Assessment item 3Case Study B - audit planning and internal control Length: 2,000 wordsAlternative submission method Task Background  You are a manager in the audit division at Miller Yates Howarth (MYH), an accounting firm with offices throughout the major regional centres of NSW and Queensland. Although a medium sized firm by national standards, MYH is the second largest regional accounting firm in Australia. Most of MYH’s audit clients are in the agriculture, mining, manufacturing and property industries. All of those industries are currently under pressure, either from a downturn in commodity prices or fierce competition from overseas competitors. You are gathering information in order to prepare the audit plan of GPSA Limited for the year ended 30 June 2017. Along with Morgan Fertilisers, GPSA is one of MYH’s most significant and longstanding clients. The following information has been gathered to date. Principal activities of GPSA  • research and development of technologies relating to medical equipment; • manufacture and distribution of medical equipment; • investment of surplus funds; and • investment in the property market. GPSA was incorporated in 1992 and has operated successfully and profitably since that date. In the last few years it has branched out into the property market, acquiring a number of commercial properties which are let mainly to medical practitioners. The directors of GPSA are: • Mr. John Stanton, Chairman • Ms Jane Quade, Chief Executive Officer • Mr. Joe Quade • Dr Barry Jones • Dr Beryl Yeo Doctors Jones and Yeo are independent non-executive directors and have been directors since 2003. The other three executive directors have been employed by the company since its incorporation and have considerable experience in the industry. Mr Stanton controls a number of private companies. In prior years MYH placed reliance on internal controls based on satisfactory results of extensive tests of control. Recent discussions with the client have revealed no changes in the system of internal control since last year. The company does not have an internal audit function. In February 2016, research activities relating to a new laser surgery device commenced. Significant costs were incurred in relation to this research. In April 2017 a competitor announced that it had successfully developed and patented a similar device. In order to finance the research activities noted above the company borrowed from its bankers an additional $5 million during the year. The loan agreement contains a covenant to the effect that should the company's debt to equity ratio (measured as total liabilities: shareholders' equity) increase above 1.2:1.0 at any time, the bankers have the right to demand immediate repayment. Throughout the 2017 financial year, the property market has been in decline. The end of financial year audit is scheduled to start on 1 August 2017 and should take about two weeks to complete. The client completed .

1. Assessment item 3Case Study B - audit planning and internal
control
Length: 2,000 wordsAlternative submission method
Task
Background
You are a manager in the audit division at Miller Yates Howarth
(MYH), an accounting firm with offices throughout the major
regional centres of NSW and Queensland. Although a medium
sized firm by national standards, MYH is the second largest
regional accounting firm in Australia. Most of MYH’s audit
clients are in the agriculture, mining, manufacturing and
property industries. All of those industries are currently under
pressure, either from a downturn in commodity prices or fierce
competition from overseas competitors.
You are gathering information in order to prepare the audit plan
of GPSA Limited for the year ended 30 June 2017. Along with
Morgan Fertilisers, GPSA is one of MYH’s most significant and
longstanding clients. The following information has been
gathered to date.
Principal activities of GPSA
• research and development of technologies relating to medical
equipment;
• manufacture and distribution of medical equipment;

2. • investment of surplus funds; and
• investment in the property market.
GPSA was incorporated in 1992 and has operated successfully
and profitably since that date. In the last few years it has
branched out into the property market, acquiring a number of
commercial properties which are let mainly to medical
practitioners.
The directors of GPSA are:
• Mr. John Stanton, Chairman
• Ms Jane Quade, Chief Executive Officer
• Mr. Joe Quade
• Dr Barry Jones
• Dr Beryl Yeo
Doctors Jones and Yeo are independent non-executive directors
and have been directors since 2003. The other three executive
directors have been employed by the company since its
incorporation and have considerable experience in the industry.
Mr Stanton controls a number of private companies.
In prior years MYH placed reliance on internal controls based
on satisfactory results of extensive tests of control. Recent
discussions with the client have revealed no changes in the
system of internal control since last year. The company does not
have an internal audit function.
In February 2016, research activities relating to a new laser
surgery device commenced. Significant costs were incurred in

3. relation to this research. In April 2017 a competitor announced
that it had successfully developed and patented a similar device.
In order to finance the research activities noted above the
company borrowed from its bankers an additional $5 million
during the year. The loan agreement contains a covenant to the
effect that should the company's debt to equity ratio (measured
as total liabilities: shareholders' equity) increase above 1.2:1.0
at any time, the bankers have the right to demand immediate
repayment.
Throughout the 2017 financial year, the property market has
been in decline. The end of financial year audit is scheduled to
start on 1 August 2017 and should take about two weeks to
complete. The client completed a stock count on 30 June 2017.
The directors require the signed audited final financial report by
28 August 2017.
Your audit partner, John Richards, has approached you and
advised that there are several areas he is concerned about and he
wants to you to report back to him about these areas before you
complete your audit program. These areas and accounts are:
• Accounts receivable
• Current investments
• Property assets
• Intangible assets
• Research and development capitalisation
Ratios extracted from an unaudited set of financial reports at 30
June 2017 together with audited comparatives for the year
ended 30 June 2016 and 2015 are set out below for your
review.

