Audit ppt
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AUDIT REPORT ON FINE PERFUMERYCO. LTD
Presented by:Pey WenSharmila
JunaidiJaslyn
Caselyn
Auditor’s Responsibilities
plan and perform the audit to obtain reasonable
assurance
express an opinion (Modified/Unmodified)
Financial Statement
Planned Scope for Internal Control
Design of Internal Controls
Have controls been
implemented
Understanding of internal
control
- Narrative- Internal Control Questionnaire
Test of controls
Statistical Sampling- Random Sample Selection
Final Conclusion on Internal Controls
Timing of the Audit
• Begin of our audit on 2 January 2013, with an expected completion date of Friday, 1 February 2013.
Audit Findings
Misstatements and Audit Risk
Credit Sales System Internal Control
Accounts Payable System Internal Control
Recommendations for control weaknesses
Audit Opinion
Accounts requiring higher attention
1. Cash2. Accounts Receivables3. Inventory4. Accounts Payables5. Sales6. Cost of goods sold7. Wages and salaries expense
Cash
Possible business reason for the
change
Increase in sales
Increase in capital
contribution
Increase in long term liabilities
Possible error in the account
Early recognition
Input data figures wrongly
recorded
Accounts receivables
Possible business reasons for the change
Increase in credit sales
Understatement of doubtful debts
Possible errors in the accounts
Early recognition
Open invoices errors
Paid invoice errors
Inventory
Possible business reasons for the change Increase in purchases
Possible error in the account
Fictitious purchase of inventory
Obsolete of inventory
Accounts payable
Possible business reason for the
change
Discounts received from
suppliers
Possible error in the account
Early recognition
Duplicate payments
Sales
Possible business reasons for the change
Increase in sales volume
Increase in selling price
Possible error in the account
Fictitious sales
Early recognition
Cost of goods sold
Possible business reasons
for the change
Increased purchased price
Increase in quantity
( unlikely)
Possible error in the account
Recording of absent
purchases
Understated closing stock
Wages and Salaries
Possible business reason for the change
Increase in number of employees
Increase in working hours of non salaried positions
Possible error in the account
Early recognition
Overpayment of wages
Assessment and Risk of Financial Failure
Our Risk Assessment
• Based onQuick Ratio Debt to Equity RatioNet Profit MarginDays to Collect ReceivableInventory TurnoverDays to Pay Payables
Quick Ratio2011 2012 Medium Industry
1.17 2.99 0.90
• Increase by 1.82 from 2011 to 2012• Above medium industry• Company has $2.99 to cover for every $1 of its current liabilities• Good liquidity position
Debt to Equity Ratio2011 2012 Median Industry
0.25 0.21 1.11
• Consistent in using its debt to equity• Debt to equity below median industry Company uses more equity than debt to finance its assets
Net Profit Margin2011 2012 Median Industry
8% 8% 8.08%
• Consistent • Low rate at 8% from 2011 to 2012 Company has more or less control over its cost compared to its creditors Might face losses in future
Days to Collect Receivable2011 2012 Median Industry
12.27 16.40 35
• High number of days to collect receivable but its below median industry• Increase by 4.13 from 2011 to 2012 Company takes shorter time to collect its accounts receivables Company in good position
Inventory turnover2011 2012 Median Industry
2.19 2.40 5.85
• Increase by 0.21 from 2011 to 2012• Company’s inventory turnover lower than median industry Bad sign Products tend to deteriorate as they sit in the warehouse• Company has poor sales excess inventory• Might face financial failure in future
Days to Pay Payables2011 2012 Median Industry
43.32 44.20 43.71
• Slight increase by 0.88• Company takes longer time to pay its creditors• Less cash flow to pay for other business opportunities
In Conclusion…
• There is a high risk that the company will fail financial in the next twelve months.
Assessment of Audit Risk
• Auditor should plan and perform the audit to reduce the audit risk to a very low level.
