Big Machine Limited Miller Yates Howarth Audit Report Analysis

This report is an audit and assurance services report for Big Machine Limited, analyzing financial statements, audit risks, and internal controls. The report examines key accounts like plant and equipment, accounts receivable, lease income, and financial liabilities, using ratio analysis and assessing the current internal control system. It identifies business risks such as strong competition, downtime in the mining industry, and weak internal systems. The report proposes internal control measures to mitigate risks and improve system efficiency, including detailed audit steps to reduce identified risks associated with each account. Furthermore, the report analyzes the company's financial health, evaluates the effectiveness of the internal control system, and lists weaknesses in the contract payroll system. This report provides valuable insights into the financial health and operational challenges faced by Big Machine Limited.

Big Machine Limited
Miller Yates Howarth
Audit Planning and Internal Control
2nd May, 2018
1

Executive Summary
This report has basically referenced to the audit and assurance services provided by an
auditor to a business organization. There are many parts of an audit and some part has been
covered in the below report. The report is for Big Machinery Limited whose audit has been
conducted and various things related to the audit has explained. There are different external
environment factors that affect the business operation of Big Machinery Limited. There are some
issues like strong competition, downtime in mining industry and weak internal system that the
company is facing. Various accounts related to audit has been demonstrated in the report and
steps are mentioned to reduce the same. There are four accounts that are considered- Plant and
equipment, machinery accounts receivable, lease income and financial liabilities. An analysis has
been done and for the same audit risk, ratio analysis and current internal control system has been
calculated in order to find out the results. This organization is facing business risk and this has
been concluded in this report. This report also includes proposed internal control measures that
can be easily implement and control the system to test them.
2

Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Question 1 A:...................................................................................................................................4
Question 1 B: Analyse the ratios and additional information to outline the business risks that
BML faces........................................................................................................................................4
Question 2 A:...................................................................................................................................5
Question 2 B: List and identify the weaknesses in internal control for contract payroll.................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7
3

