Audit ppt

AUDIT REPORT ON FINE PERFUMERYCO. LTD

Presented by:Pey WenSharmila

JunaidiJaslyn

Caselyn

Auditor’s Responsibilities

plan and perform the audit to obtain reasonable

assurance

express an opinion (Modified/Unmodified)

Financial Statement

Planned Scope for Internal Control

Design of Internal Controls

Have controls been

implemented

Understanding of internal

control

- Narrative- Internal Control Questionnaire

Test of controls

Statistical Sampling- Random Sample Selection

Final Conclusion on Internal Controls

Timing of the Audit

• Begin of our audit on 2 January 2013, with an expected completion date of Friday, 1 February 2013.

Audit Findings

Misstatements and Audit Risk

Credit Sales System Internal Control

Accounts Payable System Internal Control

Recommendations for control weaknesses

Audit Opinion

Accounts requiring higher attention

1. Cash2. Accounts Receivables3. Inventory4. Accounts Payables5. Sales6. Cost of goods sold7. Wages and salaries expense

Cash

Possible business reason for the

change

Increase in sales

Increase in capital

contribution

Increase in long term liabilities

Possible error in the account

Early recognition

Input data figures wrongly

recorded

Accounts receivables

Possible business reasons for the change

Increase in credit sales

Understatement of doubtful debts

Possible errors in the accounts

Early recognition

Open invoices errors

Paid invoice errors

Inventory

Possible business reasons for the change Increase in purchases

Possible error in the account

Fictitious purchase of inventory

Obsolete of inventory

Accounts payable

Possible business reason for the

change

Discounts received from

suppliers

Possible error in the account

Early recognition

Duplicate payments

Sales

Possible business reasons for the change

Increase in sales volume

Increase in selling price

Possible error in the account

Fictitious sales

Early recognition

Cost of goods sold

Possible business reasons

for the change

Increased purchased price

Increase in quantity

( unlikely)

Possible error in the account

Recording of absent

purchases

Understated closing stock

Wages and Salaries

Possible business reason for the change

Increase in number of employees

Increase in working hours of non salaried positions

Possible error in the account

Early recognition

Overpayment of wages

Assessment and Risk of Financial Failure

Our Risk Assessment

• Based onQuick Ratio Debt to Equity RatioNet Profit MarginDays to Collect ReceivableInventory TurnoverDays to Pay Payables

Quick Ratio2011 2012 Medium Industry

1.17 2.99 0.90

• Increase by 1.82 from 2011 to 2012• Above medium industry• Company has $2.99 to cover for every $1 of its current liabilities• Good liquidity position

Debt to Equity Ratio2011 2012 Median Industry

0.25 0.21 1.11

• Consistent in using its debt to equity• Debt to equity below median industry Company uses more equity than debt to finance its assets

Net Profit Margin2011 2012 Median Industry

8% 8% 8.08%

• Consistent • Low rate at 8% from 2011 to 2012 Company has more or less control over its cost compared to its creditors Might face losses in future

Days to Collect Receivable2011 2012 Median Industry

12.27 16.40 35

• High number of days to collect receivable but its below median industry• Increase by 4.13 from 2011 to 2012 Company takes shorter time to collect its accounts receivables Company in good position

Inventory turnover2011 2012 Median Industry

2.19 2.40 5.85

• Increase by 0.21 from 2011 to 2012• Company’s inventory turnover lower than median industry Bad sign Products tend to deteriorate as they sit in the warehouse• Company has poor sales excess inventory• Might face financial failure in future

Days to Pay Payables2011 2012 Median Industry

43.32 44.20 43.71

• Slight increase by 0.88• Company takes longer time to pay its creditors• Less cash flow to pay for other business opportunities

In Conclusion…

• There is a high risk that the company will fail financial in the next twelve months.

Assessment of Audit Risk

• Auditor should plan and perform the audit to reduce the audit risk to a very low level.

