Evaluation of Accounts Receivable Liabilities
Discuss about the Planning and Techniques of audit in BML.
This report plays a key role in highlight relevant segments such as business risks and analysis of rations that are associated with the company’s audit plan. Further, the effectiveness of current internal control measures prevalent together with the current shortcomings in this same segment are also intended to be discussed.
|
Account |
Evaluation |
Audit risks |
Audit steps to mitigate risk |
|
Accounts receivables |
The average of industries in relation to accounts receivables in days is forty-five days. Further, the company also had 53 days for such accounts in the past tenure that had enhanced to 62 in 2017. |
BML must seek legitimate reasons to interpret why it has not attained industry’s average in relation to such accounts. Furthermore, to prevent delay or postponement of BML’s cash flow and working capital cycle, proper precautions must be undertaken at the initial stages itself (Livne, 2015). |
In order to supervise BML’s smoother flow of operations, it is necessary that the company makes attempts to discuss and deal the accounts receivables separately that have become due for a longer tenure. |
|
Machinery Finance Liabilities |
The average of industry in relation to debt-equity ratio is the most effective as it reports at 1.50. Further, the bank loan in the company can also be effectively interpreted while accounting for its debt-equity ratio that was 1.32 for the year 2016 but had declined to 1.05 for 2017. |
The company’s debt-equity ratio is reported to have witnessed a significant decline in comparison to the past year. Further, the company has a current debt structure of $1.05 for each dollar of its equity. Moreover, it cannot be considered a variation that incurred overnight. Nevertheless, the audit risk has been hidden from the company’s balance sheet owing to being interpreted as a long-term liability (Lapsley, 2012). |
In order to confirm the company’s coverage of all its liabilities, it is required that there prevail accurate and effective disclosures that an audit process must look for scrutinization from several resources. |
|
Plant and Equipment |
BML attained a big 17% return on its total assets for the year 2016 that has declined to 14% for the year 2017. Moreover, twenty percent of such return is regarded to be the aggregate for the company. |
The company has not been making a proper utilization of its assets and the reason behind this can be attributed to the fact that the machines have not been utilized. Moreover, to attain enhanced ratios, the company must take accurate actions together with accounting for its written down values (Lapsley, 2012). |
The audit of the company in relation to the number of idle days the machine has not been utilized, must take notice together with the legitimate rates for the days when such machines were used. Furthermore, the written down value for such machines together with their closing and opening figures necessitate proper verification (Livne, 2015). |
|
Lease income |
The company primarily attains most of its revenues from the income that incurs from leases. Further, the margin on such lease for the past tenure was twelve percent that declined to eight percent in the present year. One of the biggest reasons in relation to the same can be attributed to the fact is the diminishing capability for employment of older machines. Further, the operation and installation of new machineries are also needed that can facilitate in incurring additional expenditures for yielding lesser returns. |
In order to make the profit margins arrive at the best possible extent and its financials to be favourable in the eyes of others, the company may depict few of its revenue expenses as a part of its revenue expenditure. Further, this can be regarded as the audit risk that is associated with the scenario (Kaplan, 2011). |
In order to prevent audit risks to the most possible extent, the auditor is required to facilitate substantive audit processes to distinguish capital expenses from the revenue expenses. |
The enhancement in the machine employment that were newly installed accounted to the decline in the company’s net profit margin by four percent. In contrast to this, the gross margin was not influenced, thereby indicating that there is no variation in the company’s direct expense.
In comparison to the last year, the company had achieved lower times of interest in the present year that is also a lesser figure when compared with the industry average. Therefore, to surpass or avoid this scenario and attain proper returns, BML must effectively concentrate on enhancing or developing the employment of its resources that have been kept idle (Hoffelder, 2012).
Further, the industry average in relation to return on equity have reported at 26%. Besides, the return on equity for the company have declined to 15% from 22% that was in the previous year. Nonetheless, the enhanced shareholding due to the issues that are made to the public and the decline in profits can be attributed to the causes of decline in return on equity (Matthew,2015).
BML pursues a favourable and acceptable current ratio and quick ratio that is closer to the industry average. Furthermore, taking into account the financial performance of the company, it can be said that the company must make proper amendments for future developments. Besides, the machines having no use must be disposed or sold off by the company so that funds can be realized in relation to the same (Geoffrey et. al, 2016).
In order to encounter the situation of present industrialization standards, the employment of machines that are automatic, and disposal of outdated machines are needed. Such machines must be computerized in nature and to follow such trend, the company has been interested in purchasing and installing automated and updated machineries that has facilitated in enhancing the requirement of massive resources (Manoharan, 2011).
The business risks posing a threat to the company are as follows:
- If it is considered that the company has kept several of its machines idle and unemployed for a longer period of time in its yard or warehouse, there must be a decline in the company’s net realizable amount in relation to such machineries. Therefore, the books of accounts of the company must acknowledge such necessary and depreciation write-offs (Gay & Simnet, 2015).
- The operations of the company are also influenced by the usual fluctuations in the metal market. Further, the prices of coal have also increased due to the decline in iron ores and gold. Besides, to encounter such fluctuations in the market, the company must make required necessary alterations in its mode of affairs and framework.
- In order to tackle emergence of fraudulent affairs, it is needed for the contracted personnel, employees, and accountant to be accustomed and updated with the newly machinery systems installed (Gay & Simnet, 2015). Moreover, regular knowledge must be facilitated through updating and training to the employees, staff, and accountants so that they are updated properly. Therefore, not accounting for such steps can pose a threat to the company.
