Audit Report: GPSA - Internal Control and Financial Risk Analysis

This report presents an audit analysis of GPSA, a medical equipment distributor, focusing on internal control effectiveness and financial risk assessment. The report examines key accounting areas, including accounts receivable, intangible assets, research and development, property assets, and current investments, identifying associated audit risks and mitigation strategies. Ratio analysis is performed on financial data from 2015-2017, revealing trends and their impact on the audit plan. The report evaluates GPSA's internal control system, highlighting strengths like password protection and bonus payment reviews, while also identifying weaknesses such as lack of segregation of duties in trade receivables. Finally, the report suggests steps to address identified weaknesses and improve internal controls, aiming to reduce audit risks and enhance financial reporting accuracy.

Running head: AUDITING THEORY AND PRACTICE
Auditing
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 that is engaged
in wide variety of activities. Analysis of risks of several accounts are done by using ratio
analysis. Internal control has been evaluated in terms of risk alleviation, text of control and
their effectiveness. Later part of report deals with division on the weakness of internal control
system and steps taken by auditor to reduce such risks.

2AUDITING THEORY AND PRACTICE
Table of Contents
Introduction:...............................................................................................................................3
Answer to question 1A:..............................................................................................................3
Answer to question 1B:..............................................................................................................6
Answer to question 2A:..............................................................................................................8
Internal control system:..............................................................................................................8
Risk alleviated-...........................................................................................................................9
Answer to question 2b:.............................................................................................................11
Weakness identified in the internal control for sales system and trade receivables of GPSA:11
Conclusion:..............................................................................................................................11
References:...............................................................................................................................12

3AUDITING THEORY AND PRACTICE
Introduction:
GPSA is an organization that is engaged in distributing, supplying the medical
equipment to medical practitioners. One of the long-standing client of MYH is GPA that is
required to conduct an audit plan for organization. While carrying out task of audit, several
areas of accounts are analysed using analytical procedures.
Answer to question 1A:
Analysing the accounting heads:
Accounts Analysis Audit risk Steps to reduce audit
risk
Accounts receivable-
Trade receivable or
accounts receivable is
the amount of money
that is received by
organization while
making payment or
goods and services.
Accounts receivable
ratio is calculated by
measuring the sales
made by organization
within average
receivable time.
Therefore, credit sales
is the account that is
From the analysis of
the given case study, it
can be observed that
trade receivable clerk
perform all the
activities of trade
receivable account. It
can be explained with
the help of instance,
that medical equipment
returned by customers,
clerk note down the
reason for return after
checking the conditions
and quality of product
and trade receivable
There is a high chance
that recording of data
in trade receivable
accounts might involve
errors, and therefore
high level of audit
risks. It is certainly
possible that trade
receivable clerk might
record the data
inappropriately and
there might be error in
recording or posting of
debtor account in
general ledger
(Abernathy et al.,
Audit risks can be
reduced by segregating
all the accounts related
to trade receivable
among different
employees.

4AUDITING THEORY AND PRACTICE
associated with
accounts receivable.
clerk raises the credit
note in customer
favour (Gaynor et al.,
2015). Moreover, trade
receivable clerk also
prepares the bank slip.
Trade receivable clerk
does receipts from
customers and posting
in ledger and therefore,
it involves high level of
risks.
2014).
Intangible assets
Some of accounts that
is associated with
business of GPSA are
goodwill, copyright
and patent right.
Recognition of value of
goodwill needs to be
analysed by
accountants. They are
required to determine
whether the life of
intangible assets are
definite or indefinite.
Determining the fair
value of assets is quote
difficult, as it does not
have any physical
existence. Therefore,
high level of risks is
associated with
Experts and authority
level are required to
determine intangible
assets fair value.
Determination of fair
value of assets should
have full control of
management.
Research and
development
capitalisation
Expenses related to
research and
developmental
activities will be
debited to profit and
loss account. Since the
Improperly recognizing
the activities related to
research and
development activities
needs to be properly
recognized as it
There needs to be
proper scrutinization of
all the expenses posted
in ledger account.
Market research is
required to be

