Internal Control & Audit Procedures

This assignment delves into the realm of internal control systems within a company, specifically focusing on their efficiency in detecting and preventing material misstatements. It outlines various testing methods used by auditors, including inspection, observation, and re-performance, to evaluate these controls. The discussion also highlights specific internal control weaknesses in sales and trade receivables areas, such as the influence of bonuses on sales figures and potential conflicts of interest in managing both sales and receivables.

Running head: AUDITING ASSIGNMENT
Auditing Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer 1A:......................................................................................................................................2
Answer 1B:......................................................................................................................................6
Answer 2A:......................................................................................................................................7
Answer 2B:....................................................................................................................................10
References......................................................................................................................................12

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Answer 1A:
The evaluations of the different accounting heads:
Accounts Receivable:
 Accounts- This refers to the whole of the amount, which is expected to be received by the
company pertaining to particular goods and services delivery by the same. The accounts
receivable by a company can be calculated with the help of analysis of the credit sales
with that of the average receivable time. Therefore, the account associated to that of the
receivable account is the credit sales account.
 Evaluation- Based on the concerned cast study it can be stated that the trade receivable
official takes all the necessary actions regarding that of the receivables. For example, if a
consumer returns a medical instrument, then post-documentation of the reason of
returning the instrument and completion of the documentation, the credit notes that are
specifically drawn in the customer’s favor, is raised mandatorily by trade receivable
clerk. Moreover, the posting in the journals are then sent to the person preparing the
bank’s deposit slip, along with that of the receipts. Therefore, the risk, in this case can be
considered to be high (Vasarhelyi et al., 2012).
 Auditing risk- The trade receivable official mandatorily takes all the necessary actions
which are related to the same. Therefore, in this scenario, there remains a risk in the
matter that the official may probably misappropriate the receivable or lesser receivable
amount may also be recorded by mistake.
 Risk reducing steps in auditing- In order to reduce the risks in relation to the accounts
receivable of that of GSPA, various actions can be sorted out which are connected to

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receivables and these actions can be allocated appropriately among relevant staff
members.
Investment:
- Account- The investment, in essence, can be converted to that of cash within a three
months time period to a period of nearly twelve months. This is registered under that os
the current assets of a company and this is considered as cash or cash equivalent. The
linked accounts to this are known to be investment accounts.
- Evaluation- Investments are generally vulnerable to the diverse accounting systems and
the treatment of the investments might also differ. Therefore, the risk level in relation to
that of the current investment of a company can be considered to be at medium level
(Beasley, 2015).
- Auditing risk- The inherent risk of assessment, which is possibly related to that of the
current investment, fundamentally includes the investments, which are done without
considering the different factors of risk and returns.
- Risk diminishing steps in auditing- To reduce the concerned risk, the return which is
earned from the investment has to be regularly monitored. The previous trends in growth
in investments should also be kept in observation and proper analysis has to be done
before the firm undertakes any investment decisions (Vasarhelyi et al., 2012).

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Property assets/Property resources:
- Accounts- The accounts that are associated to the property assets are mandatorily those of
the fixed assets and also that of the amount of depreciation.
- Evaluation- In this case, if there is no proper registration of the property assets or if there
is no proper mentioning of the depreciation occurring, then there can be large distortions
in the assertions of the financial accounts. Therefore, the risks, which are associated with
that of the property resources, can be considered to be high.
- Auditing risk- In this case, the assessor may not differentiate the resources, which were
used for over 180 days and for those which were used for less than 180 days in that
specific year. This can happen if the resources are not properly recorded.
- Risk reducing steps in auditing- It is needed to properly assess the ledger for the
particular asset in order o check the sales and purchase of any kind of property assets. In
addition to that, the deleting as well as the adding up along with that of the impairing also
should be correctly analyzed and monitored (Hayes, Wallage & Gortemaker, 2014).
Intangible Assets:
 Accounts- In general, patent, goodwill or copyright are the specific accounts that are
basically related to that of the intangible assets.
 Evaluation- The analysis of the intangible assets has to be appropriately done to examine
the mode of recognitions and the value of those assets. The economic life of definite or
indefinite period of that of the resources has also be checked. In this context, there is high
risk in relation to this account.

