Auditing Report: Evaluating Internal Controls at BML Ltd.

This report provides a comprehensive analysis of BML Ltd., focusing on its financial and non-financial aspects. It begins with an executive summary outlining the report's objective: to identify weaknesses in the company's internal controls and propose remedial actions. The report then delves into a detailed analysis of financial ratios and additional information to assess the risks faced by the company, including obsolescence of plant and equipment, machinery finance liabilities, and accounts receivables. It identifies specific audit risks related to depreciation, revenue generation capacity, and payment delays. The report also examines effective internal controls, the risks they alleviate, and methods to test their effectiveness, such as inventory control systems, receivables management software, and accounting software. Furthermore, it pinpoints weaknesses in the internal control for contract payroll, suggesting improvements like maintaining soft copies of employee details and implementing automated time-tracking systems. The report concludes by summarizing the key findings and recommendations to improve BML Ltd.'s internal control environment.

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Authors Note:

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Executive summary:
In the present, report the different aspects that might affect the business of BML Ltd. The
main objective of the report is to find the weaknesses in the internal control of the company
and also illustrate the remedial measures that can be taken for the same. The task will be
achieved by analysing the various information already available like the financial ratios and
the additional information.

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Table of Contents
Introduction:...............................................................................................................................4
Analysis of the ratios and the additional information................................................................4
Analysis of the ratios and the additional information to determine the risks faced by the
company:....................................................................................................................................9
Internal controls that are effective, risks that they alleviate and the test of control to check
them..........................................................................................................................................10
Identification of the weaknesses in the internal control for contract payroll:..........................12
Conclusion:..............................................................................................................................13
Reference..................................................................................................................................15

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Introduction:
In the following report, all the financial and non-financial aspects of the company will
be analysed properly. After the results of the analysis are obtained, an effort will be made in
respect of recognising the weakness in the internal control of the company (Leung et al.,
2014). After the recognition of the risk in the internal controls of the company is achieved,
the procedures for alleviating them will be listed out.
Analysis of the ratios and the additional information
Account Analysis Audit risk Audit steps to
reduce risk
Plant and
equipment
The plant and equipment of the
company had to face a
remarkable amount of
obsolescence. It is because of
the fact that the kind of
equipment required by the
industry substantially changed
over the period of last 18
months. Computer aided
machinery took the place of old
machinery. Hence, the major
shift has drastically affected the
plant and equipment
requirement of the company
(Hay et al., 2017). The company
is in dire need of replacing its
Some of the various
risk involved in the
reporting of the
financial statements of
the company include
factors like reduction in
the market share of the
company, the
obsolescence of the
equipment used by the
company and many
more.
The company faces
significant risk in
respect of the policy
adopted for the
One of the
many steps
that can be
taken up by
auditor is to
reduce such
risk is to
physically
verify the
assets. This
will ensure the
determination
of the revenue
generation
capacity of the
assets in the

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present fleet of machinery. The
company might lose its present
customers and viability of
operations if it fails to achieve
that. The present stock or
inventory of the company is not
incapable of generating revenue
and profit for the company. The
company will also need to
objectively analyse its policies
in respect of recognising the
amount of depreciation in
respect of the present plant and
equipment.
recording of the
depreciation of the
equipment used by the
company. This is
because of the fact that
the circumstances
present at the time of
acquisition of the assets
will be much different
from the present
situation. The company
also needs to properly
quantify the impact of
the obsolescence of the
equipment on their
respective recoverable
value.
future. In
addition to
that, the
auditor must
take advice of
an expert to
determine the
amount of
depreciation
that should be
charged by the
company.
Machinery
finance
liabilities
To purchase the new equipment
the company has taken huge
amount of loans. Loan was
taken by the company for
financing of the old machinery
too. Hence, the financial
obligations in respect of the
assets of the company have
The audit risk in the
present situation is in
respect of the revenue
generation capacity of
the present assets of the
company. The auditor
will also have to
determine the impact of
To minimise
this there are
several steps
that can be
taken up by
the auditor.
They are as
follows:

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increased significantly. The new
asset’s revenue generation
capacity should compensate for
the same.
the reduction in its
present market share
within the industry. The
reason for this is that
the result of this
reduction will be the
reduction in the cash
flow of the company
and thereby a reduced
capacity to pay the
financial liabilities of
the company.
a) The
terms
and
conditi
ons of
the
debt
taken
by the
compa
ny for
purcha
sing
the
new
assets
must
be
studied
very
careful
ly by
the
auditor
. The

7AUDITING
period
of
repaym
ent
must
also be
consid
ered by
the
auditor
.
b) The
auditor
must
determ
ine the
revenu
e that
the
present
asset of
the
compa
ny can
generat

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e.
Accounts
receivables
It is observed that the debtors of
the company are delaying the
payments to be made to the
company. Hence, the number of
days in the receivables has
increased.
There is a significant
risk that the amount
classified by the
company as receivable
will be classified by the
company as bad later
on.
The
management
should provide
the auditor
with a sheet
containing the
list of all the
debtors and
the delay they
have made in
making the
payment to the
company.
Lease
Income
The amount shown by the
company in the unaudited
financial statements is less than
the amount of audited financial
statements. In respect of the
industry average, no figure is
available.
Due to the absence of
any parameter for
comparison, there is
significant audit risk
present in the item.
The
sufficiency
and propriety
of the income
earned by the
company
through lease
should be
checked by
experts by the

