ACCT20075 Auditing and Ethics | Marketing expenses by sales

Answer to Question 1

Part 1: ratio analysis

The ratio measures whether the investors or the shareholders money is utilized in an efficient manner or not. The efficient manner here relates to the generation of the revenues for the overall development of the company along with its shareholders. The ratio must be high to show that the company has been maintaining its efficiency as per the requirement. As per the table below, the company needs to attain a minimum of 15.5, while it had been efficient in the year 2015 i.e. 14.8, the year 2016 was not up to the mark as it had attained a very low ratio. In 2016, the ROE was 12.9 that state that the return was not satisfactory and too lower than the budgeted one. The auditors need to mark the risks of the funds of the investors and the position of the company must note the same (Bamber et al., 2014).

Rota

The total amount of the profits created by the total assets in average of the business is measured under the ratio. The ratio must be high to show that the company has been maintaining its efficiency. As per the table below, the company needs to attain a minimum of 14.5, while it had been efficient in the year 2015 i.e. 13.1, the year 2016 was not up to the mark as it had attained a very low ratio. In 2016, the ROTA was 10.7 that state that the return was not satisfactory and too lower than the budgeted one i.e. 14.2. 

Gross Margin

Gross Margin is the measurement of the ratio of the total profits with the total sales. The ratio must be high for maintaining the efficiency. As per the table below, the company needs to attain a minimum of 9.0, while it had a great achievement in the year 2015 i.e. 9.5, the year 2016 not well. In 2016, the Gross margin was 8.5 that state that the return was not satisfactory and too lower than the budgeted one i.e. 9.0 (Bodie, 2013).

Expenses/Sales Ratio

Marketing expenses by sales represents the total expenses of the marketing and other related expenses incurred upon the total sales and the administration expenses ratio represents the total expenses of administration over the sales. The ratio must be low to maintain the efficiency of the firm because greater expenses will reduce the total revenue. As per the table below, the company needs to attain a minimum of 2.2 and 2.0 for the marketing and administration expenses ratio respectively. The year 2015 noticed a lower one i.e. 2.0 and 1.8 for the marketing and administration expenses ratio respectively. In 2016, the ratio turned high for the marketing expenses i.e. 2.6 that are even higher than the benchmark. Thus, the auditor must know the reason behind the same and have a control over it. The admin expenses are under control but still necessary steps must be taken to maintain the same.

Interest coverage ratio

It measures the potentiality of making the timely payments of the debts and the interests obtained from financial institutions or other sources i.e. stakeholders. The ratio must be high to show that there is a trustworthy position for the investors. As per the table below, the company needs to attain a minimum of 6.0, while it had a great achievement in the year 2015 i.e. 6.4, the year 2016 saw a ratio of 5.4 that state that the ratio was bad and not worthy for investors as the budgeted was 8.1. There is a necessity of checking and controlling the same as the investors might stop themselves from investing (Cotching et al., 2014).

Days in inventory and accounts receivable

The ratio depicts the total days towards the sale of the total stocks and accounts receivable of the company. The less time take denotes efficiency as the greater the movement of the stocks and accounts receivable, the more will be the efficiency of the firm. As per the table below, the company requires 30 and 45 days respectively for movement of stocks and accounts receivables. In the year 2015, the actual days was higher that was not efficient as it went above the benchmark of the industry. In addition, in year the days were 33.1 and 50.0 that reflected a higher movement and lower efficiency of the firm that must be controlled and managed (Holland et al., 2016).

Current and the quick ratio

The two given ratios measure the position of the liquidity of the company and checks whether the amount of the assets is enough in meeting up the total liabilities. The ratio must be high to be effective and in the below table shows that the company has a safe and good position of liquidity as both the current and quick ratios are as per the requirement and budget of the company.

Debt to equity

Through this ratio, the position of the solvency of a company is known. The ratio measures whether the company is able to meet the debts through the total equity amount available with the business. The higher ratio depicts a bad and weak situation as it reflects that the company has insufficient amount of funds left with it. As per the table below, in the year 2016 the ratio became 0.51 that is far above the benchmark of the industry and hence must be managed well as the same might lead to the losing of the investors and shareholders.

Part 2: Audit Impact

As per the above scenarios, the auditors must have an analytical process that must consider the analysis of the above ratios analyzed. The impacts as seen above have huge current and potential impacts upon the organization (Jiawen, 2013). The ratios have shown that the management is unable to maintain the ratios as per the budgeted ones and thus, the same may result in the overall inefficiency of the firm.

