Financial Analysis and Internal Control Report - University

This report presents a detailed financial analysis of a company, examining its financial statements through variance, trend, and ratio analyses. The variance analysis compares financial figures between two years, identifying significant changes in sales, cost of goods sold, gross profit, and various balance sheet items like receivables, inventory, and property, plant, and equipment. Trend analysis evaluates historical financial trends over several years, highlighting inconsistencies in operating expenses, interest expenses, and asset turnover. Ratio analysis assesses profitability, efficiency, solvency, and liquidity, pointing out concerns like declining profit margins, asset turnover, and increasing debt ratios. The report also addresses the going concern assumption, identifying potential risks due to declining net income and increasing liabilities. Furthermore, it examines internal controls, including segregation of duties and approval processes, and proposes tests of controls and identifies weaknesses. Finally, the report discusses application controls in a new system implementation, focusing on access control and transaction verification.

Assignment 2

Contents
Question 1........................................................................................................................................3
Part 1............................................................................................................................................3
Part 2............................................................................................................................................6
Part 3............................................................................................................................................6
Part 4............................................................................................................................................7
Question 2........................................................................................................................................8
Part 1............................................................................................................................................8
Part 2............................................................................................................................................8
Part 3............................................................................................................................................9
Question 3......................................................................................................................................10
Part 1..........................................................................................................................................10
Part 2..........................................................................................................................................10
Part 3..........................................................................................................................................10

Question 1
Part 1
Variance analysis of the financial statements
This analysis provides a comparison between financial statements of two years by making
calculations of change in financial figures from one year to another (Marshall, McManus, &
Viele, 2004). It also calculates the percentage change in the financial figures from one year to
another.
Variance analysis for income statement
2017 2016 Variance $ Variance %
Increase or (decrease)
Sales $ 3,080 $ 2,660 $ 420 15.789%
Cost of Goods Sold $(2,350) $(2,010) $ (340) -16.915%
Gross Profit $ 730 $ 650 $ 80 12.308%
Other Expenses $ (350) $ (390) $ 40 10.256%
Interest $ (300) $ (120) $ (180) -150.000%
Net Profit $ 80 $ 140 $ (60) 42.857%
Variance analysis for financial position
2017 2016 Variance $ Variance %
Increase or (decrease)
Assets
Current assets
Trade and other receivables $ 772 $ 660 $ 112 16.970%
Inventory $ 680 $ 510 $ 170 33.333%
Total current assets $ 1,452 $ 1,170 $ 282 24.103%
Non-current assets
Property, plant and equipment $ 1,810 $ 1,500 $ 310 20.667%
Intangible assets $ 40 $ - $ 40 ∞ %
Total non-current assets $ 1,850 $ 1,500 $ 350 23.333%
Total assets $ 3,302 $ 2,670 $ 632 23.670%
Liabilities and equity
Liabilities
Current liabilities
Trade and other payables $ 835 $ 795 $ 40 5.031%
Current borrowings - Bank Overdraft $ 52 $ 40 $ 12 30.000%
Total current liabilities $ 887 $ 835 $ 52 6.228%

Non-current liabilities
Non-current borrowings - Secured loan $ 1,500 $ 1,000 $ 500 50.000%
Total liabilities $ 2,387 $ 1,835 $ 552 30.082%
Net Assets $ 915 $ 835 $ 80 9.581%
Equity
Share capital $ 300 $ 300 $ - 0.000%
Retained earnings $ 615 $ 535 $ 80 14.953%
Total Equity $ 915 $ 835 $ 80 9.581%
This variance analysis raise various concerns related to the significant variance
a. Organization’s revenue increased by the 15.79%, on the other hand, this increase is not
reflected by an increase in gross profit. Gross profit of the organization shows increase on
by12.31% due to a significant increase in the cost of goods sold by 16.92%.
b. Inventory and receivables of the organization both showing a significant increase of
33.33% and 16.97% respectively. These balance sheet balances do not have a tendency for
such significant increase.
c. Increase in Plant, property, and equipment and bank liabilities is because of new
investment by the way of bank liabilities.
Trend analysis is the financial analysis of calculating trends of historical financial balances
(Guay, Samuels, & Taylor, 2016). Under this analysis, any significant change in such trend is
observed by the auditor of the organization.
Trend analysis for income statement
2017 2016 2015 2014
Sales 100.00% 100.00% 100.00% 100.00%
Cost of Goods Sold -76.30% -75.56% -76.02% -73.97%
Gross Profit 23.70% 24.44% 23.98% 26.03%
Other Expenses -11.36% -14.66% -13.11% -10.69%
Interest -9.74% -4.51% -3.40% -0.15%
Net Profit (Loss) 2.60% 5.26% 7.48% 15.19%
Trend analysis for financial position
2017 2016 2015 2014
Assets
Current assets
Trade and other receivables 23.38% 24.72% 25.38% 39.92%
Inventory 20.59% 19.10% 20.56% 21.42%

