Auditing: Sales and Receivables Control

This assignment focuses on analyzing the internal controls surrounding sales and receivables in a business context. Students are tasked with identifying potential weaknesses in these processes, providing specific examples, and suggesting remedial measures to strengthen control. Additionally, the assignment requires students to discuss appropriate audit procedures that can be employed to assess the effectiveness of these controls.

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

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AUDITING THEORY AND PRACTICE
Executive Summary
The present study aids in gaining comprehensive understanding regarding auditing theory as
well as practice with regard to the functions of corporations. In essence, this segment
critically evaluates different accounts heads, risks connected to auditing of the accounts and
the actions that can be carried out for diminution of the risks of audit. Additionally, the
current study also examines and analyses significant financial ratio for evaluation of risk of
the business entity. Moreover, this piece also illustrates in internal control processes of the
specific business with emphasis on systems of competent control as well as risk mitigation
processes. Moving further, this segment also elucidates in detail about the identified
limitations in internal structure of control of the functions of business entity.

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AUDITING THEORY AND PRACTICE
Table of Contents
Solution to Question 1A:............................................................................................................2
Solution to Question 1B:............................................................................................................4
Solution to Question 2A:............................................................................................................7
Solution to Question 2B:..........................................................................................................10
References................................................................................................................................11

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AUDITING THEORY AND PRACTICE
Solution to Question 1A:
Analytical of different account heads:
Receivable:
- Accounts: Accounts receivable is calculated by evaluating credit sales with the
average time of receivable.
- Analysis: Based on business case, it can be stated that all the activities associated to
receivables are carried out by officials responsible for handling receivable. For
example, customer returning medical tools after citing proper reasons of returning,
specific notes drawn in favour of buyers and many others (Stewart & Shamdasani,
2014). Thus, high risk is said to be involved in this case.
- Risk of audit: there exists a risk that the trade receivable might perhaps get
misappropriated by firm’s official and lower amount of receivable might be
registered.
- Different actions connected to receivables trade can be segregated among different
members for lessening the audit risk (Reporting et al, 2017).
Investment Account:
-Accounts- Investments can be transformed into cash within a period of 3 months to 12
months
-Evaluation- Investments susceptible to different accounting system is said to be at medium
level (Hardy, 2014).
- Audit risk – Fundamentally, inherent risk assessment might be associated to investment
carried out without considering diverse risks.

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AUDITING THEORY AND PRACTICE
- Audit steps for lessening risk – The return acquired on specific investments can be assessed
at regular intervals (Hay et al., 2016).
Property Resources:
- Accounts: Accounts related to property resources are necessarily related to fixed asset
accounts along with amount of depreciation
-Evaluation: Improper registration of resources and inappropriate presentation of
depreciation can pose high level of risk (Bik et al., 2017).
-Audit Risk: Auditor might not distinguish resources used for period more than 180 days and
for period lower than 180 days in a specific year in case if resources are not registered
suitably (Hay et al., 2016)
-Audit Steps for decreasing risk- ledger for asset, examination of purchase and sales of
property resources can be examined.
Intangible Assets
Accounts: Accounts associated to intangible assets are goodwill, copyrights and patents.
Evaluation: Intangible asset need to be evaluated correctly in a bid to assess the value and
mode of recognition
Audit Risk: Intangible assets necessarily have no physical subsistence and the procedure of
determination of intangible asset’s fair value can be regarded to be difficult (Moroney et al.,
2014).
Steps for reducing risk: Fair value of different intangible assets can be determined by
proficient experts. Attainment of control over the procedure of determination of fair value of
assets aids in diminution of risk.

