TOBOARD OF DIRECTORS, SHAREHOLDERS, INVESTORS, AND CREDITORS
TheHome Depot Corporation is currently the world’s largest retailerfirm dealing with construction products, construction services, andso forth. In 2015, the company realized revenue worth $83.176billion, operating income worth $10.469 billion, and net income worth$6.345 billion. The organization also had total assets amounting to $39.946 billion and shareholder’s equity amounted to $ 9.322 billionfor that financial period. All these financial records increased thisyear. This implies that The Home Depot Inc. is a profitable andworthwhile investment opportunity (The Home Depot Inc, 2016).
Thebusiness’s slogan is ‘more saving is more doing’. This impliesthat customers are offered various home improvement products,services, construction products, and services at an affordable price.Their vision was to create a firm that would respect all people,maintain customer and supplier relationships, have an effectivefeedback system, have an excellent customer service, and give back tothe society (The Home Depot Inc, 2016).
TheHome Depot Inc. is an American retailer firm that was founded 38years ago (in 1978) by Bernard Marcus, Pat Farrah, and Arthur Blank.The company’s main headquarters is at Marietta, Georgia UnitedStates. The organization is currently traded on the New York StockExchange (NYSE) with ticker symbol HD. It is also a public limitedcompany in the retailing industry. As of February 2016, The HomeDepot Corporation is situated in 2,274 countries or locations. Theenterprise’s stores approximately average 104,000 square feet witha 24,000 square feet garden area (The Home Depot Inc, 2016).
Whenthe firm was formed, management had a proposition that they wouldbuild home improvement stores, which would be larger than theircompetitors. Their main worry was dealing with the rising competitionin the industry. The directors contacted Ken Langone, a well-renownedinvestment banker, who helped them acquire the necessary capital inorder to increase the space size of their stores (The Home Depot Inc,2016).
AuditAreas/ Functions for Internal Audit
Theaudit areas or functions that I will deal with when performing theinternal audit of The Home Depot Corporation are the sales andinventories departments. The reason I chose these two departments isthat they are the weakest areas within the organization and that theyare prone to potential errors and fraud. Second, I chose theinventories department since the payment data systems were breachedin 2014. This majorly affected those who used payment cards likecredit and debit cards in the U.S and Canadian stores. I will alsoperform an audit of the sales department because the company incurredhuge losses related to the breach. During physical inventory counts,The Home Depot Corporation accrues estimated losses related toshrink. Shrink is the difference between the number of unitinventories recorded and the physical inventory present. Shrink mayoccur due to theft, deterioration of goods, inaccurate records ofinventory or loss of goods. The reason we chose to audit theinventory department of The Home Depot Inc. is that it is prone topotential risks like theft and loss of inventory. When managementaccrues shrink losses, it implies that there exists a loophole withinthe organization that may cause shrink to occur. To perform thisinternal Audit, I will have to use the sales and collections cycleand the inventories cycle.
Internalcontrols are controls put in place within an organization to preventthe occurrence of errors and fraud. In the payroll department, Iwould ensure segregation of duties and physical safeguards likelocking money in safes while for the sales department, I would ensureauthorization and approval of transactions and top management levelreview. Segregation of duties involves separating the functions,roles, and responsibilities to different individuals or employees.Here, I would separate authorization, recording, and custody toprevent the occurrence of errors and fraud. Physical controls orsafeguards involve usage of lock and key, CCTV cameras, and physicalbarriers to protect and safeguard assets and cash. In authorizationand approval, only one person is responsible for reviewing particulartransactions. Lastly, top management review involves the reviewing ofthe activities of employees in a particular department.
Totest the efficiency and effectiveness of the controls put in place, Iwould perform three audit procedures. First, I would identify theassertion being tested. These management assertions includepresentation and disclosure, classification, accuracy, completeness,cut-off procedures, rights and obligations, and existence. Second, Iwould identify a risk that may cause material misstatement in thefinancial statements. Lastly, I would then decide what auditprocedures ought to be implemented. These audit procedures includeanalytical procedures, inquiry, and confirmation, inspection ofclient records and assets, and recalculation and reperformance.Substantive procedures or tests are those tests or activities carriedout by the auditor to detect material misstatements at the assertionstage while analytical procedures include a test of ratios andtrends, which test the effectiveness of the substantive tests.
Addressingthe Audit Report
Thisaudit report is addressed to the company as a whole, theshareholders, the board of directors, the investors, and thecreditors of the organization.
PartII: Audit Report
TOTHE BOARD OF DIRECTORS, STOCKHOLDERS, INVESTORS, AND CREDITORS
Belowis a detailed audit report of The Home Depot Corporation. It wasundertaken to determine the true and fair view of the financialstatements and annual records of the company and to determine whetherthere are loopholes within the organization that could lead topotential errors and fraud.
Accordingto various audit procedures and tests performed, the financialstatement and annual report of The Home Depot Corporation portrays atrue and fair view. In this case, we decided to issue an unqualifiedreport with an emphasis of the matter paragraph. This because thereare some principles and assumptions that cannot easily be explainedbut the book of accounts and the financial statements are prepared asper the Public Companies Accounting Board and the Sarbanes-Oxley Act.Management also changed some accounting policies like the recordingof shipping and handling costs, but they did not explain the reasonsfor the change (The Home Depot Inc, 2016).
Inresponse to this, management ought to institute and implementinternal controls that could prevent and detect the occurrence oferrors and fraud, safeguard the assets of the company and its cash,and determine unusual transactions, unusual procedures, and theintegrity of management.
