Auditing Report: GPSA Internal Control System Evaluation and Analysis

This report provides an in-depth analysis of the internal control system of GPSA, a company involved in medical equipment research, development, manufacturing, and distribution. The report, prepared by an accounting firm, focuses on key accounts like current investments, accounts receivable, and intangible assets, highlighting potential audit risks. It utilizes ratio analysis to assess the company's financial health, revealing trends in profitability, liquidity, and solvency. The report identifies weaknesses in the new internal control manual, particularly concerning sales and trade receivables. It recommends improvements, including segregation of duties and enhanced control procedures, to mitigate risks and improve the overall effectiveness of the internal control system. The conclusion emphasizes the need for auditors to evaluate these risks and implement tests of control to ensure the reliability of GPSA's financial reporting.

Running head: AUDITING
Auditing
Name of the University
Name of the student
Authors note

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Executive summary:
The report is prepared for explaining the various aspects of internal control system of GPSA.
Ratio analysis tool has been adopted for evaluating the risks faced by some specific accounts.
Evaluation of internal control system has been done by analysing its effective and capability
of alleviating risks faced in managing accounts. Furthermore, report also demonstrates the
weakness of the new internal control manual of GPSA and addressing the specific areas by
adopting the effective internal control system.

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................3
Answer to question 1A:..............................................................................................................3
Accounts-...................................................................................................................................3
Analysis-....................................................................................................................................3
Audit risk-..................................................................................................................................4
Following steps can be taken for reducing audit risk faced by GPSA:......................................5
Answer to question 1B:..............................................................................................................5
Answer to question 2A:..............................................................................................................6
Effective control-.......................................................................................................................7
Risk alleviated-...........................................................................................................................7
Test of control-...........................................................................................................................8
Answer to question 2b:...............................................................................................................9
Weakness identified in the internal control for sales system and trade receivables of GPSA:..9
Conclusion:..............................................................................................................................10

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Introduction:
The accounting from Miller Yates and Howarth is responsible for preparing adit plan
of GPSA. GPSA is one of the long standing and significant client of accounting firm that is
engaged in research and development of medical equipment’s, acquisition of property and
manufacturing and distribution of medical equipment. Auditors are concerned about specific
areas and they are placing great re4laonce on internal control system of business. The internal
control system would be reviewed and they have been pursuing new internal control manual
(Eilifsen et al., 2013). Extensive work faced by organisation would be reduced by placing
reliance on internal control.
Discussion:
Answer to question 1A:
Accounts-
The five types of accounts where auditors have expressed their concern are current
investment, account receivable, property investment, research and development capitalization
and intangible assets. It is perceived by them that these accounts would pose risks while
carrying out audit (Brusca et al., 2016).
Analysis-
New internal control manual has brought changes in the system of trade receivable
account, as the trade receivable clerk is responsible for handling all the transactions relating
to sales. All entries made in the computer system would be made by him and he would be
responsible for reconciliation of debtor account into general ledger (Hayes et al., 2013). Some

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of the current investment is made in research and development activities relating to
development of new laser surgery device. For financing of such investments, GPSA has
borrowed a loan of amount $ 5 million from banks. However, organization is required to
maintain debt equity ratio and d 1.2:1 and an increase in ratio would make them repay the
amount of loan borrowed. Furthermore, investment made in property market, their return is
also uncertain because of decline, and they are susceptible about the investment.
Audit risk-
While conducting audit, auditors faces several risks associated with accounts that is
regarded as one of the relevant part of conducting audit. Performance risk analysis would
help auditors in prioritizing, identifying and evaluating risks while management of all
accounts. When clerk records looking at trade receivable account, values of data relating to
transactions and it is certain that there is possibility of manipulating data or conducting
certain errors. Sales director is involved in looking at information technology function that is
not considered as full time job by management. There is lack of duties segregation that might
impose possible risks on carrying out audit. Due to decline in property market, investment
made in such areas might lead to inflating the value of their investments (Beasley, 2015).
Steps taken for reducing GPSA audit risk:
Audit plan should be conducted by complying with the requirements of International
standards. Some of the steps that would help in reducing audit risks are as follows:
 Management and several reporting authority within organization should be integrated
with inspection and observation process.
 Identification and assessing risks associated with normal course of transaction and
account receivable.