Introduction
This was important to ensure the controlling of the management in the working of the company
and an internal analysis has been designed to know the same. By conducting audit of the internal
control, the effectiveness and efficiency of the control system has been judged. In this report, all
the internal control measures for of Big Machine Limited (BML) are done. Ration analysis and
additional information has been considered in order to do the analysis. It also includes the control
measures used by the company to minimize the risk and test the control.
Question 1 A:
Account Analysis Audit Risk Audit steps to
reduce risk
Plant and
Equipment
There must be an increase in the
account for plant and equipment in
a great extent. The main reason
behind is the recent changes in the
nature of the major business
operations of the organization.
They cannot use already owned or
second hand machinery because it
cannot fulfil the further
requirements due to change and
improvement in the technology. In
order to overcome this issue, an
investment has been done on plant
and machinery. This resulted in
the return on total assets equal to
14% (Porter, Hatherly and Simon,
2008).
Existence is really
important to be
checked in detail.
In this case, the
major issue was
that the auditor
was unable to
measure the value
of assets as they
got acquired on
contractual basis.
There is a chance
of wrong valuation
of assets and this is
the reason of the
importance of
valuation process.
These are the
steps that needs
to be taken in
order to reduce
the risk of audit:
There should be
a proper
examination of
all the
documents
related to the
equipment like
the design, life
of the asset and
value of the
asset. Physical
verification has
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to be done for
the fixed assets
of the company
to check their
existence and
proper valuation
of the same.
Machinery
Finance
Liabilities
Machine finance liability refers to
the account that considers the debt
and finance taken to back
equipment or machinery that has
been recorded. This is basically
concerned with debt income or
lease income of Big Machine
Limited during the year. There are
two ratios that have been
calculated for completing the
analysis (Gautam, 2010).
1. Debt Equity ratio- It helps
in analysing the debt and
equity involve in the
business. Many new debts
have come in order to
procure more equipment
for carrying out business
It is important to
examined audit
risk and for the
same completeness
should be
examined
properly. This
assertion consist
the recognition of
all the fixed assets.
These should be
inspected and
examined in terms
of existence,
valuation and total
disclosure related
to financial
statement.
There should be
complete
inspection of all
the documents
related to debt
taken and the
use of the same
for getting any
particular
equipment.
Analysis has
been done for
the lease
agreement and
inflow of lease
for the mining
machine.
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operations. So, there is a
change in debt equity ratio
but it is still according to
the expected level.
2. Profit/ Lease income ratio-
It is a ratio that helps in
analysing the part of lease
income in the overall profit
of Big Machine Limited.
There is an increase in
lease income for the
current year and it is
currently it should situate
at a higher level but it is
showing on a position of
moderate level (Apreda,.
2010).
Accounts
Receivable
Accounts receivable account in the
current year should be increased
because much equipment has been
procured by Big Machine Limited
and same has been provided on
rent or lease. Therefore according
to current situation accounts
receivables should be increased
(Audit & risk, 2011).
But from the analysis of current
ratio it can be observed that
current assets have been decreased
Completeness is
examined in the
first assertion
process. In BML
company,
receivable
recording is done
on the basis of the
total credit sales.
There might be
possibility that
Lease agreement
should be used
and mutually
agreed by the
both parties. .
Credit policies
and regulations
should be
recorded. .
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as compared to last year. Therefor
there may be some misstatement in
accounts receivables account.
Current ratio includes accounts
receivables under current assets
part and according to changed
business operations current ratio
should be at higher side.
The lease agreement in the debtors
and BML should be based on the
entered contract. There is
possibility of the material mis-
statement in the recording of the
debts and other liabilities.
recording
procedure may
neglect the
transactions of the
receivables and
equipment sales.
Lease
income
Lease income is recorded as
capital revenue in the books of
accounts of the BML.
Recording of the lease income is
done as per the accounting rules
and regulation.
There should be a higher side of
the profits earned by lease income
but according to the ratios it is
showing low profits. So, there is a
possibility of a major misstatement
in this account (Elder, Beasley, &
Arenas, (2011).
Accuracy is the
main concern
while doing the
analysis and
auditing of
financial
statements. The
correctness of
lease income will
be checked under
this assertion
(Standover, 2017).
An analysis of
lease agreement
in a detailed way
has been done.
The amount
shown in lease
income should
be verified or a
cross checking
has been done
with the external
confirmation
team and lease
agreements.
Lease income
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The gross margin of the company
has shown a static result if we
compare the same to the last year’s
figures. But there should be a
decline in the gross profit margin
according to the current scenario
of the business. Big Machine
Limited is facing so many issues
but still they are capable of
generating an appropriate profit is
not a realistic situation.
should be
calculated in
terms of the date
of receiving and
amount
mentioned in
lease agreement
(Developing an
audit trail,
2008).
Question 1 B: Analyse the ratios and additional information to outline the business
risks that BML faces.
After the completion of analysis regarding the actual position of Big Machine Limited, the ratios
has been calculated and some risks are determined that can interrupt the working of the
organization (Mainardi, 2011).
Return on Assets- It has been concluded that the overall return on total asset has decreased and
the reason for the same is the increase in fixed assets. Profits earned by using the same assets are
known as return on assets. There is a chance to maintain the returns normal the options for the
same were sale of fixed assets and hike in profits. These results are in the low business expansion
as well as low investments done by investors (Gay, & Simnett, 2015).