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 Auditing risk- There is no physical existence of the intangible assets in general and
therefore, the ascertainment process of the fair value of these types of assets is considered
to be not so easy. There is also presence of variance between the acquirement cost and
the fair value of the intangible assets of the firm in addition to this.
 Risk reducing steps in auditing- The fair value of that of the different assets of this type
can be ascertained with the help of the professionals. The control of the fair value
determination of the resources can also help in risk reduction in this context (William Jr,
Glover & Prawitt, 2016).
Capitalization of the research and development of the firm:
- Accounts- The research activities of the GPSA were not found to be that much
flourishing. Therefore, the expends can get debited to loss account as well as to the profit
account. However, the development disbursement can be capitalized as there was
unbeatable development in this case.
- Evaluation- There is a very thin difference between the successful and not successful
research and development. The disbursements on these activities involving bigger
amounts, non-appropriate recognitions of these numbers can lead to creation of high
levels of risk.
- Risk in auditing- The risk which is inherently involved in the expenditures in the field of
research and development is that of categorization of the research activities in successful
and failed attempts. In addition, the amounts that are involved in this actions are not so
easily enumerated.

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- Risk reducing steps in auditing- The ledger which is specifically linked to that of the
expenditure should be monitored and examined correctly. In addition to this, before
establishing the product as a successful or a failed one, a robust market research has to be
conducted.
Answer 1B:
Evaluation of assessment ratio of business risk:
Returns on equity-As per the analysis of the financial pronouncements asserts, the returns on that
of the equity has a falling trend and the same has experienced a fall from 22.7% in 2015, to that
of a striking 7.19% by 2017. This in turn shows that the profit generating capacities of the firm,
out of its investments are lowering down with time. Therefore, there is risk related to the
profitability on the shareholders’ equity.
Analysis of returns on the total assets- The returns earned by the company on the total assets is
also observed to be decreasing. This has fallen to 4.86% in 2017, from that of 15.52% prevailing
during the year 2015. This contributes to the assertion that the firm’s income pre-tax as well as
the interests and the capacity of generation of the gains of the firm has been decreasing.
Therefore, risks can be seen on the corporation’s profitability scenarios.
Net profit margin analysis- The net profit of that of the concerned company shows a trend which
is declining as the same decreased to 1.90 times from that of 3.51 times (2016) and 4.10 times
(2015). Therefore, it can be concluded that there are high risks additionally associated to the

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savings as the concerned company is unable to generate adequate savings from interest earnings
creations.
Analysis of accounts receivables days- The day in that of the accounts receivable has increased
from 53.24 days (2015) to that of 83.07 (2017). This indicates towards the presence of bad debt
risk from the receivables mandatorily.
Current ratio analysis- The current ratio of the concerned company is showing an upward trend
with the ratio being 1.80 during 2016. This mandatorily indicates that the risk of non-utilization
of the working capital in an effective manner by the management of the concerned company.
Debt to equity ratio analysis- A debt to equity ratio, which is high and greater than one, indicates
that the concerned company is highly leveraged and the company through debt financing has
gathered more funds than that of the equities. This has the potential to increase the level of risk,
which is associated to the payments that have to be made to the financers and creditors as a high
debt amount implies greater interest amount (Knechel & Salterio, 2016).
Answer 2A:
Internal control system:
a. Effectual Control:
Bonus Disbursement- The bonus which the management official receives can be
measured by the shareholders of the concerned company. However, if there are variances