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 Performing analytical procedures for recognizing probable relationship between
several accounts.
Answer to question 1B:
Tool of ratio analysis can be used for evaluating the business risk and auditors would
be able to obtain significant audit evidence by analysing ratios over several year. Ratios have
been calculated for analysing the efficiency, profitability, liquidity and solvency position of
organization.
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
Debt to equity ratio has increased considerably increased in year 2017 to 1.11 as
compared to 1.02 and 1.04 in year 2016 and 2015 respectively. Return on equity has declined
significantly to 7.19 in year 2017 as against 18.61 and 22.17 in year 2016 and 2015. This
depicts that efficiency of organization has reduced in generating return to shareholders and
they are increasingly depending on loans for financing their capital requirements. Days in
inventory and days in account receivable has increased considerably for consecutive years.
This is indicative of the fact inventories are talking time to be converted into sales and
accounts receivable are being collected frequently (Louwers et al., 2016). Current ratio has

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also increased to 1.80 in year 2017 compared to 1.54 in year 2015 indicating improved
liquidity position of GPSA.
Answer to question 2A:
Internal control system of GPSA is so designed that helps in obtaining reasonable
assurance for achieving the objective of business, improving the financial reporting reliability
and making operations efficient.
Effective control-
It is required by GPSA to refine the internal control system as they have not been
change for years and no internal audit function exists. Data regarding the several business
transactions should be recorded and documented. After the manual delivery of products has
been done, it is the responsibility of dispatch department to raise the orders for sales. Proper
procedures are adopted for follow up of procedures of trade receivables (Louwers et al.,
2016). Some relevant aspects examine procedures of internal control system of organization
are done by auditors.
Risk alleviated-
Adopting the effective internal control system will help in alleviating the risks
associated with several accounts. Trace receivable accounts are exposed to several risks of
data manipulation and improper recording and reconciliation of accounts. While preparing
debtors list and sales orders, there is a high chance that some error can arise while recording.
If GPSA has such internal control system that are properly designed for dealing with such
tasks, risk arising from account management would be reduced. Coordination among several
departments such as operations, finance and sales department would be enhanced by
implementing effective system of internal control (William et al., 2016).

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Test of control-
Authorization In order to make system of internal control
effective, proper authority should control
operations department. This will enable auditors
to grasp proper, appropriate and reliable
information from departments.
Organizational control For the trade receivable account and sales system,
written procedures for accounting needs to be
adopted by employees.
Segregation of duties Different staff members should be involved in
looking after the information technology
functions and sales department. Moreover, two
separate employees should do sales invoices and
recording of data. Posting of invoices and
customer receivable two different members of
sales team should do accounts maintenance
(Stojanovic & Andric, 2016).
Physical control Invoices are created by using the computer
system that involves manual recording of data. in
this regard, adequate control should be exercised
over such system.
Accounting and arithmetic Proper recording of accounting transactions
should be done by incorporating se of numbers.
This is done by numbering the invoices generated
and prompt recording the same.

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Answer to question 2B:
Identification of internal control weakness of GPSA regarding trade receivables and
sales system are as follows:
 GPSA lacks internal control function that leads to arising of weakness by accounts
department in recording transactions of sales. This leads to arsing of possibility of
inaccurate and improper recording of details sales transactions.
 Targeted monthly volume of sales and deviation or variation in the overhead of
departmental budget forms the basis of bonuses received by sales staff management
and sales team. In the event of any non-completed transactions and not meeting the
desired target, risks of not making bonus payment would arise (Cannon & Bedard,
2016). In order to facilitate the internal control check, calculation of bonus amount
should be separated from sales made by sales department.
 Trade receivable clerk is responsible for recording all the aspects of trade receivable
accounts and invoice generation. He should not be integral for managing and
recording of all such transactions. It is also responsible to enhance the volume of
sales. This might lead to evolving of conflict with the maximization of sales volume
and risks minimization.
Conclusion:
GPSA intends to create new internal control manual for facilitating the internal
control system, as it needs to manage the diversified range of activities. It can be observed
from the above analysis of several aspects of the system; there exist some risks that needs to
be evaluated by auditors for planning audit. The new internal control system would help in
alleviating some risks that might arise while managing accounts. However, weakness have
also been identified in the system that can be managed by making the internal control

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effective. Auditors would adopt test of control for dealing with the identified audit risks
attributable from managing the specific accounts discussed.
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