Audit Risk And Control Measures For Accounts Receivable, Investments, And Property Resources

Accounts Receivable

Question:

Discuss About The Consumer Returns The Medical Instrument?

Accounts receivable refers to the entire amount that the company is expected to receive pertaining to the delivery of specific products as well as services. Beasley (2015) opines that the accounts receivable is enumerated by analysing the credit sales with the mean receivable time. Thus, the account related to the account receivable is the account of credit sales (Beasley, 2015).

Evaluation: based on the case study it can be mentioned that all the actions related to receivables are undertaken by the trade receivable official. For example, the consumer returns the medical instrument, after documenting the reason behind the return as well as completion of documents, specific credit notes drawn in favour of customer is necessarily raised by the trade receivable clerk. Furthermore, the journal posting along with receipts from different debtors are sent to the one who prepares the deposit slip of the bank. Thus, in this case risk can be regarded to be high.

Risk of audit: All the actions associated to the receivables are essentially undertaken by the trade receivable official. Essentially, there subsists a risk that the receivable might possibly be misappropriated by this official else wise lesser amount of receivable might be recorded (DeFond & Zhang, 2014).

Audit steps that can diminish the risk- In a bid to reduce the risk related to accounts receivable of GPSA, different actions connected to the receivables need to be separated out among different members of the staff.

Account- In essence, it is particularly the investment that can be converted to cash within the period of 3 months to nearly 12 months. As such, it is registered under the current assets and are considered as cash or else equivalents of cash. () asserts that accounts linked to this is referred to as the investment account.

Evaluation- As such, investments are basically susceptible to diverse system of accounting and the treatment might also be different. Therefore, the risk related to the current investment can be ascertained to be medium level (Jia, 2016).

Risk of audit- Fundamentally, the inherent assessment risk that might possibly be related to the current investment include investment done without taking into consideration different risk as well as return factors.

-Audit steps for diminishing risk- The return earned from the investment need to be examined regularly. Additionally, the precedent growth trends observed in investment need to be analysed before undertaking investment by firm (Jia, 2016).

Investments

Accounts: The accounts associated to property resources are essentially the account of fixed assets as well as the depreciation amount (Jia, 2016).

Evaluation- In case if the property resources are not registered appropriately or else if the depreciation is not mentioned appropriately, the this can exert huge influence on the financial assertions. Thus, the risk associated with property resources can be regarded to be high.

Risk of audit- The assessor might possibly not differentiate the resources that were utilized for over 180 days and for less than specifically 180 days during the particular year if the resources were not recorded appropriately (Jia, 2016).

Audit steps for lessening the risk- the ledger for asset have the need to be assessed appropriately for checking both the purchase as well as sales of property assets. Additionally, adding up, deleting along with impairing also needs to be examined correctly.

• Accounts: In particular, the accounts that are related to the intangible assets are necessarily the goodwill, patent or else the copyright.
• Evaluation: Intangible asset need to be analysed appropriately in order to examine their value and mode of recognition. Again, it also needs to be checked whether the resource has economic life of indefinite else wise definite period. Thus, the risk related to the account can be considered to be high (Jia, 2016).
• Risk of audit- the intangible assets essentially has no physical existence and the process of ascertainment of fair value of intangible asset can be considered to be difficult. Additionally, there is said to be variance between the cost of acquirement and the fair value of firm’s intangible assets (DeFond & Zhang, 2014).
• Steps for diminishing risk: Fair value of diverse intangible assets will be ascertained by the professionals. Control over the entire process of determination of fair value of resources also helps in reduction of risks.

