Audit Expectations Gap And Corporate Fraud: Analysis And Discussion

Account

Analysis

Audit Risk

Audit steps to reduce risks

Accounts Receivable

In the receivables scenario, we  can see that the receivables days has almost been constant in the wine business but the same is on the upper side as the industry trend is near 30 days whereas the company in hand is operating at the receivable days average of around  50 days, which his quite high. ON the other hand, the receivable days in case of beef business has been increasing drastically over the last 3 years and has almost doubled from 24 days in 2016 to 57 days in 2017.

Since the state of receivable days is increasing in such a fashion, it indicates the audit risk as well as the business risk on the collection from the debtors as to whether to not the receivables has been correctly recorded in the books or not and why the company has is not being able to collect from debtors. Furthermore, the auditors also need to check if there is a requirement of providing for bad and doubtful debts based on this (Choy, 2018).

Some of the audit steps which can be conducted to check the health of the debtors in the books are reconciling the sales and the debtors ledger, the follow up procedures with the debtors, the monthly and quarterly outstanding balances report with the debtors, balances confirmation from debtors, whether the debtors have been correctly and completely recorded in books, how the valuation is being done and what the disclosures in this respect.

Current Investment

In terms of investment made by company, if the returns on equity is being analysed, we can see that the same has decreased drastically from 17.5% in 2017 to 10.80% in 2018. Furthermore the gross margin has declined to 24.5% from 30% last year as well as the net profit ratio is also showing a downward trend and is at 14.38% in 2018 as against 20.27% in the last year (Dichev, 2017).

The decrease in return poses a major risk on the investment being made by the stakeholders and if the company is meeting the minimum levels of expectations. This shows the risk that either the costs are increasing tremendously or the company is not being able to generate revenue at good margins.

Since the ratios show that there is a deterioration in the efficiency of operations, it is necessary to check the major costs incurred, the management decisions, the pricing of goods and why all of a sudden, the profitability has been so low. It needs to be checked if the costs are being properly monitored and approved by management or if they pertain to the current period or future periods.

Property Assets

In terms of return on the property assets, we can see that the return on beef production assets was negative in previous years whereas the same has been 1.67% in current year. On the other hand, the return on grape wine production assets has decreased from 16.2% in 2016 to 12.2% in 2018.

The decrease in the return on assets is an indication that the property is not reaping the expected benefits and there are several factors which are hindering the growth of the returns. The risk here is that the business continuity and going concern needs to be checked and also if there are any risks on the company (Jefferson, 2017).

This risk can be checked by checking the returns and what the major reasons for the decrease in returns from the land, is it because of natural reason, or market pressure or internal policies. It can also be due to decrease in demand, low productivity or accounting policy such as that of charging depreciation, etc.

Marketing Expenses

For this head, the ratio of marketing expenses as a percentage of total SG&A expenses has been calculated and found to be increasing continuously since last 3 years and is at 23.67%.

The major risk is what are the marketing expense heads which are increasing, whether it is approved and whether the accounting is done correctly in the books, is it really required and if yes, then why the positive impact in not seen in terms of sales, productivity, profitability and growth, why all of them are falling down.

This risk can be checked in terms of quantum of marketing expenses that has been increased over the year and what the new heads under which the expenses are being incurred, is it approved by the management and if yes, on what basis. It also needs to be checked if the bookings have been done for current period only or also for the future periods as well.

Effective control

Risk alleviated

Test of control

Effective management of the passwords of the IT system in the company. Post the implementation of the new IT system and resolution of all the teething issues, this is being managed and monitored by management accountant (Bizfluent, 2017).

The IT system holds a number of finance configurations and also a lot of data. If the configurations are being altered unauthorised then it may bring upon the change in functionality and can adversely affect the financial accounting and results altogether. So this risk is alleviated. Furthermore, strict password control exists over access to programs, only the access to database is being enabled, so this also alleviates the risk that anybody and everybody cannot pass financial entries in the books.

Here the test of control ca be in the form of checking the authorization of the people working in finance team and other people as well. Also, it can be checked if the entries have come from other IDs as well. Certain, big ticket line items can be checked if the same has been approved and whether there are relevant supporting for the same.

The 2^nd internal control is approval mechanism for the orders value limit. If the ordering amount is between $ 10000-30000, it needs to be approved by management accountant and if the value is beyond $30000, it is to be approved by company’s CEO.

And if it is beyond $50000, it is to be approved by the Board.

This ensures that none of the section managers, be it grape, wine or beef production managers do not order supplied greater than $10000 in one go. The value limits ensured that no wrong use of authority is being taken and 4 eye principle is being followed. Furthermore, it also avoids the unnecessary blockage of the funds (Belton, 2017).

The order booking can be checked in the computer ordering system as it is directly linked to the approved suppliers. A test of control can be conducted as to if there are necessary approvals in hand.

The process for receipt of the goods and invoice verification with the electronic copy received from the supplier and punching of the invoices in the payment register is a comprehensive control for the purchases and payment to vendors (Gooley, 2016).

This alleviates the risks that the false purchases are not recorded in the system, there is no shortage or discrepancy in the inventory when it is being received in the factory premises and that the invoice from supplier and the order received matches and then the payment is being processed. Due to this, no false invoices and no false delivery is accounted in the system.

The auditor can check whether the 4 eye principle was being ensured or not during receiving or orders and recording the invoices in the system. Also, sample checks can be conducted on the order copies and the invoices received electronically from suppliers if they are matching.

Weaknesses

Justification

The supplier information file is being centrally handed by the accounts clerk and any changes to the file is being approved manually by the management accountant. There is no such record maintenance in system as to how many times the changes have been done and the management accountant is the ultimate authority post which no control is maintained (Werner, 2017)

The approval procedure is manual and hence there is every chance that the management accountant holds the ultimate authority to make the changes in the supplier information file. There may be a case that a new unapproved supplier may be added to the file without any intimation and nobody in the company would be aware of the same and hence the records should be maintained in the system.

The payments file is finally being approved by the management accountant once in a week and then he only uploads the ABA file in the bank portal for the payment.

This shows that there is no segregation of duties and the company may fall into situation where the management accountant may also approve for the unauthorised and unchecked payments and upload the same in the bank portal for the payment. The company might suffer a loss on account of this. Therefore, there should be proper internal control and 4 eye principle being followed here (Heminway, 2017).

With regards to the payment of the service as well as supplier invoices, as soon as the invoice is being punched in the payments file and approved by management accountant, it is being recorded as paid in the accounting system without proper acknowledgement system or procedure. This can lead to serious reconciliation issues in the future with the creditors.

To avoid the reconciliation issues with the creditors in the future, the company should ensure that the acknowledgement is generated form the bank side and is also captured in the payments file and is also properly accounted in the accounting system. Also, the balance confirmation from the creditors and the vendors should be asked on a monthly basis (Trieu, 2017).

There is no control om when the next purchases of the wine, grape or beef should be made by the section managers. There should be a limit on the stock which when reached, only then the next order should be made (Linden & Freeman, 2017).

In case this control is not being maintained or implemented, then the section managers can send the purchase requisition for any and every quantity and it would be difficult for the company to maintain and monitor the stock levels and thus it can end up having excess stocks.