Analysis Of Ratios, Internal Control Weaknesses, And Computer Assisted Audit Techniques For Audit Risk Reduction

Ratio Analysis

The return on equity represents the measurement of the efficiency of an organisation in making the use of money derived by the investors for generating profit that leads to growth and development of the organisation (Pizzini et al., 2014). The higher the ratio it will reflect a superior environment and in the provided case the benchmark is 15.5, as the company had increased the ratio during the year 2015. It was ineffective in the year 2016 since it did not meet the budgetary ratio. Hence, it involves risk in using the shareholders fund and the auditors must look into the same.

The ratio represents the assessment of profits which is generated by the average of the total assets of the organisation. The higher the ratio the better will be the efficiency position of the organisation (Ege, 2014). As evident in the current scenario, the benchmark is 14.5 while the organisation has increased the ratio in the year 2015. However, the company was inefficient in 2016 since it failed to meet the benchmark of 14.2 and only reported 10.7 for the year 2016.

The above stated ratio measures the gross profits that is produced from the total amount of sales and higher ratio highlights better position of the organisation (Desai et al., 2017). In the current scenario, the industry benchmark was 9.0 and the company has successfully met the benchmark with 9.5 being reported for the year 2015. While in 2016 the company failed to reach the industry benchmark as it reported 8.5 for the year 2016.

The above stated ratio illustrates the total amount of expenditure that has been incurred on sales with marketing and administration expenditure has greater impact on the business. The higher will be the expenditure, the ratio will be on the higher side and the organisation efficiency will be on the lower side. The benchmark for the given scenario is 2.2 and 2.0 for both marketing and administrative expenses in respect to sales ratio (Harrison, 2015). The organisation was efficient in 2015 since it did not went beyond the prescribe mark however in 2016 the marketing expenditure was higher than the budgeted amount and the benchmark of 2.6. There should be decrease in marketing, sales and controlled.

The interest coverage ratio evaluates the ability of an organisation in paying interest on the debts incurred within the timeframe. In the current scenario, the industry benchmark is 6.0 and the company has reported higher ratio of 6.4 in 2015. However, in 2015 the is fall in interest coverage ratio as it fell to 5.4 (Carcello et al., 2016). A check on non-payments of debt must be performed to reduce the falling trust of creditors.

The inventory turnover and accounts receivable represents the days taken to sell inventories and accounts receivable. From the following case study the benchmark for inventory turnover was 30 and 45 days accounts receivable. The real ratio represented 31.1 and 49.7 days during 2015 and created higher cost for the organisation. Appropriate steps must be taken to cut down cost. The organisation failed to meet the requirement which lead to increase in days for the year 2016 and this requires appropriate management.

Impact of Audit

The current and the quick ratio evaluates the liquidity position of an organisation together with the effectiveness of the current assets to meet the current liabilities of an organisation. The current ratio for the organisation is sufficient in upholding its current position (Davidson et al., 2013). The quick ratio is also in accordance with the budget.

The above stated ratio meets the solvency position of the organisation in meetings its debt and borrowings with the amount of equity possessed by the company. The ratio should be lower as it will be able to meet the debts of the organisation. The debt equity ratio for the 2016 have increased to a significant amount representing that the organisation is unable to meet its debts efficiently.

The managers and the auditors must assess the effectiveness and efficiency of the organisation. The management have tried and indulged in the manipulation of accounts having severe impact on the audits. The process ratio analysis forms the important part in risk base audit approach. It involves designing and executing the procedure and allows the auditors in achieving their objectives of audit by reducing the detailed test of audit (Luo, 2015). According to the analysis made above, there are several ratios that have failed to meet benchmark or the budgeted ratio leading to overall efficiency of company. This possess reflection in the overall accounts and the bookkeeping records leading to harsh impact on the audit procedure.

The reason behind the reduction in return on equity and total assets must be discussed with the management. The marketing expenditure have increased significantly and requires increase in profit margin. Furthermore, the interest coverage ratio is lower and debt equity ratio is higher because the company is unable to meet the debts with the availability of finance of the organisation, which the auditor must have a check on (Kend et al., 2014). The position of liquidity has turned out to be weak with inventory and receivables management is falling which the managers should have a check on. There should be strict control imposed by the senior and it is fundamental that the analytical procedure must be adequately identified.

The electronic security control provides the access of an electronic system of information and fall in such system may lead to accidental or intentional loss of vital company data. From the following scenario, Alex Blenheim implements the online computer system in order to maintain the inventory system, which can lead to loss of vital data if no appropriate control is implemented (Bowling, 2014). The loss of data may result in error and production of reports, which may be ineffective.

Inappropriate control by the senior and the top management in the analysis of data may lead to inefficiency of internal control. The function of administering security is considered as common among large number of users because it is not under strict control of officials. Therefore, there is no such strict control over the official procedure and no such excellent application is in position hence leaving the organisation at greater risk (William et al., 2016). The new and the latest financial systems consists of several capacities and probable users however they are regularly used in the process of compilation of results from the current system. These kind of approaches to growth and expansion of system possess additional compilation with upholding the financial information.

Steps in Audit to Reduce Risk

The contemporary control and management structure should be allowed  in order to facilitate the appropriate incorporation of manual control process surrounded by electronic structure. The electronic controls possess the nature of being more systematic and comprehensive in contrast to manual controlling records (Waldron, 2016).

