Introduction: Financial Statement Analysis Of The Company According To Auditing Assignment Work
The author has discussed how the Auditor will conduct the analyse the financial statement of the company according to auditing assignment work. Auditors have the responsibility to forecast the actual financial condition of the company and recommend for further improvement of the company. In this research study, the author has identified the audit risks, prepare a debit and cash Memeo of a company and discuss a brief idea about the auditing assignment.
Q 1: Identify the potential audit risk areas of RC Pty Ltd.
Cost of goods sold of RC Pty Ltd was 79.34% that are higher than average industry average. Current year company’s Cost of goods sold decreased to 73.27% in the current year. Operating expenses of the company were 16.25%, that is higher than industry average. Current year company’s Operating expenses is 12.96% that also higher than the industry average rate 14.81%. Selling and administrative expenses were 4.51% that are higher than industry average. Current year company’s operating expenses is 4.00% that also higher than the industry average.
The auditor has seen that the cost of goods sold, operating expenses, administrative expenses are decreasing, it represents that management of the company effectively manages financial activities (Valipour et al. 2012, p.35) Cost of goods sold reduces it means company’s production cost decreased. Operating expenses decrease, it means company’s operating cost those are indirectly related with the production decreased. Operating cost includes sales commission, depreciation of assets, rent, repair, travel, contributions, commissions, and employee benefits. Selling and administrative cost of the company decreases from 4.51% to 4.00% it represents that their administrative cost like advertisement cost, insurance pay, salaries, rent, travel and entertainment expenses decreased (CPA Australia, 2014).
On the other hand the assistant of the auditor provides wrong information that all of the ratios are lower than the industry averages. The auditor found that all of the ratios like the cost of goods sold, operating expenses and selling and administrative expenses not less than the industry average. Hence it represents the company’s performance, not as the average industry standard. Inventory turnover ratio of the company was 1.95 times that were less than the industry average ratio 2.15 times. In current year inventory turnover ratio of the company is 1.44% that also lower than the industry average turnover ratio. Inventory turnover ratio shows effectively control of merchandise (Moroney et al. 2014). Lower inventory turnover ratio represents the over-stocking that may pose the risk of obsolescence and holding cost increased (Alawattage et al. 2009, p. 187). In case of RC Pty Ltd inventory turnover ratio is lower than the industry average inventory turnover ratio. In one year the company increase inventory ratio from 1.44 times to 1.95 times. That represents the company’s cost of holding inventory increased. The company goes towards the obsolescence.
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Debtor turnover days of the company was 95 days, that was higher than the average industry turnover ratio. In the current year, their debtor turnover ratio is 80 that also lower than the industry average turnover ratio. It has seen that the company’s debtor turnover ratio reduces 15 days that indicates the company decreases its collection period. In recent the company reduces its debtor collection period (Albrecht et al. 2011). Now the company collects debts in 15 days. Debts collection period decreases it represents cash flow increases. On the other hand, as the debts, collection period is lower so it may affect upon debtors, they may not able to pay the debt within 15 days, then the company must transfer the debt amount into the provision for doubtful debts account. That means company’s doubtful debts will increase and that will be pressurised to the provision for doubtful debts account.
The company’s current assets to current liabilities were 1.20 that was lower than the industry standard average ratio. In current year company’s current assets to current liabilities is 1.37 that is near to the industry standard average ratio. The company’s liquidity ratio increases that represent an improvement of company’s liquidity position.
The auditor analyse the company’s financial ratios and evaluate the company’s current financial position is not as strong compared with the other company, but compared with the previous year now the financial position of the company is better (Arens et al. 2011). The company is involved in the new project that helps the company to improve performance. In current company’s operating profit increased 50% that represents good effect, but on the other hand, company’s sales decrease that indicates the performance of the company increased. The company decreased its cost of goods sold, operating expenses, selling and administrative expenses. It shows the good management over the cost controlling of the company.
In this case the auditor has done the audit testing through using enquiry and confirmation process, the inspection process, observation process and recalculation and re-performance process. The Auditor may adopt Inspection and Inquiry process to collect evidence. Through Inspection process the Auditor able to verify the documents and records. Through, inspection of physical assets and document verification the Auditor could find the production related information. Through that process the Auditor also could find the debtor related information. On the other hand, the Auditor could use Inquiry methods that helps him to find evidence from debtors and production related information. Enquiry sometime works effectively because enquiry process in-depth process of finds evidence. On the other hand, there are mainly two types of substantive procedure theses are analytical procedures and test of detail procedure. In analytical procedure in audit substantive testing the auditor gets less reliable evidence with compare to the tests of detail.