Wehave audited the consolidated balance sheets, the consolidated incomestatements, the consolidated statement of earnings, the comprehensiveshareholder’s equity, and the consolidated statement of cash flowsof The Home Depot Inc. for the financial period ended January 31,2016. The preparation and maintenance of the comprehensive financialstatements are the responsibility of the management while ourresponsibility is to give an opinion on the truth and fairness ofthese comprehensive financial statements.
Weconducted our audit of The Home Depot Corporation in accordance withthe Sarbanes-Oxley Act and the Public Company Accounting OversightBoard (PCAOB). The accounting standards require us to plan andperform the audit tests in order to provide reasonable assurance thatthe financial statements of The Home Depot Inc and their accountingrecords portray a true and fair view and that they are free from anymaterial misstatements.
Anaudit is the examination of the books of accounts and the financialstatements of a particular company by using test of controls,substantive tests, and analytical procedures and providing evidencesupporting the accounting values. It also involves the assessment ofestimates, principles, and accounting policies of the organization.
Objectives of the Audit
Thepurpose of the audit is to give an opinion as to the true and fairview of the financial statements and the books of the original entryof The Home Depot Corporation. The audit also performs tests toprovide reasonable assurance that the financial statements presentedand reported by the company are free from any material misstatements.
Scope of the Audit
Weperformed the audit on the sales and collection cycle and the payrolland personnel cycle. The audit is to be conducted for a period notexceeding one month on all the documents and activities of the salesand payroll departments.
Inour audit, we used the risk-based audit approach. This type of auditapproach is designed to be used throughout the audit to focusefficiently and effectively on the scope of the audit that is thenature, timing, and extent of the audit procedures. It is mainly usedwhen there are areas or functional units within the organization,which are prone to potential risks. Here, we determined backgroundview of the entity and its environment both internal and external andassessed the inherent and control risks at the assertion andfinancial reporting levels.
Inour opinion, the comprehensive financial statements of The Home DepotCorporation for the year ended January 31, 2016, portrayed are true,and they are in conformity with the generally acceptable accountingstandards (GAAP), the accounting standards set by the Public CompanyAccounting Oversight Board (PCAOB), the Sarbanes-Oxley Act (SOX), aswell as other accounting standards. Tests carried out on theconsolidated balance sheet, the consolidated income statement, theconsolidated statement of shareholder’s equity, the consolidatedstatement of retained earnings, and the consolidated statement ofcash flows provide reasonable assurance that the comprehensivefinancial statements are free from material misstatements. Accordingto Item 9 A in the 10K annual report of The Home Depot Corporation,it is evident that management has instituted internal controls overpresentation and disclosures and financial reporting (The Home DepotInc, 2016).
Wenoted that there was no segregation of duties in the salesdepartment. The personnel responsible for the sales orders is thesame person responsible for the collections made from the cash sales.This results to a teeming and lading fraud. We, however, issued anunqualified audit opinion with the emphasis of the matter paragraph.This is because as seen in Note 2, the company changed its shippingand handling costs without explaining the reasons for the suddenchange. The Home Depot Corporation also made some assumptions in thecomprehensive financial statement figures, which have not been fullyexplained as seen in note 1. Note 1 also states that the company’spolicies require management to recognize revenue when customers arein possession of the merchandise. However, the sales department woulddefile this accounting principle if they receive payment before thecustomer is in possession of the goods and record the amount receivedin the deferred revenue. In note 6, it is evident that the companypays a high weighted average interest rate of 34%. This implies thatthey borrowed more debt in 2016, which is not good for the company,as investors would not want to associate with it since they know theywill receive low returns. Lastly, in note 13, the payment cardnetworks made litigation claims against the firm for costs incurredby their issuing banks as well as the counterfeit of fraud losses(The Home Depot Inc, 2016).
Dueto the limitations inherent, the internal control system may notprevent or detect material misstatements. Future budgets andprojections are also subject to risks that the controls put in placemay be inadequate due to changes in conditions and policies of thebusiness. It is also evident that management may circumvent thecontrols put in place, and the compliance of the policies andpolicies laid down by the company’s Memorandum of Association (MOA)and Articles of Association (AOA) may deteriorate.
Inresponse to our audit observations, we recommended or made itmandatory that the supervisory personnel performed periodic reviewsof all the procedures performed in the sales and inventorydepartments. We also advised management to institute controls inthose departments by ensuring that the same person who made the salesdoes not record cash receipts made. The cash made from the salesshould also be put under lock and key and later banked immediately.Segregation of duties is another recommendation that we gave. Thisimplies that authorization duties should be separated from custody aswell as other duties of the organization and every duty should bedelegated to different personnel. Management should ensure frequentjob rotations and regular inventory counts or surprise counts on theinventory and cash received. Lastly, we advised the management of TheHome Depot Corporation that when a sale is made, or inventory ispurchased, they should be authorized and approved by the rightpersonnel. Follow-ups should also be made for goods in transit.
Management Response/ Action Plans
Managementof The Home Depot Inc. agreed to implement the recommendations wegave them within the shortest time possible. They decided that theywould institute strong internal controls on both their sales andinventory departments. They agreed to rotate the jobs of theiremployees frequently and perform surprise checks on the inventory toconfirm whether the amount of inventory is the same as thatphysically present in the organization. They found that segregationof duties and job rotation to be a great way of reducing job monotonyand boredom and a way of increasing creativity and boredom. Lastly,they agreed to implement an internal audit function to oversee theoperations of the company and to ensure that the financial statementsportray a true and fair view.
TheHome Depot Inc. (2016). Annual Report. Retrieved on 29thJune 2016 fromhttps://www.sec.gov/archives/edgar/data/354950/000035495016000060/hd-1312016x10xk.htm/