Auditing Theories and Practices

This assignment delves into the core concepts of auditing theory and practice. It examines various perspectives on auditing from renowned scholars like Dennis, Bik, Doxey, and others. The discussion encompasses established auditing standards set by bodies like the PCAOB and IIA. Furthermore, it explores emerging trends in auditing, such as the impact of big data and cloud computing, highlighting their implications for the profession.

Running head: AUDITING THEORY AND PRACTICE
Auditing theory and practice
Name of the University
Name of the student
Authors note

1AUDITING THEORY AND PRACTICE
Executive summary:
The report is prepared to discuss the internal control system of GPSA and its effectiveness. In
the past few years, management of organization has not been keen in enforcing effective
internal control system. Now, with increased business prospects, there arises a need to design
such system. Discussion part of report involves details about accounts, their analysis, audit
risks and steps taken for reducing such risks. Business risk of GPSA has been analyzed using
too of ratio analysis. Internal control system of organization has been discussed in context of
risk alleviation and test of control. Several weaknesses in the internal control system of sales
and trade receivable have also been identified.

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Answer to question 1A:..............................................................................................................3
Accounts-...................................................................................................................................3
Analysis-....................................................................................................................................3
Audit risk-..................................................................................................................................4
Following steps can be taken for reducing audit risk faced by GPSA:......................................5
Answer to question 1B:..............................................................................................................5
Answer to question 2A:..............................................................................................................6
Effective control-.......................................................................................................................7
Risk alleviated-...........................................................................................................................7
Test of control-...........................................................................................................................8
Answer to question 2b:...............................................................................................................9
Weakness identified in the internal control for sales system and trade receivables of GPSA:..9
Conclusion:..............................................................................................................................10

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Introduction:
The preparation of audit plan of GPSA is done by accounting firm Miller Yates and
Howarth having its offices throughout major regional centre of NSW and Queensland. GPSA
is one of the most longstanding and significant clients of the firm for which audit plan is
required to be conducted. Organization is engaged in wide range of activities related to
medical practitioners that involves making investment in property, research and development
technologies, distribution and manufactures of medical equipments (Jia, 2016). While
conducting audit, accounting firm places great reliance on internal control system of GPSA
and there are various areas of concerns related to few accounts that would be enquired into.
Discussion:
Answer to question 1A:
Accounts-
Auditors of GPSA are concerned about five types of account while planning audit and
this includes intangible assets, property assets, current investment, research and development
capitalization and accounts receivables. Before conducting the audit of organization, auditors
are required to enquire about these accounts that would enable them in gaining audit
evidence.
Analysis-
GPSA is planning to implement a new internal control manual where Trade receivable
clerk is responsible for maintaining records of transactions in the whole sales system. He is
responsible for reconciliation of trade receivable ledger to debtor control account in the

4AUDITING THEORY AND PRACTICE
general ledger. There is a computer system in which the debtor payment is manual recorded.
Investment is made by organization in commencement of new laser surgery device that led to
incur considerable amount of costs. A loan of amount $ 5 billion is borrowed from bank by
organization with the purpose of financing research activities. Furthermore, a number of
properties have been acquired by GPSA relating to medical equipments. There has been a
decline in property market that is making investment in such branch quite susceptible. Due to
bearish property market, investment in property has become a major area of concern in recent
year. Other principal activity of GPSA is to make investment in research and development
activities relating to technological development of medical equipments. For the funding of
such investments and acquisition of loan from financial institutions, it is required by GPSA to
maintaining debt to equity ratio at around 1.2:1. Organization is required to repay the amount
of loan taken if there is increase in level of debt to equity ratio (Bik et al., 2017).
Audit risk-
One of the significant parts of audit plan of any organization is analysing several risks
related with various accounts while conducting audit. Auditors are able to identify, prioritize
and evaluate the risks related with managing all the accounts as mentioned above while
performing risk analysis. It is certainly possible on part of management of organization and
their incapability of tracking records of all transactions. This is so because value of trade
receivables is recorded manually by trade receivable clerk. Information technology function
of organization and any investment made in same is looked after by sales director that is not
regarded by management as full time job. It can be taken as an instance of lack of duties
segregation that might evolve the risks of some manipulation to their own advantage (Gaynor
et al., 2014).