Q 2: Prepare a Debit/Credit Memo and analyse:
The auditor check company’s account and invoice, he found that there having some error that needs to adjust.(refer to Appendix)
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Debit/Credit memo by Marcus plc has shown below
| Debit/Credit Memo
Marcus plc |
||||
| We have made the Following adjustment to your accounts | ||||
| Order No. | Date | Creditors | Description | Adjustment Amount ($) |
| 4580 | 2.1.2014 | Abyss Company | Wrongly credited $ 25000 instead of $ 24500 | 500 |
| 4589 | 1.3.2014 | Lend Capital Bank | Wrongly debited $ 7000 instead of $ 70000 | (63000) |
| 4591 | 4.5.2014 | Fiona supplier | Wrongly created $ 20000 instead of $25000 | 5000 |
| 4592 | 7.7.2014 | Creane Finance Plc | Wrongly created $55000 instead of $67000 | 12000 |
| 4593 | 15.8.2014 | Mr. Mike Johnson | Wrongly debited $9000 instead of $ 10000 | (1000) |
| 4595 | 11.6.2014 | Pressi Finance Institution | Wrongly credited $ 40000 instead of 48000 | 8000 |
| 4596 | 7.2.2014 | Daily Supplier | Wrongly credited $ 8000 instead of $18000 | 10000 |
| 4597 | 29.3.2014 | Zynra McDine | Wrongly debited $ 11000 instead of $13000 | (2000) |
| 4560 | 30.6.2014 | Borrowers Financing | Wrongly credited $ 17000 instead of $ 19000 | 2000 |
| 4563 | 27.1.2014 | Righting Solution Company | Wrongly credited $ 21000 instead of $ 25000 | 4000 |
| Total adjusted Amount | (24500) | |||
Table: Credit Memo by Marcus plc
The auditor has found that many of the entry have created wrongly on the invoice that is why the Auditor has created the memo. The auditor has found that company’s credit has access to $24500 that would be debited.
Audit assertions procedure:
The Auditor requires to obtain sufficient evidence in respect of the financial statement assertions. Various stages of assertions of a financial statement has described below
Planning– As part of the assertion of risk of the company, Auditor needs to clarify the risk entity due to mistake or fraud. Through planning the Auditor determine the nature, timing and extent of audit procedures that are necessary for the assertions risk (Chen & Deng 2011, p.289). In this case the Auditor finds that there are many types of errors on the invoice of the company. In this case study help, the Auditor collects invoice and accounting statement of the company. Through these evidences, the Auditor found the risk of material misstatement (ROMM). The auditors should analyse the sample size with invoices of the creditors.
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Testing– Substantive test is important for the identify the material misstatements at the assertion level, but only substantive test is not considered as sufficient for test appropriate evidence for assertions of significant risk. Another test tool of the assertions of risk is the test of control (TOC). Through matching ledgers with the invoice, the auditor must test the vouchers of each creditor. It helps the auditor to assess the operating effectiveness of the financial statement and the assertion risk level of the company (cpaaustralia.com.au, 2014).
Completion-At the assertion level if the Auditor unable to obtain sufficient and appropriate audit evidence, then the Auditor requires to modify an audit report in accordingly. According to the evidence the auditor total all of the creditors ledger and that put into the trial balance and general ledger account. In this stage the Auditor will finds that the company recorded all of its assets and liabilities in its financial statement (isaca.org, 2014).
In the case study, the Auditor found that most of the risk of material misstatement has done due to error. In this case study the Auditor did not find any fraud. Checking all of the invoice and account statement the Auditor analyse their assets and liabilities. Due to some error in the invoice of the company’s liability increased in the balance sheet. On the other hand, the Auditor did not find many evidences that helps to analyse the financial condition of the company such as debtor account account information, the company’s production related information (Chenhall, 2012, p.75). For that reason the Auditor needs to adopt other techniques to collect evidence.
The Auditor may adopt Inspection and Inquiry process to collect evidence. Through Inspection process the Auditor able to verify the documents and records. Through, inspection of physical assets and document verification the Auditor could find the production related information (Duh et al. 2009, p.38). Through that process, the Auditor also could find the debtor related information. On the other hand, the Auditor could use Inquiry methods that helps him to find evidence from debtors and production related information. Enquiry sometime works effectively because of enquiry process in-depth process of finds evidence.
Conclusion:
The responsibility of an Auditor is to find the actual financial statement with the help of some tools and techniques such as enquiry and inspection. An auditor concludes the financial condition of the company based on some evidence. If the Auditor does not get any evidence, then the Auditor follows another process of collecting evidence. The Auditors have the responsibility to inform all of the stakeholders who are directly linked with the organisation.
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