Audit Of Alex Blenheim Pty Limited In Essay.

You are planning the 31 December 2016 audit of Alex Blenheim Pty Limited, a discount clothing company based in Sydney but with outlets across New South Wales, Queensland and Victoria. Using the company's financial report, its budget for 2016 and industry benchmarks, as well as your understanding of Alex Blenheim under ASA 315.

Alex Blenheim operates in a low gross margin environment, which typically means that large volumes are required to cover overhead costs and generate profits. It also means that overheads need to be kept under control to ensure that a net profit results from its operations.

The company did not reach industry benchmarks with regard to profitability in the previous year, and budgeted to do better this in the current year. It thought that it could do so by keeping its costs down in relation to sales while allowing its gross margin to drop, evidently planning to generate a larger volume of sales.

The company also planned to improve its working capital management by reducing levels of inventory and accounts receivable. It budgeted for a drop in debt levels, indicating that it expected to produce a healthy cash flow to enable it to do so.

Alex Blenheim uses an on-line computer system. No items are manufactured in-house; rather, Alex Blenheim maintains a stock of raw materials and sub-contracts the manufacture of its items to factories in Fiji. Approximately 50 suppliers and sub-con

Analyse the ratios with reference to the additional information. Identify the potential impact for the audit and any particular audit steps that need to be undertaken to reduce audit risk. For example, if there was a worsening inventory turnover, one of the audit steps would include a review for obsolete inventory.

Answer this question using the following headings:

(a) Ratio analysis
(b) Audit impact
(c) Audit steps to reduce risk

Identify the weaknesses in the internal control system described above and the potential impact on your audit. Indicate the additional audit steps that you will need to undertake to reduce audit risk.

Answer this question using the following headings:

(a) Internal control weakness

(b) Audit impact

(c) Audit steps to reduce risk

Develop and justify three (3) Computer Assisted Audit Techniques (CAATs) that you would use to assist you in this audit.
Professional communication and referencing.

Analysis using key financial ratio:

 

As rightly put forward by Wahlen et al., (2014), the return on equity is essentially a dimension that can measure efficiency of a corporation in utilizing the funds acquired from different financiers for yielding profits. A higher return on equity percentage essentially replicates a greater efficiency on the part of the corporation. However, in the present case, the set standard is 15.5. The corporation has recorded a return on equity percentage of 14.8 that is below the industry benchmark. However, the budgeted return on equity was set at 16.6, however the actual figure failed to meet the budgeted figure and was recorded to be 12.9.

 

The ratio return on assets measures the profits that is generated by the mean of the overall assets of the corporation. A higher return on assets represents a favourable financial condition of the firm (Henry & Robinson, 2015). The industry benchmark for this particular ratio is set at 14.5. The company registered a return on asset of 13.1 % during the period 2015 that was below the industry benchmark of 14.5. Again, the budgeted figure for the return on assets for the period 2016 was 14.2, while the actual figure was recorded to be 10.7%. The actual figure for 2016 is below the industry benchmark and the actual figure also fails to meet the budgeted figure. Thus, this can be regarded as an unfavourable financial condition for the corporation.

 

As rightly indicated by Robinson et al., (2015), gross margin ratio enumerates the gross profit generated out of the sales. Higher gross margin ratio indicates a desirable financial condition of the corporation. In this case, the industry standard is set at 9. The actual gross margin ratio is recorded to be 9.5% that is above the industry benchmark. The budgeted figure for the gross margin ratio is recorded to be 9% for the year 2015 while the actual figure is registered to be 8.5% that is below both the budgeted figure as well as the industry benchmark. Thus, as per the findings it can be hereby inferred that the financial condition of the company has deteriorated in the year 2015 as compared to the year 2015 and also in comparison to the industry standard.

 

The ratio of marketing expense to sales reflects the overall expense that the firm has incurred in comparison to sales (Bodie, 2013). Higher ratio indicates an unfavourable financial condition for the firm. This ratio has decreased during the period 2016 in comparison to 2015 as well as in comparison to industry benchmark of 2.2.

