Question:
Discuss About The Analytical Procedure Clients Business Risks?
GPSA Limited is a medical technology company that was incorporated in 1992 as the pioneer in medical technological research and distribution of medical equipment. In previous years from its inception, the company has relied on its internal control systems based on its results satisfaction of extensive control tests (Shim, 2011). After discussions with the clients, the company has made no changes in the internal controls systems while it also does not have an audit control or internal audit department. Therefore extensive audit is required especially in its internal controls to steer the company clear from wastages, theft and pilferages while out rightly going to profitability (Corsi, Castellano, Lamboglia & Mancini, n.d.). This is the auditable areas of accounting;
These are the debtors that owe the company money. A bad debtor’s accounts means that the company will have problems with their cash flows. According to the ratios of 2017 unaudited report, the company’s days in accounts receivables stands at 83.06 days. To put it in perspective, it will take roughly 84 days for a debtor to pay for the item that he or she took on debt (Corsi, Castellano, Lamboglia & Mancini, n.d.). This is unacceptable, the higher the number of days, the less the operating cash flows of the company. In fact, in the audited reports of 2016, the days in accounts receivable stands at 60.65 days while the audited financial ratios for 2015 stands at 53.24 days. This shows an increase in the number of days the company is willing to let the debtors have its goods and services on credit. The company should avoid extending the debt window as it will only hurt the company’s financial and cash flow position.
In current investments the ratios used are times interest earned and current ratio. Investments bring interest to the company. The company has invested in properties and has bought multiple numbers of properties and leased them mostly to healthcare facilities. This will bring in rent which will be regarded as interest or revenue on investments (Chambers & Rand, 2011).
The property assets account is a secondary account of the company as they have entered the property market just for diversification. Although initially the property market was relatively profitable, the market prices for property market have been tumbling (Chambers & Rand, 2011). This is also partly due to global economic trends and a market that is so unstable in Australia.
They consist of company’s goodwill, patented rights and intellectual properties to mention just a few. Goodwill is the company’s brand name in value and how best GPSA limited has sold itself over the years. As a manufacturer of medical equipment the company is doing extensive research and development to innovate and patent its intellectual development (Gay & Simnett, n.d.).
There is extensive capital involved in research and development. GPSA limited can either fund its R&D through its cash reserves or choose a strategic partner in its research and development. It has chosen the latter through a bank loan of $5 million to invest more in research and development (Gay & Simnett, n.d.).
The analysis of these accounts shows a struggling company unable to match its previous years performances. Perhaps, the economic environment and great competition from its rivals is eating greatly into its business a marketing it has dominated for the last 25 years. Its investment is also on a decline as shown by the interest earned ratio and the profitability of the company (Halpert, 2011). Although it is doing well in research and development, the company has again faced stiff competition with rivals coming up with ideas before it finishes its research therefore losing out on the property rights.
According to their nature, analytical procedures provide different levels of security; to the extent that the level of security decreases may require the incorporation of another type of procedure or, where appropriate, non-application of that procedure. When evaluating the reliability of the information, the auditor should take the following into account for the information available: the source, comparability, nature and relevance and the controls established in the preparation (Halpert, 2011).
Likewise, it is necessary to evaluate the possibility of applying together with substantive analytical procedures, details. For example, for the validation of the client balance, it is possible for the auditor to perform substantive analytical tests (evaluation of the seniority of balances) and to apply detailed tests (check of subsequent collections).
There are several steps that can reduce the audit risk. Firstly and of most importance is to talk to the client, GPSA Limited on the material misstatement that were raised in the audited accounts of 2015 and 2016 (Arens, Elder, Beasley & Hogan, n.d.). The company should also give an explanation on what was done on the issues raised on the previous accounts. Another step is audit planning. Strategic planning on how to conduct the audit will reduce the audit risk.
ROE- return on equity falls from 2017 to 2017. In 2015,it was 22.17 against 7.19 in 2017 which mean GPSA performance in comparison to equity has gone down.
Return on Total Assets- has also declined in 30 years due to tumbling prices of property markets and the reason is that it has no return on assets (Arens, Elder, Beasley & Hogan, n.d.).
Gross margin-this is varying on year end. In 2017, unaudited ratio it was at 31.76%, this means it has risen albeit marginally.
Net profit margin- this are profits after all costs and operations. At 10.38%, it means that the costs in 2017 have increased maybe to alarming levels.
Times interest earned- as the ratios show, it is decreasing. In 2015, it was at 4.10 in 2016 it was at 3.51 and in 2017, it was at 1.90. it means that the net interest from investment is falling.
Days in inventory- at 166.53 days in 2017 unaudited reports, the equipment are staying too much in the warehouse (Arens, Elder, Beasley & Hogan, n.d.).
Current ratio- it is fluctuation and means that GPSA is doing not so well
Debt equity ratio- this is the level of debt in comparison with equity of the company.
