Question 1A
Auditing firm Miller Yates and Howarth is engaged in the preparation of audit plan. One of the most outstanding and significant clients of MYH is GPSA for which accounting records are audited. Internal control of organizations are placed great reliance by the auditing firm derived from extensive test control. There are several area of concerns related to some accounts of organization in preparation of audit plan. Analysis of ratio has been done that helps in evaluation of the effectiveness of internal control systems (Bik et al., 2017).
Accounts-
The five types of accounts that is a concern for the auditors of GPSA while carrying out audit plan includes accounts receivables, current investment, property assets, intangible assets and research and development capitalization. The audit partner of organization is concerned about these areas of accounts prior to conducting the audit program (Pitt, 2014).
The reconciliation of trade receivable ledger in the general ledger to the debtor control account is to be done by trade receivable clerk. All the receipt from debtors and preparation of bank slip is done by clerk. Payments made to debtors are recorded in the computer system as debtor payment. Current investment is made by GPSA relating to research activities for the commencement of new laser surgery device. Research activities of organization are financed by borrowing loan of amount of $ 5 million during a year. In addition to this, GPSA has branched out in the property market and acquired a number of properties relating to medical practitioners. They have made investment in property market and there has been decline in property value in recent years. However, they are susceptible to such investments due to bearish property market. GPSA has other principal activities of being involved in research developmental activities in technologies relating to medical equipment. For enabling the borrowing of loan amount to make investment in research and development activities, bankers requires GPSA to maintain debt to equity ratio around 1.2:1. An increase in ration above this level would lead to make repayment of bank loan. When looking at the audited value of debt to equity ratio, it can be seen than GPSA is near the banker’s criteria ratio maintenance. It can be seen that time taken by organization to collect receivables form customer has increased that reflects that organization might have lenient credit policy criteria (Quick, 2014).
Analysis of audit risk is essential part of audit plan and there are several risks associated while carrying out audit. Analysis of risk is carried out for evaluating, identifying and prioritizing the risks associated with the management of all the accounts mentioned above. When looking at recording of trade receivables value that is done by trade receivable clerk, it is certainly possible that management might not be efficient in keeping the tracks of such record. Investment made in the implementation of new information technology system and the function of information technology in organization is looked after by sales director. However, the sales director duties toward information technology function are not regarded as full time job by organization’s management. Risk is associated because there is no proper segregation of duties and this might manipulate data (Boone et al., 2017). There are several risk associated with accounts receivables as there can be improper reconciliation of accounts receivables into the general ledger account. Measures of collecting receivables might be ineffective. While making investigation into the property investment made by organization, is susceptible to the fact that organization can engaged in fluctuating or inflating the value of their investment made in property market because of decline.
Question 1B
Stakeholders of organization should be well informed about the duration of audit risks and audit engagement should be conducted in accordance with International standards on auditing.
The business risk faced by GPSA can be outlined by analysing the information of ratio. Some of the enquires are required to be done by auditors that form an essential part of audit plan.
- Risk of material misstatement relating to all the accounts can be identified by making enquiries to management that requires enquiries of financial and non financial data.
- Analytical procedures are required to be performed by auditor for identifying plausible relationship between several accounts.
- Risk of transactions in normal course of operations relating to accounts receivable are assessed and identified.
- Inspection and observation process are collaborated with management and other reporting authority within organization.
The business risk of organization can be outlined by evaluating the ratio analysis. The tool of ratio analysis helps in explaining the relationship between widely used analytical procedures and relevant items of financial information. In order to derive at audit evidence and deriving at audit relevance, auditors make the comparison of ratios. When looking at the audited financial ratios, debt to equity ratios has decreased inn year 2015 to 1.02 from 1.04 in year 2014 respectively. For unaudited ratio, debt to equity ratio has increased considerably to 1.11. This is indicative of the fact that the proportion of debt in relation to equity has increased. Number of days required to collect receivables has increased considerably as depicted from unaudited financial ratio. Return on total assets has declined significantly from 13.7% in year 2015 to 4.86% in year 2016. This is indicative of the fact that total assets have not been efficiently utilised in the current year (De Santis, 2016). Current ratio has also reduced from 1.66 in year 2015 to 1.54 in year 2016 respectively. The unaudited financial ratio depicts that current ratio stand at 1.80. Increase in current ratio shows that organization is capable of meeting its short term obligations using current ratio. Looking at return on equity, it can be seen that, ratio has been significantly falling return to shareholders is declining.