5AUDITING THEORY AND PRACTICE
development was
successful, expenses
related to them will be
capitalized.
involves high amount
of costs
conducted before
launching any
equipment in market.
Property assets
Property assets account
of GPSA involves
depreciation account
and fixed asset
account.
Financial statement of
organization will be
greatly impacted if
there is improper
recording of
depreciation amount
and carrying value of
assets.
Improper recording of
assets wold enable the
auditors to differentiate
the duration of
existence of assets
whether they are less
than 180 days or for
more than 180 days.
Sales and purchase of
property assets needs
to be scrutinized
properly and it is also
essential to check
several impairments
related to assets.
Current investments
Current investments is
related to accounts that
is converted into cash
within short time
period that is within a
period of 3 to 12
months. Current assets
such as cash and cash
equivalent is recorded
under current
investments (Beasley,
2015).
Under different
accounting system
treatment of investment
account is different and
it can be said that
medium level risks is
associated with current
investments.
Audit risk involved
with current investment
is making investments
without evaluation of
risks.
There needs to be
regularly checking of
return generated from
investments. It is also
essential to evaluate
the past trend of
investment growth
performance.

6AUDITING THEORY AND PRACTICE
Answer to question 1B:
Ratio 2017 (Unaudited) 2016 (Audited) 2015 (Audited)
Return on equity % 7.19 18.61 22.17
Return on total assets
%
4.86 13.7 15.52
Gross margin % 31.76 30.00 24.94
Net profit margin % 10.38 20.27 17.85
Times interest earned 1.90 3.51 4.10
Days in inventory 166.53 127.89 115.85
Days in accounts
receivable
83.07 60.65 53.24
Current ratio : 1 1.80 1.54 1.66
Quick asset ratio : 1 0.89 0.78 0.82
Debt to equity ratio : 1 1.11 1.02 1.04
Ratio Ratio analysis Audit impact Steps of audit
Return on equity % There is a decreasing
trend for return on
equity and it declined
to 7.19% in year 2017
as against 22.17% in
year 2016.
Declining trend has a
high impact on audit,
as auditors are
concerned about net
worth of organization.
Organization should
efficiently utilize its
assets for generating
return.
Return on total assets
%
Significant decline on
assets has been
experienced from
13.7% in year 2016 as
against 4.86% in year
2017.
Risk is incurred on
level of profitability.
Auditors should assess
the returns generated
from assets.
Gross margin % Gross margin has
increased in current
year 2017 to 31.76 as
compared to 30 in year
Auditors needs to
analyse the reason for
increasing trend for
which they are required
Assessment of factors
generating increased
profit margin should be
done.

7AUDITING THEORY AND PRACTICE
2016. This depicts that
gross margin has
increased.
to evaluate the
accounts.
Net profit margin % Net profit margin has
decline significantly to
10.38% in year 2017
from 20.27 in year
2016.
Fall in net profit
margin has been
ascertained that has
significant impact on
conducting audit.
Organization’s
profitability involves
high risk level.
Days in inventory Days in inventory has
increased to 166.53 in
year 2017 from 127.89
in year 2016.
Increase in days of
inventory needs to be
assessed by auditors.
Auditors need to make
the assessment about
the sales account and
inventories account.
Days in accounts
receivable
Days in account
receivable has
increased significantly
from 127.89 in year
2016 to 166.53 in year
2017.
Increase in days
receivable indicates
that organization is
collecting its
receivables frequently.
For this purpose, credit
policies of GPSA
should be examined.
Current ratio Current ratio has
witnessed an increasing
trend from 1.54 in year
2016 to 1.8 in year
2017 respectively.
Increase in current
ratio indicates that
liquidity position of
organization has
improved.
Auditors are required
to review the current
assets and its
utilization.
Quick asset ratio Quick asset ratio has
increased to 0.89 in
year 2017 compared to
0.78 in year 2016.
Changes in level of
inventories has impact
on audit plan of
organisation.
Auditors are required
to make the
examination of
inventories account

8AUDITING THEORY AND PRACTICE
Debt to equity ratio Debt to equity ratio has
increased to 1.11 in
year 2017 to 1.02 in
year 2016. This
indicates that leverage
of organization has
increased.
Audit will be impacted
significantly due to
increase in leverage
ratio.
Risk involve with
payment of creditors
needs to be assessed by
auditors.
Answer to question 2A:
Internal control system:
Effective control-
Protection of password- Management, Sales director and finance controlled were
actively involves in generation of success of new Information technology system. In order to
have access to programs the system has access and they were strictly protected with
passwords.
Bonus payment- Shareholders of organization are involved in reviewing of bonuses
that are paid to management of staffs. Concerned employees are asked to explain the reasons
for any variance existing in the budgeting and overheads of employees.
Aging analysis- At the end of each month, recording of receivables and that are
entered in the computer system. Financial controller is further responsible for analysing the
trade receivables and trade receivable clerk should explain any delay made in payment to
debtors (Cannon & Bedard, 2016).

