Analysis of the ratios and the additional information as listed out by audit partner
Discuss About The Building Automated Auditing Capability.
The following report presents the analysis of all the financial and the non –financial aspect so the company. The purpose of the analysis is to determine the weaknesses that are present in the internal control of the company. After the weaknesses of the internal control of the company are being identified, an effort will be made to determine their implication on the audit risk of the company. In addition to that an effort will be made to alleviate, the various risk faced by the company (William et al., 2016).
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Account |
Analysis |
Audit risk |
Audit steps to reduce risk |
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Plantand equipment |
It has been seen over the period of 18 months that the assets of the company had to encounter a significant decrease in their utility due to the obsolescence of the mechanical equipment’s prior to the use oftechnology-aided machinery. The company is facing the risk of losing its present customers and the viability of its operations in the event it fails to replace the aging machinery with the new computer aided ones (Rezaee et al.,2018). The requirement of the company in respect of the plant and machinery has changed drastically over the period. The company needs to address the issue of incapacity of the present fleet of machinery to generate the revenue and income for the company and the issue of adopting a policy of depreciation that can better reflect the recent changes in the environment of the company. |
Of the significant audit risk present in the present case is that of the right treatment of the deprecation or rather determination of a policy that will most efficiently reflect the changes that has happened in the recent times in respect of the value of the assets and factor in that information to determine the depreciation amount of the assets (Wang et al., 2015). In addition to that, the present share of the market held by the company has reduced significantly over the years. The company needs to address the issue very objectively to determine the real reduction in the value of the assets (Alles et al., 2018). The reason being that the circumstance in which the machineries were bought and the present circumstances of the company haschangedcompletely. |
Several steps can be taken by the auditor to reduce the risks. On of them include the physical verification of the assets. The reason being that the auditor will get an idea regarding the revenue generating capacity of the asset. In addition to this, the auditor must make sure that the company makes use of such accounting policy in respect of the depreciation that objectively recognises the amount to be recorded in the finalcoalstatementsof the company in respect of the depreciation. |
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Machinery finance liabilities |
The company, in order to meet up with the requirement of the computer-aided machinery took a huge loan for the financing of the assets of the company. In addition to that, the company had also originally taken loans for purchasing the old machineries, which the company was presently operating. Hence, the accumulation of all such liabilities has increased the financial liabilities of the company (Chan & Vasarhelyi, 2018). It is necessary that the revenue generation capacity of the new assets acquired by the company compensate the finance cost of the company. |
The audit risk faced by the auditor is to determine reliably the revenue generating capacity of the entity. The auditor will also determine the amount to be recognised in respect of the reduction in the market share of the company and thereby the reduction in the revenue generation capacity of the company. This may hamper the liquidity position of the company. |
Some of the steps to be taken up by the auditor to reduce the risks are as follows: a) To analyse the debt taken by the company very carefully. Ina addition to this finding out the period of time for which the debt has been taken by the company. b) The auditor should also objectively calculate the amount of revenue to be generated by the company in the near future. |
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Accounts receivables |
The company is getting delayed payments from its debtors. This has increased the number of days in the receivables. |
It is highly possible significant portion of the amount categorised by the company, as receivable will become bad in the future (Knechel & Salterio, 2016). |
The auditor should immediately receive an aging schedule of the debtors of the company. |
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Lease Income |
The amount shown in the audited financial statement of the company is more than the amount shown in the unaudited financial statement of the company. There is no figure available for the industry average. |
There is significant audit risk present in the item due to the absenceof any measure of comparison of the item. |
The validity and the propriety of the income earned by the company from leased out property should be checked with by the auditor. |
The proper development of an understanding in respect of the various risks that are being faced by the company on a regular basis is necessary. The risk faced by the company will have to be assessed along with the various implications they have on the operations of the business. This development of the understanding regarding the various risk face by the company will enable the auditor top determine the key areas having the maximum chance of presence of material misstatement (Furnham & Gunter, 2015).
- The present inventory of machinery operated by the company is unable to generate revenue for it because of the advent of the computer-aidedmachinery in the market. Hence, the company will need to replace its entire inventory consisting of only such machinery, whichdoes not make use of computer aid (Griffiths, 2016).
- The amount of finance required by the company has increased over the years due the fact that the company will be requiring more funds to finance the new machineries to be purchased by it, which will utilise the aid of computer for functioning (He et al.,2015).
- The metal industry have gone through several fluctuations over the period and the same has affected the operations of the business in the following manner:
- There has been a downfall in the gold market of around 24.85% since the year 2012.
- There has been a downfall in the iron ore market amounting to 43.78% since the year 2012.
- The additional funds that have been acquired by the company for financing its new machineries come with a huge financial burden that will have to be borne by the company in the future.
- The new machineries, which are being operated by the company using the latest computer technologies, will require employees who have superior training and will definitely demand higher salaries (Cannon & Bedard, 2016). Hence, the company will have to bear higher employee costs for the year.
- The industry average in respect of the Rerun on Assets is significantly higher than the company’s figure.
- The industry average of Return on Equity is higher than the figures of the company.
- The profit margin prevalent in the industry is significantly higher than that earned by the company.
- The difference between the audited and the unaudited financial statements of the company is substantial. The reason for this might be because of the fault and mistakes committed by the accountant of the company or due to the lack of efficiency of the software implemented by the company for the purpose of preparation and presentation of the financial statements of the company (Demb et al.,2017).