5AUDITING THEORY AND PRACTICE
Risks are also associated with managing the trade receivable accounts that involves
inappropriate reconciliation of accounts into general ledger. There might be inefficacy in
measures adopted for receivables collection. Property market investment might lead to
inflating the value in their financial statements due to decline in property market.
Following steps can be taken for reducing audit risk faced by GPSA:
Organizations should conduct auditing plan in accordance with International standard
requirements and they should also inform stakeholders about duration of audit risks. Some of
the steps that can be taken are as follows:
 Auditors are required to make analytical procedures for identification of probable
relationship between accounts.
 Enquiries into several accounts can be made for identifying the risk of material
misstatement that involves looking into details of financial and non finacil data
provided (William et al., 2016).
 Process of observation and inspection should be collaborated with reporting authority
and management within organization.
 Assessing and identifying the risks associated with accounts receivable and normal
course of transactions.
Answer to question 1B:
Business risks faced by GPSA can be analysed using the tool of ratio. The relevant
financial information and analytical procedures that are widely used can be explained and
analyzed using ratio analysis. Comparing and analyzing the ratios over several years or for
considerable time period would help auditors in deriving relevance audit evidence. Financial

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ratios are provided for three years, however for year 2016 and 2015, audited financial ratios
are provided and unaudited financial ratios are provide for year 2017.
Ratio 2017 (Unaudited) 2016 (Audited) 2015 (Audited)
Return on equity % 7.19 18.61 22.17
Return on total assets
%
4.86 13.7 15.52
Gross margin % 31.76 30.00 24.94
Net profit margin % 10.38 20.27 17.85
Times interest earned 1.90 3.51 4.10
Days in inventory 166.53 127.89 115.85
Days in accounts
receivable
83.07 60.65 53.24
Current ratio : 1 1.80 1.54 1.66
Quick asset ratio : 1 0.89 0.78 0.82
Debt to equity ratio : 1 1.11 1.02 1.04
Table 1: Financial data
Return on equity has declined for two consecutive years; it stood at 22.17 in year
2015 and fell to 18.61 in year 2016 respectively. Unaudited data for current year depicts
considerable decline in ratio at 7.19. This depicts that GPSA has not been able to provide
sufficient return to its shareholders in recent years. Debt to equity ratio has initially decreased
from 1.04 in year 2015 to 1.02 in year 2015. However, unaudited data depicts that it further
increased to 1.11 in year 2017. This indicates that proportion of debt to equity has increased
in recent year. Days in accounts received has increased considerably from 53. 24 in year 2015
to 60.65 in year 2016 and further to 83.07 in year 2017. Increase in ratio is indicative of the
fact that there management is taking time in collecting their receivable that is nit regarded in
the interest of organization as it is delaying in other payments (Dennis, 2015). Current ratio
has decreased initially from 1. 66 in year 2015 to 1. 54 in year 2016 and increased further in
year 2017 to 1.80. Increase in ratio depicts that GPSA is liquid enough to meet its short-term
obligations. Days in inventory has also reduced significantly from 115. 85 in year 2015 to

7AUDITING THEORY AND PRACTICE
127. 89 in year 2016 and further increased to 166.53 in year 2017. Increase in inventory days
depicts that it’s taking time for management of organization to convert their inventories into
sales. Gross margin has increase and net profit margin on other hand has declined
substantially.
Answer to question 2A:
Internal control is the process that is affected and designed by management of
organization that helps in providing reasonable assurance about objectives of entity
concerning efficiency and effectiveness of operations and reliability of financial reporting. It
can be observed from the given case study that internal control manual system is designed to
enable the business for achieving specific objectives. Control system are mainly designed for
effecting sales system
Effective control-
The internal control system of GPSA has not changed over the years and since there is
no internal audit function of organization, planning stage of audit requires refinement of such
system. Management has employed proper procedures for recording of sales data and they
needs to be properly documented. Sales orders are raised by dispatch department in event of
making any manual delivery.
Staffs are required to manually check the conditions and quality of medical equipment
that is returned by customers. For the follow up of trade receivable procedures, there are
proper procedures. It is required by auditors to examine some relevant aspects for reviewing
internal control procedures and achieving sales system objectives (Knechel & Salterio, 2016).

