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Accounts Receivable

Question:

Discuss About The Equipment’s It Invests In Property Market?

Accounts receivable refer to the amount that the business organizations expect to receive from their debtors as a result of credit sales.

Evaluation: From the case study, it has been seen that the trade receivable official nhas all the required steps related to accounts receivable. For example, in case of medical instrument return by the consumer, the respected official drawn credit notes in favor of the customer after investigating the reasons behind the return and the documentation process. Moreover, officials sent the related journal postings along with receipts to the bank for the preparation of deposit slip. Thus, it can be seen that the risk is high.

Audit Risk: The trade relievable has undertaken all the necessary steps related to receivables. The risk involved in this case is that the trade receivable officials might inflate the receivables in order to show lesser amount of receivables (Arens, Elder & Mark, 2012).

Audit Steps to Reduce Risk: In order to reduce the accounts receivable risk of GPSA, the officials must separate out different actions related to the accounts receivable among the staffs.

Investment: Investment refers to a particular amount of money that can be converted into cash within a period of three to twelve months. Thus, it is considered as cash equivalent.


Evaluation: Business investment use to influence the whole accounting systems of the companies and this, it needs to be differently treated. Hence, risk related to investments is medium.

Audit Risk: Risk in investments arrive when the investments are done without taking into consideration the related risk factors with it.

Audit Steps to Reduce Risk: It is needed to inspect the return from investments on a regular basis. Moreover, the investment process, the related investment trends needs to be analyzed.

Property Assets and Resources: The accounts associated with this are considered as fixed assets and the depreciation related with the fixed assets.

 Evaluation: The ineffective registration of fixed assets and ineffective calculation of depreciation can negatively affect the financial statements of the companies. Thus, the risk is high associated with property assets and resources (Vona, 2012).

Audit Risk: Audit risk can be arrived in case the accounts do not differentiate the utilization of resources for more than 180 days and less than 180 days and they do not record this effectively.

Audit Steps to Reduce Risk: It is needed to maintain the ledger of these accounts properly in order to bring coordination between purchase and sales. In addition, the amount of impairment also needs to be evaluated.

Investment

Intangible Assets: The major accounts related with intangible assets are goodwill, patents, copyright and others.

Evaluation: The thorough examination of intangible assets is required in order to determine the value and recognition mode.  The definite or indefinite life period of them needs to be determined. Thus, risk related to these assets is high.

Audit Risk: It is difficult to ascertain the fair value of intangible assets as they do not have any physical existence. Apart from this, variance can be seen between the acquirement cost and fair value of intangible assets (William Jr, Glover & Prawitt, 2016).

Audit Steps to Reduce Risk: The professionals need to determine the fair value of the intangible assets. Audit risk can be reduced by implementing control over the process to determine the fair value of the intangible assets.

Capitalization of Firm’s Research and Development: It can be seen that GPSA research activities were not growing and thus, it is possible that both the profit and loss accounts are debited.

Evaluation: A very thin gap can be seen between the successful and unsuccessful research. Ineffective recognition can lead to high risk as the research processes include high amount of money.

Audit Risk: Inherent audit risks can be seen in case of unsuccessful research processes. Furthermore, it is difficult to mention the specific amount of money related with the research process (Ashley-Smith, 2013).

Audit Steps to Reduce Risk: It is needed to properly examine all the ledger accounts related with these researches. In addition, it is needed to carry out a marker research before involving in any kinds of research activities.

Return on Equity: In case of return of equity, a downward trend can be observed in return on equity of the company as it decreased from 22.7% in 2015 to 7.19% in 2017. It indicates the decreased capacity of the company to generate profit from investments. Thus, major risks can be seen in profitability on equity of the company (Hevert, 2013).

Earned Return on Total Assets: In case of return on total assets, a downward trend can also be observed as it decreased from 15.52% in 2015 to 4.86% in 2017. It  indicates that the capacity of the company to generate income before tax and to gain tax against resources has reduced. Thus, it is a major risk in the company (Kabajeh, Al Nuaimat & Dahmash, 2012).

Net Profit Margin Analysis: Declining trend can also be seen in the net profit margin of the company as in dreaded from 17.85% in 2015 to 10.38% in 2017. It shows the reduced capacity of the company to earn profits and leads to the high risk of profitability. This is one of the major financial risks of the companies as the company is failing in the generation of higher net profit (Stahl et al., 2012).

Property Assets and Resources

Time Earned Ratio Analysis: The capacity of the company to earn interest has decreased as the times earned ratio decreased from 4.10 in 2015 to 1.90 in 2017. It leads to the financial risks as the firm is losing its capacity to earn interest incomes.

Days in Accounts Receivable: It can be seen that there has been an increase in the days in accounts receivable from 53.24 in 2015 days to 83.07 in 2017. This aspect increases the bad debt risk of the company for the increase in the chance to not recover the receivables (Michalski, 2013).

 Current Ratio Analysis: A riding trend can be seen in the current ration of the company. However, it needs to mention that in 2016, the current ratio was 1.80. Thus, the risk of not utilizing the working capital of the company remains high (Babalola & Abiola, 2013).

