Internal Controls

Risks surrounding the set accounts The Audit of short ton Ltd has highlighted number of fortunes. The gambles highlighted In the audit argon discussed throughout the track. Below is a table of the take chancess and tests to carry out, based on the five accounts highlighted as macrocosm of risk. The common assertion that is common to the five accounts is valuation and exceptocation. Account perspicacity of Risk Substantive audit procedure Accounts due Account Receivable has change magnitude while gross gross gross sales has rock-bottom. geezerhood In receivables proportion has also Increased considerably. This highlights a high risk of exaggeration of the summations. Subsequent assessment of sales receipts, aged receivable trial balance, and follow up on meters that be overdue. Inquiry with key persons as to how and when overdue balances atomic number 18 classified as stinky debts. afoot(predicate) Investments The decrease In menstruation Investments needs Inve stigating, as sanitary as why It has been Impaired and has the Impairment correctly been done. refresh the cope certificates, to vary they are held, and how many are held. Review the share impairments used in the balance to the ASS listed prices. Property Assets Due to the piazza marketplace being in decline, why hasnt the property in the monetary reports not also decreased considerably? There could be an overstatement of property assets. Inquiry on why the music directors valued the property the style they did and debate for It. external valuation by an expert. Intangible Assets No faeces in intangible assets is unusual, particularly considering technology does not down an undefined life.Overstatement of assets could be in use. Inquiry on why the directors valued the asset they way they did and reasoning for It. External valuation by an expert. Deferred Developmental consumption Even though analytical procedures can only be used, deferred phylogenesis expenditure re quires Investigation, due to the more(prenominal) than significant increase. attention deficit hyperactivity disordered to that the cultivation that a foe has successfully developed and patented a similar device the upcoming economic wellbeings from the deferred development expenditure is in question.Is on that point / could there be an overstatement? judicial decision of accounting procedures used to create the deferred development expenditure balance. Inquiry to directors, and experts about the obsolescence of the companys laser development. Expert analysis of the technology. After all analytical procedures obligate been used to evaluate any risks to the monetary reports of ton Ltd a number of risks hurl been highlighted in new(prenominal) accounts. Although It Is highly tall(a) for a business to genuinely manipulate expenses to A) is certainly a major(ip) push for short ton Ltd.The operating expenses has also doubled in part of total sales ( appurtenance C). Th e decrease in inventories whilst also having an increase in accounts receivable is very unusual, mainly due Tao decrease in sales revenue. This highlights that accounts are not being written off to (increase he companys assets), falsified sales (increase the companys assets), or even theft of inventory. Business Risk The business risk for TON Ltd has change magnitude from previous years. The primary business risk of partake is the loan intellect placed on the money borrowed to fund look into projects.As the agreement with the bank states, that if the companys debt to equity ratio increases to over 1. 21. 0 the bank is allowed to demand immediate re remuneration. The analytical procedure has shown that the debt to equity ratio has change magnitude from 1. 021. 0, to 1. 111. 0 (Appendix B). This is of great concern to he issue concern of the business, and points out that the entities is highly leveraged and may be incapable to amass its debt obligations. Other factors concernin g going concern are the opposite meshworkability ratios (Appendix B).This risk of going concern can create considerable pressure for the manipulation, falsity or modification of monetary records in order to meet the agreement in place. The decline of the property market is also another(prenominal) increased business risk, as one on TON Lads major activities is expend in the property market. The decrease in the property market in conclusion decreases the value of assets in TON Ltd and such presents the risk of overstatement of the value, or understatement of the impairment of the property.This influences the flow liquid ratios, and may be the reason for an increased ratio (Appendix B), when there should be a decline as indicators drive presented. This is mainly apparent in the directors valuation of investment properties. (Note 8 of the financial reports). One property has not decreased from the previous year, and one was purchased in the current year. This could be an indic ation of a phonyulent misstatement. Competitors are another business risk for TON Ltd. One competitor of TON Ltd