- The time taken by the debtors to make the payment to the company in respectof the amount due from them by the company is very long. The lag in the payment made by the debtors is significantly confirmed by the figures of the financial statement so the company.
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Control |
Risk Alleviated |
Test of Control |
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Inventory control system: The company neds to update the inverntory control system so as to remain updated to measure the obsolescence of its present inventory. |
It will alleviate the risk of over obsolescence of the inventory of the company |
The company must put in all the details of the present inventory and check for the correctness of the present obsolescence shown by the system. |
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Software for receivables management: Adoption of such softwares will enable the detailed record keeping by the company of all the debtors of the company. It will intimidate the company regarding the payment due from each individual and at the same time enable the debtor to recognise that the payment has to be made. |
The use of the systemwill enable the company to reduce or eliminate the risk of bad debt completely (Griffin & Wright, 2015). |
The debtors at present are making very late payments and hence the present system will keep the detailed records of all the debtors of the company to ensure timely payment. |
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Use of effective and efficient accounting softwares: The company as of now has failed to reduce the difference between the amount presented in the audited and the amount in the unaudited financial statements. Confirming that it is incapable of preparing accurate financial statements (Yu et al., 2015). |
The software will eliminate the risk of faulty and inappropriate recording by the company in its financial statements. Significant matter will be given more focus by the auditor rather than all the petty sues. |
The accounting software must be provided an input in respect of all the recent amendments that have been prescribed by the statute for compliance. |
In respect to the internal control of the payroll contract of the company, certain weaknesses in the internal control system of the company are as follows:
- The company should maintain he soft copy of the employee details along with the hard copy of the details. The reason being that it is easy to lose the hard copy and it encourages wrong input of data by the project manager (Power & Gendron, 2015). Hence, the soft copy of the details of the employees must be kept in the computer of the company.
- It is physically impossible for the project manager to maintain record of the entry times of the various employees working in the company. Hence, the practice of the manual entry of the time of entry should be prohibited by the company and instead the time should be automated by making use of hardware such as biometric attendance keepers etc.
- The entire process of recording and preparation of the financial statements of the company is fully automated. It can lead to severe misstatement in the financial statements of the company inn case of any error on the part of the accountant (Dennis et al., 2018).
- The accountant must not be provided with such log in details of the bank that can give him access to the authentication of making payments. The reason being that it can be misused by him to embezzle cash from the company.
- Separate calculations should be conducted by the management of the company in respect of the regular payments to be made to the employees of the entity and special payments like that of the annulations fund (Griffin & Wright, 2015). This will help in deterring the cascading effect of the error committed by the system.
Conclusion:
After conducting the detailed analysis of the financial and the non-financial factors f0o the company, it can be concluded that the company at present is encountering huge amount of threats from its external environment. The threats include the obsolescence of the assets used byte company and the shrinking of the share in the market enjoyed by the company. It has also been established from the internal control of the company is not strong enough. In order to increase the efficiency and the effectiveness of the internal control system of the company it should make use of the software-aided technologies.
Reference
Alles, M. G., Kogan, A., & Vasarhelyi, M. A. (2018). Putting continuous auditing theory into practice: Lessons from two pilot implementations. In Continuous Auditing: Theory and Application (pp. 247-270). Emerald Publishing Limited.
Cannon, N. H., & Bedard, J. C. (2016). Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), 81-114.
Chan, D. Y., & Vasarhelyi, M. A. (2018). Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Demb, J., Chu, P., Nelson, T., Hall, D., Seibert, A., Lamba, R., … & Gould, R. (2017). Optimizing radiation doses for computed tomography across institutions: dose auditing and best practices. JAMA internal medicine, 177(6), 810-817.
Dennis, S. A., Dickins, D., Earley, C. E., Nolder, C., & Schaefer, T. J. (2018). Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Rulemaking Docket Matter No. 042; PCAOB Release No. 2017-005, Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard-Dividing Responsibility for the Audit with Another Accounting Firm. Current Issues in Auditing.
Furnham, A., & Gunter, B. (2015). Corporate Assessment (Routledge Revivals): Auditing a Company’s Personality. Routledge.
Griffin, P. A., & Wright, A. M. (2015). Commentaries on Big Data’s importance for accounting and auditing. Accounting Horizons, 29(2), 377-379.
Griffiths, P. (2016). Risk-based auditing. Routledge.
He, D., Zeadally, S., & Wu, L. (2015). Certificateless public auditing scheme for cloud-assisted wireless body area networks. IEEE Systems Journal.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Power, M. K., & Gendron, Y. (2015). Qualitative research in auditing: A methodological roadmap. Auditing: A Journal of Practice & Theory, 34(2), 147-165.
Rezaee, Z., Sharbatoghlie, A., Elam, R., & McMickle, P. L. (2018). Continuous auditing: Building automated auditing capability. In Continuous Auditing: Theory and Application (pp. 169-190). Emerald Publishing Limited.
Wang, B., Li, B., & Li, H. (2015). Panda: Public auditing for shared data with efficient user revocation in the cloud. IEEE Transactions on services computing, 8(1), 92-106.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.
Yu, J., Ren, K., Wang, C., & Varadharajan, V. (2015). Enabling cloud storage auditing with key-exposure resistance. IEEE Transactions on Information forensics and security, 10(6), 1167-1179
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