Auditing Theory and Practice: Internal Control & Audit Risk at GPSA

This report analyzes the internal control effectiveness of GPSA in the context of its audit plan. It identifies potential audit risks, including those related to accounts receivables, current investments, and property assets, and discusses steps to mitigate these risks. The report emphasizes the role of e...Read More

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 analyse the internal control effectiveness of GPSA in the
preparation of audit plan. Potential audit risks of organization have been analyzed and
sufficient steps are taken for minimizations of such risks have been discussed in the report.
Report also demonstrates the risks that can be alleviated due to the effective internal control
system of organization. Test of control has been adopted for making the internal control
efficient. Later part of report discusses the weakness that might arise in the trade receivables
and sales system of organization.

2AUDITING THEORY AND PRACTICE
Table of Contents
Introduction:...............................................................................................................................4
Discussion:.................................................................................................................................5
Answer to question 1A:..............................................................................................................5
Accounts-...................................................................................................................................5
Analysis-....................................................................................................................................5
Audit risk-..................................................................................................................................6
Audit risk faced by GPSA can be reduced by performing following steps:..............................7
Answer to question 1B:..............................................................................................................7
Answer to question 2A:..............................................................................................................8
Effective control-.......................................................................................................................8
Risk alleviated-...........................................................................................................................9
Test of control-...........................................................................................................................9
Answer to question 2b:.............................................................................................................11
Weakness identified in the internal control for trade receivables and sales of GPSA:............11
Conclusion:..............................................................................................................................12

3AUDITING THEORY AND PRACTICE
Introduction:
Auditing firm Miller Yates and Howarth is engaged in the preparation of audit plan.
One of the most outstanding and significant clients of MYH is GPSA for which accounting
records are audited. Internal control of organizations are placed great reliance by the auditing
firm derived from extensive test control. There are several area of concerns related to some
accounts of organization in preparation of audit plan. Analysis of ratio has been done that
helps in evaluation of the effectiveness of internal control systems (Bik et al., 2017).
Discussion:
Answer to question 1A:
Accounts-
The five types of accounts that is a concern for the auditors of GPSA while carrying
out audit plan includes accounts receivables, current investment, property assets, intangible
assets and research and development capitalization. The audit partner of organization is
concerned about these areas of accounts prior to conducting the audit program (Pitt, 2014).
Analysis-
The reconciliation of trade receivable ledger in the general ledger to the debtor control
account is to be done by trade receivable clerk. All the receipt from debtors and preparation
of bank slip is done by clerk. Payments made to debtors are recorded in the computer system
as debtor payment. Current investment is made by GPSA relating to research activities for the
commencement of new laser surgery device. Research activities of organization are financed
by borrowing loan of amount of $ 5 million during a year. In addition to this, GPSA has
branched out in the property market and acquired a number of properties relating to medical

4AUDITING THEORY AND PRACTICE
practitioners. They have made investment in property market and there has been decline in
property value in recent years. However, they are susceptible to such investments due to
bearish property market. GPSA has other principal activities of being involved in research
developmental activities in technologies relating to medical equipment. For enabling the
borrowing of loan amount to make investment in research and development activities,
bankers requires GPSA to maintain debt to equity ratio around 1.2:1. An increase in ration
above this level would lead to make repayment of bank loan. When looking at the audited
value of debt to equity ratio, it can be seen than GPSA is near the banker’s criteria ratio
maintenance. It can be seen that time taken by organization to collect receivables form
customer has increased that reflects that organization might have lenient credit policy criteria
(Quick, 2014).
Audit risk-
Analysis of audit risk is essential part of audit plan and there are several risks
associated while carrying out audit. Analysis of risk is carried out for evaluating, identifying
and prioritizing the risks associated with the management of all the accounts mentioned
above. When looking at recording of trade receivables value that is done by trade receivable
clerk, it is certainly possible that management might not be efficient in keeping the tracks of
such record. Investment made in the implementation of new information technology system
and the function of information technology in organization is looked after by sales director.
However, the sales director duties toward information technology function are not regarded
as full time job by organization’s management. Risk is associated because there is no proper
segregation of duties and this might manipulate data (Boone et al., 2017). There are several
risk associated with accounts receivables as there can be improper reconciliation of accounts
receivables into the general ledger account. Measures of collecting receivables might be

5AUDITING THEORY AND PRACTICE
ineffective. While making investigation into the property investment made by organization, is
susceptible to the fact that organization can engaged in fluctuating or inflating the value of
their investment made in property market because of decline.
Audit risk faced by GPSA can be reduced by performing following steps:
Stakeholders of organization should be well informed about the duration of audit risks
and audit engagement should be conducted in accordance with International standards on
auditing.
The business risk faced by GPSA can be outlined by analysing the information of
ratio. Some of the enquires are required to be done by auditors that form an essential part of
audit plan.
 Risk of material misstatement relating to all the accounts can be identified by making
enquiries to management that requires enquiries of financial and non financial data.
 Analytical procedures are required to be performed by auditor for identifying
plausible relationship between several accounts.
 Risk of transactions in normal course of operations relating to accounts receivable are
assessed and identified.
 Inspection and observation process are collaborated with management and other
reporting authority within organization.
Answer to question 1B:
The business risk of organization can be outlined by evaluating the ratio analysis. The
tool of ratio analysis helps in explaining the relationship between widely used analytical
procedures and relevant items of financial information. In order to derive at audit evidence
and deriving at audit relevance, auditors make the comparison of ratios. When looking at the