- The business risk of enhanced and modern technology advancements is a major concern for the company because what may be trending in such technology today may become outdated and old in the future taking into account the speed at which developments are being made.
|
Control |
Risk alleviated |
Test of control |
|
Approval of exact working time- It is needed that the contract manager must compare the actual working hours of employees with the hours that are entered by him so that he can approve prior to the initiation of payment processes (Fazal, 2013). |
It can be witnessed that the employees have reported working hours that were untrue and were also approved and verified by the contract managers, thereby proving that the manager is questionable and accountable for the frauds on the part of employees. |
It is needed that the auditors evaluate on what basis the approval of working hours has been conducted by the contract managers through day-to-day timely records that are maintained by the manager for such time reflected by the employee (Fazal, 2013). |
|
Recruiting new personnel- The information from hard copies and authorized revenue tax declaration must be verified by the payroll clerk. |
It is the responsibility of employees to monitor and double check the information filled by payroll clerks and accountants to prevent mistakes. The information offered by the clerk passes through various stages, so it is easy for contract managers, employees, and payroll clerks to double check the information (Elder et. al, 2010). |
The information from the hard copies and authenticated declaration of income tax filled by the payroll clerk must also be verified by the auditor of the company. This can be undertaken by comparing specific details that are filled by such clerk and accountants with the supporting documents (Elder et. al, 2010). |
|
Bank reconciliation- For the purpose of payment processing from bank of both contract managers and accountants are engaged simultaneously. |
The accountant must detect mistakes that are made by the contract managers whether the same has been committed unintentionally or intentionally. |
In order to check the verifications undertaken by the contract managers and accountants, the auditor must check the reconciliations from the bank accounts. |
|
Pay-run processing- This is processed by the clerk and followed by the approval of contract managers. Thereafter, it is sent to the bank and entered in the general ledger |
The manual approval of manager and accountants makes reporting of fraudulent entries difficult. |
The difference betwixt actual and budgeted hours, documents, and other timesheets approved by the contract managers and accountants must be verified by the auditor. |
The reason behind the usage of internal control is to enhance effectiveness and decrease the emergence of frauds. If an employee is operating overtime, then they must be liable to attain a wage for such particular time that is marked by documentation and analysis and verification. Such kind of risk emerges when this documentation is missing or failed to be recorded by the management (Baldwin, 2010). If the time duration of such overtime is terminated, then the ending time is also relevant for the assessment of amount that the employees are liable to attain. Besides, most of the opening gaps are associated with the internal control mechanisms.
The loopholes that prevail in the internal controls are:
- It can be seen that the contract manager can control the information associated to working hours has access to the salary website of the company. Further, no verification system is present that can check the stored data. It is relevant for the company to allow verification of records and data by the accountant but not allowing to any other person (Cappelleto, 2010).
- It is usual for an employee to join the company and therefore, payroll clerk is responsible to set a password and username. This is simple and accurate but it can be feasible that false entries are made here, thereby resulting in fraud and another loophole in internal control.
- For the employees’ working hours, they are to enter their respective timing themselves that are approved and verified by the contract managers. If the employee has connection with the manager, false entries can easily be made, and the accountant may fail to verify the same. It may also happen that the contract manager overlooks a false record by mistake and this can facilitate in becoming a boon to the employee, thereby resulting in another loophole of internal control mechanism (Merchant, 2012).
Conclusion
Considering the previously mentioned scenario and analysis, the several standards of re-evaluation including data verification by more than one individual must be established by the company so that it can easily pave a path for mitigating or avoiding such loopholes and frauds. Besides, an efficient risk management plan must collaborate with the mechanisms of internal control so that it can assist in eliminating risks, thereby facilitating in smooth flow of operations. Moreover, it is the obligation of auditors to report significant threats so that it cannot influence the company and its activities. Nevertheless, various structural changes are needed in the internal control mechanisms so that the path towards fraud and risks can be terminated.
References
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.
Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne
Elder, J. R., Beasley S. M., and Arens A. A. (2010). Auditing and Assurance Services. Person Education, New Jersey: USA
Fazal, H. (2013, May 13). What is Intimidation threat in auditing?.Retrieved from: https://pakaccountants.com/what-is-intimidation-threat-in-auditing/
Gay, G., and Simnet, R. (2015). Auditing and Assurance Services. McGraw Hill
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons, 30(1), 143-156. https://doi.org/10.2308/acch-51309
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Kaplan, R.S. (2011). Accounting scholarship that advances professional knowledge and practice. The Accounting Review, 86(2), 367–383. https://doi.org/10.2308/accr.00000031
Lapsley, I. (2012). Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management, 9(3), pp. 291-292. https://doi.org/10.1111/1468-0408.00081
Livne, G. (2015, May 12). Threats to Auditor Independence and Possible Remedies. Retrieved from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full
Manoharan, T.N. (2011). Financial Statement Fraud and Corporate Governance. The George Washington University.
Matthew, S. E. (2015). Does Internal Audit Function Quality Deter Management Misconduct?. The Accounting Review, 90(2), 495-527. https://doi.org/10.2308/accr-50871
Merchant, K. A. (2012). Making Management Accounting Research More Useful. Pacific Accounting Review, 24(3), 1-34. https://doi.org/10.1108/01140581211283904
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