• Accounts- Since the research activities of particularly GPSA was not flourishing, expends can possibly be debited to both profit as well as loss account. Nevertheless, disbursement on development can essentially be capitalized since the development was unbeaten (DeFond & Zhang, 2014)
• Evaluation- there is said to exist a very thin line between specifically successful and unsuccessful research as well as development. Since the disbursements on research and development involve greater amount, inaccurate recognition can direct towards high risk level (DeFond & Zhang, 2014).
• Risk of audit- the inherent risk that can be related to expend on research and development involves categorising research as successful or else unsuccessful ones. Additionally, the specific amounts engaged in the actions are difficult to enumerate appropriately.
• Audit steps for reduction of risks: particular ledger that can be linked to expend can be examined appropriately. Moreover, prior to establishment of product as successful or else unsuccessful one, it is essential to carry out a market research (Hayes et al., 2014).

Return on equity-  Analysis of the financial pronouncements reveal the fact that the return on equity is observed to have a downward trend and has dropped from nearly 22.7% during 2015 to 7.19 during 2017. This reflects that the capability of the firm  to generate profits out of the investments are decreasing. Thus, there is said to risk on profitability on equity of the shareholders (DeFond & Zhang, 2014).

Analysis of return earned on total assets- The return earned on total assets of the corporation is seen to be on downward trend. This has essentially dropped from the level of 15.52% during the year 2015 to around 4.86% during the year 2017. This necessarily replicates the fact that income of the firm before taxes as well as interest along with the capability of the firm to generate gains as against the resources of the firm is diminishing (Fung, 2014). Thus, it can be said that there subsists risk on particularly the profitability of the operations.

Analysis of profit margin (net): the net profit margin of the company displays a declining trend and the same has dropped from 15.52 during the year 2015 to 4.86% during the year 2017. This essentially shows that the income before both taxes as well as interest along with the capability of the firm as regards generation of profits as against the resources is diminishing. Thus, there is said to be risk on profitability of the firm (Beasley, 2015).

Analysis of firm’s time earned interest- in essence, this reflects the times for which the firm’s interest earned during a specific period decreased to 1.90 times as compared to 3.51 during 2016 and 4.10 times during the year 2015. Thus, there exists a risk of savings since the corporation is not able to save sufficient amount to create interest earnings (Beasley, 2015).

Property Resources

Analysis of days in accounts receivables- Since the days in accounts receivable has enhanced from the level of 53.24 days to around 83.07 over the two year period of 2015 and 2017. Therefore, there exists a bad debt risk from essentially the receivables (Cannon & Bedard, 2016).

Analysis of current ratio- Even though the current ratio of the corporation is in rising trend, the current ration of the firm stands at 1.80 during the year 2016. This essentially shows the risk of not utilizing the working capital effectively by the firm’s management.

Analysis of debt to equity ratio: A higher debt to equity ratio greater than 1 shows that the corporation  is hugely leveraged and the firm has acquired more funds through debt financing as compared to equities (Jia, 2016). Thus, it might possibly enhance the risk related to payment to diverse financiers along with creditors since higher amount of debt refers to greater amount of interest.

• Disbursement of bonus: Bonuses paid to management official can be assessed by firm’s shareholders. However, in case of variance with the budget prepared (
  monthly), the person accountable is asked to explicate the reason behind the variance.
• Protection of password- the application programs were strictly protected with passwords that restricted free admittance. The implementation of the IT system in the company involved assessment of success of the system (Eilifsen et al., 2013).
• Permitting discount- Discount permitted to all the esteemed customers are substantiated by particularly the sales director before upgrading permissible discounts to customers (Beasley, 2015). 
• Receivable from trade – Receivables are merged with the control of debtors during the closing of each and every month.
• Aging evaluation- Aged evaluation for receivables are presented using the computers at month end after taking into account all the invoices that can be processed into the specific system. Essentially, the aged evaluation is further assessed by the financial controller. Particularly, the receivables for over and above 890 days are necessarily separated and the firm’s clerk responsible for trade receivable is asked to mention the reason behind the payment delay (Hay, 2015).
• Doubtful Debt- Whilst the process of preparation of the follow up strategy for doubtful debtors, in which the balance is well above the prescribed limit, the shipment of further products to specific customers is essentially withheld in case if minimum prescribed amount is not accepted (Sookhak et al., 2017).