Downtime in mining industry- There is a downtime in the mining industry as per discussed and
this is the reason for the shutdown of many companies. There are strict implications of the
government in the mining industry and due to this many companies are going back from this
business (Demina, Larionova and Chinaeva, 2017).
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Change in the metal market- there is a major change in the market of metal and this created an
impact on the business of BML. Due to the same, there was a drop in the rates of the metals. All
these fluctuations on the market and industry have impacted the business operation of BML.
Unstable receivables credit policy- It has been observed while analysing efficiency ratio that the
money taken by the debtors is more. It shows the low availability of cash in the business
organisation (O'Donnell, Arnold, & Sutton, (2010).
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Question 2 A:
Internal control system plays a very important role in the management of the organization. It
provides support in managing all the operations of the organizations. Internal control refers to the
process that helps in conducting any operation in the organization. It is very important to manage
the issues created by misstatements in financial statements like authentication, proper cross-
checking and authorisation (Sickles, 2012).
Control Risk alleviated Test of control
Physical
verification of the
assets is essential to
know the physical
presence of the
same in the given
case. There are
many fixed assets
that are not in the
working condition
and remain idle.
In this feature, assertion is the
existence of the assets that needs
to be checked. All the utilised
assets need to be depreciated time
to time and actual value is
calculated (Apreda, 2010).
Physical verification of the
assets has been done.
Examination of the fixed
assets takes place that is a part
of the audit plan.
Reconciliation and
lease approval
income
Internal control has been done
properly for BML by
reconciliation lease income and
lease contracts that have been
created to take heavy mining
equipment on lease. After all the
above procedure, approval of
finance manager should be
mandatory on monthly basis
(AICPA. 2017).
Selection of the sample of
lease income transaction has
been done and afterwards audit
trail should be developed.
External information has been
taken from lessor.
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No use of personal
accounts policy
Internal control is important for
BML and it is important to
introduce policy regarding the
non-usage of personal account or
personal nature elements.
Although, it has been already
decided that manager’s personal
bank account is use for making
payments.
There should be a proper
examination of all the accounts
individually.
Authorisation and
authentication
There is no procedure of
authorization and authentication in
BML. This system is same for
payroll account and any other
account too.
ID and password testing has
been done for verification
purpose.
Question 2 B: List and identify the weaknesses in internal control for contract
payroll.
The company is facing a downtime and one of the major reasons for the same is the weak
internal control system. Some known weaknesses are (Arens, Elder, & Beasley, 2013).
Unsecured payroll system- A testing of BML has been initiated regarding the payroll system
with the help of using password on a dummy. After the installation of the system, password has
been removed. This is the main reason for unsecured payroll system
No cross- checking of documents- It has been observed that in BML, hard copy has not been
used for making the entries by the employees in the systems.
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This is the reason for lacking in cross checking from the relevant source of information to the
wrong entries (Mohseni, 2014).
Wrong working hour entries by payroll employees- There is a fictitious system for the
employees, and this helps employees to enter working hours in the system according to them. It
was found that employees made false entries, when checking has been done (Dube, & Gulati,
2015).
Improper management of deduction and overtime- The system used by BML has not the capacity
to calculate the deduction for leaves and absenteeism. There are no proper rules and policies for
the employees who work overtime. So, controlling of working hours is very important (Messier,
Glover, & Prawitt, 2016).
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Conclusion
Big machine has been facing a major issue in the operational downtime in mining industry as
concluded. To resolve the same issue, an external environmental analysis has been done and the
same has been conducted in order to face high competition, environmental factor as well as
industry pressure. Internal control audit has been done to improve many things. There should be
a proper authentication for payroll system, and cross check and physical verification should be
done to ensure the accuracy.
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References
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Electronic Journal.
Arens, A. A., Elder, R. J., & Beasley, M. S. (2013). Auditing and assurance services. Pearson
Higher Ed.
Demina, I., Larionova, E. and Chinaeva, T. (2017). Investments in fixed assets and depreciation
of fixed assets: theoretical and practical aspects of study and analysis. Statistics and
Economics, (3), pp.71-79.
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Dube, D. P., & Gulati, V. P. (2015). Information System Audit and Assurance. Tata McGraw-
Hill Education.
Elder, R. J., Beasley, M. S., & Arens, A. A. (2011). Auditing and Assurance services. Pearson
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Gautam (2010). A System for Payroll Management. Journal of Computer Science, 6(12),
pp.1531-1534.
Gay, G. E., & Simnett, R. (2005). Auditing and assurance services in Australia. Mcgraw-hill.
Mainardi, R. (2011). Harnessing the power of continuous auditing. Hoboken, N.J.: John Wiley.
Messier, W. F. G., Glover, S., & Prawitt, D. (2016). Jasa Audit & Assurance. Pendekatan
Sistematis.
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Components of Audit Risk and Determine the Impact on the Components of Audit Risk in Audit
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O'Donnell, E., Arnold, V., & Sutton, S. G. (2010). An analysis of the group dynamics
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domains. Journal of Information Systems, 14(s-1), 97-116.
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Porter, B., Hatherly, D. and Simon, J. (2008). Principles of external auditing. Chichester,
England: John Wiley.
Sickles, E. A. (2012). Quality assurance. How to audit your own mammography
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