Internal Control Weakness

 

Bodie (2013) opines that the interest coverage ratio refers to enumeration of the overall capability of a corporation in making interest payments on diverse debts in timely as well as appropriate manner. Higher ratio refers to greater trust worthiness of the company to creditors as well as debtors. The actual figure for interest coverage ratio has declined during 2016 as compared to year ago period to 5.4 and has decreased in comparison to industry standard of 6. Therefore, this indicates an unfavourable financial condition of the corporation.

 

As rightly indicated by Bodie (2013), days in inventory refers to the days that needs to be taken for particularly selling off inventories of a corporation. Again, days in accounts receivable refers to the days required by the company to collect money from the debtors. In both the cases, the lesser the number of days the higher is the efficiency of the corporation. The days in inventory have risen to 33.1 in 2016 as compared to the figure of 31.1 registered in 2015 as well as industry benchmark of 30. This indicates an unfavourable financial condition of the firm. Similarly, the days in accounts receivable increased to 50 in 2016 as compared to 49.7 registered during 2015 and was above the industry benchmark of 45. Thus, this too indicates inefficiency and undesirable financial condition of the firm.

 

As rightly indicated by Bodie (2013), the current ratio and the quick asset ratio both indicate the liquidity position of the firm and points out towards effectiveness of the firm to meet up all the current liabilities of the firm using the current assets. In this case, higher efficiency represents higher level of liquidity of the firm. Both the ratio have increased during the period 2016 in actual as compared to the actual figure as well as the budgeted figure for 2016, indicating a favourable financial condition.

 

As rightly indicated by Wahlen et al., (2014) debt to equity ratio enumerates the solvency position of the firm and indicates whether the firm can repay the debts of the firm using the equity of the firm. Here, higher ratio indicates undesirable financial condition as this implies that majority projects of the firm are financed by debt than equity. Here, this ratio has increased to 0.51 during 2016 in actual as compared to the actual figure of the year ago period and the industry benchmark. Thus, this too indicates a n undesirable financial condition for the firm.

Computer Assisted Audit Techniques (CAATs)

Audit Impact

The possible influences that are produced for the assessors are that the efficiency of the administration has to be tested. The administration might have attempted and have participated in the procedure of handling of accounts that in turn might have a severe influence on audits. The processes of the substantive analytics that is essentially ratio analysis play a very integral part in risk-based approach of audit. This essentially leads to the process of designing and implementing of the processes in permitting assessors for attainment of the goals of the review in effectual manner by the reduction and replacement of the detailed test of audit (William Jr et al., 2016). Based on the analysis and findings, there are several ratios that has failed to meet the benchmark or else budgeted ratios that directs towards inefficiency of the corporation.

Steps that can be followed for lowering risk

The primary reason behind decrease in the returns on the equity as well as total assets need to be known and need to be conversed with the administration for enabling increase in the same. Again, the marketing expenses of the corporation have augmented to a significant level and must be disregarded and conversed with the management for augmenting the profit margin. In addition to this, the interest coverage ratio is also registered to be low and debt equity ratio is recorded to be high that refers to the fact that the corporation is failing to make payment for the debts by using the existing funds of the corporation and this needs to be examined by an assessor (Porter et al., 2014). Essentially, the liquidity position of the firm is strong as per the year ago period but not as per the industry benchmark. Again, the inventory as well as receivables administration is decreasing that needs to be controlled and taken into account by the administration for increasing efficiency. In essence, a stringent review as well as control by management is essential for improvement of audit (Porter et al., 2014). It is fundamental that the investigative processes is effectively documented to facilitate a knowledgeable assessor. 

