hold done more testing in the controls of the fiscal procedure by a program to scrutinize other of import fiscal statements such as the hard currency flow statement and the bank rapprochement statement. The hearers should hold besides followed the fiscal minutess that had resulted to the balances in Leslie Fay’s balance sheets and the income statement. This would include carry oning trials of control in the dealing rhythm. The hearers should hold audited Leslie Fay’s gross revenues system. the purchases system. the stock list system. the hard currency system and the paysheet system. In add-on to this the hearer should hold asked inquiries about ant subsequent events. Subsequent events are those events that occur in the period between the fiscal period shutting day of the month and the day of the month that the hearers conduct the hearer. both the adjusting and the non-adjusting events. In add-on to the balance sheet. the income statement and the ratios. the hearer should hold besides asked for the period’s hard currency flow statement.

The hard currency flow statement is an of import tool to investors and the direction as it assists them in cognizing the fiscal wellness of the organisation. It is a statement that supports the income statements as there must be a connexion between hard currency gross revenues and recognition gross revenues particularly if they have non been paid by the terminal of the fiscal period. Huge gross revenues in the income statement without matching immense hard currency flow from the organisations operations should raise inquiries and should be explained by rapprochement. It has a nexus with the balance sheet as it records ay new hard currency gross revenues and purchases and other payments. The hard currency and bank balances can so be verified by a physical hard currency count for the hard currency balances and verification by the bank through a bank missive that is sent by the hearer. The hearer should besides bespeak for the bank rapprochements and accounts for all the check shown in the bank rapprochement. A comparing of the ratios by the competing houses would hold been of import to the hearer in detecting the irregular discrepancies.

The hearer would hold asked for an account for the discrepancy every bit good as the grounds for the account figures. A qualified hearer should do wise judgement when be aftering an audit. The hearer should be speculative and should be speedy to detect some abnormality in the fiscal statements. This curiousness should hold guided the hearer to understand why Leslie Fay gross revenues increasing while gross revenues in the overall garment industry had been traveling down. This would hold led to the querying by the hearers as to how Leslie Fay was the lone garment industry that had non suffered a diminution in gross revenues during the late eightiess and early 1990s recessive period. This in bend would hold led to a demand to be after an audit on the gross rhythm and trials on the internal controls in relation to the gross rhythm. The hearer should hold verified the truth and the being of the figures that were looking in the income statement as gross.

The confirmation of the gross revenues system should include mandate of the gross revenues and the histories recording of these gross revenues ( Rittenbergm Et Al. . 2009 ) . An audit on the sale systems involves guaranting that there is proper mandate of the gross revenues orders. proper matching of clients to these orders. payments and the bills and the records of goods outwards. An audit program on gross and gross revenues system should include confirmation of any gross revenues figure that appears at the terminal of the fiscal period as in most instances. there is a possible hazard of fraud or incorrect accommodation of figures. It would besides include an audit on the gross revenues ledger control history. The gross revenues gross rhythm would affect confirmation of the price reductions to the clients. Had these steps been taken by the BDO Seidman audit house. the fraud by Kenia would hold been discovered earlier. The hearer should hold planned to scrutinize the stock list of the organisation. Inventory audit is of import as it may organize significant and material sums in the fiscal statements. This was the instance at Leslie Fay where stock list was more than 30 % of entire assets in all the old ages within 1987 to 1991.

A program for stock list audit should stress on the being of the stock list. truth and proper revelation. This should include verifying the cut off whereby the stock list is recorded in the right fiscal period. An hearer should be after to go to the client’s stock list physical count which provides the hearer with dependable audit grounds about the being of this stock list. When be aftering for the attending. the hearer should take into consideration the old year’s physical count processs. the value of the stock list in comprison with the entire assets. and the processs involved during the numeration procedure. An attending by BDO Siedman hearers during the stock list physical count at Leslie Fay would hold revealed a deficit in the physical count as compared to the recorded figures.

The physical count would hold detected the abnormalities that had been created when Kenia and his co-workers forged stock list tickets. Physical stock list numbering includes a comparing and recording of the purchase orders. good received notes and bringing notes. This ensures that the goods that are recorded as gross revenues have really been sold. Sing the goods in theodolite. the hearer should be after to acquire 3rd party verification that these goods are in being and that they are in their premises. The stock list numeration should be taken by conducted by forces who are non daily involved in the stock list. In obtaining the paysheet system the hearer would hold identified how the wages for the executives at Leslie Fay were being calculated.

A confirmation of the paysheet system includes the certification and mandate of the salary alterations. the computation of the wages and tax write-offs. the payments. The payments should be compared with the hard currency sent to the bank and money debited to Leslie Fay’s bank histories. This would hold led to the hearers query on the high inducements by the executives. Another of import country that should hold been audited is the purchases system. This should stress on the mandate of the purchasing procedure. the detention and being of the received goods and the recording of these minutess in the accounting books. Close to the purchases system is the accrual control history. To scrutinize the accumulations the hearer should hold asked for after shuting day of the month bills. This would guarantee that all goods received have been recorded decently.

Non-financial variables or factors that an hearer should see when be aftering an audit and their audit deductions.

When fixing for an audit. there are some factors that an hearer should take into consideration. This should include the nature of the concern. the timing of the audit. and the extent of the hazard appraisal processs which is equal for placing the hazard of material misstatement. After the assignment the hearer should acquire to cognize the operations of the client’s concern that is being audited. This includes the concern operations. the investings and funding. and the fiscal coverage day of the months and methods. The hearer should measure the client’s internal controls. the control procedures every bit good as taking a hazard appraisal trials.

