Audit Risk Assessment: Analyzing Ratios And Internal Controls

Marketing cost

Analysis

Audit Risk

Audit steps to reduce risk

The company’s marketing costs have increased in comparison to the last two years and the reason behind this can be due to increased exposure of the company towards its beef operations.

The audit risk here is that marketing costs consists of personal expenses of directors and other costs that are not allowed. This is because the proportion of increment in such expenses does not go together with sales increment or present years return in comparison to the previous tenures.

The auditor’s group must monitor all documents and vouchers of such expense. Besides, they must observe whether superior authorities have permitted such expenses (Elder et. al, 2010). Further, the personal expenses bill that are of a relevant value must be accounted by the auditors as well.

Investments

Analysis

Audit Risk

Audit steps to reduce risk

The times income earned from this account has deteriorated in comparison to the last years.

The audit risk here is that the same may possess a risk of material misstatement or can be undervalued in nature because the interest on investments has deteriorated with due course of time.

Auditors must analyze the cause behind deterioration in such interest earned. Further, investments must be monitored when it comes to their disposal process (Matthew, 2015). Nevertheless, if these have been disposed, proper verification of documents must be made for the same. In addition, receipts attained from sale of investments must be monitored by the auditors collectively (Matthew, 2015).

Accounts receivable

Number of debt collection days has primarily increased in the year 2018 in comparison the last year.

Bad debts can reflect an improper depiction of the performance of the company. Further, the aging of debtors can be misled by the company as well (Baldwin, 2010).

The aging register of the debtors must be verified by the auditors. In addition, bad debts must also be analysed with the allowances for such bad debts that has been permitted by the management (Baldwin, 2010).

Property assets

The return on property assets has reflected the upcoming trends:

Return on assets on production of beef has reflected a potential increment that reports at 1.67% in 2018. Nevertheless, the same reported at -0.82% in 2017 and 3.45% in the year respectively. However, in opposition to this, the return on assets in relation to grape and wine production has deteriorated in comparison to the previous year.

The audit risk in association to property assets is that the company must have increased the sales of beef to reflect an efficient financial situation (Gay & Simnet, 2015). Nevertheless, in relation to the last two years, the organization is obtaining negative outcomes in this framework.

In relation to property assets, the auditor must evaluate the sales and revenue aspects to check the reason behind the sudden increment in the returns for beef production (Gay & Simnet, 2015). In addition, the sales ledgers must also be assessed with the records of sales order that is for the attained orders.

As an audit partner, the company’s return percentage and its segments must be checked so that all the amounts can be effectively monitored. Further, through this way, the audit group can easily come at the effectiveness of calculation as well.

The internal control mechanisms related to the sales and returns must be monitored so that it can be ensured on the part of auditors whether efficient sales recognition and revenue has been undertaken by the company (Geoffrey et. al, 2016).

Ratio

2018 (Unaudited)

2017 (Audited)

2016 (Audited)

Return on equity %

10.8

17.5

15.2

Return on beef production assets %

1.67

-0.82

-3.45

Return on grape and wine production assets %

12.2

14.5

16.2

Gross margin %

24.5

30

31.76

Net profit margin %

14.38

20.27

17.85

Marketing expense % of total S & A expenses

23.67

17.89

15.2

Times interest earned

6.67

7.51

8.1

Days in inventory – wine

367

423

460

Days in accounts receivable – wine

50.2

60.65

53.24

Days in accounts receivable – beef

57

36

24

Current ratio:1

2.8

2.54

2.66

Quick asset ratio:1

1.18

1.15

1.2

Debt to equity ratio:1

0.54

0.63

0.67

Effective Control

Risk alleviated

Test of Control

If there is a requirement of repairs in the wine operation of the company, it must be handled or looked after by the departmental manager. Further, it is his duty to generate online orders and final payment procedure will be automatically eradicated by the approval on the part of the management.

In association to this, the audit risk is that there can be several undue expenses on the repairing aspects of the company as there is not supervision on such requests that has been undertaken by the departmental manager (Rezaee & Kedia, 2012). Furthermore, the management accountant and clerk must come into light when the services are vanquished and the provider has also offered an invoice to the company.