The identified authority controls forms the part of the internal control system as under the internal control system the requirement of achieving the appropriate approval and must get hold of the appropriate goods and service before making any compensation. The inventory along with other authorization must be obtained for the payment requisition. Payments can be done without getting documented and delegated by signing the authority and authorization.

The inadequacy and weakness in electronic security control may lead to access in the authorization with other individuals which further leads to loss of private data or information. It also has the impact on the reporting done by the auditors and generated by the system. The lack of deficiency in the process of monitoring will lead to faults and mistake due to ignorance of the management (Knechel & Salterio, 2016). This necessarily means that negotiating the accurateness and soundness of the data or information is vital. In addition to this, there will be an increase in the threat of data loss and corruptions. The advantages of the new system should be taken into the considerations and not accepting the system will lead to loss of enhancing the efficiency and effectiveness of business functions. The non use of in build control can assist in reducing the consistency and reliability of internal control. Creation of electronic structure leads to an increase in the risk of data values, which cannot be checked, and removing the duplicate data helps in removing the errors and frauds happening within the organisation. The authority control must be imposed and has no guarantee whether the payments should be received from the products or service or through the government authorities.

Interaction of audit process: There should be interaction among the managers and employees to successfully eliminate risk of frauds. The auditors play an important role in providing assurance regarding the latest policies and technologies relating to products which makes the auditor the part of the valuable organisation of source (Coetzee et al., 2015). There should also be clarification of roles and responsibilities for both managers and management for strong internal controls of the organisation.

Communication: Another step in reducing audit risk is enhancing the procedure of communication with the help of key stakeholders as the awareness of major process leading to undesirable situation in the organisation. Hence, there should be constant interaction among the management and the departments.

Segregation of duties: Segregation of duties leads to better internal control. Segregating the duties of managers and owners helps in reducing frauds and errors in the organisation (Weil et al., 2013). There should also be assurance that the employers will be able to manipulate or modify the procedure of performing random number of audit with reconciliation of financial transactions.

There are three types of techniques for assisting auditors, which consists of following;

Weaknesses of Internal Control

Audit procedure is a form of inspecting the client and the audit software helps in scrutinising large volume of information, which may increase the load on the manual implementation. The process of investigations can be further enhanced if the audit procedure takes into the considerations the process of random sampling computations of the ratios. Furthermore, creating the necessary benchmarks, also checking the appropriateness of the arithmetical data along with the preparation of necessary reports including the actual budgeted, and data (Edwards, 2013). There should be stratification of information and the such information must be sent to the suppliers and customers. The CAAT software and models helps in tracking the transactions with the system of computerization.

This is a written program for audit, which should be implemented in the system of accounting and bookkeeping of the clients. The objective of such audit software is to perform definite task that has similarity and comparison with the software of audit with the benefit modification and altering the wishes of auditors. these kinds of tools and methods will have allowance of gathering and attaining the required information based on the specific dealings for testing the prospective of future test. The tool also helps in recognition of attention during the final review of audit procedure.

Under the given technique, the auditor has the involvement in the creation of trail or dummy model of performing study. A false model is created within the system of client that is the organisation with the objective of providing correct procedure helps in preventing the material misstatement within an organisation (Hoskin et al., 2014). The data should be appropriately checked and controlled with frauds and errors contained within the data may lead to ineffectiveness of the system and within the overall organisation. The errors may consist of the arithmetical errors that may be prevailing in the invoices with incorrect account balances. The errors also consists of the dealings which is beyond the control determined over a specification of the customers and suppliers. The functional operations are tested within the organisation with the help of this technique having the presence within the system.

Reference list:    

Bowling, A. (2014). Research methods in health: investigating health and health services. McGraw-Hill Education (UK).

Carcello, J. V., Eulerich, M., Masli, A., & Wood, D. A. (2016). The Value to Management of Using the Internal Audit Function as a Management Training Ground.

Coetzee, G. P., Du Bruyn, R., Fourie, H., & Plant, K. (2015). Advanced internal audit topics.     

Davidson, B. I., Desai, N. K., & Gerard, G. J. (2013). The effect of continuous auditing on the relationship between internal audit sourcing and the external auditor’s reliance on the internal audit function. Journal of Information Systems, 27(1), 41-59.

Desai, R., Desai, V., Libby, T., & Srivastava, R. P. (2017). External auditors’ evaluation of the internal audit function: An empirical investigation. International Journal of Accounting Information Systems, 24, 1-14.

Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.

Ege, M. S. (2014). Does internal audit function quality deter management misconduct?. The Accounting Review, 90(2), 495-527.  

Harrison, M. (2015). Implementing the 2014 changes to internal audit. Governance Directions, 67(1), 38.

Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user perspective. Wiley Global Education.  

Kend, M., Houghton, K. A., & Jubb, C. (2014). Competition issues in the market for audit and assurance services: Are the concerns justified?. Australian Accounting Review, 24(4), 313-320.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: assurance and risk. Routledge.

Luo, Y. (2015). Acctg 626 Audit and Assurance Services.

Pizzini, M., Lin, S., & Ziegenfuss, D. E. (2014). The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), 25-58.

Waldron, M. (2016). The Future of Audit. CFA Institute Magazine, 27(3), 55-55.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.

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