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Trend and Ratio Analysis for Financial Position Evaluation

Discuss About The Journal Emerging Technologies Accounting.

The trend and ratio analysis helps organization in comparing information about financial of company for different years. Auditors are required to deal with one of the most important judgment whether the organization is in sufficient danger of experiencing financial distress and whether they will be able to continue as a going concern. It is required by auditors to evaluate as per auditing standards that whether there is considerable doubt about Printer solutions ltd to continue as a going concern for twelve months after the auditing of financial statements have been done.  Ratio analysis is considered as common method of judgment for evaluating the financial performance of company (Brown & Kohlbeck, 2017). Such analysis helps auditors in linking the information derived from balance sheet and income statement for identification of any unusual relationship across financial statements.

Based on information provided in the financial statements of Printer solution limited, the analysis of financial position of organization is done. It can be seen that profitability ratio has reduced in recent years. Return on assets as well as return on equity has declined considerably from 0.22 in year 2015 to 0.09 in year 2017 and 0.064 in year 2016 to 0.027 in year 2017 respectively. Debt to equity ratio has also become unstable from 1.45 in year 2015 to 2.61 in year 2016 respectively and this is indicative of the fact that company is relying more on debt rather than adequately utilizing their own assets and generating return. Value of debt ratio has also increased to 0.72 in year 2017 as against 0.59 in year 2015 respectively. This depict that the ability of organization to pay off their liabilities using assets have declined. Furthermore, this also indicates that the company has become highly leverage and pose risk to investors. On other hand, looking at figures of liquidity ratio, it can be seen that both current and quick ratio has increased in recent year. Current ratio value stood 1.64 in year 2017 as against 1.4 in year 2016 respectively. Value of quick ratio stood at 0.87 in year 2017 as against 0.79 in year 2016. This depicts that company has high degree of liquidity. Analysis of the ratios is illustrative of the fact that company runs a probable degree of going concern risks.

Inventory account- The total valuation of inventory might not be done accurately and the people entrusted with performing inventory valuation perform the physical count rather at year end. This might be done intentionally for overvaluing the inventory so that higher sales value is recorded. Pricing of inventory is the factor that would lead to overstating inventory value (Coskun et al. 2017). Since, Printer solutions limited is facing increased amount of expenses, they might intend to increase the value of inventory for selling it at higher price and generating higher sales value and covering increased expenses.

Analysis of Accounts and Material Misstatements

Revenue account- The material misstatement is indicated in the revenue account due to some fraudulent financial reporting. There is certainty of recording fictitious sales if there is an excess volume of sales over the production capacity. It can be inferred from the trend analysis that there has been 15.79% increase in sales in year 2017. This is indicative of the fact that there might be some undisclosed side agreements with customers for returning goods and this would preclude recognition of revenue.

Expenses account- It is certainly possible that Printer solutions might have over stated and under stated. The invoices relating to expenses might not be properly included and there might be under recorded liabilities. The increase expenses of the company have been covered by increasing the facility of loan and generating funding from cash flow (Carson et al. 2016).  Figures presented in the income statement represents that expenses have decreased in recent year and this reduced figure might represent understatement of figures. There might not be sufficient generation of cash flow but the management might have over stated the value and lowered the expenses amount.

Cost of goods sold account- It can be seen from the income statement of Printer solutions limited that there have been considerable increase in cost of goods sold year on year. Cost of goods sold has increased from 1566 in year 2015 to 2350 in year 2017 respectively. This figure is indicative of the fact that there has been considerable increase in value of cost of goods sold and depicts that there might be over statement credit and charges for amount that is transferred from the finished goods and work in progress and there is higher variances from inventory costs.

Assertions are the claims that the management made regarding certain aspects of business. Auditors make use of assertions for considering different type of material misstatement related to accounts of balances.

Inventory- The assertions that is of primary interest concerning inventory account is valuation and allocation and existence. It is certainly possible that there have been material misstatement in the value of inventory recorded and they are not recorded at appropriate amount.  Inventory of printer solution is recognized in the balance sheet at the end of reporting period.

Revenue- Valuation and allocation and completeness are the assertions that are related to revenue account. The revenues that are applicable to reporting period might not be presented in the financial statements. Valuation of sales and revenue recognition might not be done properly and during proper reporting period (Hay et al. 2017).

Assertions related to Different Accounts

Expenses- The expenses have not been disclosed in the notes to financial statements and their occurrence have not been disclosed appropriately. Therefore, the assertions associated with inventory account balances are occurrence and accuracy and valuation.

Cost of goods sold- Completeness and cut off are the assertions related to cost of goods old account. This helps in understanding auditors that company has not understated or overstated the cost of goods sold by recording expenses and deferring recording expenses to next period.

Cash is the most liquid assets and it must be ensured by Printer solutions that that they have strong internal control process build around collection of cash and revenue.

Accounting accurately for all cash and revenue transactions for generating correct information about cash flows and revenue- A good internal control system requires that system would be in place for reconciling revenues with the related services provided. There should be properly developed procedures for recording revenue so that risk of fraud is reduced and diverted.