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in the case of the prepared budget (which is monthly prepared), the accountable person
can be asked for the reasons behind the concerned differences.
Password protection- There were strict protection mechanisms by usage of passwords for
the application programs which helped in restriction of free admittance. The IT system
implementation on part of the company had successful implications for the concerned
firm (Jia, 2016).
Permitting discount- The permitted discount to the customers who are valuable, is done
specifically by the director of sales before up gradation of the permissible discounts.
Trade receivables- the receivables from that of the trade are merged to the debtors control
during each months’ closing.
Aging evaluation- At the end of a month, the aging evaluations for the receivables are
shown after accounting the invoices which are processed in the concerned system. The
aged evaluation is obviously assessed further by the controller of the finance. The
receivables over 890 days are mandatorily kept in separation and the clerk with the
responsibility for trade receivables is asked for the reasons of delay in the payments.
Doubtful Debt- The preparation process of the strategy to follow up the debtors who are
doubtful has the balance above the limit which is prescribed. However, the further
shipment of products to particular customers is withheld mandatorily in the cases where
the minimum amount which is prescribed is not accepted (Titera, 2013).
b) Mitigated Risk:
Admittance to database- Though there is implementation of strict password in the
admittance control on the particular programs which is related to the functions of the IT,

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the same for the database does not have protection of password. This poses the risk of
exposing the system to unlawful access and activities (Sookhak et al., 2017).
Notes on Physical Delivery- the shipping tiles generate manual notes which has risen
with time. This in turn exposes the system to unintentional as well as intentional mistakes
which are related to the delivery amount.
Single person involvement for different activities- The commercial trade receivable
related activities of the firm can be done by the firm’s clerk. For example, the customer’s
return on medical equipments, earned after the ascertaining of the reason of document
completion and the clerk can form the credit notes. The posting of the journals with
receipts from the debtors are sent to the accountable official for the bank’s deposit slip. If
the same individual takes the different actions then it can lead to the risk of frauds, faults
and misappropriation, which can be intentional or unintentional (Knechel & Salterio,
2016).
c) Text of control:
This process of audit can be utilized to examine the internal procedure’s efficiency, which the
company uses for detecting and prevention of wrong statements of material. The assessor, based
on the test results can take decisions regarding the level of control of the internal system. The test
can be categorized as follows:
- Inspection- The related documents can be assessed in this system using authorization,
stamps and also signatures of the examination of the controls.

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- Observation- The process that is in action and the system which is linked internally can
be assessed.
Effective controls are as follows:
- Bonus disbursements- For this tactic of observation of control can be undertaken
- Password protection- For this inspection tactic can be used
- Discount allowance- Re-performance tactic can be implemented
- Trade receivables- The same tactic can be used
- Analysis of Aging- Observation tactic and inspection tactic can be utilized
- Doubtful Debt- For this Re-performance tactic can be used
Answer 2B:
Internal control weaknesses (Specifically in sales and trade receivables):
Sales:
- The bonuses are disbursed by the firm to the officials in the management based on the
volume of sales. But this can also misleadingly increase.
- The declaration of the manual notes for sale can be faulty, fraudulent or there can be
wrong assessment
- The journals of sales are presented monthly, which creates avenues of manual documents
misplacements.

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Trade Receivables:
- The official accountable for this is also accountable for the business receivables which
are related to the activities which intentionally or unintentionally can lead to fraudulent
activities or material misstatement
- The trade receivables are also merged to the bank’s receipts at the month ending, which is
a big time for the settlements of items like that of the receivables (William Jr, Glover &
Prawitt, 2016).

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References
Beasley, M. S. (2015). Auditing cases: An interactive learning approach. Prentice Hall.
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.
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.
Titera, W. R. (2013). Updating audit standard—Enabling audit data analysis. Journal of
Information Systems, 27(1), 325-331.
Vasarhelyi, M. A., Alles, M., Kuenkaikaew, S., & Littley, J. (2012). The acceptance and
adoption of continuous auditing by internal auditors: A micro analysis. International
Journal of Accounting Information Systems, 13(3), 267-281.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic
approach. McGraw-Hill Education.

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