Weakness of internal control

As rightly indicated by Hayes et al., (2014), the electronic security control essentially controls the access rights to electronic system of information. Hence, the gaps in the system might probably lead to accidental or else loss of significant data of the corporation. According to the given case, online computer system is used by Alex Blenheim for the purpose of preservation of the system of inventory. However, this can again in turn can lead to loss of significant data if not properly controlled. This loss of important data might perhaps lead to the generation of erroneous as well as ineffective reports produced by the systems. The non-existence of monitoring control by the senior as well as top level management also lead to inefficiency in the internal control. However, the functionality of security administration can be considered to be common among users and cannot be considered to be under stringent controls. In addition to this, there are no official processes as well as application in position that can leave the corporation at risk. The latest financial system have different capacities as well as potential uses and this can be utilized in the process of compilation of outcomes formed in the current system. This kind of approaches towards development and assimilation of system lead to intricacies and increase in cost of preservation of important financial information. () opines that the current control as well as structure of management need to be permitted for accurate incorporation of different manual processing controls that have an electronic framework. However, the electronic control essentially tend to be more systematic and at the same time understandable in comparison to diverse other internal controls (DeFond & Zhang, 2014). The inventory as well as other authorizations need to be acquired prior to specific requisition payments. However, the payments can be essentially made without getting recorded and authorized by the signing authority.

Audit Impact

Impact of audit

As rightly indicated by Knechel & Salterio (2016), inadequacy in the electronic security can lead to unauthorised access to the confidential data that in turn can lead to fraudulent activities. However, this essentially exerts impact on the pronouncements generated by the assessors and the ones generated by the systems.

The insufficiency in the system of monitoring controls allow flaws as well as mistakes to go unrecognized. This essentially refers to negotiation of the accurateness as well as soundness of the acquired data. Besides this, this lack of monitoring control can also enhance the threat of loss of data and lead to corrupt activities (Eilifsen et al., 2013).

The benefits of the new system need to be taken into account. However, non-acceptability leads to opportunity loss and augmentation of the efficiency of business operations of the corporation. In addition to this, the non-usage of different built in controls can also assist in the process of lessening of the overall uniformity along with consistency of different internal controls (Carson et al., 2013) asserts that the generation of electronic framework can lead to enhancement of the risk of data value as this cannot be examined, removed or else used as duplicate data. A variety of errors as well as frauds might occur within a particular organization owing to the formation of electronic framework. Besides this, the authority as well as service controls need to be appropriate since the same has no assurance that the payment can be made for received products as well as services. Again, the service controls need to be appropriate as there is no assurance that the payment can be made for the received products as well as services.

Audit Steps that needs to be followed for reduction of risk

Enhanced interaction in the process of audit: As rightly put forward by Frishammar et al., (2016), there needs to be interaction among all the involved professionals, members of the staff of the corporation as well as administration for the purpose of reduction of fraudulent activities. However, the role of an assessor is to provide assurance as regards latest policies, processes as well as technologies of the novel services as products of the company. This essentially makes audit a valuable factor for an organization. As correctly indicated by Hay et al., (2014) there needs to be definition, clarification as well as clarity in different roles as well as accountabilities of owners as well as management that necessarily forms an integral part of internal control of a firm.

Steps to Reduce Risk

Communication: The augmentation of communication process with the key stakeholders can help in improvement of business processes. This is so because unawareness of stakeholders regarding functioning and important decisions might lead to undesirable circumstances within a specific corporation. Thus, there needs to be interaction with stakeholders of the corporation on a regular basis for augmentation of the audit process Zaiceanu et al., (2015).

Segregation of duty: As rightly indicated by Thibodeau & Freier (2014) the internal controls need to involve in the process of segregation of duties as well as policies. In essence, the segregation of duties also replicates different primary controls. The deficiency in the controls might probably lead to the different flawed activities in the corporation. In itself, there needs to be establishment of certain best practices that can help in the process of prevention of frauds as well as other erroneous activities. In addition to this, there is a need to ensure the fact that employees of the firm cannot manipulate or else modify business processes by undertaking random audits and reconciliation of statements. Other than this, there is also need for controlling as well as checking different approvals acquired from the management regarding different functions as well as business processes undertaken by a business corporation.

CAAT Techniques

There are three different techniques that are essentially useful for the aiding the auditors are as follows:

Audit software:

As rightly indicated by Pedrosa & Costa (2012) audit software can be considered to be a process of examining the client system and this has the capacity of packaging and at the same time transforming the software for writing on the client’s system. In essence, the tool of audit aids in the process of scrutiny of enormous volume of information that could have augmented load on particularly manual implementation. However, the processes of further examination involves ransom sampling, enumeration of key financial ratio, creation of essential benchmarks, examining accuracy of arithmetical data, preparation of requisite reports counting actual as well as budgeted information. There also needs to be categorization of specific information and letters need to be delivered to the different suppliers as well as customers. In addition to this, there also needs to be tracking of different dealings as well as transactions by means of computerised systems that is incorporated in the mechanisms of CAAT software Robert Knechel et al, (2015). As such, these processes as well as actions assist in the process of simplification of the overall activities of the assessors by means of carefully selection of samples for examination. By itself, this particular technique also aids in the process of recognition of high risk areas by means of practical trials and policies.