The repairing function must be checked by the management staff twice so that a proper verification on the requirement and expenses being incurred on the repair affairs.

Management of supplies have been monitored department wise

The purchase managers can place inappropriate offers below $10000 as there is no system of checking the process twice.

The purchase requisition issued by managers of department must be checked twice so that the actual amount of purchase can be ascertained (Rezaee & Kedia, 2012).

The company’s invoices are attained online through the suppliers and thereafter, they are matched with the received orders. This is undertaken by the management accountant and clerk of the company.

Although invoices are matched with the orders, the issue regarding this can be that payments received for the orders may be deferred in nature. In addition, after aligning the order register with that of purchases, the payments file is thereafter approved and sent to the banks.

The responsibility of payment processes must not be in the hands of a management accountant and it must be borne with another individual who is primarily involved in the payments department (Roach, 2010). In addition, any payments associated to defective orders must be deducted and prohibited from being reflected in the software.

The company has an automated strategy of IT in its system including password protection to allow program accessibility.

Although there is an IT system in the company’s management, the same is not supervised by an experienced professional. Furthermore, the organization has offered this job to a management accountant who does not have proper knowledge regarding the same. Therefore, this can result in detection and generation of various business risks for the company.

The company does not have password protection for the base of IT that is also a major threat to its affairs.

The company must hire or engage an experienced professional in relation to management of the IT department. Further, there must be an extra managerial personal who can advice or counsel the authority of IT department to smoothen the process. The reason is that this can assist in identification of flaws or errors so that corrective measures can be taken rapidly.

The IT database must be protected with the help of a stronger password and the details of the department must also be checked manually so that no errors can be found later (Roach, 2010).

The staff has received bonus based on fulfilment of goals like monthly sales, etc. This can be an appropriate method to involve the staff in sales promotion.

There can be a possibility that such staff is involved in illegal affairs to address all major goals and attain maximum revenues.

There must be an appropriate check on the staff affairs so that the sales can be promoted on an effective basis. In addition, the same must be monitored whether the staff is not involved in illegal activities that can hamper the goodwill of the company. If the staff has been creating nuisance to spoil the company’s reputation, it is not bound upon the company to address such matter.

The details of suppliers have been accumulated in the file of suppliers and the placed orders are also undertaken with the assistance of an ordering system. Moreover, the same is undertaken for the approved suppliers and if any unapproved suppliers are granted any orders, the same will be eradicated and sent to the accounts department.

There is a material business risk that these approved suppliers may change their rates as the same has not been entered in the master file of suppliers. Therefore, this can result in hampering the smooth flow of affairs of the company, thereby requiring corrective measures in the future (Peirson et. al, 2015).

Every time when a particular order is being placed, the rates must be confirmed before placing the orders, thereby assisting in safeguarding such issues in the future.

Weakness

Justification

There is no continuous check of payment registers

The payment registers must be regularly monitored and the same must be conducted by the management accountant only (Needles & Powers, 2013).

There are no proper reconciliations to the payments and accounts payable section.

The management accountant must depend on the IT system to generate file of payments and other aspects as well. However, no ledgers have been prepared in relation to the same.

There is no check by the higher authorities when it comes to payment approval process.

The management accountant must be liable for approving the same and thereafter, uploading it to the banks. Moreover, there must be a system that can assist in addressing all contingencies.

Weakness

Justification

Separate files are not present for lower quality goods

The clerk matches the order details and records it in the payment register later. There may be several items of low quality but the same is not considered by the clerk. Besides, only paper vouchering is done.

There is no check of present registers.

The purchase orders are often not checked properly with the present items that can result in extra stocking in the warehouses. Therefore, variations can arise and the same must be considered for facilitating decision-making processes (Peirson et. al, 2015).

There is unwanted reliance on the company’s approved suppliers

When suppliers are provided orders based on their reputation, other material aspects like price changes, changes in terms and conditions, etc are not evaluated. This issue can be problematic in the decision-making process.