9AUDITING
auditor.
Analysis of the ratios and the additional information to determine the risks faced by the
company:
It is very important that the various risks faced by the company be properly discussed along
with the various ways in which they affect the business of the organisation. The auditor needs
to develop an understanding about the various risks faced by the entity to determine the areas,
which have the maximum possibility of presence of material misstatements (Malone et al.,
2014). This entire process is very successful in increasing the effectiveness and efficiency of
the audit procedures applied by the auditor.
Some of the business risks that are mentioned in the additional information are as follows:
a) The present market is experiencing an increase in the demand of the computer-aided
machinery and this has resulted in the downfall in the demand of the machineries
operated by the company. Hence, the present old and costly equipment o the company
will not be able to generate value in the near future (Mygind et al., 2016).
b) The company had to increase its amount of borrowings due to the increased need of
purchase of new machineries by the company.
c) The fluctuations in the metal industry of the country has significantly affected the
operations of the company in the following manner:
i) Since the year 2012, the gold market has registered a downfall of 24.95%.
ii) . Since the year 2012, the iron ore market has registered a downfall of 43.78%.
d) The company will have to bear huge financial burden in respect of the funds it will
need to acquire in respect of the new machinery it will have to acquire for its
operations.

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e) The company is in dire need of such employees who are well trained and skilled in
operating the new machineries that will be acquired by the company. The company
will have to pay higher salaries to these trained employees. Hence, the employee cost
of the company will increase substantially (Sookhak et al., 2018).
The ratio analysis confirms the presence of the business risk in the operations of the company
in the following ways:
a) The company’s present return on assets is lower than the industry average.
b) The present return on equity of the company is significantly lower than the average of
the industry.
c) The present profit margin earned by the company is much smaller than the industry
average.
Some of the business risks that can be identified from the ratio analysis are as follows:
a) The company is failing to keep the difference between the audited and unaudited
financial statements low. This may be the result of the faulty accounting practices
adopted by the employees either intentionally or unintentionally (McGain et al.,
2015).
b) The debtors of the company are paying the amount due after a long period of time
than the due date. This is reflected by the difference in the industry average and the
company’s figures.
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 risk that some significant After the adoption of the

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The company needs to
make use of
softwares that will
keep a logbook of
the details of the
entire inventory of
the company. The
system will
automatically
inform the
management
regarding an
inventory that has
not been used by the
management over a
significant period of
time (Huang et al.,
2015).
non-financial information
related to the company’s
position will not be reflected
in the financial statements
will be alleviated. The
amount that the company
must provide for depreciation
due to the obsolescence of
the inventory of the company
will be ascertained with ease.
All the information with
respect to the nature of the
future acquisitions to be
made by the company will
also be conveyed to the
company.
system, eh company should
input the details of the entire
inventories it has at present
into the system. In case the
system is able to recognise
the inventory that has gone
obsolete at present, the
system can be confirmed to
be working and efficient.
Receivables management
softwares:
The company needs to use
the services of receivables
management softwares. It
will help the company to
keep the track of details of
Risk of bad debt will be
alleviated:
The use of the system will
ensure that the company is
able to reduce substantially
its days in receivables. This
will in turn reduce the risk of
In the present case, the
debtors of the company are
making the payments long
after its due date. Hence, the
immediate adoption of the
system will ensure that the
company is able to keep

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every debtor it has its
transaction with. Along with
that, the debtors of the
company will be able to keep
record of the time they are
supposed to make the
payment to the company. In
addition to this the
receivables manager will be
able to keep record of the due
dates of collection of the
debtors of the company.
bad debts for the company
(Johnson & Comensoli,
2017).
record of the details of the
employees who are regularly
engaging in making delayed
payments.
Use of effective and
efficient accounting
softwares:
Presently the difference
between the audited and
unaudited financial statement
is immense. This confirms
that the concerned employees
of the entity are failing to
keep proper and appropriate
records of the financial
transactions of the company.
The risk of wrong and
faulty recording,
accounting and treatment
swill is completely
alleviated. The auditor will
be able to focus on the key
and most significant
matters of the company
rather than focussing on
the minor errors in the
financial statements of the
company.
All the relevant amendments
that have been prescribed
recently by the statute must
be incorporated within the
accounting software.

13AUDITING
Identification of the weaknesses in the internal control for contract payroll:
Certain deficiencies present in the internal control of the company regarding tis
internal control of contract payroll are as follows;
a) Along with the hard copy from which the details of the employee re being recorded in
the system, the company must make sure that it keeps a soft copy with itself. It will
ensure that in case of losing of hard copy by the project manager the details can still
be retrieved (Carson et al., 2016).
b) In case the number of employees working in the entity is huge, it will not be possible
for the project manager to maintain and look for the entry times of each employee.
Hence, the system of manual entering of the worn hours must be abolished by the
company immediately (Tuckers & Schaltegger, 2016).
c) At present, the company has fully automated the process of recording and preparation
of the accounts. In case of any error in respect of the recent amendments in the
regulation and failure to recognise, the same by the system can result in a huge error
in the reporting of the company (Yu et al., 2015).
d) The bank log in details should be immediately taken away from the accountant. At
least the company must make sure the same do not authorise him to process the
various payments made by the company. This may lead to defalcation of cash by him.
e) The company should separately calculate the regular payments and the
superannuation payments of the employees. This will eliminate the cascading effect of
any error made by the accountant or any error within the system. It will increase the
transparency of the method employed by the entity in respect of calculation of the
total salaries of the employee (Ferguson et al., 2016).