Total current assets 43.97% 43.82% 45.95% 61.34%
Non-current assets
Property, plant and equipment 54.82% 56.18% 54.05% 38.66%
Intangible assets 1.21% 0.00% 0.00% 0.00%
Total non-current assets 56.03% 56.18% 54.05% 38.66%
Total assets 100.00% 100.00% 100.00% 100.00%
Liabilities and equity
Liabilities
Current liabilities
Trade and other payables 25.29% 29.78% 28.55% 41.80%
Current borrowings - Bank Overdraft 1.57% 1.50% 1.23% 1.67%
Total current liabilities 26.86% 31.27% 29.79% 43.47%
Non-current liabilities
Non-current borrowings - Secured loan 45.43% 37.45% 29.38% 0.00%
Total liabilities 72.29% 68.73% 59.17% 43.47%
Net Assets 27.71% 31.27% 40.83% 56.53%
Equity
Share capital 9.09% 11.24% 17.63% 31.35%
Retained earnings 18.63% 20.04% 23.21% 25.18%
Total Equity 27.71% 31.27% 40.83% 56.53%
This trend analysis raise various concerns related to significant trend variance
 Operating expenses showing a decline in the present year however in all other three years
it is having increasing trend.
 Interest expenses showing a significant increase due to increase in bank liabilities.
 Plant, property, and equipment are showing declining trend even after having a
significant investment in this asset.
Ratio analysis is the analysis which shows profitability, liquidity, solvency etc. relationship
between various financial figures (Weygandt, Kimmel, & Kieso, 2015).
Year ending 2016 2017
Profitability ratios
Net Profit margin 5.26% 2.60%
Operating Profit Margin 9.77% 12.34%
Return on common stock equity 16.77% 8.74%
Return on Total Assets 5.24% 2.42%
Efficiency ratio
Accounts receivable turnover ratio 4.09 4.04
Average collection period ratio 87.97 89.06

Accounts Payable turnover ratio 3.58 3.85
Accounts Payable turnover in days ratio 100.69 93.39
Fixed asset turnover ratio 1.77 1.66
Total asset turnover ratio 1.00 0.93
Long-term solvency ratio
Debt Ratio 68.73% 72.29%
Times interest ratio 2.17 1.27
Liquidity ratio
Current ratio 1.40 1.64
This ratio analysis raises various concerns
 Operating profit ratio showing an unexpected increase
 Accounts payable ratio shows an unexpected decline
 Asset turnover ratios are also showing decline due to new investment in assets
 The debt ratio is showing an increase due to increase in debt liabilities
 A current ratio showing an unexpected increase
Part 2
Going concern is a significant accounting assumption. As per this assumption, every analyst for
the economic business assumes that such business will continues till the end of unforeseeable
future period (Amin, Krishnan, & Yang, 2014). Every organization prepares financial statements
using historical values due to this concept. The organizations which are not expected to remain
going concern in future will make their financial statements by using realization values in place
of historical value.
Moreover, if an organization shows some indicators effecting going concern assumption
adversely for the organization then such organization does not expect to remain going concern.
Such indicators can be accumulated losses, nonpayment of dues, loss of market etc.
Furthermore, in the present case, the organization is having additions in the long term as well as
short-term liabilities. Additionally, net income generated by the organization is showing a
significant decline hence it can assume that organization may have some going concern issues.
Part 3
Following Account, balances have a potential risk of misstatement
Account balance Justification
Net income a. Significant negative variances
b. The significant declining trend is a risk for going concern
Receivables a. Significant increase in variance,
b. significant increase in current ratio
Total liabilities a. Increase in debt ratio,

b. continually increasing trend is a risk for going concern
Noncurrent assets a. Significant variance,
b. Significant increasing trend,
c. on the other side, asset turnover ratios have declining trend
Part 4
Following assertions are of primary interest
Account balance Justification
Net income
Operating expenses Unexpected declining trend and unexpected increasing
operating margin ratio emerge the risk of understatement of
operating expenses.
Income expenses a. A significant increase in variance and trend
b. Percentage Variance change for interest balances is
higher than the percentage variance change in debt
liabilities
Receivables
Gross account balance A significant increase in variance and current ratio hence
doubt of overstatement of the account balance
Provision for doubtful
receivables
A significant increase in the variance of gross amount and
current ratio hence doubt of underestimation of
provisioning
Total liabilities
Bank liabilities The significant increasing trend, increasing debt ratio
emerges the doubt regarding the utilization of funds from
such external funding
Payables Payables have an unexpected declining trend and declining
payable turnover ratio hence emerges doubt of payment for
payables by an increase in bank liabilities
Noncurrent assets
Plant property and equipment Showing a declining trend even after having a huge
investment in this asset
Intangibles This asset emerges from the current year hence need to
make extensive procedures regarding this
Question 2
Part 1
Key control

