Acct1059 Letter to Sheridan AV 2022

Running head: ACCT1059
Acct1059
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Letter to Sheridan AV................................................................................................................2
Internal Memorandum................................................................................................................3
Analysis of Financial Position of Sheridan AV.........................................................................4
Internal Control Techniques.......................................................................................................6
Control Deficiencies and strategies to be implemented.............................................................8
Reference..................................................................................................................................10

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Letter to Sheridan AV
TO: Sheridan AV
FROM: Senior Auditor at Alex Gold
Dear Sir,
This letter is to intimate Sheridan AV that the audit team of Alex Gold that is leaded by
Graeme Moore will be conducting an audit of Sheridan AV’s financial statements for the year
2021. The team will analyze the financial position of Sheridan Av to find areas where the
audit team needs to focus more to find for material misstatement. The business risks that
Sheridan AV has faced during the period will be analyzed. Sheridan AV started business
since the year 1971. John Sheridan was the founder of the company (Reddy, Rekha and
Scholar 2018). Sheridan AV is known for their innovation in the design of the speakers and
the acoustics. Sheridan AV had created the Epsilon variable Coil Drive system which was
one of the most amazing speakers that was sold throughout the globe. The speakers were able
to produce crystal clear sounds and the reproduction of the sound was very realistic. The new
managing director David Sheridan was appointed in the year1994. David Sheridan had
combined the best sound technology with the best visual technology provided by the
company to create a home cinema system to be sold in the market. Sheridan AV has the
mission to sell the best quality sound and visual technologies in the market (Kolhar, Abu-
Alhaj and El-atty 2017). Sheridan AV has the aim to make the audio and the visual
technologies with the sources from the manufacturers that have high quality production. Each
product of Sheridan AV is tested by the engineers who are extremely qualified before they
are launched to the public. Sheridan AV sells its products on wholesale to the resellers who
distribute the products of the company throughout the country. The Audit team of Alex Gold
will have the opportunity to audit the financial statement Sheridan AV.

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Thanking You,
Yours Sincerely,
Senior Auditor
Internal Memorandum
TO: Graeme Moore
FROM: Senior Auditor at Alex Gold
This letter is to intimate that the audit team at Alex Gold is going to audit Sheridan AV. The
audit team will analyze the risks that are involved in each of the accounts that are there in
each of the financial statements that have been provided by Sheridan AV. Sheridan AV has a
wholesale distribution that sells its products throughout the country and also to the resellers
who in turn sell the products throughout the globe (Gepp et al. 2018). For such a large
company that sells such large batches of various products throughout the globe material
misstatement can be an issue. The audit team at Alex gold will analyze the various tangible as
well as the intangible assets that are used by Sheridan AV (Ma 2020). The team will examine
the new accounting standards that have been implemented recently that could increase the
business the business risk in the company which could lead to an increase in the risk of
material misstatement. There is high competition in the audio and the visual industry recently
which will also be considered assessing the risk of material misstatement. Since Sheridan AV
has been headed by David Sheridan the company has faced heavy changes mainly relating to
technology. The audit team will also examine whether Sheridan AV is having problems
relating to the generation of enough cash flow this could also increase the risk of material
misstatement. The audit team will also analyze whether Sheridan AV has any unusual
increase in the profitability of the company with respect to the other companies that are in the
same industry. The audit team will also analyze whether Sheridan AV an unexpected amount

