GPSA Audit Report

This report details an audit of GPSA, analyzing financial ratios related to accounts receivable, current investments, research and development, intangible assets, and property assets. It identifies several audit risks stemming from potential errors in financial statements and management misrepresentation. The report suggests steps to mitigate these risks, including using audit software, avoiding round-off numbers, and ensuring accurate tax returns. Furthermore, it examines GPSA's business risks, including substitute products, declining property markets, new IT development, and strategic risks. The report also analyzes GPSA's internal controls, highlighting their effectiveness in risk reduction and identifying weaknesses related to sales and receivables, such as inadequate documentation and lack of work duplication. The conclusion summarizes the findings, emphasizing the need for improved internal controls and risk mitigation strategies.

Auditing Theory and Practices 1
Auditing Theory and Practices

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Executive Summary:
This report is based on the audit of GPSA. This report consist the analysis of ratios associated
with the five accounts such as accounts receivable, current investment, Research and
development capitalisation, Intangible assets and Property assets. From this report it has been
analysed that there are several audit risks of GPSA and along with this some steps to reduce the
audit risk also discussed in this report. It has been also analysed that there are several business
risks that GPSA faces and those risks are; Substitute product and research cost, Decline in
Property Market, New IT development and Strategic Risk. In addition to this, it has been also
analysed that there are some internal control of GPSA and how internal control reduce the risks.
Weaknesses of internal control that effect the sales and receivable have been also analysed in this
report.
Table of Contents

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Executive Summary:...................................................................................................................................2
Introduction:................................................................................................................................................3
Question 1A:...............................................................................................................................................4
a) Accounts:.........................................................................................................................................4
b) Analysis of the Ratio:......................................................................................................................5
c) Audit Risks:.....................................................................................................................................5
d) Audit steps to reduce risk:...................................................................................................................6
Question 1B:................................................................................................................................................6
Business risks of GPSA:..........................................................................................................................6
Question 2A:...............................................................................................................................................7
a) Effective control:.............................................................................................................................7
b) Risk Alleviated:...............................................................................................................................8
c) Test of Control:................................................................................................................................8
Question 2B:................................................................................................................................................9
Internal control weaknesses for Sales and receivable:.............................................................................9
Conclusion:...............................................................................................................................................10
References:................................................................................................................................................10
Introduction:

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This is an audit report of GPSA. This report will consist the analysis of the ratios, potential audit
risks and the several steps to reduce the risks. Along with this, this report will also provide
details about the business risks of GPSA. The internal control system of GPSA and how that
system reduces the risk will be discussed in this report.
Question 1A:
a) Accounts:
Following are the five accounts listed by audit partner:
• Accounts receivable
• Current investments
• Research and development capitalisation
• Intangible assets
• Property assets
b) Analysis of the Ratio:
From the given report of the ratio it can be analyse that return on equity of 2015 was 22.17%,
and in 2016 it reduces and auditor found that the return on equity ratio was 18.16% and in 2017
with a huge downfall return on equty ratio is 7.19% it shows that the account receivable is
decreasing. The return on total assets is also decreases in 2017 and this also affecting the account
receivable. Gross margin is increased in 2017 as compare to 2016 and 2015 but the net profit is
decreased. In addition to this, the company has borrowed $5 million from its bankers and
because of this its liability is increased. Along with this, in 2017 the property market is going to
be decline so company should not invest in this market and the existing value of property assets
will also decrease.

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c) Audit Risks:
There are many chances of audit risk because financial statement that company provided to
auditor can be with many errors and management can misrepresent the data. This can be happen
that the accounts manager can increase the amount of accounts receivable in the books to show
the higher earnings. Company has borrowed $5 million from its bankers so this is a big liability
for it and to impress the auditor the company can decrease the amount of borrowing and
misguide the auditor. Along with this during 2017 the value of property is also decreases so if the
finance manager increase the value of property than it can be a audit risk.
d) Audit steps to reduce risk:
There are several steps that should be taken by the auditor to reduce the audit risks:
Use Audit Softwares:
There are big chances of error if audit is done by human. To reduce audit risk, auditor should use
audit softwares because softwares are more reliable than manual work. Using audit software is
very easy because of its automatic calculation facility, auditor just has to enter the data and the
calculation will be done by the software (Johnstone, et al., 2013).
Avoid round-off number:
When auditors round-off the numbers it increases the audit risk. To avoid this risk it is better to
write the exact number.
Accurate Tax Return:
Another thing that can help to avoid the audit risk is to prepare a report which reflects the same
data of tax return report (Knechel and Saltario, 2016). This can minimize the audit risk.