Implanted audit software:

As rightly indicated by Špi?ka (2016) implanted or else embedded audit software is essentially a written program that needs to be imbedded into a particular accounting system of clients. The primary intention and plan is to perform particular tasks that have a similarity and connection with the audit software and has the advantage of modification as per the desire of the assessor. However, this tool as well as mechanism also permits amassing requisite information on particular transactions that in turn helps in testing. In addition to this, this tool also aids in process of identification at the time of review as well as audit procedures.

Test Data:

Vickerstaff & Johal (2014) opines that in this particular technique, the assessors have an involvement in the process of creation of trial or else dummy model for the study. Fundamentally, a fake model is developed within a specific system of the client for assurance of the accurate procedures in addition to identification and prevention of different material misstatements that are existent in the corporation.  However, the major functions of the organization are examined by this mechanism of test data that also has presence within the system. Essentially, this test data needs to be examined and at the same time controlled as errors within data records might perhaps lead to ineffectiveness of systems of the organization. Nevertheless, these errors comprise of arithmetical errors that are existent in different invoices as well as incorrect data on diverse batch control. In addition to this, the errors also comprise of dealings that are beyond the limits that have been determined earlier, codes as well as other specifications provided to customers as well as suppliers. In essence, the data might possible have a processing according to the operation cycle that include both live as well as dead test data.

References 

Bodie, Z. (2013). Investments. McGraw-Hill.

Carson, E., Simnett, R., & Vanstraelen, A. (2013, September). Auditing the auditors: An international analysis of the effectiveness of national inspection regimes on audit quality. In The University of Auckland Business School Seminar.

DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2), 275-326.

Eilifsen, A., Messier, W. F., Glover, S. M., & Prawitt, D. F. (2013). Auditing and assurance services. McGraw-Hill.

Frishammar, J., Richtnér, A., Brattström, A., Magnusson, M. and Björk, J., 2016. Auditing Innovation Capability in the new Innovation Landscape. In ISPIM Innovation Forum: Charting the future of innovation management 13/03/2016-16/03/2016.

Hay, D., Knechel, W. R., & Willekens, M. (2014). The function of auditing.

Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

Henry, E., & Robinson, T. R. (2015). Chapter 1. Financial Statement Analysis: An Introduction. CFA Institute Investment Books, 2015(2), 1-35.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: assurance and risk. Routledge.

Olasanmi, O. O. (2013). Computer aided audit techniques and fraud detection.

Pedrosa, I., & Costa, C. J. (2012). Computer assisted audit tools and techniques in real world: CAATT's applications and approaches in context. International Journal of Computer Information Systems and Industrial Management Applications, 4, 161-168.

Porter, B., Simon, J., & Hatherly, D. (2014). Principles of external auditing. John Wiley & Sons.

Robert Knechel, W., Vanstraelen, A., & Zerni, M. (2015). Does the identity of engagement partners matter? An analysis of audit partner reporting decisions. Contemporary Accounting Research, 32(4), 1443-1478.

Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.

Špi?ka, J., 2016. Market Concentration and Profitability of the Grocery Retailers in Central Europe. Central European Business Review, 5(3), pp.5-24.

Thibodeau, J. C., & Freier, D. (2014). Auditing and accounting cases: Investigating issues of fraud and professional ethics. McGraw-Hill, a business unit of The McGraw-Hill Companies, Incorporated.

Vickerstaff, B. & Johal, P., 2014. Financial Accounting. Routledge.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic approach. McGraw-Hill Education.

Zaiceanu, A. M., Hlaciuc, E., & Lucan, A. N. C. (2015). Methods for Risk Identification and Assessment in Financial Auditing. Procedia Economics and Finance, 32, 595-602.