Making sure that all the payments have been received on due date- It should be ensures by organization that revenue is collected as and when they are falling due and there should be financial control by the revenue department. There should be a well designed control system related to activities for collection of revenue. Moreover, the payment received by company from their customers should be properly tracked and they are recorded in the appropriate account when they are received and are not carried forward (Junior et al. 2014).

Determination of revenue recognition standard- Effective guidance and procedures needs to be in place and using of appropriate authorities for accounting to such revenues. Cash receipts should be properly and promptly recorded with the knowledge that certain revenue should be deposited and received. Since all the remittances are received by typist and office assistants and in this regard there is a need for improvement relating to transmittal revenue. Veterinarians are notified about the cancellation of contract by bookkeeper for whom they are entitled to acknowledge the cancellation notification. It should not be the only responsibility of bookkeeper to notify about the cancellation of contracts.

Performance measure- There is certainty that figures of revenue might be misstated and the performance measures are linked to short-term targets of revenue. This becomes true when there is unexpected realization on part of management. Performance measures should be developed appropriately to make proper reporting of revenue and cash figures (Kend, 2015). In this regard, the internal control system of organization should have well in built performance measures for accurately reporting figures.

Strengthening the internal control system of Printer solutions

Auditors are able to get more evidence on the effectiveness of control system of Printer solutions if the testing control is over a great period of time. In order to obtain supporting evidence on the effectiveness of operations of organization, auditors are required to balance performing test of controls that is closer to as of date having need of testing.

Samples of entries in cash receipt journals are selected and remittances and sales invoices are traced. Sample of remittance advice is selected and deposits in bank account are traced along with recording of cash receipts. Considering reasonableness of explanation and reconciliation of items relating to endorsement of cheques and pre numbering of invoices.

There needs to be entity level control comprising of control related to control management and control over management override. It would have direct impact on the likelihood detection of material misstatement. The cash receipt books should be prepared in a standard way and there should be sufficient entity level control that might allow the auditor to reduce the testing of control.

Test of control for examination of revenue from service account involves people who are involved in the approval and acceptance of credit sales, recording receipts, depositing collection of cash, recording of sales and contracts, collection of remittances, receiving of monthly fees and pre numbering of invoices (Eulerich & Ratzinger, 2018).

Reviewing the accounting for numerical transactions of original contracts for which the customers are entitled to one routine service of Veterinarians. For indication of approval, such contracts should be inspected.

The sales transactions should be recorded back to customer order and pre numbering of invoices for emergency services (Sarens, 2015).

Auditors in an integrated audit rely on control for reducing their substantive testing financial disclosures and financial statements accounts. Therefore, any deficiency in evaluation of internal control and testing measures would result in inadequate disclosure of financial accounts and testing of accounts. When the auditors perform the substantive testing such as test of control for assessing the risks, some of developed test of control might not be adequate in situation of addressing inherent risks. In case of Printer solutions limited, customers are required to sign on the annual contracts in duplicate that are pre numbered. On other hand, original copy of contract is provided to customers by filling it in numerical order. In this situation, the staff and employees of organization might get involved in fraud act as there is pre numbering and there is original and supplicate copy of the contract filled separately. Therefore, this is the risk that is inherent to the system of organization. Even if such contracts are inspected, auditors might not be able to detect existence of material misstatements in such accounts.

In smaller audits, organization should not spend great deal of time in designing and developing the internal control system. The reason is attributable to the fact that such internal control systems are not regarded as relevant to the process of risk assessment. In such situation where developed control might not be reliable, then the operating effectiveness of control for testing should be tested by auditors. Operating effectiveness of testing control should be done by auditors by development of procedures incorporating a mixture of observation of operations of company, inquiry of appropriate personnel, re performance of control and relevant documentation inspection.

Length of time- The implementation of new payroll application by NSW Rural health is faced with timing crunch as there is wide variation in average length of typical process of implementing software. Hardest part of transitioning to the software is the time it would take for migration of data and smoothly running the business. Moreover, such software implementation is complex because if the business is to be conducted as usual, it would require existing staffs to be provided with adequate training, learning and migration to new system. It can be seen from the given case that the operations of rural health was ceased due to the implementation of payroll software. Furthermore, organization does not have sufficient process of testing the application and there was no adequate for training of staffs (Moroney & Trotman, 2016). Therefore, it can be seen that time of implementation concerning data migration and system implementation timing is the concerns of the new payroll system.