• Based on1. External user’s reliance on the financial

statements2. Likelihood of financial difficulties3. Management integrity

External user’s reliance in the financial statements

• Large client size• Public listed company• Relatively high amount of long term

borrowings of $150,000

Likelihood of financial difficulties

• Profitability ratio 8%• Quick ratio 2.99% Not short of working capitalMore than 1, therefore company is able to

pay off current liabilities• Debt to equity ratio 0.21 Martin and Larry partnership borrow money for working capital in 1995

Management Integrity

• High standards of integrity and ethical values among officers and personnel at Fine Perfumery

• No frequent turnover and aggressively policy Employees remained in the company

CREDIT SALES SYSTEM

Segregation of Functions:

Strengths

Sales manager

Accountant

Weaknesses

Credit Manager

Storeroom clerk

Access to Assets

Strengths

Sales manager

Customer Master File

Financial controller

LAN administer

Weaknesses

Customer SL

AR Clerk

Authorization

Strengths

Sales order

Credit sales

Credit memo

Weaknesses

LAN application

Write offs of bad debts

Invoices

Input Controls+ve

Controlled and pre-numbered

Aged monthly periodically

Filling ,Generating & Updating

Invoices Credit Memos

Shipping documents

ARSL Balancing Report General

Ledger Master Card

Processing Controls

A record maintained of accounts previously

written off (+ve)

Sales invoices are not checked as to prices and

mechanical accuracy. (-ve)

Output Controls

Customer subsidiary ledger reconciled with

control account periodically (+ve)

OBJECTIVEDetermine whether the control that “credit sales are approved before shipment” is operating efficiently

CONDITIONSAttribute = YESException = NO

POPULATION: 468 sales invoices

SAMPLING UNIT:20099 to 20566 invoice number

Confidence level=95%TDR=4%

EPDR=0%

∴ Sample size= 74(0)

SDR= 7% CUDR= 13.6% Confidence level: 95%, No. of deviations: 5, Sample size: 75]

TDR = 4% CUDR= 13.6%

∴ CUDR>TDR => Controls are ineffective unreliable

Accounts Payable SystemInternal Control Strength & Weakness

STRENGTH WEAKNESS

Segregation of Functions

• A responsible official review the debit distribution of vouchers for proper recording.

• Cheques are not mailed by the person signing the cheque and are returned to the preparers ( Accounts Payable Clerk ) to mail

Access to Assets • Supporting documents stamped paid by the cheque signers

-

STRENGTH WEAKNESS

Authorization Vouchers approved

by a responsible official before payment

Obtain financial controllers’ signature on each voucher

Adjustment to Accounts Payable require approval of a responsible official.

• ---

STRENGTH WEAKNESS

Input Control The general entry generated by Accounts Payable module is used to update General Ledger Master File.

• Some invoices are run directly through cash disbursements.

Processing Control Company maintain an Accounts Payable Sales Ledger

Storeroom clerk, Eunice Lim matches these documents with 2nd copy of Purchase order and send all 3 documents to Accounts Payable clerk.

Vendors’ invoices are only occasionally checked for proper pricing, extensions, castings and terms.

Unmatched invoices, Receiving reports and Purchase Orders are not reversed periodically

STRENGTH WEAKNESS

Output Control • Accounts Payable Sales Ledger reconciled monthly with Accounts Payable control account.

• Vendors’ monthly statements are not reconciled to the accounts payable subsidiary ledger.

Recommendation for Internal Control Weakness

Observations Risk Arising/ Implications Recommendations

#1Accounts receivable clerk who maintains the records also has access to customer cheques.

Embezzlement Proper access to assets

#2The cashier has access to the LAN accounts receivables application.

Modification of figures Proper authorization

#3Customers are invoiced by the accountant, Cynthia Ng, who records journal entries.

Discrepancies can be kept Proper access to assets

Internal Controls Recommendations (Credit Sales)

Observations Risk Arising/ Implications Recommendations

#4Vendors’ monthly statements not reconciled to the accounts payable subsidiary ledger.

Occurrence of dishonest act Proper output controls

#5All vendors’ invoices are checked occasionally for proper pricing, extensions, castings and terms.

Possible human/system error

Proper processing controls

#6Cheques are mailed by accounts payable clerk.

Personal interest benefits Proper segregation of functions

Internal Controls Recommendations (A/c Payable)

Adjusted Journal Entries

Evaluation of Audit Opinion

(NPBT)

(2 d.p)

• Since the effects of proposed adjustments is ≤ 10%, the impact of the proposed adjustments is immaterial.

• Therefore, my team and I has form an unmodified audit opinion for Fine Perfumery Co. Ltd for the financial year 2012.

Conclusion