Debt to Equity Ratio Analysis: Higher debt to equity ratio that is more than one show the high leverage of the company and it implies that the company is hugely dependent on long-term debts. This aspect increases the financial risk of the companies, as the company has to pay higher amount of money as interest expenses (Palley, 2013).   

(a) Effective Control

Bonus Disbursement: Shareholders of the companies can assess the bonus paid to the managers. The responsible person to prepare budget needs to be asked to explain the reasons for budget variance (Soudani, 2012).

Password Protection: Passwords helped the form in protecting various applications to restrict free admittance. It is needed to assess the success of the company’s IT system.

Permitting Discount: In the company, the system is to obtain permission from sales director  in order to provide the customers with various discounts (Soudani, 2012).

Trade Receivable: At the time to close the accounts, the trade receivables are merged with the debtor accounts.

Aging Evaluation: After considering the amount of all the invoices, the aged evaluation of receivables is done with the assistance of computerized systems. Financial controller of the firm is responsible for this evaluation. The responsible officials for receivable management are asked to produce the reasons behind the delays in payments.

Doubtful Debt: As a part of the follow up strategy of the company’s doubtful debts, further shipments to the specific customers are refused in case of the not payment of required minimum amount (Soudani, 2012).

(b) Risk Alleviated

Admittance to Database: Even in the presence of strong password to access the company’s specific programs, it can be seen that there is not any password protection of the database of the firm that increases the risk of unlawful access.

Intangible Assets

Physical Delivery Notes: Shipping tiles to the customers increases the amount of manual notes. Increased amount of notes leads to the increase risks in making mistakes in these notes (Chopra & Sodhi, 2014).

Single Individual Responsible for Diverse Activities: It can be seen in the company that a single person is responsible for carrying on diverse business operations. A single clerk is responsible for issuing of credit notes, documentation of reasons, management of trade receivables and many others. Thus, the chance to make mistakes by the clerk increases (Chopra & Sodhi, 2014).

(c) Test of Control

Test of control is one of the major processes of audit to examine the internal control of the companies. The classification of test of control is done below:

Re-performance: As a part of this system, there is the introduction of a new transaction for the examination of internal control (Numan & Willekens, 2012).

Inspection: In this process, the assessment of important documents is done with the help of stamps and authorized signatures.

Observation: In this system, all the business processes ate observed and assessed in order to bring improvements.

Bonus Distribution: In order to distribute bonus, internal control system can be used.

Password Protection: In order to protect the passwords, the inspection tactic of control can be used.

Discount Allowance: In case of the allowance of discounts, the tactic of re-performance can be used.

Trade Receivable: The performance of re-performance can be used for the management of trade receivables.

Aging Analysis: Both the tactics of observation and inspection can be used in this regard.

Doubtful Debt: In this situation, the re-performance tactics can be used (Numan & Willekens, 2012).      

The weaknesses in sales and trade receivables are discussed below:

Sales

  • Bonus to the management is provided based on the sales volume of the company. This is a weakness as the sale s figures can be increased with the help of manipulation.
  • Manual declarations for sales can include the chance for mistakes and faults.
  • The chance of misplacement on the sales journals cannot be ignored, as they are produced monthly basis (Skaife, Veenman & Wangerin, 2013).

Trade Receivables

  • It can be seen that the trade receivables officials are also responsible for business receivables. This reason can lead to the unintentional mistakes or errors in the financial statements. This is a major weakness in trade receivables.
  • At the end of every month, the trade receivables are merged with the bank receipts. This aspect represents an extensive period for the settlement of some of the key items of the company like receivables (Skaife, Veenman & Wangerin, 2013).

References

Arens, A. A., Elder, R. J., & Mark, B. (2012). Auditing and assurance services: an integrated approach. Boston: Prentice Hall.

Ashley-Smith, J. (2013). Risk assessment for object conservation. Routledge.

Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), 132-137.

Chopra, S., & Sodhi, M. S. (2014). Reducing the risk of supply chain disruptions. MIT Sloan Management Review, 55(3), 73.

Hevert, S. R. B. (2013). Return on Equity.

Kabajeh, M. A. M., Al Nuaimat, S. M. A., & Dahmash, F. N. (2012). The relationship between the ROA, ROE and ROI ratios with Jordanian insurance public companies market share prices. International Journal of Humanities and Social Science, 2(11), 115-120.

Michalski, G. (2013). Portfolio management approach in trade credit decision making. arXiv preprint arXiv:1301.3823.

Numan, W., & Willekens, M. (2012). An empirical test of spatial competition in the audit market. Journal of Accounting and Economics, 53(1), 450-465.

Palley, T. I. (2013). Financialization: what it is and why it matters. In Financialization (pp. 17-40). Palgrave Macmillan UK.

Skaife, H. A., Veenman, D., & Wangerin, D. (2013). Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading. Journal of Accounting and Economics, 55(1), 91-110.

Soudani, S. N. (2012). The usefulness of an accounting information system for effective organizational performance. International Journal of Economics and Finance, 4(5), 136.

Stahl, F., Heitmann, M., Lehmann, D. R., & Neslin, S. A. (2012). The impact of brand equity on customer acquisition, retention, and profit margin. Journal of Marketing, 76(4), 44-63.

Vona, L. W. (2012). Fraud risk assessment: building a fraud audit program. John Wiley & Sons.

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

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