ACC331 Auditing And Assurance Services

2017

2016

Variance $

Variance %

Increase or (decrease)

Sales

 $  3,080

 $  2,660

 $     420

15.789%

Cost of Goods Sold

 $(2,350)

 $(2,010)

 $    (340)

-16.915%

Gross Profit

 $     730

 $     650

 $       80

12.308%

Other Expenses

 $   (350)

 $   (390)

 $       40

10.256%

Interest

 $   (300)

 $   (120)

 $    (180)

-150.000%

Net Profit

 $       80

 $     140

 $      (60)

42.857%

2017

2016

Variance $

Variance %

Increase or (decrease)

Assets

Current assets

Trade and other receivables

 $     772

 $     660

 $     112

16.970%

Inventory

 $     680

 $     510

 $     170

33.333%

Total current assets

 $  1,452

 $  1,170

 $     282

24.103%

Non-current assets

Property, plant and equipment

 $  1,810

 $  1,500

 $     310

20.667%

Intangible assets

 $       40

 $       –   

 $       40

∞ %

Total non-current assets

 $  1,850

 $  1,500

 $     350

23.333%

Total assets

 $  3,302

 $  2,670

 $     632

23.670%

Liabilities and equity

Liabilities

Current liabilities

Trade and other payables

 $     835

 $     795

 $       40

5.031%

Current borrowings – Bank Overdraft

 $       52

 $       40

 $       12

30.000%

Total current liabilities

 $     887

 $     835

 $       52

6.228%

Non-current liabilities

Non-current borrowings – Secured loan

 $  1,500

 $  1,000

 $     500

50.000%

Total liabilities

 $  2,387

 $  1,835

 $     552

30.082%

Net Assets

 $     915

 $     835

 $       80

9.581%

Equity

Share capital

 $     300

 $     300

 $        –   

0.000%

Retained earnings

 $     615

 $     535

 $       80

14.953%

Total Equity

 $     915

 $     835

 $       80

9.581%

2017

2016

2015

2014

Sales

100.00%

100.00%

100.00%

100.00%

Cost of Goods Sold

-76.30%

-75.56%

-76.02%

-73.97%

Gross Profit

23.70%

24.44%

23.98%

26.03%

Other Expenses

-11.36%

-14.66%

-13.11%

-10.69%

Interest

-9.74%

-4.51%

-3.40%

-0.15%

Net Profit (Loss)

