Upper Plain Auto Rentals
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Timeline:
Year-End
December 31, 1996
September 18, 1996
Key Issues:
Introducing new type of Vehicle for renting – before only rented out cars now have started to rent out pickup trucks.
UPAR has an obligation to pay over $2 million within the next year and UPAR is already in financial difficulties to repay the debt. (it is due in 1997)
Malfunctioning of computer system could cause problems for UPAR since there is no accuracy for their inventory (rented out cars vs. Cars on the lot)
Control Risk – Although UPAR has a system in place when renting the vehicle and record a reference number for that particular vehicle but sometimes customer change mind for choosing the vehicle and employees of UPAR only manually make the change for reference number but it is never entered into the system.
No accuracy of what vehicle is really rented out and what is not.
Potential loss of future sale if for example a customer wants a red car but the system says that red is rented out (but really blue was rented out but the change is not made in the system by the counter staff member)
Segregation of duties – there is a discount offered to customers those who have UPAR valid coupon and customers who have companies about the rented vehicle. Now the counter staffs have authorization of overriding the rental price. It should really be done by a manager or someone other than the counter staff who is doing the paper work for rental.
Bias:
Overstate current assets and understate current liabilities. Overstate working capital. Generally 2:1 is an acceptable working capital ratio but depends on the industry).
Have to meet the debt covenants
Time Constraints: Company needs the approval for the Loan from the Bank now since the bank requested the audited statements.
Increase revenue to show profitability to please the bank for loan and also GMAC to show that the company is capable of paying them.
Users: Owner, Bank, Potential Users of GMAC
Ownership: Family owned/Private Company
Constraints
Debt covenant – issue clean audit opinion
Immediate repayment of debt required by GMAC
General lack of IT controls (for the rental computer system)
Lack of reliability
Need more time to do the audit
Need more work to check accuracy
Real Required:
Determine client business risk
Audit Risks
Business Risks:
Majority of revenue comes from corporate travel card holders and city of Minneapolis – risk if economy goes bad and they cant afford anymore.
UPAR is trying to even get a contract from city of Des Moines for fifty pick-up trucks.
Loss for last 3 years at Fargo Location – plans to close that office at end of 1996.
Difficulties to pay off GMAC when the vehicles are sold by UPAR as mentioned in the contract when UPAR leases these vehicles from GMAC.
GMAC has notified UPAR that it will do surprise audits for its vehicle inventory and threatened to call financing if UPAR