8AUDITING THEORY AND PRACTICE
Risk alleviated-
Some the risks that might arise from the sales system would be eliminated with the
implementation of effective internal control system. Recording invoices and entering data
manually is prone to several risks that can be alleviated from adopting the effective system of
internal control. Trade receivable clerk is responsible for recoding all the sales data and
entering the same into computer system and reconciling the general ledger accounts. Risks
arising from manual recording can be reduced from effective system that helps in mitigating
such risks. It is quite possible that there can be either intended manipulation or unintended
mistakes while preparing slip and list of debtors. Moreover, there is a manual updating of
customer volume rating and the report of same is authorized by sales directors. Employing
the effective internal control system would help in alleviating the possible risks that would
arise in recording the data related to transactions (Louwers et al., 2015). Effective system
would help in appropriately responding to finance, operations and business compliance by
facilitating efficient and effective operations.
Test of control-
Segregation of duties For maintaining customer accounts receivable
posting of invoices, different staff members
should be involved. They should also be different
from receiving cash from customers. Moreover,
sales team should not be involved in looking after
information technology functions of organization.
Organizational control GPSA should employ written procedures
accounting for accounts receivable and sales
system.
Authorization There needs to be proper authorization for

9AUDITING THEORY AND PRACTICE
controlling the operations that would make
internal control system effective.
Physical control Invoices are required to be numbered
consecutively and there should be adequate
control over the computer system that is used for
invoice creation (Doxey et al., 2016).
Restrictions should be imposed on unauthorized
person from accessing any accounts.
Accounting and arithmetic Prompt recording of credit notes and invoices
should be done and there needs to be analytical
review procedures. Furthermore, production of
credit control reports along with aged receivable
control should be done.
Answer to question 2b:
Weakness identified in the internal control for sales system and trade receivables of
GPSA:
 Trade receivable clerk is responsible for actioning all aspects of generation of
invoices and recording of data related to sales. Updating volume rating of individual
customers and sales volume are prepared by him. Trade receivable clerks should not
be integral to managing all aspects of trade receivable accounts and sales system.
Inefficient handling of data might lead to some bad debts. There can arise conflict
with being responsible for minimizing such risks whilst maximization of sales for
generating revenue for organization (Baker et al., 2014).

10AUDITING THEORY AND PRACTICE
 Bonuses would be received by management staff based on targeted monthly sales
volume and variance of budgeted departmental overheads (Pitt, 2014). There exist
high risks that organization will make any bonus payment in event when there are any
non-completed transactions of sales. Calculation of bonus should be done
independently of sales department for facilitating internal check.
 In the absence of internal control function, weaknesses have been identified in
recording sales transactions by account departments. Concerning this, it is certainly
possible that there would be inadequate and inaccurate recording related to
transactions of sales.
 As observed from the case study, that balance of doubtful debtor is the main concern
of financial controller of GPSA and the prescribed payment made from customers
should not be withhold. All the aspects of trade receivable are handled by clerk;
therefore there exist possibility that there would be bad and doubtful debts in any
particular financial year.
Conclusion:
From the analysis of the given case study, it can be inferred that GPSA is engaged
diversified range of activities for which it intends to create a manual internal control system.
However, creation of such system would help in alleviating risks and at the same time, such
system suffers several weaknesses. Risk would arise in the sales system and trade receivable
accounts that can be alleviated by adoption of effective control system. Audit partner of
organizations have specified the accounts which are prone to several risks. For the effective
implementation of internal control system and to address the specified area, auditors have
adopted test of control. This would help in managing accounts for preventing audit risks and
gaining viable audit evidence while conducting audit of organization.

11AUDITING THEORY AND PRACTICE
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12AUDITING THEORY AND PRACTICE
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