Internal Control Effectiveness

In this assignment content, various internal control procedures are discussed, including effectual control, risk mitigation, and test of control. Effectual control refers to the disbursement of bonuses, protection of passwords, permitting discounts, receivables from trade, aging evaluation, and doubtful debt. Risk mitigation involves controlling admittance to databases, physical delivery notes, and involvement of single individuals for diverse activities. Test of control includes re-performance, inspection, and observation tactics used to examine the efficiency of internal controls in detecting or preventing material misstatements. Weaknesses in internal control are identified for sales and trade receivables, including manual delivery notes, sales journals, and potential fraudulent activities.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
University Name
Student Name
Authors’ Note

2
AUDITING THEORY AND PRACTICE
Table of Contents
Answer to Question 1A:.............................................................................................................3
Answer to Question 1B:.............................................................................................................6
Answer to Question 2A:.............................................................................................................8
Answer to Question 2B:...........................................................................................................11
References................................................................................................................................13

3
AUDITING THEORY AND PRACTICE
Answer to Question 1A:
Evaluation of different heads of accounting
Accounts Receivable
- 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.
Investment

4
AUDITING THEORY AND PRACTICE
-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).
Property assets/resources
-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).

5
AUDITING THEORY AND PRACTICE
-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.
Intangible Assets
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.
Capitalization of firm’s research and development
- 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,

6
AUDITING THEORY AND PRACTICE
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).
Answer to Question 1B:
Evaluation of ratio for assessment of business risk
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

7
AUDITING THEORY AND PRACTICE
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 corporation.
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).
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).

8
AUDITING THEORY AND PRACTICE
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.
Answer to Question 2A:
System of internal control
(a) Effectual control
 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.

9
AUDITING THEORY AND PRACTICE
 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).
(b) Risk Mitigated
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

10
AUDITING THEORY AND PRACTICE
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).
(c) Test of control
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:
-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).

11
AUDITING THEORY AND PRACTICE
-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).
Answer to Question 2B:
Weaknesses in internal control for particularly sales as well as trade receivable
Sales –
-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
-Sales journal are also presented on monthly basis, however, there remains chances of
misplacement of different manual documents (Hayes et al., 2014).
Trade Receivables-
-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

12
AUDITING THEORY AND PRACTICE
-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).

13
AUDITING THEORY AND PRACTICE
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.

14
AUDITING THEORY AND PRACTICE
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.