6AUDITING THEORY AND PRACTICE
audited financial ratios, debt to equity ratios has decreased inn year 2015 to 1.02 from 1.04 in
year 2014 respectively. For unaudited ratio, debt to equity ratio has increased considerably to
1.11. This is indicative of the fact that the proportion of debt in relation to equity has
increased. Number of days required to collect receivables has increased considerably as
depicted from unaudited financial ratio. Return on total assets has declined significantly from
13.7% in year 2015 to 4.86% in year 2016. This is indicative of the fact that total assets have
not been efficiently utilised in the current year (De Santis, 2016). Current ratio has also
reduced from 1.66 in year 2015 to 1.54 in year 2016 respectively. The unaudited financial
ratio depicts that current ratio stand at 1.80. Increase in current ratio shows that organization
is capable of meeting its short term obligations using current ratio. Looking at return on
equity, it can be seen that, ratio has been significantly falling return to shareholders is
declining.
Answer to question 2A:
Effective control-
The internal control system of GPSA is effective and there has not been any change is
the control system for the last few years. There is no internal audit function and the system of
internal control is being refined at the planning stage of conducting audit. The sales invoices
are properly documented as there are proper procedures for deciding of data related to sakes
made. If there is any manual delivery made, dispatch department raises the sales order and in
event of incomplete deliveries, it is essential to have proper follow up.
The quality and conditions of medical equipments returned by customers are properly
checked by the staff of dispatch department. There is proper procedures related to trade
receivables follow up. In order to achieve the objective of sales system for reviewing the

7AUDITING THEORY AND PRACTICE
procedures of internal control procedures, some of relevant aspects are required to be
examined and this involves organizational control, segregation of duties, authorization,
physical control and accounting control (Gendron & Power, 2015).
Risk alleviated-
The effective internal control system could help in alleviating the risk that might arise
in organization. Implementation of effective measures would helps in eliminating the risks
that may arise from the manual recording of data and invoices. Recording of trade receivable
data are done by trade receivable clerk and he is responsible for posting the same into ledger
accounts (Zadek et al., 2013). If organization has effective internal control, system then there
can be reduced risks arising from recording of accounting transactions. It is certainly possible
that the trade receivable slip by trade receivable clerk might have some defect as there can be
manipulation or improper recording of list of debtors in preparing the slip. The individual
customer volume rating is updated manually by trade receivable clerk and sale director is
responsible for authorizing the report. All the possible risks associated with accounting and
transactions recording of data would be alleviated by the effective control system of
organization. Thus is so because it helps in facilitating efficient and effective operations as it
becomes easy to respond appropriately to operations, finance and compliance of business.
Quality of external and internal control of reporting is ensured by maintenance of processes
and proper records that helps in generating relevant timely and reliable information within
and outside the organization (Davies & Goddard, 2017).

8AUDITING THEORY AND PRACTICE
Test of control-
Organizational control Written procedures should be there for granting
credit to customers and receiving orders and
recoding of sales amount.
Physical control The documents related to sales order should have
physical control and their should be numbering of
re order sales forms. The monitoring of condition
and quantity of goods supplied should be done.
Sales invoices and delivery notes should be pre
numbered. Notes related to service performance
and goods delivery notes should be pre
numbered.
Segregation of duties Different members of sales team should be
involve in different aspects of the process of
sales. There should not be any involvement of
sales team members in some other functional
areas such as information technology department
as this cam lead to some potential risks to internal
system. Moreover, if looking within the same
department, there needs to be segregation, for
instance, same staff should not be involved in
raising invoices and dispatching the good to
customers (Earley, 2015).

9AUDITING THEORY AND PRACTICE
Accounting There should be proper accounting of all the
transactions and recording of data relating to
customer and sales invoices. Quotation of prices
should be correct and calculation of discounts
should be done appropriately.
Authorization Proper authorization should be involved in
change of any customer database and changes
made to credit limit must be properly authorized.
Answer to question 2b:
Weakness identified in the internal control for trade receivables and sales of GPSA:
The objective of trade receivables and sales system involves efficient and prompt
recording of customer orders. Recording of sales transactions are appropriate and prompt and
payment of invoices are made in accordance with organization’s trading terms.
 Trade receivable clerk is responsible for auctioning all aspects of invoice generation.
He is further responsible for preparing the sales volume analysis along with updating
the volume rating of individual customers. They should not be integral to handle all
the aspects of recording invoices and sales system. Such functions should be managed

10AUDITING THEORY AND PRACTICE
and controlled by employee who is independent of recording transactions and
performing the analysis relating sales and purchase.
 Sales bonuses are paid to employees against their targeted monthly sales volume and
target ratios and there is high risk of part of management making bonus payments in
event of inadequate sales transactions (Broberg, 2013).
 As depicted from the case study that financial controller is concerned about the
balance of doubtful debtors and there is no prescribed payment received from
customers that should be withhold. Since clerk is responsible for handling all matters
relating to trade receivables, there is increased risk that there will be bad debts and
doubtful debts. In this regard, they would have conflict of interest in minimizing the
doubtful debts and maximising the sales volume.
 Since there is no internal audit function of GPSA, there exists weakness in recording
of sales transactions in the account department (Griffin & Wright, 2015). In regard to
this, there is increase risk that the accounting record of company will be inaccurate
and inadequate relating to sales transactions.
Conclusion:
The given case study depicts the internal control system of GPSA that is actively
engaged in development of technologies relating to medical equipment. It has been
ascertained for the analysis of the given case that the internal control system of organization
is somewhat effective. However, there are some risks associated with the trade receivable and
sales system that can be mitigated by the effective implementation of audit plan.
Investigations have been carried out manly in five accounts listed by audit partner of
organization. Furthermore, the test of control is also employed for effective implementing of
internal control so that they are able to address the concern area.

11AUDITING THEORY AND PRACTICE
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