The internal control system of GPSA is effective and there has not been any change is the control system for the last few years. There is no internal audit function and the system of internal control is being refined at the planning stage of conducting audit. The sales invoices are properly documented as there are proper procedures for deciding of data related to sakes made. If there is any manual delivery made, dispatch department raises the sales order and in event of incomplete deliveries, it is essential to have proper follow up.
The quality and conditions of medical equipments returned by customers are properly checked by the staff of dispatch department. There is proper procedures related to trade receivables follow up. In order to achieve the objective of sales system for reviewing the procedures of internal control procedures, some of relevant aspects are required to be examined and this involves organizational control, segregation of duties, authorization, physical control and accounting control (Gendron & Power, 2015).
The effective internal control system could help in alleviating the risk that might arise in organization. Implementation of effective measures would helps in eliminating the risks that may arise from the manual recording of data and invoices. Recording of trade receivable data are done by trade receivable clerk and he is responsible for posting the same into ledger accounts (Zadek et al., 2013). If organization has effective internal control, system then there can be reduced risks arising from recording of accounting transactions. It is certainly possible that the trade receivable slip by trade receivable clerk might have some defect as there can be manipulation or improper recording of list of debtors in preparing the slip. The individual customer volume rating is updated manually by trade receivable clerk and sale director is responsible for authorizing the report. All the possible risks associated with accounting and transactions recording of data would be alleviated by the effective control system of organization. Thus is so because it helps in facilitating efficient and effective operations as it becomes easy to respond appropriately to operations, finance and compliance of business. Quality of external and internal control of reporting is ensured by maintenance of processes and proper records that helps in generating relevant timely and reliable information within and outside the organization (Davies & Goddard, 2017).
|
Organizational control |
Written procedures should be there for granting credit to customers and receiving orders and recoding of sales amount. |
|
Physical control |
The documents related to sales order should have physical control and their should be numbering of re order sales forms. The monitoring of condition and quantity of goods supplied should be done. Sales invoices and delivery notes should be pre numbered. Notes related to service performance and goods delivery notes should be pre numbered. |
|
Segregation of duties |
Different members of sales team should be involve in different aspects of the process of sales. There should not be any involvement of sales team members in some other functional areas such as information technology department as this cam lead to some potential risks to internal system. Moreover, if looking within the same department, there needs to be segregation, for instance, same staff should not be involved in raising invoices and dispatching the good to customers (Earley, 2015). |
|
Accounting |
There should be proper accounting of all the transactions and recording of data relating to customer and sales invoices. Quotation of prices should be correct and calculation of discounts should be done appropriately. |
|
Authorization |
Proper authorization should be involved in change of any customer database and changes made to credit limit must be properly authorized. |
Weakness identified in the internal control for trade receivables and sales of GPSA:
Question 2A
The objective of trade receivables and sales system involves efficient and prompt recording of customer orders. Recording of sales transactions are appropriate and prompt and payment of invoices are made in accordance with organization’s trading terms.
- Trade receivable clerk is responsible for auctioning all aspects of invoice generation. He is further responsible for preparing the sales volume analysis along with updating the volume rating of individual customers. They should not be integral to handle all the aspects of recording invoices and sales system. Such functions should be managed and controlled by employee who is independent of recording transactions and performing the analysis relating sales and purchase.
- Sales bonuses are paid to employees against their targeted monthly sales volume and target ratios and there is high risk of part of management making bonus payments in event of inadequate sales transactions (Broberg, 2013).