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of sale to the customers which can also increase the risk of material misstatement. The audit
team will also examine whether there are any risk that Sheridan AV is facing which can lead
to loss of business of the company (Lenert, Walsh and Miller 2018). Sheridan AV will be
appointing a Non-Executive Director to be head of the audit team. Sheridan AV does not
have an internal audit team so the company is outsourcing the internal audit task from Alex
Gold. The human resource of Sheridan AV is managed by David Sheridan himself. The staffs
are regulated by David Sheridan. The audit team will examine the staffing processes of
Sheridan AV. Again there are risks of fraud by the staffs of Sheridan AV. Although the
computers of Sheridan AV have good security levels and also the security of Sheridan AV is
tight but still there can be chances of fraud from the end of the staffs that can also lead to an
increase in the risk of material misstatement (Udukeke and Ezenwafor 2019). But Sheridan
AV’s IT staff has not been able to implement the new accounting standard in the software
that has been designed by them. The audit team will analyze the contingency plans that
Sheridan AV has implemented in its organization to assess the risk of material misstatement
that is present in the company.
Thanking You,
Yours Sincerely,
Senior Auditor
Analysis of Financial Position of Sheridan AV
The analysis of the financial statement of Sheridan AV for the period of nine months
will be done by the audit team. The audit team will then compare the results of the financial
statements for the nine months till 31st December 2020 with the previous financial year
ending on 31st March 2020. As per the income statement of Sheridan AV the gross margin
ratio of the company was 0.177 ((revenue-cost of sales)/revenue = 961,809/5,410,175) in the

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nine month period which is about 17% of the total revenue which is not good. While in the
previous year the gross margin was 0.257 ((revenue-cost of
sales)/revenue=1,250,448/4,846,699) which is more than 25% of the revenue. So the gross
profit margin of Sheridan AV has reduced (Manaseer and Alawneh 2019). The net profit
margin of Sheridan AV as per the financial statement for the period of nine months is
0.013(Net profit / revenue = 75,270/5,410,175) which is just 1 percent of the total revenue
earned by Sheridan AV. While the net profit margin for the previous year was 0.022 (Net
profit/ revenue = 107,832/4,846,699) which is more than 2 percent of the revenue of Sheridan
AV (Edmunds and Chen 2017). The current ratio of Sheridan AV was 1.49 (current asset /
current liabilities = 1,033,812/689,770) which is more than 1 so the current assets of Sheridan
AV can meet the current liabilities (Simeunović, Grubor and Ristić 2016). In the previous
financial year the net margin ratio of Sheridan AV was 1.65 (Current asset / Current liabilities
= 1,325,279/798,564) which is higher than 1.5. This shows that the current asset position of
the company has dropped significantly from the previous financial year (Mohamed,
Muhayyidin and Rozzani 2019). The quick ratio of Sheridan AV was 1.006 (quick asset /
current liabilities = 694,000/689,770) which is more than 1 so the current assets of Sheridan
AV can meet the current liabilities. In the previous financial year the net margin ratio of
Sheridan AV was 1.37 (quick asset / Current liabilities = 1,098,730/798,564) which is higher
than 1.5. This shows that the quick asset position of the company has dropped significantly
from the previous financial year (Houston, Probst and Martin 2018). The current asset of
Sheridan AV has been maintained high with the help of the inventories of the company. The
cash in hand of Sheridan AV has decreased significantly from the previous financial year to
the present year. The cash in hand was 426,359 in the previous financial year and in this nine
month the cash in hand is 169,000. But the inventories have increased from 226,549 in the
previous financial year to 339,812. So the inventories have increased. This can be due to

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increase in the production of Sheridan AV or can be due to the fact that Sheridan AV is not
able to sell off its inventories. So this can be a drop in the financial position of Sheridan AV.
Also Sheridan AV doesn’t have a proper human resource employment system. The process
for employing the staffs of the company is not documented in proper order. Also the
computer system of Sheridan AV is not proper and the software used has not been
implemented with the new accounting standard.
Internal Control Techniques
Two internal control techniques have been identified to control the sales and the cash
receipt process of Sheridan AV. They are as follows:
For the Sales process of Sheridan AV:
1. Sheridan AV is a huge organization that sells its products on wholesale to various
customers so the assessment of the amount of the sales of the company is to be done
with the help of several individuals. The total job of assessment of the sales is to be
divided among the staffs who are involved in the accounting processes of Sheridan
AV. The task of the assessment of the sales of Sheridan is also to be allotted to the co-
workers who are not the accounted of Sheridan AV (Harrell et al. 2016). The staffs of
Sheridan AV are involved in the sales process of Sheridan AV must also record the
sales and also each and every transaction. This distribution of the task of assessment
will reduce the chance of errors.
2. Sheridan AV must also implement a management in its system whose task will be to
check the sales transactions that are occurring in the company and then authorize
them. The sales transactions of Sheridan AV will be assessed by this management
team and then the analysis by this management team will decide whether the
transactions are authentic and then they will be recorded (Jones 2017). The recording

