Internal Control Measures to Reduce Audit Risk
Discuss about the Audit Planning and Internal Control of Big Machine Limited.
With the ramified and complex business functioning each and every company needs to implement proper audit and assurance process to mitigate possible accounting and auditing risk. Internal control is a procedure to set up audit control mechanism to mitigate possible risks to save company from the losses. In the later control measures are used by the company, so that the risk can be reduced to the acceptable level there is some of the control that is also given below. In this report, audit and assurance measurement have been implemented to identify the business reporting risk.
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Account |
Analysis |
Audit Risk |
Audit steps to reduce risk |
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Plant and Equipment |
The plant and equipment account should be increased to the grate expand. Due to the change in the technology, the big machines limited have to purchase new machinery or development will be done for further business operations (Gay, & Simnett, 2015). |
Existence is the issue as auditor is not able to measure all the new plant and equipment that are purchase by the business (Elder, Beasley, & Arens, (2011). Valuation is the issues that should be undertaken by the auditor as it is the part of audit risk. There is the possibility that all the new equipment is not valued at the current price in the market. |
There are following step that are taken to reduce the audit risk. The documents that are related to the new assets should me examine in detail, life of the assets, design of equipment etc. The one more step that is taken is the physical verification of the equipment so that auditor can check that the entire assets that are record really exist or not. |
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Machinery Finance Liabilities |
The machinery finance liabilities account is use to record the debt and finance that is taken by the company to back the plant or equipment. This account is directly connected to the debt or lease earning of the big machine limited during the year (O’Donnell, Arnold, & Sutton, (2010). Two ratios is been use for measuring this: Debt to equity ratio is utilized to measure the use of obligation and equity in the business operation. In the recent year numerous current obligation is been taken for the purchasing plant and equipment. So debt and equity ratio has change drastically, but it has been move to expected level. Profitor lease income shows the income that is included in the overall profit in the organization. The lease income is increasing in the current year but, it is showing at the moderate level. |
Completeness is at the first level that should be measure to reduce audit risk up to the acceptable level. Under this level, identification of fixed assets like equipment should be measure so that its valuation, existence and full disclosure is shown in the financial statement (Arens, Elder, & Beasley, (2013). . |
The detail study should be done of the document that is related to debt and utilization of it for purchase of particular equipment. Examine the lease agreement and inflow of lease against the mining equipment. |
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Accounts Receivable |
Receivable account should be increase in the current year because BML have purchase the new equipment and have been given on rent, so the receivable account should be expand. But from the recent observation of the current, we have seen that current assets are lower as compare to the previous so there may be chances of material misstatement due to fraud and the error receivables account. Current ratio includes accounts receivables under current assets part and according to changed business program current ratio should be at higher side. On the further side, due to the agreement between the debtor and BML the account receivable day should be decrease or moderate side. But according to days in accounts receivable ratio it has shown adverse result, therefore there is possibility of material misstatement in financial statements of the company |
Completeness is the first issue that shall be measured. In case of Big Machine Limited, all transactions with debtors or service receivers should be measured and then recorded in the financial statements for the year. Because of recent changes and expansion in new equipment there is possibility that some transactions have been forgotten to record in the financial statement due to error. |
Lease agreement with each and every service receiver should be measure so that you can get the confirmation accounts receivables, outer justification shall be used to support the account balances of accounts receivables. Credit policy shall be check and advice should be made for that. |
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Lease income |
Lease earning is the most unsafe account so there is of material misstatement because of creation of business of Big Machine Limited. The leasing agreement is changed as new equipment is been purchased and development is also done with contract staff. The profit or lease should show high side but it is showing lower so there may be chances of material misstatement. (Davis, & Hay, 2012). . |
Perfection is the assertion that will be measured while auditing the financial statements. Under perfection assertion, correctness and perfection of lease earning will be measured (Elliott, 2018). |
Deep evaluation of lease contract should be undertaken (Leech, . (2010). |
After grasping the real position of the BML and considering the ratios analysed, the issues that can affect the smooth working of the company are as follow:
Return on Assets: It is measured that the return on assets has decreased. This is mostly because the fixed assets like new equipment that is purchase by the BML, this return can be increase by maintaining the hike or sale of the assets (Christensen, Glover, S. & Wood, 2012).
Downtime in mining industry: From the earlier discussion, it is seen that the mining industry is facing the downtime because of closing down of the companies. With the increasing of the government suggestion many company decided to take their foot back from the industry, this lead to reduce demand for the mining machinery by the company.
Change in Metals Market: Another risk BML is facing is the drastically change in the metal market that can affect the business functioning. This risk arise due to the changes in the value of the books of accounts and how company has been showing the value of the company in its financial statements.
Credit policies of receivables are improper: By measuring the efficiency ratio, it is been observed that the day in which the debt will be recovered is more (Arens, , Elder, & Mark, 2012). The credit policies of the company should be based on cash flow in the business and turnover benefits which company will receive if the proper method is followed.
