Comprehensive Audit Report: Big Machine Limited, Miller Yates Howarth

This report provides an in-depth analysis of the audit of Big Machine Limited (BML), focusing on audit planning and internal control. The report evaluates the business risks faced by BML, using ratio analysis and other financial information to identify potential vulnerabilities. It examines the current internal control system and pinpoints weaknesses, particularly in contract payroll. The report assesses audit risks related to plant and equipment, machinery finance, accounts receivable, and lease income, proposing audit steps to mitigate these risks. Furthermore, the report highlights specific issues such as the decrease in return on assets, sluggish market conditions in the mining industry, changes in credit policies, and external market factors. The report also examines the internal control system, control risk and proposes tests of control. It concludes by emphasizing the importance of effective audit control procedures to reduce business and audit risks, offering valuable insights for improving BML's financial management and operational efficiency. This report is designed to help students understand the audit process and the importance of internal controls.

Big Machine Limited
Miller Yates Howarth
Audit Planning and Internal Control
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Contents
Executive Summary.........................................................................................................................3
Introduction......................................................................................................................................4
Question 1 A:...................................................................................................................................4
Question 1 B: Analyse the ratios and additional information to outline the business risks that
BML faces.......................................................................................................................................8
Question 2 A:...................................................................................................................................9
Question 2 B: List and identify the weaknesses in internal control for contract payroll...............10
Conclusion.....................................................................................................................................12
References......................................................................................................................................13
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Executive Summary
In this report, audit and assurance services have been analyzed. The audit of Big
Machinery Limited and its audit procedure have been considered. There are several issues such
as high competition, downtime in mining industry and loss of its busienss that have been faced
by Big Machinery Limited. The audit risk has been evaluated that by using the ratio analysis,
current internal control system and bottom up analysis
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Introduction
The internal audit risk has been evaluated possible risk and vulnerability of the business
risk faced by company. The internal control system is used to evaluate the busienss and audit risk
for the better implementation of BML business.
Question 1 B:
Analyse the ratios and additional information to outline the business risks
that BML faces.
Account Analysis Audit Risk Audit steps to
reduce risk
Plant and
Equipment
Plant and equipment of the Big
Machine Limited should be
increased with the increase in its
output (Fazal, 2011).
The current return on total assets is
reflecting the negative outcomes
which are currently showing 14%
and there are possibilities of
increasing its overall return
throughout the time.
Existence is
ascertaining
which shows the
negative and
reduces value of
the assets. It may
be hard for the
auditors to
determine the
assets (Graham,
Bedard, & Dutta,
2018).
Valuation should
also be done by
using the
Steps to reduce
the risk.
Proper
documentation
and analysis.
Physical
verification of the
assets
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impairment test.
Assets must be
valued at their
current value
(Elsayed,
2017).
Machinery
Finance
Liabilities
The debt and lease option should be
analyse the audit risk of company.
The debts to equity ratio have also
changed with the changes in
financial leverage. It has also keep
the finance liabilities with the
increase debt turnover raito
(Askary, Goodwin & Lanis, 2012).
Profitability ratio is used to analysis
the net profit and changes in earning
of company.
Completeness is
the first assertion
which needs to be
recognized of the
fixed assets.
Full disclosure of
the financial
statement.
Details
description of the
documents which
are used in debt
financing.
Accounts
Receivable
Receivable account will be
increased due to the increased
machineries as all the machines are
sold on credit by Big Machine
Limited.
Current ratio has been increased
with the increase in their debtors.
Days in accounts of the receivable
should be lower but due to
Completeness is
the first assertion
which needs to be
recognized of the
fixed assets and
should be
disclosed in the
notes of accounts
Examination of
the lease
agreement.
Confirming and
internal control
process for the
credit policies
and evaluating
the internal and
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misstatement it is showing negative
results.
. control system.
Lease
income
Lease income is vulnerable and
should be covered under the capital
assets of BML company.
The profit earned on the lease
should be higher but it is already
reflecting the negative results
(Fazal, 2011).
The gross margin has also affected
by the least payment which has
resulted to the decrease gross profit
margin.
Accuracy is the
assertion is done
to identify the
correctness of the
statement
(Niemi, et al.
2018).
Details cross
check of the
amount
undertaken for
the correctness of
the documents.
Lease agreement
terms and
condition will
also be evaluated.
There are several business risks that have been faced by BML throughout the time.
Return on assets: The Return on assets have been decreased due to the low investment from the
investors. It has shown high amount of plants and machineries in its books of account which
have lower down the value of its business.
Sluggish market condition- The mining industry have been offering low amount of return on
capital employed which is negative indicator for the business.
Changes in credit policies of the receivables- The efficiency ratio of the BML shows that the
cash availability with the money has been decreased due to increased debtor’s turnover ratio. It
will increase the overall cost of capital and increase the busienss risk at large.
External market factors- The external market of the Metal and mining is showing high amount of
capital requirement which BML needs to invest in busienss. If these investments are not made
then it will reduce the overall capital earning capacity of company.
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Question 2 A:
Internal control system will assist in evaluating the busienss efficiency and lower down the
number of days required in the debtors turnover.
Control Risk alleviated Test of control
Physical
verification of the
document of the
assets of the BML
Existence is the assertion that of
the assets whether they are laying
in the cart or not (Contessotto,
& Moroney, 2014).
Physical value assertion and
cross check of every single
document.
Reconcile and
approval of lease
agreement
Reconciliation of the least
agreement.
Proper financial plans approved by
the financial manager
Approval from the external
accounts management team
and workers.
No use of personal
accounts policy
Implement business policies to not
to use personal and busienss assets
in the books of accounts of
company.
All the books should be
examined on daily basis.
Authorisation and
authentication
There is no authorisation in the
books of accounts of BML.
There is no proper authorisation
in booking the journals
ID password and login details
should be assessed.
(Hsieh, Lin, & Chang, 2018)
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Question 2 B: List and identify the weaknesses in internal control for
contract payroll.
There are several reasons for the weakness in the internal control for the contract payroll of the
company.
No security of the payroll system: The payroll system of BML is secured by the password and
Dummy system procedure. The password and security system will be changed. The securities to
data control system will be changed accordingly (Elsayed, 2017).
Cross check inefficiency: The manager of BML is using the hard copy of the lists filled by
employees for making entries in the system. The cross checking is mostly required for the
effective implementation of the payroll.
False entry in payroll recording: The false entry of the employees may also showcase the
negative outcomes for the organization. It might render the negative impact on the attendance
recording of BML
No proper management of deduction and overtime in contact payroll: There is no proper
arrangement for the recording of leaves and absents of employees. It increase the mistakes and
problems in recording of the employee’s data in business.
Therefore, by using the proper control system and internal control system, BML could increase
its overall efficiency of the business and output in determined approach.
Non-effective internal control system- It has been evaluated that BML has been using non-
effective internal control system which not only reduces the control procedure but also reduces
the overall outcomes of the busienss. Company should use double check procedure to mitigate
the process issue.
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Conclusion
There are several audit control system and lack of efficient control program which needs
to be undertaken by the BML to reduce the business and audit risk. Now in the end, it could be
inferred that these accounting and auditing risks could be mitigated by using proper audit control
procedure.
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