Segregation of duties The organization required this internal control for
the execution of the transaction. Single-handed
execution of cash transaction emerges the risk of
cash theft and cash fraud (Kobelsky, 2014). In the
present case receipts of cash cheques is made by
office assistant and recoding is done by the
bookkeeper.
Policies and procedure identification The organization needs to identify policies and
procedures for the significant financial transaction.
Service charge calculation is the significant
procedure for the organization. In the present case,
the organization defined the procedure for making
calculations of service charges i.e. 300% of hourly
rates. This control helps in fairly and accurate
service revenue calculation.
Approval for contract cancellation Every organization must have approval policies for
the significant transactions. A service contract is a
significant business activity for the clinic. In the
present case acceptance and cancellation of any
service contract is made by managing director.
Hence it seems that organization is having control of
policies and procedures.
Recording and reconciling cash Real-time recording of cash transaction and
periodical reconciliation of cash transaction results
in a reduction in a misstatement of cash. In the
present case, such recording and reconciliation are
made by the bookkeeper.
Part 2
Test of controls
Test of controls are the procedures which performed by the auditor for testing actually the
internal control is working appropriately or not (Auditing and Assurance Standards Board,
2013).
Observation Segregation of duties can be tested by the auditor by making
an observation. Under this auditor needs to observe how
activities and operations are performed in the organization.
In the present case, the auditor will observe how cash
receipts and recoding of such receipts is actually performed
in the organization. Are the receipts actually have control of
segregation of duties or not?
Analytical review procedure Analytical review procedures are ratio calculations, trend
calculations and another financial number crunching
(Auditing and Assurance Standards Board, 2009). In the present
case service fee is charged at 300% of hourly rates. The

auditor can make check service charge calculation by
making analytical review procedures.
Inspection In the present case acceptance and cancellation of any
service contract is made by managing director. The auditor
should check whether all cancellations of service contract
and acceptance of service contracts have the approval of
managing director or not. Hence for this test of control
auditor should make an inspection of service contract file.
Re-calculations In the present case, cash recording and reconciliation are
made by the bookkeeper. The auditor needs to check
whether such reconciliation is free from error or
misstatement or not. Thus, for making this check auditor
needs to make re-computation of the reconciliation
statement.
Part 3
Concerns about the controls
a. Segregation of duties for cash receipts and cash recording exists, however, cash
depositing, reconciliation preparation, and cash transaction recording are under the
control of the bookkeeper. Hence there is concern that improper segregation of duties
may result in cash frauds or misstatements.
b. Revenue recording is done by the organization on the cash basis, however; the
organization is following accrual basis system of accounting. Hence there is a concern
that revenue account balance of the organization will show wrong balances.
Question 3
Part 1
Concerns for relevant control

Nonperformance parallel test Parallel test refers to the parallel running of the old and new
system and makes identification of errors, wrong outputs, and
bugs created by the new system. In the present case, the
organization does not make this test hence new system have
expectations of inefficient output.
Inefficient access control In system implementation, access controls are most significant
control. In the present case, the organization does not provide
access to transaction file to the supervisor, the only master file
can be accessed by supervisor. If a supervisor needs to access
transaction file for making rechecking of any master file
assertion then such access is denied by the system.
Part 2
Application controls
Existence control for the occurrence of
a transaction
Organization’s application system should have an
existence for all employee data which are currently
working. Such data must be updated on each new
recruitment and termination. Such data existence will
help in the occurrence of payroll transactions for all
current employees.
Input controls for the accuracy of
transactions
The system must have input controls so that accuracy
of transaction processing and output can be ensured.
The organization can implement input controls of
format check, check digit and reasonableness check.
Such control helps in making an accurate input to the
application system.
Part 3
The appropriate test of control for the application system is test data. Under this control auditor
of the organization put some dummy data and observes the output from such dummy inputs. If
such dummy inputs become eligible to provide expected correct output then it is concluded that
application system is eligible to provide correct output otherwise not. In addition to this auditor
can put some unacceptable input to check input controls.
Works Cited
Amin, K., Krishnan, J., & Yang, J. S. (2014). Going concern opinion and cost of equity.
Auditing: A Journal of Practice & Theory , 33 (1), 1-39.

Auditing and Assurance Standards Board. (2013, November 11). Auditing Standard ASA 315
Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity
and Its Environment. Retrieved April 30, 2018, from http://www.auasb.gov.au:
http://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_
315.pdf
Auditing and Assurance Standards Board. (2009, October). Auditing Standard ASA 520
Analytical Procedures. Retrieved April 26, 2018, from
http://www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf
Guay, W., Samuels, D., & Taylor, D. (2016). Guiding through the fog: Financial statement
complexity and voluntary disclosure. Journal of Accounting and Economics , 62 (2-3), 234-269.
Kobelsky, K. (2014). A conceptual model for segregation of duties: Integrating theory and
practice for manual and IT-supported processes. International Journal of Accounting
Information , 15 (4), 304-322.
Marshall, D., McManus, W., & Viele, D. (2004). Accounting: What the numbers mean.
McGraw-Hill/Irwin.
Weygandt, J., Kimmel, P., & Kieso, D. (2015). Financial & managerial accounting. John Wiley
& Sons.