Complexity of the new payroll application- The new payroll application restricts the access of master files and transaction files. This might create complexities for existing other staffs to deal with the application implementation. One of the major setbacks that can be experienced by the rural health is the lack of comprehensive and detailed methodology of training (Peterson & Malthus, 2017). If the organization is not coming out with clear goals and timeline since beginning, implementation of payroll application can be stalled. Access to files should not only be limited to payroll supervisors and payroll staffs. It is so because it would be difficult on part of management to monitor all such payroll accounts and create difficultly for auditors to in verifying such accounts. Therefore, it is required by organization to take appropriate measures for minimizing errors of data and implementation of timeline track. Risks relating to training efforts should be reduced by focusing on all parties related to the implementation of system.

i) Occurrence of expense transactions- The occurrence of expenses transactions relating to wages and salaries can be ensured is the reconciliation of such accounts. Reconciliation of account and amount is one of the most important control activities. It would take into account total number of hour’s worked, taxable wages, adjusted gross salaries and flexible spending account deductions. There should be balancing of hours entered into the payroll system from time sheets to a summary of report of hours that is generated from the payroll system. The employee classification enables making payment by same amount each period to a number of employees (Carson et al. 2014). Hence, employee payment would vary provided adjustments are to be made in the payment. Moreover, employees might elect to make annual contributions to the accounts that are flexible spending. In such events, employees are not capable of making changes unless there are any qualifying events. Therefore, control activities of reconciliation should incorporate all these for identifying the occurrence of expenses transactions.

ii) Accuracy of expense transactions- Accuracy of expenses transactions can be identified by the documentation control activity. Employees should authorize and complete the proper documentation of all such transactions. Deductions such as federal and state taxes should not be withheld until there is form from employees that are properly completed. Forms that are to be completed by employees should involve personal data involving identification of information and there should be e verification system that would be used by employees for verifying information. Such forms can be submitted and completed online with the advances in payroll software’s and information technology. Some of the forms that need to be filled include form for personal data that helps in identifying of information, benefit forms such as dental, health and other plans and forms of retirement plan (Trotman et al. 2015).

Description of appropriate test of control for evaluating the effectiveness of new payroll application employed by NSW Rural health and they are listed below:

Strengthening of control in areas such as security of payroll information, checking payroll files version and reconciliation of total of payrolls to other financial records.

Periodic reviews of control process should be undertaken by organization for ensuring that they are appropriate in ensuring accuracy and validity of transactions of payroll.

Additional control procedures should be implemented and additional staff training should be considered by organization for minimizing the exceptions and errors that have been recognized in the processing of payroll (Simnett & Huggins, 2015).

Exception reporting should be used on greater basis since it is considered as a key method for gaining oversight to changes in payroll data (Weins et al. 2016). Moreover, it also helps in gaining information about recording and processing of reasonableness of amounts and any unusual or exceptional transactions.

Additional staff training should be considered for minimizing the errors in the payroll processing system (Hardy, 2014).

The implementation of existing process and existing control should be give particular attention. This is so because it will help in addressing the additional risks attributed from errors that arise when payroll data is changed substantially. Such substantial change involve rise in general award processing for large number of employees.

The updating of payroll procedures and policies and its regular review should be done by systematic approach implementation (Kocken & Hulstijn, 2017). In order to ensure that all payroll process key areas are properly addressed, there should be development of procedural documentation and additional policy by organization.

It should be ensured by all agencies of organization that key functions of payroll should be subjected to review by internal audit on cyclical basis. A more formal and systematic approach should be adopted by organization for reviewing and monitoring the activities that would provide management with assurance over completeness and accuracy of payroll processing and overall payroll efficiency operations (Leung et al. 2014). For the payroll functions, there should be implementation of benchmark using comparative information from functions against the benchmark that have been set.

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Carson, E., Fargher, N. and Zhang, Y., (2016). Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.

Carson, E., Redmayne, N. B., & Liao, L. (2014). Audit market structure and competition in Australia. Australian Accounting Review, 24(4), 298-312..

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Kend, M. (2015). Governance, firm-level characteristics and their impact on the client’s voluntary sustainability disclosures and assurance decisions. Sustainability Accounting, Management and Policy Journal, 6(1), 54-78.

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Leung, P., Coram, P., Cooper, B. J., & Richardson, P. (2014). Modern Auditing and Assurance Services 6e. Wiley.

McKee, D. (2015). New external audit report standards are game changing. Governance Directions, 67(4), 222.

Moroney, R., & Trotman, K. T. (2016). Differences in Auditors' Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research, 33(2), 551-575.

Peterson-Palmer, K., & Malthus, S. (2017). Financial reporting by charities: The impact of recent changes to accounting standards and assurance requirements. New Zealand Journal of Applied Business Research, 15(1), 41.

Sarens, G. (2015). Guest editorial on internal assurance: a concept in evolution. Managerial Auditing Journal, 30(1).

Simnett, R., & Huggins, A. L. (2015). Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), 29-53.

Simnett, R., Zhou, S., & Hoang, H. (2016). Assurance and other credibility enhancing mechanisms for integrated reporting. In Integrated Reporting (pp. 269-286). Palgrave Macmillan, London.

Trotman, K. T., Bauer, T. D., & Humphreys, K. A. (2015). Group judgment and decision making in auditing: Past and future research. Accounting, Organizations and Society, 47, 56-72.

Weins, S., Alm, B., & Wang, T. (2016). Rethinking The Future of Auditing: How an Integrated Continuous Auditing Approach Can Leverage the Full Potential of Continuous Auditing.

Weins, S., Alm, B., & Wang, T. (2017). An Integrated Continuous Auditing Approach. Journal of Emerging Technologies in Accounting

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