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of the transaction in the books of accounts will depend on whether the management
has authenticated it or not. The implementation of a new management team in
Sheridan AV will require time and money. But this is one of the ways in which the
company can assess the actual sales volume. The implementation of such a
management team is necessary in Sheridan AV as its sales are huge.
For the Cash Receipt process of Sheridan AV:
1. For managing the cash receipt process of Sheridan AV the company must implement
a proper accounting system in the company. All the cash receipt of the company must
be updated by the staffs into the accounting system (Krieger and Drews 2018). But
the control and the access of the accounting system of Sheridan AV must be limited.
All the transactions of the cash receipts of Sheridan AV must be updated on to the
accounting system but the individual staffs who are updating the transaction on the
accounting system must be tracked. The control of the access of the accounting
system must be limited by the controller of the system. The staff updating the
transaction must have to provide proper authentication username and password to
update the transaction and also to access other transactions.
2. The accounting system that is used by Sheridan AV must be updated on a regular
basis so that the system is in order with the banks and the customers of the company.
The banks reconciliation system must be updated on a regular basis. This is because
the cash receipt transactions must be compared between the bank’s statement on it
with the cash balance of Sheridan AV’s statement (Lenghel and Vlad 2017).

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Control Deficiencies and strategies to be implemented
The audit team of Alex Gold has identified two control deficiencies in the purchasing
and the payroll processes. The audit team will analyze the deficiencies in these two processes
of Sheridan AV and then recommend strategies to Sheridan AV to control them internally:
In the purchasing process of Sheridan AV the company faced a major drawback when
there were technical errors in the accounts of the management system of Sheridan AV.
Sheridan AV also had no measure in the purchase of the warehouse. The loan that was taken
by Sheridan AV from the bank of 450,000 pounds must have been registered with the
company’s accounting system (Dai, Byrnes and Vasarhelyi 2019). The purchase process of
Sheridan AV has two flaws in it. Firstly there is a lack of the management that does not look
into the matter important matters of the purchase. Secondly the warehouse of Sheridan AV
does not have high capacity to accommodate the inventories that are being increased in the
company. Also there is a huge pressure from the management to increase the revenues of the
company. Sheridan AV must implement double entry accounting in its company to increase
the reliability of the transactions recorded in the books of accounts (Groomer and Murthy
2018). The management authorization must re made mandatory for the purchase processes.
The bank loan amount checking of the Sheridan AV must also be done on every purchase.
The purchase of the warehouse must be compared with the bank statement to find whether
the purchase amount and the loan amounts are equal or not.
In the payroll process of Sheridan AV, the company awards incentives to the
employee when he or she has achieved profits above his or her target. The annual bonuses of
the employees of Sheridan AV are set at a maximum limit of 100% of the employee’s salary.
Also Sheridan AV had decided not to pay for the damages that had been caused because of
the company’s fault. Mr. Munn’s wife had not recovered from the leg injury when she fell in
the Sheridan AV shop. This has led to a negative reputation of Sheridan AV. Sheridan AV is

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now looking for expansion of the company. So such fall in the reputation of the company is
not good. Sheridan AV is a company that sales its speakers and visual equipment to the
people. So their view of the company is one of the top priorities (Kim 2019). The company
must become more customers oriented to be able to expand its current position. The incentive
plan by Sheridan AV is not enough to motivate the employees to increase their individual
production. The company must increase the number of benefits for the employees. Certain
benefits like the Profit sharing, loyalty bonuses and two types of incentive schemes must be
employed in the company that are the long term and the short term incentives (Kim 2019).
The salary structure of the employees of Sheridan AV must also be improved. The employees
of Sheridan AV must also be offered with pension plans.

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