impart developed and patented a device similar to the one in which TON Ltd spent a considerable amount on.This highlights a risk of obsolescence of inventory for the company and an overstatement of assets as the expenditure hasnt been written off. The reportage of this expense into other non-current assets account has lead to an increase of 1900 percent in the trend statement (Appendix A), and an increase in the percentage of total assets by almost 13% (Appendix C). As with the property, the treatment of expenditure affects the current liquidity ratio, making impasse liquidity look better than it in truth is (Appendix B).If the amount was written off, due to it not providing any future economic benefit to the company then it would decrease the assets of the business, and increase the tax liability of the company. The factors highlighted higher up would get down placed pressure on the directors of the company. Considering the directors value certain financial report balances, these balances have a risk of being fraudulently mis say. These accounts are Investments (non-current), Property Plant and Equipment, and Intangible Assets (non- current).As discussed previously, the decline in the property market would indicate a decline to the value of the property held by TON Ltd. However, TON Ltd has not The pressures that might been placed on the directors, may have lead to the directors to not devalue the property. This can also be tell for the intangible assets account which contains technologies thats valued by the directors. These technologies have not been damage which is not normal, considering technology is regularly improving and therefore obsolete in a shorter period than other intangibles. Plant and Equipment also needs be looked at.Although there is no indication of misstatement in this account, in fact it has decreased in the trend and co mmon size statements (Appendix A and C) should be looked into. Appendix A Trend Statement 2013 2012 2011 sales deoxycytidine monophosphate% Cost of nigh(a)s sell 68% 85% deoxycytidine monophosphate% Gross kale% 109% one hundred% other gross vitamin C% operating 154% 100% Finance costs one hundred fifty% 128% 100% profit before Tax 103% 100% Tax outgo 103% 100% make profit 103% 100% 9000 $000 $000 cash 139% 100% handle and other receivables 131% 111% 100% Investments 110% 100% Inventories 110% 107% 100% other% 92% 100% heart current Assets 110% 108% 100% Non Current AssetsInvestments 150% 145% 100% Property, appoint &038 equipment 84% 92% 100% Intangibles 200% 200% 100% otherness% 100% 100% summate Non-current Assets 158% 130% 100% sum Assets 140% 122% 100% Current Liabilities condescension and other payable 104% 118% 100% provosts 59% 100% fundamental current Liabilities 101% 116% 100% Non Current Liabilities sank Loans 188% 125% 100% provosts 116% 114% 100% Total No n-current Liabilities 179% 124% 100% Total Liabilities 144% 120% 100% Net Assets one hundred thirty-five% 123% 100% Equity Share capital 100% 100% 100% Reserve 107% 100% 100% Retained Earnings 190% 163% 100% Total Equity% 123% 100% Appendix BActivity Ratios Receivables Turnover 4. 55 6. 32 Days in Receivables 80 58 Inventory Turnover 2. 19 2. 85 Days in Inventory 166. 53 127. 89 lucrativeness Ratios Gross profit 0. 32 0. 30 0. 25 Net profit 0. 07 0. 14 0. 13 go on Total Assets 0. 03 0. 09 0. 11 Return on Shareholders Equity 0. 07 0. 19 Solvency Ratios 0. 22 Times Interest clear 0. 63 1. 76 Liquidity Ratios current Ratio 1. 80 1. 54 1. 66 Quick Asset Ratio 0. 90 0. 79 0. 83 Appendix C Common Size Statement $000 $000 $000 sales revenue 100% 100% 100% 2. 17 Cost of goods sold 68% 70% 75% Gross profit% 25% other Revenue 7% 7% operatingFinance cost 11% 8% 6% profit Before Tax Tax Expense 6% 5% Net profit $000 $000 Current Assets cash 0. 15% 0. 25% 0. 22% change and other receivable s 11. 15% 10. 79% Investments 3. 36% 5. 91% 6. 56% Inventories 14. 80% 16. 45% 18. 75% other. 22% 0. 31% 0. 41% Total current Assets 29. 68% 33. 70% 37. 81% Investments 33. 59% 37. 26% 31. 25% Property, plant &038 equipment 14. 33% 17. 99% Intangibles 8. 96% 10. 28% 6. 25% 23. 75% Total Non-current Assets 70. 32% 66. 30% 62. 19% Total Assets 100% 100% 100% Trade and other payable 29. 99% 40. 2% 41. 68% provosts 1. 28% 2. 55% 3. 13% Total current Liabilities 31. 6% 43. 27% 44. 81% sank Loans 63. 80% 50. 91% 49. 04% provosts 4. 93% 5. 82% 6. 15% Total Non-Current Liabilities 68. 74% Total Liabilities 100% 100% 100% Net Assets 56. 73% 55. 19% Share capital 23. 65% 25. 94% 31. 88% Reserve 25. 30% 25. 94% 31. 88% Retained Earnings 51. 05% 48. 11% 36. 