4. Ratio2017 (Unaudited)2016 (Audited)2015 (Audited)
Return on equity %7.1918.6122.17Return on total assets
%4.8613.715.52Gross margin %31.7630.0024.94Net profit
margin %10.3820.2717.85Times interest
earned1.903.514.10Days in inventory166.53127.89115.85Days
in accounts receivable83.0760.6553.24Current ratio :
11.801.541.66Quick asset ratio : 10.890.780.82Debt to equity
ratio : 11.111.021.04
Internal controls
The financial controller at GPSA has been refining the system
of internal controls and informs you, at the planning stage of
the current year's audit, that he has put together an internal
control manual for the company. He has stated that this manual
will create greater awareness of controls in the company,
particularly with management which, in the past, has not been
overly conscious of the need to implement and enforce effective
internal controls.
Management staff receive bonuses based on certain agreed-upon
target ratios which include measures such as targeted monthly
sales volumes, variance of actual to budget departmental
overheads and profit before interest and tax. The major
shareholder takes an active interest in the performance of the
company and is quick to request explanations on variances from
the agreed-upon monthly budgets.
Two years ago, the company devoted significant time and
resources to the development and implementation of a new IT
system. All teething problems associated with the
implementation phase have now been resolved, and the financial
controller is satisfied that the automated controls in place are
assisting in producing accurate and complete accounting
records. The sales director also looks after the IT function as

5. the position is not regarded by management as being a full-time
job. Once application programs have been tested, strict
password control exists over access to the programs. Passwords
are not required for access to databases.
To assist in the planning for the current year's audit
engagement, you extracted the following information from a
review of the systems notes in the permanent file and perusal of
the new internal control manual:
manual delivery notes for dispatch of tiles to customers are
raised by the dispatch department from the sales order form.
Where a delivery is only partially filled, the delivery note is
marked 'hold for invoice' and placed on the incomplete
deliveries file. At month end, the supervisor of the dispatch
department is responsible for follow-up of the reasons why
incomplete deliveries have been outstanding for greater than 30
days.
returns of medical equipment by customers due to inferior
quality, incorrect specifications or oversupply are received by
the dispatch department where staff are required to check
quantity and condition of the returned tiles. Details noted by the
dispatch personnel, including the reason for the return, are
recorded on a ‘goods returned’ note. Once completed, this
document is passed on to the trade receivables clerk who raises
a credit note and sends it to the customer.
once a delivery has occurred, the office copy manual delivery
note is forwarded to the trade receivables clerk who is
responsible for generating an invoice on the computer system.
An invoice is raised by inputting the total quantity delivered
(Note: this could be a number of partial deliveries) and the
stock code which is also recorded on the delivery note. The
computer then automatically retrieves the stock code price from

6. the selling price master file. Posting to the debtors account
occurs automatically once the trade receivables clerk has
performed a screen check on the accuracy of the input of
delivery details.
for valued customers, discounts are applied in accordance with
the company's volume rating system. The trade receivables clerk
is responsible for updating the individual customer volume
ratings every six months after preparing the 'sales volume
analysis by customer' report. This report is authorised by the
sales director prior to updating the customer discounts.
a sales journal summarising all sales invoices is prepared
monthly by the computer system. This journal is then used by
the trade receivables clerk for posting to the general ledger.
receipts from debtors are passed on to the trade receivables
clerk after having been opened by the mail room. The trade
receivables clerk lists all receipts from the debtors and then
prepares a bank deposit slip. The list prepared by the trade
receivables clerk is used to enter the debtors’ payments on the
computer system. The batch total of postings to the individual
debtors’ accounts is balanced to the bank deposit slip before
processing occurs on the system. At each month end, the trade
receivables clerk prepares a reconciliation of the trade
receivables ledger to the debtors control account in the general
ledger.
the computer generates an aged analysis at month end based
upon all invoices that have been processed onto the system for
the period up until the last day of the month.
the financial controller obtains the latest trade receivables aged
analysis at the end of each month and reviews all amounts
out-standing for longer than 90 days. The trade receivables
clerk is required to detail reasons for delays in payment by long

7. outstanding debtors and the financial controller discusses items
of concern with the clerk.
usually an action plan is agreed for follow-up; this may include
involvement of debt collectors or the issuing of writs. Where
necessary the financial controller records details of amounts
that should be provided for as doubtful debtors. Whilst
performing this re- view, the financial controller notes the level
of individual debtors’ balances and, in instances where he is
uncomfortable with the level of this balance, he instructs the
dispatch area to withhold any shipments until a minimum
prescribed payment is received.
John Richards your partner on the audit has mentioned to you
that, in the past, a substantive approach had been adopted for
the audit of GPSA. He now feels that, with the improvements
that the client claims to have made to the systems of internal
control, an opportunity exists to place reliance on the internal
controls and therefore reduce the extent of substantive work.
Required
Write a report, including a brief executive summary, to your
managing partner that addresses the questions below. Where
indicated, use the required format to answer that question.
Question 1A 8%
Analyse the ratios and additional information associated with
the five accounts listed by your audit partner, John Richards.
Identify the potential audit risks and any particular audit steps
that need to be undertaken to reduce audit risk.

8. Answer this question using the following headings:
(a) Account (b) Analysis (c) Audit risk (d) Audit steps to reduce
risk
Question 1B 2%
Analyse the ratios and additional information to outline
business risks that GPSA faces.
Question 2A 7%
Identify the internal controls in the system that are potentially
effective, the risk that the control could alleviate and one test of
control for each of the identified potentially effective controls.
Answer this question using the following headings:
(a) Effective control (b) Risk alleviated (c) Test of control
Question 2B 2%
List and justify the weaknesses in internal control for sales and
trade receivables.
Rationale
This assessment has been designed to assess your ability to:
be able to demonstrate risk management methodologies and the
role of internal controls in an audit context;
be able to design an audit plan and select and apply appropriate
audit procedures for a financial statement audit;
be able to exercise critical and reflective judgment.

9. Presentation
The report should follow a standard business report format.