• Based on1. External user’s reliance on the financial
statements2. Likelihood of financial difficulties3. Management integrity
External user’s reliance in the financial statements
• Large client size• Public listed company• Relatively high amount of long term
borrowings of $150,000
Likelihood of financial difficulties
• Profitability ratio 8%• Quick ratio 2.99% Not short of working capitalMore than 1, therefore company is able to
pay off current liabilities• Debt to equity ratio 0.21 Martin and Larry partnership borrow money for working capital in 1995
Management Integrity
• High standards of integrity and ethical values among officers and personnel at Fine Perfumery
• No frequent turnover and aggressively policy Employees remained in the company
CREDIT SALES SYSTEM
Segregation of Functions:
Strengths
Sales manager
Accountant
Weaknesses
Credit Manager
Storeroom clerk
Access to Assets
Strengths
Sales manager
Customer Master File
Financial controller
LAN administer
Weaknesses
Customer SL
AR Clerk
Authorization
Strengths
Sales order
Credit sales
Credit memo
Weaknesses
LAN application
Write offs of bad debts
Invoices
Input Controls+ve
Controlled and pre-numbered
Aged monthly periodically
Filling ,Generating & Updating
Invoices Credit Memos
Shipping documents
ARSL Balancing Report General
Ledger Master Card
Processing Controls
A record maintained of accounts previously
written off (+ve)
Sales invoices are not checked as to prices and
mechanical accuracy. (-ve)
Output Controls
Customer subsidiary ledger reconciled with
control account periodically (+ve)
OBJECTIVEDetermine whether the control that “credit sales are approved before shipment” is operating efficiently
CONDITIONSAttribute = YESException = NO
POPULATION: 468 sales invoices
SAMPLING UNIT:20099 to 20566 invoice number
Confidence level=95%TDR=4%
EPDR=0%
∴ Sample size= 74(0)
SDR= 7% CUDR= 13.6% Confidence level: 95%, No. of deviations: 5, Sample size: 75]
TDR = 4% CUDR= 13.6%
∴ CUDR>TDR => Controls are ineffective unreliable
Accounts Payable SystemInternal Control Strength & Weakness
STRENGTH WEAKNESS
Segregation of Functions
• A responsible official review the debit distribution of vouchers for proper recording.
• Cheques are not mailed by the person signing the cheque and are returned to the preparers ( Accounts Payable Clerk ) to mail
Access to Assets • Supporting documents stamped paid by the cheque signers
-
STRENGTH WEAKNESS
Authorization Vouchers approved
by a responsible official before payment
Obtain financial controllers’ signature on each voucher
Adjustment to Accounts Payable require approval of a responsible official.
• ---
STRENGTH WEAKNESS
Input Control The general entry generated by Accounts Payable module is used to update General Ledger Master File.
• Some invoices are run directly through cash disbursements.
Processing Control Company maintain an Accounts Payable Sales Ledger
Storeroom clerk, Eunice Lim matches these documents with 2nd copy of Purchase order and send all 3 documents to Accounts Payable clerk.
Vendors’ invoices are only occasionally checked for proper pricing, extensions, castings and terms.
Unmatched invoices, Receiving reports and Purchase Orders are not reversed periodically
STRENGTH WEAKNESS
Output Control • Accounts Payable Sales Ledger reconciled monthly with Accounts Payable control account.
• Vendors’ monthly statements are not reconciled to the accounts payable subsidiary ledger.
Recommendation for Internal Control Weakness
Observations Risk Arising/ Implications Recommendations
#1Accounts receivable clerk who maintains the records also has access to customer cheques.
Embezzlement Proper access to assets
#2The cashier has access to the LAN accounts receivables application.
Modification of figures Proper authorization
#3Customers are invoiced by the accountant, Cynthia Ng, who records journal entries.
Discrepancies can be kept Proper access to assets
Internal Controls Recommendations (Credit Sales)
Observations Risk Arising/ Implications Recommendations
#4Vendors’ monthly statements not reconciled to the accounts payable subsidiary ledger.
Occurrence of dishonest act Proper output controls
#5All vendors’ invoices are checked occasionally for proper pricing, extensions, castings and terms.
Possible human/system error
Proper processing controls
#6Cheques are mailed by accounts payable clerk.
Personal interest benefits Proper segregation of functions
Internal Controls Recommendations (A/c Payable)
Adjusted Journal Entries
Evaluation of Audit Opinion
(NPBT)
(2 d.p)
• Since the effects of proposed adjustments is ≤ 10%, the impact of the proposed adjustments is immaterial.
• Therefore, my team and I has form an unmodified audit opinion for Fine Perfumery Co. Ltd for the financial year 2012.
Conclusion