The initial planning should get down with the strength and dependability of the internal controls that are in being. Internal controls aid in the safeguarding of the company assets and investors investings. bar and sensing of fraud. Internal controls are meant to better efficiency in running a concern as hazards are identified. The internal controls besides do assist in guaranting the truth and dependability of the one-year studies as the control systems guarantee that the coverage is in conformity with the bing ordinances. In measuring the dependability of the internal controls. the hearer will be able to find the sum of proving that should be taken on the fiscal statements.

Paul Polishan seemingly dominated Leslie Fay’s accounting and fiscal coverage maps and the persons who were his subsidiaries. What deductions do such fortunes pose for a company’s independent hearers? How should hearers take such fortunes into consideration when be aftering an audit? A company in which one individual is ruling all the accounting and fiscal coverage would connote that the company may hold weak internal controls. When one individual is basically in charge of all the minutess in two sections. it would decidedly bespeak a set of weak internal controls. Weak internal controls can take to employees commiting fraud. as it did in the Leslie Fay instance. Management of the company. non the hearers. are responsible for internal controls. Section 404 of Sarbanes-Oxley requires that all public companies issue a study on internal control containing: 1 ) a statement that they are responsible for set uping and keeping the controls and 2 ) an appraisal of the effectivity of those controls.

Recall besides that the 2nd GAAS fieldwork criterion states that “The hearer must obtain a sufficient apprehension of the entity and its environment. including its internal controls…” the internal control model followed by most U. S. companies is the Committee of Sponsoring Organizations of the Treadway Commission ( COSO ) . More specific to this instance. the audit squad would hold to presume that these fortunes would connote a weak internal control over categories of minutess. Hearers frequently are more concerned with the minutess instead than the history balances because the minutess will weigh to a great extent into the rightness of the history balances. The 3rd constituent of internal control under COSO is control activities. There are several relevant factors under this constituent. For starting motors. there was likely non equal separation of responsibilities. It was said that Polishan ruled the accounting and finance sections. The individual whom is responsible for seting out the fiscal statements and demoing the populace the fiscal place of the company should non be the one engagement entries.

Besides. was there proper mandate of minutess and activities? Every dealing had to be run through Paul Polishan. the CFO. This sounds similar adequate controls ; the job was that Polishan’s word was concluding on everything. No 1 else had any say because of Mr. Polishan’s entire authorization. Mr. Polishan besides had near entire authorization on fiscal coverage. The existent job here is when person has entire control over both these maps. chances for fraud start to look. With no 1 willing to oppugn his places. he was free to authorise minutess that made the books look better but evidently did non reflect economic actuality. Another facet is independent cheques. Basically. this is reexamining the other countries of control activities.

There were likely no cheques done in the instance of Leslie Fay because Polishan had the concluding say on all minutess. Even if cheques were in topographic point. they were likely done by Polishan. The individual responsible for executing the cheques should be independent of the individual originally responsible for executing the information. Obviously Polishan can non be independent of himself. It was besides mentioned that Mr. Polishan’s overall compensation was tied to the fiscal public presentation of the company. He had the motivation. ability and means to cover up his deceitful activity. Another cardinal factor taking to weak internal control was the fact that Polishan’s section was in an wholly different physical location. A batch of the major accounting and fiscal determinations for this company were being made at a separate edifice. far off from other cardinal direction personal. Now how should auditors take into consideration these fortunes when be aftering the audit? The audit squad will necessitate to obtain and document their apprehension of the company’s internal controls. This can be done utilizing a narrative. flow chart. or questionnaire.

A narrative seems it would be best if applied here because it will assist place the separation of responsibilities factor. The hearers may so desire to execute a walkthrough to do certain what has been written down in the narrative is really what is performed. In a walkthrough. the hearer selects a few paperss and hints them from get downing to stop. This manner. the hearer can see the full procedure involved in every dealing. This type of control may hold helped the hearer see merely how much influence Polishan had over the accounting country. It could hold easy. nevertheless. been covered up. However. holding the apprehension that he had important influence over finance. and that he oversaw all accounting affairs should hold raised a ruddy flag. It would be really easy for person to perpetrate fraud in accounting cognizing that they besides controlled finance. It seems that the fraud perpetrated in this instance would be hard for an hearer to bring out.

One individual had control over two cardinal sections. He himself ne’er “got his custodies dirty” . yet. ever instructed subsidiaries to follow his instructions. After obtaining proper apprehension of internal controls. the hearers must so measure control hazard. This involves placing audit aims. placing bing controls. tie ining controls with related audit aims and. measuring control lacks. important lacks and material failings. A control lack exists if the design or operation of controls does non let a company to forestall or observe fraud on clip. When a control is good designed yet is non carried out good. an operational lack exists. In this instance. the controls would look to be in topographic point. All minutess are done at the appropriate degree. and are vouched for by the CFO.

However. the CFO ( Polishan ) was coercing incorrect and deceitful entries. Polishan would coerce his subsidiary Donald Kenia to do so erroneous entries. The procedure would look to be appropriate. but in this instance fraud was committed at top degrees. In general. the independent hearers should see this multi-tiered degree of control and it should raise a ruddy flag. They should put some type of proving. such as the walkthrough or narrations to better find if there is possible for fraud. So much being done and controlled by one adult male is a ruddy flag. The fact that Leslie Fay was able to keep high gross revenues and net incomes while others in the industry struggled was another ruddy flag. These were all cardinal factors that point to hapless internal control and possible fraud.