3. Planned Scope for Internal Control
Design of
Internal
Controls
- Narrative
- Internal Control Questionnaire
Have controls
been
implemented
Understanding
of internal
control
5. Timing of the Audit
• Begin of our audit on 2 January 2013, with an
expected completion date of Friday, 1
February 2013.
6. Audit Findings
Misstatements and Audit Risk
Credit Sales System Internal Control
Accounts Payable System Internal Control
Recommendations for control weaknesses
Audit Opinion
7. Accounts requiring higher attention
1.
2.
3.
4.
5.
6.
7.
Cash
Accounts Receivables
Inventory
Accounts Payables
Sales
Cost of goods sold
Wages and salaries expense
8. Increase in sales
Possible business
reason for the
change
Increase in
capital
contribution
Increase in long
term liabilities
Cash
Early recognition
Possible error in
the account
Input data
figures wrongly
recorded
9. Increase in credit sales
Possible business
reasons for the change
Understatement of
doubtful debts
Accounts receivables
Early recognition
Possible errors in the
accounts
Open invoices errors
Paid invoice errors
10. Possible business
reasons for the change
Inventory
Possible error in the
account
Increase in purchases
Fictitious purchase of
inventory
Obsolete of inventory
11. Possible business
reason for the
change
Accounts
payable
Discounts
received from
suppliers
Early recognition
Possible error in
the account
Duplicate
payments
12. Possible business
reasons for the change
Increase in sales
volume
Increase in selling
price
Sales
Fictitious sales
Possible error in the
account
Early recognition
13. 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
14. Increase in number of
employees
Possible business reason
for the change
Increase in working hours
of non salaried positions
Wages and Salaries
Early recognition
Possible error in the
account
Overpayment of wages
16. Our Risk Assessment
• Based on
Quick Ratio
Debt to Equity Ratio
Net Profit Margin
Days to Collect Receivable
Inventory Turnover
Days to Pay Payables
17. Quick Ratio
2011
Medium Industry
1.17
•
•
•
•
2012
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 Ratio
2011
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
18. Net Profit Margin
2011
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 Receivable
2011
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
19. Inventory turnover
2011
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 Payables
2011
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
20. In Conclusion…
• There is a high risk that the company will fail
financial in the next twelve months.
21. Assessment of Audit Risk
• Auditor should plan and perform the audit to
reduce the audit risk to a very low level.
• Based on
1. External user’s reliance on the financial
statements
2. Likelihood of financial difficulties
3. Management integrity
22. External user’s reliance in the financial
statements
• Large client size
• Public listed company
• Relatively high amount of long term
borrowings of $150,000
23. Likelihood of financial difficulties
• Profitability ratio 8%
• Quick ratio 2.99%
Not short of working capital
More 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
24. 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
30. 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)
31. Confidence
level=95%
TDR=4%
EPDR=0%
CONDITIONS
Attribute = YES
Exception = NO
POPULATION:
468 sales invoices
SAMPLING UNIT:
OBJECTIVE
Determine whether the control
that “credit sales are approved
before shipment” is operating
efficiently
20099 to 20566
invoice number
∴ Sample size= 74(0)
34. 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
-
35. STRENGTH
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.
WEAKNESS
•
---
36. STRENGTH
WEAKNESS
• Some invoices are run
directly through cash
disbursements.
Input Control
The general entry
generated by
Accounts Payable
module is used to
update General
Ledger Master File.
Processing Control
Company maintain an Vendors’ invoices are
Accounts Payable
only occasionally
Sales Ledger
checked for proper
pricing, extensions,
Storeroom clerk,
castings and terms.
Eunice Lim matches
these documents
Unmatched invoices,
with 2nd copy of
Receiving reports and
Purchase order and
Purchase Orders are
send all 3 documents
not reversed
to Accounts Payable
periodically
clerk.
37. STRENGTH
Output Control
• Accounts Payable
Sales Ledger
reconciled monthly
with Accounts
Payable control
account.
WEAKNESS
• Vendors’ monthly
statements are not
reconciled to the
accounts payable
subsidiary ledger.
39. Internal Controls Recommendations
(Credit Sales)
Observations
Risk Arising/ Implications
Recommendations
#1
Accounts receivable clerk
who maintains the records
also has access to customer
cheques.
Embezzlement
Proper access to assets
#2
The cashier has access to the
LAN accounts receivables
application.
Modification of figures
Proper authorization
#3
Customers are invoiced by
the accountant, Cynthia Ng,
who records journal entries.
Discrepancies can be kept
Proper access to assets
40. Internal Controls Recommendations
(A/c Payable)
Observations
Risk Arising/ Implications
Recommendations
#4
Vendors’ monthly
statements not reconciled
to the accounts payable
subsidiary ledger.
Occurrence of dishonest act
Proper output controls
#5
All vendors’ invoices are
checked occasionally for
proper pricing, extensions,
castings and terms.
Possible human/system
error
Proper processing controls
#6
Cheques are mailed by
accounts payable clerk.
Personal interest benefits
Proper segregation of
functions
42. 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.