9AUDITING THEORY AND PRACTICE
Trade receivable- At the end of each month, the debtor account is reconciled into
general ledger account by trade receivable clerk.
Doubtful debts- In event when balance of doubtful debtors goes above prescribed
limit while preparing the plan of following up of doubtful debtors. This requires withholding
the shipment of goods to costumers when they are not able to provide organization with
prescribed limit (Hayes et al., 2016).
Risk alleviated-
Delivering notes manually- System of recording of data is exposed to some sort of
risks and for delivery, manual notes are prepared. It is certainly possible that there might be
errors while noting or preparing manual and this might lead to act of fraud.
Database access- In relation to information technology function, it has been observed
from the given case study that the access to over program is controlled by the application of
strict password (Doxey et al., 2016). If there, is any unauthorized access to the system and if
they are not password protected, then there arises chances of misappropriation and ultimately
fraud.
Lack of segregation of duties- Trade receivable clerk is responsible for performing
all the aspects of trade receivable account and engaged in manual recording of data into
computer system. He is responsible for raising the credit note in favour of customers,
preparation of documentation and properly recording the reason for returning the goods from
customers. Moreover, he does bank deposit slip and posting of journal and this involves
some errors whether they are done intentionally or unintentionally. There exist possibility of
conducting fraud or errors while recording the entries (Glover e al., 2016).
Test of Control-

10AUDITING THEORY AND PRACTICE
Test of control is used by auditors for analysing and evaluating the efficiency of
internal control system of organization. Level of reliance on internal control system of
organization is based on result and outcome of test conducted by auditors. The categorization
of test of control are discussed below:
 Observation- Auditors under this category makes the analysis of efficiency of internal
control of organization and evaluating the business procedures that are in action.
 Inspection- Under this, documents are examined with respect to internal control
authorization, stamps and signatures.
 Performance- Internal control system of organization is checked in relation to any
new transactions involved in business.
In order to generate effective control in internal control system, some of test of
control are as follows-
Protection by passwords- in relation to protecting password, auditor will perform
inspection approach on control test.
Aging analysis- Auditor will perform inspection and observation approach.
Bonus payment- For this control test, auditor will perform observation approach
control test.
Trade receivable- Auditors will perform re performance approach control test
Doubtful debts- Auditors will perform re performance approach control test (Jia,
2016).

11AUDITING THEORY AND PRACTICE
Answer to question 2b:
Weakness in the internal control system of GPSA:
Internal control weakness Impact on audit Steps taken to reduce weakness
The recording of invoices are
done solely by trade receivable
clerk and he is responsible for
positing the journal and
reconciliation of accounts.
Risk might evolve while
maximization of sales revenue
and minimization of risks
(Knechel & Salterio, 2016).
Only trade receivable clerk
should not do the management
of all aspects of trade receivable
account and other should be two
or more person involved in
handling the accounts.
Management staff are receiving
bonuses based on targeted
volume of monthly sales,
departmental budget and
variation of sales overhead.
This type of weakness might led
to evolving of risks relating to
bonus payment to employees in
event when there is any non-
completed transactions.
Bonus amount should be
calculated irrespective of sales
made by sales department for
internal control check
facilitation.
Inefficiency in internal control
due to inappropriate recording
of data and journal entries by
trade receivable clerk
Several aspects of internal
control will significantly affect
audit, as there can be
misappropriation of data and
ultimately fraud.
System of internal control
should be made efficient by
segregating duties relating to all
aspects of trade receivable
account and sales system
(DeFond & Zhang, 2014).
Conclusion:
From the above analysis, it is depicted that the internal control system of GPSA
would be facilitated by creation of new internal control manual. This has made trade
receivable entitled to handling all data relating to such accounts. However, such system is

12AUDITING THEORY AND PRACTICE
regarded as inappropriate as it carries several amount of risks of misappropriation and risks
while dealing with accounts. Furthermore, some weaknesses in the internal control of GPSA
have also been identified that has several impact on audit procedures of organization. In light
of this, auditors are required to take steps for minimization of audit risks faced.

13AUDITING THEORY AND PRACTICE
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