Admittance to the database- Even though strict password is implemented to control the admittance on specific programs associated to IT functionalities, the admittance to the database is not protected by password that in turn can expose the entire system to risk of unlawful access (Barton & Bruder, 2014).

Physical Delivery Notes- In essence, shipping tiles to customers leads to generation of specific manual notes and this has increased over time. This necessarily exposes the entire system to both intentional as well as unintentional mistakes associated to amount of delivery (Beasley, 2015). 

Involvement of single individual for diverse activities- All the business activities related to firm’s trade receivables can be undertaken by the clerk of the firm. For instance, the returns of the customers on medical equipments earned after ascertaining the reason of gaining return and completion of documents, credit note in favour of consumers can be raised by the clerk for managing trade receivable. Furthermore, the journal posting along with the receipts acquired from the debtors are essentially passed to the official who is accountable for deposit slip from the bank. Undertaking all the actions by the same individual leads to exposure to fraud risk, faults or else misappropriation either intentionally or else unintentionally (Cannon & Bedard, 2016).

As rightly indicated by Jia (2016), test of control can be considered as a process of audit that can be used for examination of efficiency of internal control procedure utilized by the client company for detection or else prevention of material misstatement. Founded on the results of the test, the assessor can decide regarding the dependence level on the internal system of control. Essentially, the tests of control can be classified as follows:

Return on Equity

Re-performance: Under this system, a new transaction is introduced to examine the internal system of control

Inspection- Under this system, the related documents are assessed using stamps, authorization as well as signatures for examining the control (Eilifsen et al., 2013). 

Observation- Under this specific system, the business process in action and the linked internal system of control are also assessed.

Effective control under the test of control is essentially mentioned below:

Disbursement of bonus- Observation tactic of control can be performed for this purpose

Protection of password- Inspection tactic of control test can be performed for this purpose

Discount allowance- re-performance tactic of control test can be performed for this purpose (Louwers et al., 2015). 

Receivables from trade- re-performance tactic of control test can be performed for this purpose

Aging Analysis-Both the observation as well as inspection tactic of control test can be performed for this purpose

Doubtful Debt- Re-performance tactic of control test can be performed for this purpose (Knechel & Salterio, 2016).

The company disburses bonuses to the management officials on the basis of sales volume. However, there are chances that sales volume might increase misleadingly (DeFond & Zhang, 2014).

Manual delivery notes are also declared for sale of tiles that are vulnerable to faults, fraud or else material misstatement

ales journal are also presented on monthly basis, however, there remains chances of misplacement of different manual documents (Hayes et al., 2014). 

Trade receivable official is also accountable for business receivables associated to activities that again might lead to intentional or else unintentional acts of fraud, errors else wise material misstatement

Trade receivables are merged with the receipt of the bank at the end of each and every month that is fairly an extensive time for settlement of major items such as receivables (Fung, 2014).

References

Barton, H., & Bruder, N. (2014). A guide to local environmental auditing. Routledge.

Beasley, M. S. (2015). Auditing cases: An interactive learning approach. Prentice Hall.

Cannon, N. H., & Bedard, J. C. (2016). Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), 81-114.

DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2), 275-326.

Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2013). Auditing and assurance services. McGraw-Hill.

Fung, S. (2014). Hong Kong Auditing: Economic Theory & Practice. City University of HK Press.

Hay, D. (2015). The frontiers of auditing research. Meditari Accountancy Research, 23(2), 158-174.

Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

Jia, X. (2016). Auditing the auditor: secure delegation of auditing operation over cloud storage. IACR Cryptology ePrint Archive, https://eprint. iacr. org/2011/304. pdf. Accessed 10 Aug.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015). Auditing & assurance services. McGraw-Hill Education.

Sookhak, M., Gani, A., Khan, M. K., & Buyya, R. (2017). Dynamic remote data auditing for securing big data storage in cloud computing. Information Sciences, 380, 101-116.