2.60%

5.26%

7.48%

15.19%

2017

2016

2015

2014

Assets

Current assets

Trade and other receivables

23.38%

24.72%

25.38%

39.92%

Inventory

20.59%

19.10%

20.56%

21.42%

Total current assets

43.97%

43.82%

45.95%

61.34%

Non-current assets

Property, plant and equipment

54.82%

56.18%

54.05%

38.66%

Intangible assets

1.21%

0.00%

0.00%

0.00%

Total non-current assets

56.03%

56.18%

54.05%

38.66%

Total assets

100.00%

100.00%

100.00%

100.00%

Liabilities and equity

Liabilities

Current liabilities

Trade and other payables

25.29%

29.78%

28.55%

41.80%

Current borrowings – Bank Overdraft

1.57%

1.50%

1.23%

1.67%

Total current liabilities

26.86%

31.27%

29.79%

43.47%

Non-current liabilities

Non-current borrowings – Secured loan

45.43%

37.45%

29.38%

0.00%

Total liabilities

72.29%

68.73%

59.17%

43.47%

Net Assets

27.71%

31.27%

40.83%

56.53%

Equity

Share capital

9.09%

11.24%

17.63%

31.35%

Retained earnings

18.63%

20.04%

23.21%

25.18%

Total Equity

27.71%

31.27%

40.83%

56.53%

Year ending

2016

2017

Profitability ratios

Net Profit margin

5.26%

2.60%

Operating Profit Margin

9.77%

12.34%

Return on common stock equity

16.77%

8.74%

Return on Total Assets

5.24%

2.42%

Efficiency ratio

Accounts receivable turnover ratio

4.09

4.04

Average collection period ratio

87.97

89.06

Accounts Payable turnover ratio

3.58

3.85

Accounts Payable turnover in days ratio

100.69

93.39

Fixed asset turnover ratio

1.77

1.66

Total asset turnover ratio

1.00

0.93

Long-term solvency ratio

Debt Ratio

68.73%

72.29%

Times interest ratio

2.17

1.27

Liquidity ratio

Current ratio

1.40

1.64

Account balance

Justification

Net income

a. Significant negative variances

b. The significant declining trend is a risk for going concern

Receivables

a. Significant increase in variance,

b. significant increase in current ratio

Total liabilities

a. Increase in debt ratio,

b. continually increasing trend is a risk for going concern

Noncurrent assets

a. Significant variance,

b. Significant increasing trend,

c. on the other side, asset turnover ratios have declining trend

Account balance

Justification

Net income

    Operating expenses

Unexpected declining trend and unexpected increasing operating margin ratio emerge the risk of understatement of operating expenses.

    Income expenses

a. A significant increase in variance and trend

b. Percentage Variance change for interest balances is higher than the percentage variance change in debt liabilities

Receivables

    Gross account balance

A significant increase in variance and current ratio hence doubt of overstatement of the account balance

    Provision for doubtful receivables

A significant increase in the variance of gross amount and current ratio hence doubt of  underestimation of provisioning

Total liabilities

    Bank liabilities

The significant increasing trend, increasing debt ratio emerges the doubt regarding the utilization of funds from such external funding

    Payables

Payables have an unexpected declining trend and declining payable turnover ratio hence emerges doubt of payment for payables by an increase in bank liabilities

Noncurrent assets

   Plant property and equipment

Showing a declining trend even after having a huge investment in this asset

   Intangibles

This asset emerges from the current year hence need to make extensive procedures regarding this

Segregation of duties

The organization required this internal control for the execution of the transaction. Single-handed execution of cash transaction emerges the risk of cash theft and cash fraud (Kobelsky, 2014). In the present case receipts of cash cheques is made by office assistant and recoding is done by the bookkeeper.

Policies and procedure identification

The organization needs to identify policies and procedures for the significant financial transaction. Service charge calculation is the significant procedure for the organization. In the present case, the organization defined the procedure for making calculations of service charges i.e. 300% of hourly rates. This control helps in fairly and accurate service revenue calculation.

Approval for contract cancellation

Every organization must have approval policies for the significant transactions. A service contract is a significant business activity for the clinic.  In the present case acceptance and cancellation of any service contract is made by managing director. Hence it seems that organization is having control of policies and procedures.

Recording and reconciling cash

Real-time recording of cash transaction and periodical reconciliation of cash transaction results in a reduction in a misstatement of cash. In the present case, such recording and reconciliation are made by the bookkeeper.

Observation

Segregation of duties can be tested by the auditor by making an observation. Under this auditor needs to observe how activities and operations are performed in the organization. In the present case, the auditor will observe how cash receipts and recoding of such receipts is actually performed in the organization. Are the receipts actually have control of segregation of duties or not?

Analytical review procedure

Analytical review procedures are ratio calculations, trend calculations and another financial number crunching (Auditing and Assurance Standards Board, 2009). In the present case service fee is charged at 300% of hourly rates. The auditor can make check service charge calculation by making analytical review procedures.

Inspection

In the present case acceptance and cancellation of any service contract is made by managing director. The auditor should check whether all cancellations of service contract and acceptance of service contracts have the approval of managing director or not. Hence for this test of control auditor should make an inspection of service contract file.

Re-calculations

In the present case, cash recording and reconciliation are made by the bookkeeper. The auditor needs to check whether such reconciliation is free from error or misstatement or not. Thus, for making this check auditor needs to make re-computation of the reconciliation statement.

Nonperformance parallel test

Parallel test refers to the parallel running of the old and new system and makes identification of errors, wrong outputs, and bugs created by the new system. In the present case, the organization does not make this test hence new system have expectations of inefficient output.

Inefficient access control

In system implementation, access controls are most significant control. In the present case, the organization does not provide access to transaction file to the supervisor, the only master file can be accessed by supervisor. If a supervisor needs to access transaction file for making rechecking of any master file assertion then such access is denied by the system.

Existence control for the occurrence of a transaction

Organization’s application system should have an existence for all employee data which are currently working. Such data must be updated on each new recruitment and termination. Such data existence will help in the occurrence of payroll transactions for all current employees.

Input controls for the accuracy of transactions

The system must have input controls so that accuracy of transaction processing and output can be ensured. The organization can implement input controls of format check, check digit and reasonableness check. Such control helps in making an accurate input to the application system.