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AUDITING THEORY AND PRACTICE
Research and development of corporation
Accounts: As the research exercises of especially GPSA was not promising, expenditure on
the same can be necessarily be capitalized as the development was un-flattened.
Evaluation: There lies a very thin line between successful and unsuccessful research and
development. Because the disbursements on research and development are comparatively
high, inappropriate recognition lead to high level of risk (Carey et al., 2013).
Audit of Risk: The inherent risk associated to expenditure on research as well as
development is the categorization of research work as either successful or unsuccessful
Steps of audit for risk diminution: Specific ledger that can be connected to expenditure
need to be assessed appropriately. Additionally, proper market research can be carried out
before establishment of product (Houghton & Campbell, 2013).
Solution to Question 1B:
Analysis of key financial ratio for evaluation of risk associated to business
Return on Equity (ROE):
Analysis of financial assertions reflects that the return on equity is seen to have a downward
trend. ROE decreased 22.7% in 2015 to 7.19% in 2017. This reflects decreased potential of
the firm to generate profits from investments and risk on profitability on shareholder’s equity.
Return on Assets (ROA):
Analysis of return gained on assets of the business concern is observed to have a downward
trend. In essence, this has necessarily decreased from 15.52% in 2015 to 4.86% in 2017. This
implies that the capability of the business concern to acquire gains against available resources
is diminishing (Stewart & Shamdasani, 2014).

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AUDITING THEORY AND PRACTICE
Profit margin:
Analysis of profit margin (net) of the corporation shows a decreasing trend. Essentially, the
same has decreased from 15.52 in 2015 to 4.86% in 2017. In essence, this reflects that the
earnings both before tax and interest with potential of business concern measured against
resources is decreasing (Reporting et al., 2017). Therefore, there is said to be profitability risk
of the corporation.
Time earned interest:
Analysis of report reveals that the time for which corporation’s interest earned during a
particular period declined to 1.90 in comparison to previous year’s figure of 3.51 in 2016 and
4.10 times recorded in 2015. Thus, there subsists a risk of saving as the corporation is not
able to save adequate amount to generate interest income (Hardy, 2014).
Analysis number of days in receivables-
The number of days in receivables has increased from 53.24 days to nearly 83.07 over the last
two years in the two years (2015 and 2017). Thus, there subsists a risk of bad debt from
particularly the receivables.
Analysis of current ratio:
Although current ratio of the firm is observed to have a rising trend, the ratio of the
corporation is enumerated to be 1.80 during the year 2016. Essentially, this reflects the risks
of not using working capital efficiently by the management of the corporation (Hay et al.,
2016).

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AUDITING THEORY AND PRACTICE
Analysis of debt equity ratio:
A superior debt equity ratio (that is higher than 1) replicates that the corporation is highly
leveraged. Effectively, this shows that the firm has also gained more funds by means of debt
financing in comparison to equities (Bik et al., 2017).
Solution to Question 2A:
Process of internal control
a) Efficient control
Pay-out of bonus: Bonuses disbursed to administrative officials can be evaluated by the
shareholders of the firm. In case if there is variance with the firm’s budget designed on
monthly basis, the individual in charge can be asked to illustrate the reason behind the
variation
Fortification of password: the implementation program was appropriately fortified with
passwords limited free admission (Hay et al., 2016).
Allowed Concession-Concessions permitted to different customers are validated by
specifically the director of sales before upgrading allowable discounts to different customers.
Receivable from trade: Receivables are fused with power of debtors during the closing of
each month
Aging Analysis: Aging analysis for receivables from trade are usually presented utilizing the
computers at the end of every month, taking into consideration all sales invoices that can
essentially be processed into the particular system (Moroney et al., 2014). This is carried out
by controllers of finance. In particular, trade receivables for more than 890 days are

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AUDITING THEORY AND PRACTICE
essentially segregated and for this the official responsible for handling receivable is asked to
mention the main cause behind delay in payment.
Doubtful Debt: While preparing follow up strategy for doubtful debtors when balance is
over and above the prescribed limit, the shipment of additional products to particular
customers is necessarily put on hold in case if minimum amount of agreed limit is not
acknowledged (Carey et al., 2013).
b) Mitigation of Risk
Accessibility to the database:
Even if strict password is applied for controlling the accessibility on particular programs
related to IT operations, admittance to company’s database is not fortified by password that
subsequently can expose the entire system to risk of illicit admittance (Houghton &
Campbell, 2013).
Delivery Notes:
Fundamentally, shipping tiles to specific customers directs the way towards generation of
particular manuals notes. Essentially, this has escalated to new heights in the recent years.
This necessarily leads to both intended or else unintended faults related to delivery (Carey et
al., 2013).
Engagement of a single person for diverse activities:
Various business actions associated to receivables from trade can be carried out by the
receivable official of the corporation. Say for example, returns of diverse customers on
specific medical instruments acquired after determination of reason of getting return, credit

