Auditing Theory and Practice: BML Ltd. Risk and Control Analysis

This report provides a detailed analysis of BML Ltd., focusing on identifying weaknesses in its internal controls and recommending corrective measures. It examines financial ratios and additional information to determine the risks faced by the company, including obsolescence of plant and equipment, increased financial liabilities due to loans, and fluctuations in the metal market. The report also assesses the effectiveness of existing internal controls, proposes tests of control, and identifies weaknesses in contract payroll. Key business risks are confirmed through ratio analysis, highlighting discrepancies between audited and unaudited results and extended accounts receivable periods. Effective inventory and receivables management systems, along with accounting software, are recommended to mitigate these risks and improve financial reporting accuracy. Desklib offers more resources for students seeking similar solved assignments and past papers.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student:
Name of the University:
Author Note:

2AUDITING THEORY AND PRACTICE
Executive summary
In the p-resent report, detailed analysis of the various aspects of the business conducted by
BML Ltd. will be analysed. The purpose of this analysis is to determine the various
weaknesses in the internal control of the company and to determine the corrective measures
to be taken to check them. The primary job will be to analyse all of the information that is
being presented like the various financial ratios and the additional information

3AUDITING THEORY AND PRACTICE
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............................................................................................................................................8
Identification of the weaknesses in the internal control for contract payroll:..........................10
Conclusion:..............................................................................................................................10
Reference List..........................................................................................................................12

4AUDITING THEORY AND PRACTICE
Introduction:
An effort is being made through this report to ensure that all the financial and non-financial
information received in respect of the given company is objectively analysed. Through the
results obtained by the analysis conducted, an effort will be made to determine the
weaknesses that are prevalent in the internal control of the company. Subsequent to the
identification of the weaknesses, an effort is made to determine the audit procedure to
objectively identify the steps that will alleviate the risks of material misstatement in the
financial statement of the company (William Jr, Glover & Prawitt, 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
From the information that has been
given for consideration, it is observed
that there has been significant amount of
obsolescence on the part of the
company’s plant and equipment. The
reason being that, the requirement of the
industry has changed substantially over
the period of last 18 months (Wang, Li
& Li, 2015). The new demand is for
computer-aided machinery. This
substantial shift of requirement of the
industry has affected the plant and
machinery requirement of the company
significantly. The company will have to
There is several audit risk that
are involved in respect of the
review of the company’s
financial statements. Some of
them include non-financial
factors like the obsolescence
of the equipment used by the
company. The reduction in
the growth of the market etc.
Someof the key audit risks
present in the project involve
the concept of depreciation.
The reason being that the
policy adopted for
Some of the steps that
can be taken up by the
auditor to minimise
the risks include
physical verification
of the assets. This will
enable the auditor to
determine the
usabilityof the asset in
the near future. Taking
the advice of an expert
for determining the
correctamountof
depreciation that must

5AUDITING THEORY AND PRACTICE
replace the majority percentage of its
stock with latest machinery. Failing to
do so will cost the company its client
and its future viability of operations.
After going through the warehouse of
the company, it is observed that the
stock of plant and equipment as kept
and manged by the company is lying
idle. This shows that the equipment
present in the stock of the company has
lost their power or ability to generate
any sort of revenue or profit for the
company. The investment of the
company on these assets has become
useless. In addition to this, the
depreciation of the machinery including
the method used for recognising the
same has to be reviewed by the
company to ensure that the depreciation
due to obsolescence is duel accounted
for by the company.
recognising depreciation at
the time of acquisition of the
machinery might have
changed over the period due
to the change of the
circumstances in the business
environment of the company.
Another significant aspect
corresponding to this account
includes the valuation of the
impact of the circumstances
on the recoverable amount of
the property, plant and
equipment.
be charged byte
company for the same.
Machinery
finance
liabilities
In the present case, the company has
taken immense loan to finance the latest
equipment. The machinery originally
purchased was financed by way of loans
too. This has led to immense finance
liabilities in respect of the assets
The audit risks that are
involved in reviewing these
include overlooking of the
present revenue generation
capability of the assets of the
company. The auditor might
There are several
methods or steps that
can be taken up by the
auditor to minimise
the risks this include:
a) Going

6AUDITING THEORY AND PRACTICE
(Waldman & Jensen, 2016). The same
has to be met by the company by
utilising the revenue generation
capability of the assets by the company.
also fail to objectively factor
in the impact of the reduction
in the market in which the
company operates. This is
because reduction of the
market of the company will
reduce its cash flow and thus
affect the repayment of the
finance liabilities the
company has incurred in
respect of the assets.
through
obligation
that the
company has
incurred in
respect of the
assets very
objectively.
The terms of
repayment
along with
the period
must be
studied.
b) Assessing the
revenue
generation
capacity of
the present
assets of the
company.
c) Estimating
the future
revenues of
the company

7AUDITING THEORY AND PRACTICE
while
factoring in
the
Accounts
receivables
The account receivable so the company
have been –paying late payments to the
company. This has increased the days in
receivablesof the company above the
industry average.
There is a huge risk that the
amount shown by the
company as receivables
become will become bad debt.
The reason being the
substantial time taken up by
the debtors.
The auditor must ask
for debtor aging sheet
from the management
that will contain the
details of the debtors
and the delay they
have shown in
repayment.
Lease Income The company has been showing less
lease income in the unaudited
statements. There is also no relevant
data available for the lease income in
respect of the industry average.
There is a substantial risk in
respect of audit as there is no
parameter against which the
income can be measured.
The auditor must take
the suggestions from
the experts of the field
regarding the
sufficiency of the
lease income earned
by the company.
Analysis of the ratios and the additional information to determine the risks faced by the
company:
It is of utmost importance that the business risks faced by the company are properly discussed
because their respective implication affects the business in a multitude of ways. The business
risk is needed to be understood by the auditor in order to determine the areas of the
company’s financial statements that are most likely to contain material misstatements