24% Total Equity% 100% 100% Question 2 Internal disciplines The lymph node of move Ltd has stated they have established improvements to their musical arrangements surrounding their innate controls.From the information that has been pro vided by the audit manager containing the new internal controls implemented at impress Ltd, the allowing table contains a list of the four internal controls that are potentially utile, the risk separately one could mitigate, and the appropriate tests of each of the identified controls. Strengths Effective Control Risk Addressed Test of Control l. accompaniment which allows the follow up of partly filled orders by the dispatch department manager. (Preventative control. ) l. Deals with the custody that happens in the sales process, dealing with shipping/ actors line in particular.The control helps to retain the overstatement of sales by accounting for part filled orders and not listing them as complete orders. It also helps to prevent the understatement of inventory by keeping a correct record of what has actually been dispatched. This deals with the occurrence and completeness assertions Examination of the reconciliation of shipments to invoices Monitor the checking of shipme nts, or inspect selected shipments, including partially filled shipments Inspection of documentation relating to shipments, and partially filled shipments IV.Computing and updating the node volume ratings that are used to apply discounts. Provides a requisition of duties by having the ratings calculated by one person, and authorized by another individual. It encourages the right recording of sales, and discounts applied. It allows discounts to be applied, with accordance to the companys indemnity. This deals with the accuracy assertion. Select a consume of invoices (with discounts applied to them), and check the evidence that the discount applied can be traced back to the approved list. Check against previous sales totals of the customer VIII.Reviewing of the grapple receivables analysis to obtain and highlight any accounts that are past 90 days. Allows the financial manager to follow up with the trade receivables clerk, and receive reasoning for the slap-up balances. Detect ive control) VIII. Deals with accounts receivable and mainly outstanding accounts. The control is in place to allow the detection of any abnormal balances, and bad debts. It encourages the chasing up of debtors before 90 days, the correct assessment of bad debts expense, It also helps to detect any customers that are of concern in these areas. The assertion here is classification. Assessment of outstanding accounts, and make inquiries with key supply about the outstanding amounts, and the possibility of payment. Examine against company, and accounting, policy on bad and doubtful debts. X. Chasing up outstanding receivables. Also makes sure that customers do not go over character reference limits by putting a hold on / delaying of shipments until a payment is received from the customer. (Preventative control) X. Deals with accounts receivable, bad debts, and sales/ inventory. The control allows for a plan thats been in placed to follow up on any outstanding debts, and or detect ba d and doubtful debts.The control is in placed to moderate sales/inventory are not completed and then shipped to customers who have outstanding accounts that the financial manager is uncomfortable with. It encourages correct credit procedures, chasing up outstanding accounts, and the correct valuation of accounts receivable. An assessment of outstanding accounts, and inquires with key staff about the outstanding amounts, and the chance of payment. Evaluate against company, and accounting, policy on bad and doubtful debts. Review the credit approval process, against customers with outstanding debt.Check against company policy The in a higher place table highlighted the potentially effective controls that get along Ltd has set in place. However though not all of the controls in placed were effective that the Audit Managers extract has identified, five out of the nine controls that ACT Ltd have in place had some impuissancees. The following section of this report go away highlight the five sales and receivables internal controls, and the weaknesses inherent in each one. Weaknesses The first weakness to be highlighted is the weakness of control two, this weaknesses completeness and occurrence.The lack of dissolution of duties in this control, allows an employee to misappropriate assets. The employee can even out up any misappropriation as they are involved in both the shipping of goods and the good turned whilst without any appropriate supervising or authorizing. Another weakness in this control is that the trade receivables clerk is the one individual in charge of all credit notes. Again, by the lack of segregation of duties, allows the employee to cover up falsified actions by having control of both transactions.The weaknesses in control lead are related to fraudulent activities, as with errors in the financial report, concerning unknowledgeable mistakes. The IT system is fairly new and is looked after by the sales director and not an IT expert. This weak ness can raise the risk of errors in the IT system. The prices of carry are gathered from the selling price master file, and as there is no password protection necessary for access to databases, the selling price master files, and every other file are all plain to inappropriate changes.This allows