Comprehensive Financial Audit Report for BML Ltd. Analysis

This report presents a comprehensive financial analysis of BML Ltd., focusing on identifying weaknesses in its internal controls and suggesting corrective measures. The analysis includes an examination of financial ratios, assessment of audit risks related to plant and equipment, machinery finance liabilities, and accounts receivables. The report also delves into the company's business risks, such as the obsolescence of machinery and market fluctuations, and their implications on financial performance. Furthermore, it evaluates the effectiveness of existing internal controls and proposes enhancements, particularly in inventory management, receivables software, and accounting software. The report also highlights specific weaknesses in the payroll contract's internal control system and suggests improvements such as maintaining soft copies of employee details and automating time tracking. The findings aim to provide insights into the company's financial health and offer recommendations for improved risk management and operational efficiency.

Running head: AUDIT
Audit
Name of the Student:
Name of the University:
Authors Note:

1AUDIT
Executive summary:
The various aspects that might affect the BML Ltd. performance over the years have been
discussed in the following report. Finding out the weakness in the internal control of the
company and to suggest the ways of remediating them is the prime focus of the report. For
achievement of the purpose various financial and non-financial information available with the
auditor will be utilised.

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Table of Contents
Introduction:...............................................................................................................................3
Analysis of the ratios and the additional information as listed out by audit partner, Ms.
Leanne Hopkins:........................................................................................................................3
Analysis of the ratios and the additional information to determine the risks faced by the
company:....................................................................................................................................6
Internal controls that are effective, risks that they alleviate and the test of control to check
them............................................................................................................................................9
Identification of the weaknesses in the internal control for contract payroll:..........................10
Conclusion:..............................................................................................................................11
Reference..................................................................................................................................12

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Introduction:
The following report presents the analysis of all the financial and the non –financial
aspect so the company. The purpose of the analysis is to determine the weaknesses that are
present in the internal control of the company. After the weaknesses of the internal control of
the company are being identified, an effort will be made to determine their implication on the
audit risk of the company. In addition to that an effort will be made to alleviate, the various
risk faced by the company (William et al., 2016).
Analysis of the ratios and the additional information as listed out by audit partner, Ms.
Leanne Hopkins:
Account Analysis Audit risk Audit steps to reduce
risk
Plantand
equipment
It has been seen over the period of 18
months that the assets of the company
had to encounter a significant decrease
in their utility due to the obsolescence
of the mechanical equipment’s prior to
the use oftechnology-aided machinery.
The company is facing the risk of
losing its present customers and the
viability of its operations in the event it
fails to replace the aging machinery
with the new computer aided ones
(Rezaee et al.,2018). The requirement
of the company in respect of the plant
and machinery has changed drastically
over the period. The company needs to
Of the significant audit risk
present in the present case is
that of the right treatment of
the deprecation or rather
determination of a policy that
will most efficiently reflect
the changes that has happened
in the recent times in respect
of the value of the assets and
factor in that information to
determine the depreciation
amount of the assets (Wang et
al., 2015). In addition to that,
the present share of the
market held by the company
Several steps can be
taken by the auditor to
reduce the risks. On of
them include the
physical verification of
the assets. The reason
being that the auditor
will get an idea
regarding the revenue
generating capacity of
the asset. In addition to
this, the auditor must
make sure that the
company makes use of
such accounting policy

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address the issue of incapacity of the
present fleet of machinery to generate
the revenue and income for the
company and the issue of adopting a
policy of depreciation that can better
reflect the recent changes in the
environment of the company.
has reduced significantly over
the years. The company needs
to address the issue very
objectively to determine the
real reduction in the value of
the assets (Alles et al., 2018).
The reason being that the
circumstance in which the
machineries were bought and
the present circumstances of
the company
haschangedcompletely.
in respect of the
depreciation that
objectively recognises
the amount to be
recorded in the
finalcoalstatementsof
the company in respect
of the depreciation.
Machinery
finance
liabilities
The company, in order to meet up with
the requirement of the computer-aided
machinery took a huge loan for the
financing of the assets of the company.
In addition to that, the company had
also originally taken loans for
purchasing the old machineries, which
the company was presently operating.
Hence, the accumulation of all such
liabilities has increased the financial
liabilities of the company (Chan &
Vasarhelyi, 2018). It is necessary that
the revenue generation capacity of the
new assets acquired by the company
compensate the finance cost of the
The audit risk faced by the
auditor is to determine
reliably the revenue
generating capacity of the
entity. The auditor will also
determine the amount to be
recognised in respect of the
reduction in the market share
of the company and thereby
the reduction in the revenue
generation capacity of the
company. This may hamper
the liquidity position of the
company.
Some of the
steps to be
taken up by
the auditor to
reduce the
risks are as
follows:
a) To analyse
the debt
taken by
the
company
very
carefully.

5AUDIT
company. Ina
addition to
this
finding out
the period
of time for
which the
debt has
been taken
by the
company.
b) The
auditor
should
also
objectivel
y calculate
the
amount of
revenue to
be
generated
by the
company
in the near

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future.
Accounts
receivables
The company is getting delayed
payments from its debtors. This has
increased the number of days in the
receivables.
It is highly possible
significant portion of the
amount categorised by the
company, as receivable will
become bad in the future
(Knechel & Salterio, 2016).
The auditor should
immediately receive an
aging schedule of the
debtors of the company.
Lease Income The amount shown in the audited
financial statement of the company is
more than the amount shown in the
unaudited financial statement of the
company. There is no figure available
for the industry average.
There is significant audit risk
present in the item due to the
absenceof any measure of
comparison of the item.
The validity and the
propriety of the income
earned by the company
from leased out
property should be
checked with by the
auditor.
Analysis of the ratios and the additional information to determine the risks faced by the
company:
The proper development of an understanding in respect of the various risks that are
being faced by the company on a regular basis is necessary. The risk faced by the company
will have to be assessed along with the various implications they have on the operations of
the business. This development of the understanding regarding the various risk face by the
company will enable the auditor top determine the key areas having the maximum chance of
presence of material misstatement (Furnham & Gunter, 2015).