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Question 1B:
Business risks of GPSA:
Following are the business risks of GPSA:
Substitute product and research cost:
In 2016 research team conducted a research about the laser surgery device and for this research
company borrowed $5 million from its bankers. But in April 2017 a competitor of GPSA
developed a similar device. The competitor also filed for the patent of that device. This is a big
issue for the GPSA because this company invested a huge amount for the research of laser
surgery device and at the end the GPSA is not able to develop that device because of the
competitor. Because of this, another issue that arises in front of the company is that the bankers
have right to demand immediate repayment.
Decline in Property Market:
Another risk of GPSA is that investment in property market is a major activity of GPSA and
during 2017 the property market decline and this will negatively affect the business. The value of
the property which GPSA held will be decrease and this will be a big loss for the company. Its
revenue will decrease because of the decline of property market and this will directly affect the
investment in this company.
New IT development:
GPSA is developing new IT infrastructure in its business, this will increase the work efficiency
but it has a risk factor also because to operate the IT skill workers needed. GPSA cannot use the
IT program with the existing employees first the employees need training than they can work or
the GSPA need to hire new employees.
Strategic Risk:

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This risk can be arise in front of any company because if a company operating within a specific
company than the change in customer’s preference and test can put a company in danger and
GSPA have many activities like; investment in property market, investment of surplus fund
manufacturing and distribution of medical equipment etc. So GSPA have more chances of
strategic risk.
Question 2A:
a) Effective control:
It is a process of assuring the effectiveness of operation by internal auditing to achieve the
business objective (Costello, 2011). The financial controller of GPSA is working for the internal
control of the business. The financial controller has made an internal control policy for the
company. The company has decided that the management staff of the company will get bonus if
they achieve their targets, this strategy will make increase the strength of the company because
timely achieve targets will increase the profitability of the company. Along with this, for
effective internal control system the company has developed the new IT system in the company
and the implementation problems of IT are also resolved. The financial controller happy with
this new IT development and he believes that the IT development will be beneficial for the
company and the automation can accurately control the production and financial data.
b) Risk Alleviated:
GPSA has some internal control policies that help to reduce the risk. The company has decided
that the employees will get bonus if they will achieve the assign targets, this will force the
employees to work hard for the bonus and this target achievement of the employees will increase
the sales of the company and the growth of the company will also increase. In addition to this,
company has also developed an IT system and this is clearly defined that the IT system is fully

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automated. So the automation of the department will decrease the chances of the fault in the
work and with this IT system the financial and other data can be kept safe and secure (Jiménez,
et al., 2013). The IT system will also reduce the fault in the calculation and will generate
accurate results.
c) Test of Control:
Test of control is an audit procedure, in this the auditor test the effectiveness of the control which
a client uses to detect the risks. GPSA has sets the targets for the employees to get bonus so this
is not fixed that the employees will achieve their targets definitely. Another one is GPSA has
developed IT system but IT system is not accurate if the user is not able to use it properly and the
GPSA has decided that password will not required to access the database, so this can be a risk for
the company.
Question 2B:
Internal control weaknesses for Sales and receivable:
Inadequate documentation:
Documents are the proof of the transactions of business. All financial documents should be pre-
numbered to ensure all transactions are recorded or not (Cunningham, et al., 2013). If the
documents will not well maintain than there is a risk that accountant will not mention the
receivables properly.
No duplication of work:
This can be a weakness because of if a person is doing multiple of tasks than there is a great
chance of fault because only one person cannot do all the tasks related to sales and receivable.
For sales and cash related transaction manager approval needed:

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This is a main factor that should be consider in the internal control that all the cash related
transactions should be done with the permission of the manager as well as all the sales should be
done with the approval of the manager (Harp and Barnes, 2012).
Hire ethical people:
If the employer hire an unethical person than that person can harm the performance and it is a big
weakness of the internal control (Kalibayev, 2015). So employer should check the background of
the employees before hiring.
Not hiring outside accountant:
If the management not hire an outside accountant for the review of the accounts than it can be a
big weakness.
Conclusion:
From this report it can be concluded that there are many chances of audit risk in GPSA and to
reduce these audit risks there are some steps like; use of software, accurate tax return and
avoidance of round off number. It is also concluded that there some business risks that GPSA
can face and the business risks are; Substitute product and research cost, Decline in Property
Market, New IT development and Strategic Risk. In addition to this, on the basis of this report it
can be concluded that there are some internal control policies of GPSA such as; target base work
and new IT system development. These internal control policies of GPSA protecting it from
many risks and thefts. It is also concluded that there are several internal control weaknesses
related to sales and receivable such as; Inadequate documentation, No duplication of work, For
sales and cash related transaction manager approval needed, Hire ethical people and Not hiring
outside accountant.

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References:
Costello, A.M. (2011) The impact of financial reporting quality on debt contracting: Evidence
from internal control weakness reports, Journal of Accounting Research, 49(1), pp.97-136.
Cunningham, M., Nikolai, L. A., Bazley, J., Kavanagh, M., Slaughter, G. and Simmons, S.
(2011) Accounting: Information for Business Decisions. Australia: Cengage Learning.
Harp, N.L. and Barnes, B.G. (2012) Internal control weaknesses and acquisition
performance, The Accounting Review.
Jiménez, G., Lopez, J. A., & Saurina, J. (2013) How does competition affect bank risk-taking?,
Journal of Financial Stability, 9(2), 185-195.
Johnstone, K., Gramling, A. and Rittenberg,L. E. (2013) Auditing: A Risk-Based Approach to
Conducting a Quality Audit. 9th edn. Australia: Cengage Learning.
Kalibayev, M.K. (2015) Audit of accounts receivable as an essential element of organization
management, Актуальні проблеми економіки, (6), pp.370-379.
Knechel, W. R. and Saltario, S. E. (2016) Auditing: Assurance and Risk. 4th edn. New York:
Routledge.