Internal control plays a very important role in every organization as it manages the day to day activities and working of the organization. Internal control can be done in any operation of the business organization (Kolk, & Perego, 2010).
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Control |
Risk alleviated |
Test of control |
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Physical verification of the assets is very main in case of BML company as there new equipment that are purchased in the business. |
Existence is important to check that the assets that recorded actually exist and are utilized or not. The utilize assets should be written off and acute value should be recorded. |
Physical verification of assets should be done during audit value and existence of fixed assets that shall be measured. This should be included in audit plan that are prepared before the starting of the audit and should be executed. |
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Reunion and acceptance of lease income |
The additional internal control that should be there in BML is leasing income and the contract that are made for leasing mining from the industry are undertaken. After reunion acceptance from finance manager should be taken on the monthly basis. |
The specimen of the lease earning should be chosen and audit should be undertaken for that. |
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The personal account policy should not be use. |
Additional main internal control for BML is to launch the policy of not to use personal account and the personal element. It stated that contract is been there that manger personal bank account is been use for the payment of the company (Alles, Kogan, & Vasarhelyi, 2018). |
All the account should be measure one by one. |
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Authorisation and authentication |
It has been observed that there is no answerability and proving of system is place in BML. While evaluate payroll account or any other system currently there is no authorisation or authentication in place (McSherry, 2016). |
The id and password should be taken for testing. |
The weaknesses in the internal control are the reason for the downtime in the company.
Plant and Equipment
Some identified weaknesses are:
The payroll system is not kept under security: As we have debate in the case, that BML has launched the testing of the payroll system by using the sign on the dummy system. When the system was placed for working than this signs by removed there was not security on the payroll system (Grol, & Wensing, 2014). The payroll system should be managed by using the proper internal control system. It will allow company to follow double check system which will eventually increase the overall outcomes and mitigate the employees management risk in determined approach.
No cross check will be done from documents that are there in contract payroll: It is been observe that the manager of BML is not using the hard copies of form that are filled by the employees for making the entries in the system. This lack of cross checking will lead to wrong entry in the system. If possible cross check process is not followed then company will have to follow proper check program. The proper documentation and testing are the key elements to increase the payroll control check program .
Wrong information recorded related to working hour by employees in payroll system: The wrong entry or inefficient recording procedure may increase the overall costing and may pose high amount of business risk (Elliott, 2015).
Conclusion
It is concluded that Big Machine Limited is facing lots of issues because of the operational downtime of the mining industry. Internal control is been done and company is getting familiar that the system need to be improve. Proving the purity of payroll system is required to establish in the organisation. Cross check, physical verification of the assets is also considered as weakness in internal control of payroll system.
References
Alles, M. G., Kogan, A., & Vasarhelyi, M. A. (2018). Feasibility and Economics of Continuous Assurance 1. In Continuous Auditing: Theory and Application (pp. 149-167). Emerald Publishing Limited.
Arens, A. A., Elder, R. J., & Beasley, M. S. (2013). Auditing and assurance services. Pearson Higher Ed.
Arens, A. A., Elder, R. J., & Mark, B. (2012). Auditing and assurance services: an integrated approach. Boston: Prentice Hall.
Christensen, B. E., Glover, S. M., & Wood, D. A. (2012). Extreme estimation uncertainty in fair value estimates: Implications for audit assurance. Auditing: A Journal of Practice & Theory, 31(1), 127-146.
Davis, M., & Hay, D. (2012). An analysis of submissions on proposed regulations for audit and assurance in New Zealand. Australian Accounting Review, 22(3), 303-316.
Elder, R. J., Beasley, M. S., & Arens, A. A. (2011). Auditing and Assurance services. Pearson education.
Elliott, R. K. (2015). Assurance service opportunities: Implications for academia. Accounting Horizons, 11(4), 61.
Elliott, R. K. (2018). Assurance services and the audit heritage. Auditing, 17, 1.
Gay, G. E., & Simnett, R. (2015). Auditing and assurance services in Australia. Mcgraw-hill.
Grol, R., & Wensing, M. (2014). Implementation of quality assurance and medical audit: general practitioners’ perceived obstacles and requirements. Br J Gen Pract, 45(399), 548-552.
Kolk, A., & Perego, P. (2010). Determinants of the adoption of sustainability assurance statements: an international investigation. Business Strategy and the Environment, 19(3), 182-198.
Leech, T. J. (2010). Discussion of an analysis of the group dynamics surrounding internal control assessment in information systems audit and assurance domains. Journal of Information Systems, 14(s-1), 123-125.
McSherry, C. K. (2016). Quality assurance: the cost of utilization review and the educational value of medical audit in a university hospital. Surgery, 80(1), 122-129.
O’Donnell, E., Arnold, V., & Sutton, S. G. (2010). An analysis of the group dynamics surrounding internal control assessment in information systems audit and assurance domains. Journal of Information Systems, 14(s-1), 97-116.
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