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AUDITING THEORY AND PRACTICE
note drawn in favour of consumers can be properly raised by the official responsibly for
handling receivable (Houghton & Campbell, 2013).
c) Test of control
Test of control can be regarded as procedure of assessment that can be utilized for assessment
of effectiveness of internal control process used by the client corporation. Essentially, tests of
control can be categorized as follows:
-New Transaction- Under this specific system, a novel transaction is introduced to assess the
system of internal control (Houghton & Campbell, 2013).
-Inspection- Under this particular arrangement, the associated documents are evaluated to
assess the system of internal control
-Examination- Under this specific system, the associated documents are evaluated utilizing
stamps, signatures as well as other modes of signatures for analysing control (Moroney et al.,
2014)
-Observation-Under this particular system, the business procedures under consideration along
with the associated internal system of control are examined thoroughly.
Effective Control that can be used for test of control is necessarily presented below:
-Disbursement of bonus – Observation strategy of control test can be performed for this
reason (Moroney et al., 2014)
-Password Fortification – Inspection strategy of control test can be performed for this reason
-Allowance of discount – Re-performance strategy of control can be performed for this
reason

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AUDITING THEORY AND PRACTICE
-Receivables derivable from trade – Re-performance strategy of control test can be performed
for this reason (Moroney et al., 2014)
-Aging Analysis- Both observation along with inspection strategy of control test can be
performed for this reason
-Doubtful debt- Re-performance strategy of control test can be performed for this reason
(Hay et al., 2016).
Solution to Question 2B:
Identified weaknesses in internal control for specifically sales and receivables of trade
Sales:
-The business concern expends bonuses to the management officials based on the volume of
sales. Nevertheless, there are possibilities that volume of sales might enhance misleadingly.
- The company delivers manual delivery notes for tile sales that are exposed to diverse faults,
scam or else material misstatement.
-Sales journal are also prepared and presented on monthly basis, nevertheless, there remains
possibilities of misplacement of diverse manual documents (Houghton & Campbell, 2013).
Receivables from trade:
-The officer in charge of receivables is also held responsible for actions that subsequently
might lead to intended else wise unintended actions of fraud, faults or else material
misstatement.

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AUDITING THEORY AND PRACTICE
-Receivables from trade are also merged with bank receipts at the conclusion of each month
that is fairly good time for settlement of major things for example, receivables (Houghton &
Campbell, 2013).

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AUDITING THEORY AND PRACTICE
References
Bik, O., Hooghiemstra, R., Bishop, C. C., DeZoort, F. T., Hermanson, D. R.,
Officers’Judgments, F., ... & Glover, S. M. (2017). Auditing: A Journal of Practice &
Theory A Publication of the Auditing Section of the American Accounting
Association.
Carey, P., Knechel, W. R., & Tanewski, G. (2013). Costs and Benefits of Mandatory
Auditing of For‐profit Private and Not‐for‐profit Companies in Australia. Australian
Accounting Review, 23(1), 43-53.
Hardy, C. A. (2014). The messy matters of continuous assurance: Findings from exploratory
research in Australia. Journal of Information Systems, 28(2), 357-377.
Hay, D., Stewart, J., & Botica Redmayne, N. (2016). The Role of Auditing in Corporate
Governance in Australia and New Zealand: A Research Synthesis.
Houghton, K., & Campbell, T. (2013). Ethics and auditing (p. 354). ANU Press.
Moroney, R., Campbell, F., Hamilton, J., & Warren, V. (2014). Auditing: A Practical
Approach. Wiley Global Education.
Reporting, D. W., Berger, L., Perreault, S., Wainberg, J., Courtois, C., Gendron, Y., ... & Li,
C. (2017). Auditing: A Journal of Practice & Theory A Publication of the Auditing
Section of the American Accounting Association.
Stewart, D. W., & Shamdasani, P. N. (2014). Focus groups: Theory and practice (Vol. 20).
Sage publications.