for any fraudulent activities and as well, honest mistakes dealing with the ever-changing of database files. The most evident weakness in this control is the wide strain check performed by the trade receivables clerk to verify the accuracy of the invoices. A high risk of misstatement can arise, whether intentionally or unintentionally. Some simple controls of passwords, federal agency of hangers, authorization and approval of invoices would help to reduce the weaknesses, and thus the risk. Control five has a few weaknesses that allow the risk of fraudulent activities, and segregation of duties.This control entitles the trade receivables clerk, who also creates invoices, to post them the general Journal. As there is not segregation of duties, this can allow the clerk to cover up any fraudulent activities they may be par taking in. Add to this weakness, not only can fraudulent activities be covered up, only when unintentional errors may not be highlighted before the sales invoices are posted to the general ledger. Segregation of these duties, posting to the ledger, and/or receiving approval and authorization of the sales invoices and general ledger, can minimize the risk surrounding the weaknesses of control.As stated above, segregation of duties is visibly a weakness in the sales and receivables of ACT Ltd. This weakness also exists in control 6. The trade receivables clerk, who computes all the data for the invoices, is also the same person who accepts the receipts from debtors, compute the payments, prepares the bank ready slip, and reconciles the trade receivables ledger to the debtors control account in this control. This is plainly gentility the risk tha t the clerk could possibly partake and conceal any fraud during their normal course of duties.Sufficient segregation of duties is very vital to reducing this risk, and therefore reduces the weaknesses highlighted in this control. Control sevens main weakness deals around the controls in the IT system and the controls around the databases. Control seven includes the computer generating an aged analysis at the end of the month, based upon all invoices completed. However with insufficient controls as highlighted in control three and our, the information in the report is likely to have errors. The fact that anyone can easily access the database means that the invoices computed can be fraudulently created, deleted or modified.Therefore occurrence and accuracy assertions can plainly be found to be inaccurate. Control seven can only be strengthened if the controls in place, the likely hood of misstatement in this control is only going to carry on. Assessment of Internal Controls As highlig hted in the report the new internal controls that are in placed at ACT Ltd have both strengths and weaknesses. As such the reliance on these internal controls fifers in different areas. The strengths outlined above are obviously of less(prenominal) concern then the weaknesses outlined.The controls recognized as effective require more tests of control rather than substantive testing, as they can be relied upon more than the controls that have been recognized with weaknesses. As for the controls with weaknesses, they are require to have more substantive testing as the controls cannot be relied upon as much. The strengths highlighted surround delivery and shipping (control 1), the accuracy of discounts applied (control 4), aged trade receivables, allow up of aged trade receivables, and the accuracy of bad and doubtful debt expense (controls 8 and 9).The assertions attributed to these areas can therefore be relied upon more than the other controls. The tests of controls outlined above s hould be undertaken on these controls identified to ensure that the controls exist and can be relied upon. The controls around these areas can be class as less than high. The weaknesses highlighted concern largely the segregation of duties, and controls around the IT system. These two weaknesses are common crosswise all the weaknesses identified. As such, these controls cannot be relied upon, at least until the management of ACT Ltd correct the weaknesses identified.Therefore the risk assessment of these areas can be classed as high, and thus require no test of controls, and a greater emphasis on substantive testing. References Gay, G. E. , &038 Sentiments, R. (2012). Auditing and assurance services in Australia (5th deed. ). Roseville McGraw Hill. ACACIA. (2014 or 2013). Auditing and assurance handbook. Brisbane butt Wiley &038 Sons Australia. Accounts Receivable Account Receivable has increased while sales has decreased. Days in receivables ratio has also increased considerably.T his highlights a high risk Current Investments The decrease in current investments needs investigating, as well as why it has been impaired and has the impairment correctly been done. Reasoning for it. External valuation by an expert. For it. Used, deferred development expenditure requires investigation, due to the more obsolescence of the companys laser development.