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The additional information has also presented some of the other business risks in the
operations of the company. They are as follows:
a) The present inventory of machinery operated by the company is unable to generate
revenue for it because of the advent of the computer-aidedmachinery in the market.
Hence, the company will need to replace its entire inventory consisting of only such
machinery, whichdoes not make use of computer aid (Griffiths, 2016).
b) The amount of finance required by the company has increased over the years due the
fact that the company will be requiring more funds to finance the new machineries to
be purchased by it, which will utilise the aid of computer for functioning (He et
al.,2015).
c) The metal industry have gone through several fluctuations over the period and the
same has affected the operations of the business in the following manner:
i) There has been a downfall in the gold market of around 24.85% since the year
2012.
ii) There has been a downfall in the iron ore market amounting to 43.78% since
the year 2012.
d) The additional funds that have been acquired by the company for financing its new
machineries come with a huge financial burden that will have to be borne by the
company in the future.
e) The new machineries, which are being operated by the company using the latest
computer technologies, will require employees who have superior training and will
definitely demand higher salaries (Cannon & Bedard, 2016). Hence, the company will
have to bear higher employee costs for the year.
The presence of the business risk in the operation of the company is substantiated by the
results of the ratio analysis as follows:

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a) The industry average in respect of the Rerun on Assets is significantly higher than the
company’s figure.
b) The industry average of Return on Equity is higher than the figures of the company.
c) The profit margin prevalent in the industry is significantly higher than that earned by
the company.
Some of the business risks that can be identified from the ratio analysis are as follows:
a) The difference between the audited and the unaudited financial statements of the
company is substantial. The reason for this might be because of the fault and mistakes
committed by the accountant of the company or due to the lack of efficiency of the
software implemented by the company for the purpose of preparation and presentation
of the financial statements of the company (Demb et al.,2017).
b) The time taken by the debtors to make the payment to the company in respectof the
amount due from them by the company is very long. The lag in the payment made by
the debtors is significantly confirmed by the figures of the financial statement so the
company.
Internal controls that are effective, risks that they alleviate and the test of control to
check them.
Control Risk Alleviated Test of Control
Inventory control system:
The company neds to update the
inverntory control
system so as to remain
updated to measure the
obsolescence of its
It will alleviate the risk of over
obsolescence of the inventory of
the company
The company must put in all the
details of the present inventory
and check for the correctness of
the present obsolescence shown
by the system.

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present inventory.
Software for receivables
management:
Adoption of such softwares will
enable the detailed record
keeping by the company of all
the debtors of the company. It
will intimidate the company
regarding the payment due from
each individual and at the same
time enable the debtor to
recognise that the payment has
to be made.
The use of the systemwill
enable the company to reduce
or eliminate the risk of bad debt
completely (Griffin & Wright,
2015).
The debtors at present are
making very late payments and
hence the present system will
keep the detailed records of all
the debtors of the company to
ensure timely payment.
Use of effective and efficient
accounting softwares:
The company as of now has
failed to reduce the difference
between the amount presented
in the audited and the amount in
the unaudited financial
statements. Confirming that it is
incapable of preparing accurate
financial statements (Yu et al.,
2015).
The software will eliminate the
risk of faulty and inappropriate
recording by the company in its
financial statements. Significant
matter will be given more focus
by the auditor rather than all the
petty sues.
The accounting software must
be provided an input in respect
of all the recent amendments
that have been prescribed by the
statute for compliance.

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Identification of the weaknesses in the internal control for contract payroll:
In respect to the internal control of the payroll contract of the company, certain weaknesses in
the internal control system of the company are as follows:
a) The company should maintain he soft copy of the employee details along with the
hard copy of the details. The reason being that it is easy to lose the hard copy and it
encourages wrong input of data by the project manager (Power & Gendron, 2015).
Hence, the soft copy of the details of the employees must be kept in the computer of
the company.
b) It is physically impossible for the project manager to maintain record of the entry
times of the various employees working in the company. Hence, the practice of the
manual entry of the time of entry should be prohibited by the company and instead the
time should be automated by making use of hardware such as biometric attendance
keepers etc.
c) The entire process of recording and preparation of the financial statements of the
company is fully automated. It can lead to severe misstatement in the financial
statements of the company inn case of any error on the part of the accountant (Dennis
et al., 2018).
d) The accountant must not be provided with such log in details of the bank that can give
him access to the authentication of making payments. The reason being that it can be
misused by him to embezzle cash from the company.
e) Separate calculations should be conducted by the management of the company in
respect of the regular payments to be made to the employees of the entity and special
payments like that of the annulations fund (Griffin & Wright, 2015). This will help in
deterring the cascading effect of the error committed by the system.

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Conclusion:
After conducting the detailed analysis of the financial and the non-financial factors
f0o the company, it can be concluded that the company at present is encountering huge
amount of threats from its external environment. The threats include the obsolescence of the
assets used byte company and the shrinking of the share in the market enjoyed by the
company. It has also been established from the internal control of the company is not strong
enough. In order to increase the efficiency and the effectiveness of the internal control system
of the company it should make use of the software-aided technologies.