Business risk is the result of events, circumstances, actions or inactions that adversely affect the entity, which impairs its ability to achieve its objectives. Business risk also includes events that arise from changes in the company, complexity in specific areas or lack of timely changes. A business risk can have immediate consequences and generate a risk of material error pertaining to transactions, balance sheet accounts and disclosures of assertions and financial statements (Rupert & Kern, 2016). They include collusion of customers and staff during delivery of tiles. Fraud from financial controller and the staff is also a part of business risk. Untimely recording of receipts is also a business risk in waiting. Return of equipment by customers is also a business risk (Rupert & Kern, 2016).
Effective control- partially filled delivery invoices is marked as hold on invoice and the dispatch department of the financial supervisor is responsible for follow up after 30 days. The risk alleviated is that there is no unintentional delay of invoices or lost invoices which cannot be tracked.
Test of control- follow up on the invoice and labeling of the invoice are the test of control (Rupert & Kern, 2016).
Effective control- the return of the medical equipment by the customers mainly due to inferior quality, oversupply or incorrect specification. Risk alleviation- ensuring that medical equipment are clearly labeled and the right quantity is supplied. Also, the company should make sure that it meets or quality controls in manufacture.Test control- follows up with the customers to learn on quality of equipment and retraining the staff.
Effective control- trade receivables clerk is responsible for generating invoices and the computer automatically retrieves the price code tag from the sales master file.
The risk alleviated is that there is no fraud in trade receivables since there are computer generated programs that cannot be used to defraud the company. Test control- creating internal control systems that are computer assisted to reduce human contact.
Effective control- In the unaudited financial reports of 2017, the company’s times interest earned ratio was at 1.90, while the audited financials for 2016 stood at 3.51 (Angappa Gunasekaran., 2010). This means that the interest on investment is decreasing as a result of slowdown in investment policy. This means that the interest rates are on a down ward trend. This partly due to falling of property market values across the country and the market value of global trends
Effective control- The financial controller acts as a safeguard in which the companies financial assets are secured and completely. The audit risk in research and development are aimed at ensuring that the money is effectively put into correct usage.
For the development of basic auditing procedures for accounts receivable, sales and collections should be performed as substantive tests or compliance tests, the extent and scope of which depends on confidence in the company’s internal control system.
For the review and evaluation of the internal control are detailed in the same order and under the same headings of the applicable audit procedures and that must be carried out according to the circumstances, both for the compliance tests and for the substantive tests. The program of applicable audit procedures indicates the steps of compliance testing and substantive testing, the extent and scope of which depend, as already stated, on confidence in the internal control system, determined on the basis of the use of questionnaires for review and evaluation. The determination of importance begins when the auditor decides the preliminary criterion on the importance of the total financial statements. Acceptable audit risk is assessed for the financial statements as a whole, and is not usually assigned to individual accounts or targets on an individual basis. The inherent risk is determined for each target for an account such as accounts receivable (Angappa Gunasekaran., 2010).
The confirmation of accounts receivable is proof of details of the most important accounts receivable. We analyze briefly the confirmation by studying the appropriate tests for each of the objectives related to the balances, and then are reviewed separately in greater detail. The analysis of the details of balances details for the accounts receivable that follows. It assumes that the auditor has completed evidence planning work papers and has decided the planned detection risks for the details tests for each of the audit objectives related to the balances (Angappa Gunasekaran., 2010). The selected audit procedures and sample size strongly depends on whether the evidence planned for a given objective is abundant, medium or low. The discussion focuses on audit objectives related to accounts receivable balances. General
Most of the audit evidence of accounts receivable and reserves for bad debts is based on the ratio of customers by age of balances. An aging check balance is a list of the balances in the accounts master file per cobra at the balance sheet date. It includes the outstanding balances of the individual customers and a breakdown of each balance by the time that has elapsed between the date of sale and the date of the balance. The test of the information of a relationship of customers by age of balances for the details links is a necessary procedure in the audit, usually this is done before any other test to assure to the auditor that the universe that is being verified agrees with the greater general and the master file of accounts receivable (Scandizzo, 2013). As a part of the test, the column of totals and the columns showing the seniority are added together, and the total of the customer ratio is compared with the highest one generat
References
Angappa Gunasekaran. (2010). Handbook on business information systems [electronic resource]. World Scientific.
Arens, A., Elder, R., Beasley, M., & Hogan, C. Auditing and assurance services.
Chambers, A., & Rand, G. (2011). The operations Auditing Handbook. New York, NY: John Wiley & Sons.
Corsi, K., Castellano, N., Lamboglia, R., & Mancini, D. Reshaping Accounting and Management Control Systems.
Gay, G., & Simnett, R. Auditing and assurance services in Australia.
Halpert, B. (2011). Auditing cloud computing. Hoboken, NJ: Wiley.
Ridley, J. (2008). Cutting edge internal auditing. Chichester, England: Wiley.
Rupert, T., & Kern, B. (2016). Advances in accounting education. Bingley, U.K.: Emerald.
Scandizzo, S. (2013). Risk and governance. London: Risk Books.
Shim, J. (2011). Internal control and fraud detection. Cranbrook: Global Professional.
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