Auditing is one of the most important function for an organization. Auditing is a regulatory requirements for a public organization and a closely held private organization that has crossed the level of sales set by audit regulatory authority in a particular country. The audit helps in identifying inefficiencies in operational and financial aspect of business. Hence it can be said that audit is essential for overall development of a company. This reports is prepared from perspective of an auditor to conduct an effective and efficient audit engagement. In this report audit will be conducted on Eco Chemical Limited (ECL) that is engaged in manufacturing of chemical products in Australia (William Jr, Glover and Prawitt, 2018). The operation of ECL are spread all over the Australia with their headquarters in Queensland. Chemical manufacturing industry in Australia is /highly competitive and the two types of products manufactured by ECL i.e. “Type X” and “Type Y” get heavy competitive from domestic as well as imported products. This report is divided into three sections that represents different aspects of audit to be conducted. The first part is related to preliminary investigation and audit planning in respected of audit activities to be conducted in the process. Second part is specifically related to audit and evaluation of purchasing and payment system of the company. At last, third part is related to case study provided in relation to ECL.
There are some factors that should be considered by auditors just after being appointed as auditor and before commencing the audit. Some of such factors that should be considered in case of ECL are as follows-
Some of the major risk areas that will be addressed in audit for the year ending 30th June 2018 are as follows-
Strengths-
Weaknesses-
After a detailed investigation in relation to purchase and payment transactions it was identified that there were certain aspects system that prone to risk and material misstatements. Hence auditor of the company has decided to implement additional audit techniques to ascertain accuracy of these data (Crosson and Needles, 2013). CAAT analysis is used to further investigate the transactions recorded by the organization in relation to purchase and payment in relation to stock management. These are various CAAT software that can be used to analyze such data and in this case Active data for excel has been used by the Auditor.
Summary investigation report
During the accounting period under consideration, there were 220 invoices that were issues regarding purchases made from suppliers of the raw material. After CAAT analysis it was identified that only 29 transaction out of 220 transactions accounted for 65.89% of the total value of purchases made during the financial. This should not have been the case as per the current stock reorder system of the company. As per stock reorder system, 3 months stock was purchased before the current stock lying in the inventory was consumed.
It this system was properly followed then the amount of invoices for each transaction would have been approximately equal to each other. There might be some instances where the amount of purchases would have been higher but discrepancy identified in CAAT analysis is very high. It is a clear indication that the stock reorder system was not properly followed. There might be repetition of some of the order as proper documentation was not made for reorder made to supplier (Maher, Stickney, and Weil, 2012).
This data was also divided into two categories i.e. transaction with invoice value greater than 1000 and transaction with invoice value lower than 1000. This stratification shows that 122 transactions accounts for 14% of the total value of purchases and other 98 transactions accounts for 86% of total value of purchases. The company should give more focus to these later 98 transactions (Chen and Simchi-Levi, 2012). There should be separate payment system in relation to these suppliers as the value of raw material supplier by them is way higher as compared to other 122 transactions. Separate purchase agreements should be prepared with these suppliers.
ECL can demand for higher discount rate from these suppliers and even small percentage of discount from these supplier can result in huge cash saving for the company. Getting higher discount rates from other 122 suppliers would not be possible as in that case company would not have much bargaining power. In addition to that time taken for payment in relation to credit purchase should also be extended through new agreement. This is a very common strategy that is used by business organization as such a huge amount can be paid after the amount is realized from sales made by the company in market (Laudon and Laudon, 2016). If company is paying these suppliers before sales are made though other sources then it would result in loss of interest income which they could have earned if such amount was not used for payment to suppliers.
Standard deviation of purchase transactions is 6135 which is very high and it can be said that each transaction is scattered from Mean purchase invoice amount. This is in contrary with the stock order policy used by the management. The main objective of following a fixed reorder policy is to bring a uniformity in amount and procedure followed for stock management (Wild, 2017).
The CAAT analysis has identifies the Top five postal coded from which the raw material is acquired by the company. One of the most important expense in relation to acquiring raw material is transportation expense. With the help of proper management of postal codes this cost can be reduces by the company. The CAAT analysis gas identified top 5 postal codes and management can arrange the time of delivery in such a manner that all of supplies from these postal codes can be acquired at the same time (Bauer et.al, 2012). This will reduce the cost of transposition as all supplies can be collected at the same time. Transportation cost is an indirect expense and it does not add any value to company. Hence it would be best to apply cost reduction methods to reduce this cost.
Conclusion
Each and every aspect of aspect of business is very important for effective management and operation of business. Auditing is very important for all the stakeholders involved in the business. It helps in identification of internal deficiencies in business management and through such evaluation management can take precautionary measured to cure such deficiency. In this report various aspects of Eco Chemicals Limited (ECL) has been evaluated. Auditor of the company has identified various deficiencies and risk areas in ECL. Auditor has also provided certain recommendations that could help management of the company in solving the problems arising from these deficiencies. In addition to that the key legal consideration are also discussed that an auditor has should consider before accepting an audit engagement. Stock purchasing and payment system of the company is also discussed in detail. Stock management is very important branch of business especially in a manufacturing company. After an audit investigation it was identified that there are various aspects of stock management that are at high risk. In this investigation strengths and weaknesses of stock management was identified with their impact on financial and operational aspect of business. In the last section of this report, auditor of the company has applied CAAT analysis methods to procure additional audit evidence to check accuracy and authenticity of transactions recorded in relation to purchase and payment to suppliers. IT can be said that auditor of the company has properly performed his functions to give true and fair review on financial statements.
References
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Bauer, D.G., Campero, R.J., Rasband, P.B. and Weel, M.D., Sensormatic Electronics Corp, 2012. Inventory management system. U.S. Patent 8,321,302.
Chen, X. and Simchi-Levi, D., 2012. Pricing and inventory management. The Oxford handbook of pricing management, pp.784-824.
Crosson, S.V. and Needles, B.E., 2013. Managerial accounting. Cengage Learning.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2-3), pp.275-326.
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Rezaee, Z., Sharbatoghlie, A., Elam, R. and McMickle, P.L., 2018. Continuous auditing: Building automated auditing capability. In Continuous Auditing: Theory and Application (pp. 169-190). Emerald Publishing Limited.
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