- As depicted from the case study that financial controller is concerned about the balance of doubtful debtors and there is no prescribed payment received from customers that should be withhold. Since clerk is responsible for handling all matters relating to trade receivables, there is increased risk that there will be bad debts and doubtful debts. In this regard, they would have conflict of interest in minimizing the doubtful debts and maximising the sales volume.
- Since there is no internal audit function of GPSA, there exists weakness in recording of sales transactions in the account department (Griffin & Wright, 2015). In regard to this, there is increase risk that the accounting record of company will be inaccurate and inadequate relating to sales transactions.
Conclusion:
The given case study depicts the internal control system of GPSA that is actively engaged in development of technologies relating to medical equipment. It has been ascertained for the analysis of the given case that the internal control system of organization is somewhat effective. However, there are some risks associated with the trade receivable and sales system that can be mitigated by the effective implementation of audit plan. Investigations have been carried out manly in five accounts listed by audit partner of organization. Furthermore, the test of control is also employed for effective implementing of internal control so that they are able to address the concern area.
References:
Bik, O., Hooghiemstra, R., Bishop, C. C., DeZoort, F. T., Hermanson, D. R., Officers’Judgments, F., … & Glover, S. M. (2017). Auditing: A Journal of Practice & Theory A Publication of the Auditing Section of the American Accounting Association.
Boone, J. P., Khurana, I. K., Raman, K. K., Chen, L. H., Chung, H. H. S., Peters, G. F., … & Truong, C. (2017). Auditing: A Journal of Practice & Theory A Publication of the Auditing Section of the American Accounting Association.
Broberg, P. (2013). The auditor at work: A study of auditor practice in Big 4 audit firms (Doctoral dissertation, Department of Business Administration, School of Economics and Management, Lund University).
Curtis, E., Humphrey, C., & Turley, W. S. (2016). Standards of innovation in auditing. Auditing: A Journal of Practice & Theory, 35(3), 75-98.
Davies, J., & Goddard, J. (2017, July). Peri-operative delirium quality improvement project: auditing best practice. In ANAESTHESIA (Vol. 72, pp. 76-76). 111 RIVER ST, HOBOKEN 07030-5774, NJ USA: WILEY.
De Santis, F. (2016). Auditing Standard Change and Auditors’ Everyday Practice: A Field Study. International Business Research, 9(12), 41.
Earley, C. E. (2015). Data analytics in auditing: Opportunities and challenges. Business Horizons, 58(5), 493-500.
Gendron, Y., & Power, M. K. (2015). Research forum on qualitative research in auditing. AUDITING: A Journal of Practice & Theory, 34(2), 1-2.
Griffin, P. A., & Wright, A. M. (2015). Commentaries on Big Data’s importance for accounting and auditing. Accounting Horizons, 29(2), 377-379.
Kogan, A., Alles, M. G., Vasarhelyi, M. A., & Wu, J. (2014). Design and evaluation of a continuous data level auditing system. Auditing: A Journal of Practice & Theory, 33(4), 221-245.
Kumar, R., & Sharma, V. (2015). Auditing: Principles and practice. PHI Learning Pvt. Ltd..
Nichols, O., Coleman, M., Jones, D. R., Unger, C. J., Donato, D., Pattenden, C., … & Brown, G. (2016). Evaluating performance: Monitoring and auditing: Leading Practice Sustainable Development Program for the Mining Industry.
Persellin, J., Schmidt, J. J., & Wilkins, M. S. (2015). Auditor perceptions of audit workloads, audit quality, and the auditing profession.
Pitt, S. A. (2014). International standards for the professional practice of internal auditing.
Quick, R. (2014). [Besprechungen von Aufsätzen] Billings, Anthony B./Gao, Xinghua/Jia, Yonghong: CEO and CFO Equity Incentives and the Pricing of Audit Services, Auditing: A Journal of Practice & Theory, May 2014 (No. 67563). Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
Zadek, S., Evans, R., & Pruzan, P. (2013). Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