8AUDITING THEORY AND PRACTICE
(Stewart & Shamdasani, 2014). This will increase the effectiveness and the efficiency of the
audit procedures applied by him.
Some of the business risks that are mentioned in the additional information are as follows:
a) The demand for the equipment owned by the company has decreased substantially
and there has been an increase in the demand for the computer operated machinery in
the market. This has rendered the costly old equipment’sof the company useless and
incapable of generating revenue in the future.
b) Due to the rising demand for the new machineries, the company had to increase its
borrowings for the purposeof acquiring tis new machineries.
c) There had been huge fluctuations in the metal market and it had effected the
operations of the company in the following manner:
i) The gold market has dropped around 24.95% since 2012.
ii) Iron ore market has dropped around 43.78% since the year 2012.
d) Due to increase in the demand of the new machinery, the company had to take huge
borrowings and thus it will have to bear higher financial obligations.
e) Along with the requirement of the new machineries, the company is facing the
requirement of new employees who are trained and skilled in operating these
machineries. As the workers of these machineries need to be more trained, they will
command higher salaries. This will increase the employee cost of the company
substantially.
The confirmation of the business risks identified in the additional information can be found in
the ratio analysis because of the following reasons:
a) The Return on Assets earned by the company is below the industry average.

9AUDITING THEORY AND PRACTICE
b) The company is earning a reduced amount of Return on Equity corresponding to the
industry average.
c) The profit margin of the company is less than the industry average.
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 ratios is substantially
high. This suggests that the company has been involving in many either intentional or
unintentional errors while reporting its annual results.
b) The days in account receivable of the company is significantly higher than that of the
industry average that suggests that the company is incurring additional opportunity
loss due to blocking of funds (Rezaee et al., 2018).
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:
Under this system, the company
can utilise the services
of information
technology to maintain
a log boom that will
automatically inform
the company regarding
the status of the
inventory or the time
period for which it has
not been used (Chan &
The risk of non-factoring
relevant non-financial
information for the planning of
the business will be alleviated.
The company will be able to
factor in the obsolescence of its
inventory to determine the
depreciation that must be
provided for it. It will also
inform the company regarding
the possible future acquisitions
to be made by the company
The company should enter into
the system the details of the
entire inventory present with it
at present. This will ensure that
the company reports the
obsolescence of the same to the
company. If it is reported, it is
assured that the system is
working properly (DeFond &
Zhang, 2014).

10AUDITING THEORY AND PRACTICE
Vasarhelyi, 2018). (Collins, 2017).
Receivables management
softwares:
Under this, the company can
make us of software that
contains the details of the entire
debtors of the company. It will
automatically inform the
debtors when the payment will
be due from them.
Simultaneously the person
concerned with the management
of the receivables will be
informed regarding the
collection of the dues from the
debtors on time (Alles, Kogan
& Vasarhelyi, 2018).
Risk of bad debt will be
alleviated:
If the system is implemented by
the company, it will ensure that
the company is bake to reduce
its days in accounts receivables
and it will substantially reduce
the risk of bad debts.
The present debtors are paying
the company in a delayed time.
Hence, immediate application
of the system should inform the
management regarding the
debtors who are making
defaults in respect of among the
payments on time.
Use of effective and efficient
accounting softwares:
Presently the gap between the
audited and the unaudited
results of the company is
immense. This suggests that the
personnel’sof the company are
failing to make the records of
the company properly according
This will alleviate the risk of
faulty accounting recording
and treatment. This will
improve the efficiency of the
auditor too as he will be able
to focus on key performance
indicators of the company
rather than getting diverted
with small but numerous
The accounting software must
be equipped with all the latest
amendments that have been
brought about by the statute
recently.

11AUDITING THEORY AND PRACTICE
to the statutory guidelines.
Hence, there is an immediate
requirement for its correction.
errors in the financial
statements of the company.
Identification of the weaknesses in the internal control for contract payroll:
Some of the weaknesses that the company experiences in the internal control of its contract
payroll are as follows:
a) The entry of the employee details by the payroll clerk is made using a hard copy
containing various sortsso details of the employee. The company must make sure that
it should maintain the soft copy of the details as well. The same should be attached
with the employee details in the system (Hayes, Wallage & Gortemaker, 2014). As
the clerk may claim to lose the hard copy.
b) The timing of the work hours are manually recorded and entered by the employee. It
is not possible for the contract’s manager to monitor each employee if his or her
numbers are significant (Freeman et al., 2017).
c) The entire system is automatic. In case of failure to change the amendments in the
regulatory requirements like that of the tax rate etc., the entire system along with the
corresponding information will give misleading results.
d) The bank log in details must not be present with the accountant. At least it must not
grant him the ability of processing of payments. This may result in manipulation of
funds by him.
e) The calculation of the regular payments and the payments regarding the
superannuation and other funds must be separate. As it will eliminate the risk of faulty
methods being used by the company for computation of the same. It will increase the
transference of the method employed by the company (Hargie, 2016).

12AUDITING THEORY AND PRACTICE
Conclusion:
After conducting the detailed analysis of the various aspects of the company, it was found
that there is substantial business risk present in the operations of the business. This includes
the obsolescence of the equipment of the company and the shrinking market. In addition to
this, it was seen that there were several weaknesses in the internal control of the company.
Those can be alleviated by optimal utilisation of the softwares by the company.