The management and the staffs under the control of the accounts and the financial statements can easily manipulate and amend the figures as per their motives that can result to huge losses and deficiency of the whole system. The errors and huge frauds can also be a part of the system that must be overlooked and controlled effectively. The scenarios above have explained that apart from the liquidity position, the other positions of the company as per the financial statements are not under strict and effective controls (Karunaratne et al., 2014). The depletion in the ratio structure can ruin the position of the company and thus, the auditors need to look into the matter and take steps under the approach of risk-based audits and other measures.

Thus, the major impact is through the management and risk provided by the ratios like the interest coverage and debt to equity ratios that might lead to the loss of the investors and the shareholders of the company (Laffy, D. & Walters, 2016).

Part 3: Audit Steps To Reduce Risk

There is a wide range of steps that might lead to the reduction of the risks present within an organization and they include:

The knowledge and the awareness about the ratios analyzed must be obtained and attained through the processes and other procedures of the risk based audit approaches performed (Maynard, 2013). For example, the reason of the decrease in the returns of both equity and the total assets has to be known and discussed with the management. The reasons behind the increase in the marketing expenses must be checked and discusses along with the reason of the decline in the interest coverage ratios and the increase in the debt to equity ratios.

The management of the movement and flow of the inventory and receivables has to be checked and discussed with the management (O'Hare, 2013). A strict audit and review about the above scenarios has to be done, discussed and documented as per the policies of an auditor.

Answer to Question 2

Part 1: Internal Control Weakness

There is an online system of computers carried on by the company and there are huge weaknesses present in the electronic security controls. The electronic data if used in an inefficient manner can lead to accidental or unintentional losses of the company and the organization. The electronic data are very risky in nature that can lead to errors and wrong reports (Wadhawan & Mahajan, 2016).

The management controls might lead to a lack of the controls that finally can lead to the weakness in the internal controls. The monitoring controls have the engagement of the senior and higher levels of the managers for the inefficiency of the internal controls. There must be a variety of administrative and other security controls as the official procedures leave the company at huge risks.

The latest systems applied by the company can further be a part of the weakness in the internal controls. They have many abilities and can be a part of the complications and expenditures other than the development and overall growth of the company. The systems carry under them, the financial information that can lead to further errors and frauds (Lee, 2016).

The electronic structures or frameworks that can be a part of the internal control weaknesses surround the structures of the latest management and controls. The manual controls cannot be efficient in terms of being systematic and comprehensive in nature as compared to the electronic controls and hence must be controlled and checked (Mansour, 2016).

The authority controls also forms part of the system of internal controls that can be a part of the weaknesses. There must be an appropriate approval of the services and goods along with the stock and other authorizations.

Part 2: Audit Impacts

Weaknesses in the electronic security controls: The inadequacies in the systems can lend a hand to the accessibility of the important and diligent data by the unauthorized people. The individuals might take undue advantage of the same that can lead to the loss and corruption incurred towards the data that is private and essential to the company. The weakness in the system will further lead to wrong documentation and reporting by the auditors (Rahma et al., 2016).

Weaknesses in the monitoring controls: The inadequacies and deficiencies in the monitoring controls can permit the errors and frauds to go ignored. The observations might fail that may lead to the further ignorance of the accuracy and reliability of the information present in the systems. The controls can have a further impact on the loss or corruption of the data or important information.

Weaknesses in the new and latest systems: The non-acceptance of the systems of the new and latest nature can lead to the loss and failures related to the available opportunities and the operation and functional efficiency and effectiveness of the organization (Gleason et al. 2017).

Weaknesses in the electronic frameworks: The weakness in the electronic or the other related structure can increase and enhance the risks of the values of the data and the information. The weakness in the same can lead to the formation of duplicate entries and other errors and frauds (Hribar et al., 2014).

Part 3: Audit Steps To Reduce Risk

Communication process: There must be steps undertaken towards the development of the procedure of the interaction or the communication among the major stakeholders and the employees or management of the company. It is important as the lack of knowledge about the most important procedures may perhaps show the way to a disagreeable state of affairs or circumstances that would form a part of the company (Skaife et al., 2013).

Segregation of the Duties: The duties among the management and the staffs have to be separated and divided as per the proficiency and experience. The lack of the separation might lead to the occurrence of the errors and frauds within a company. Hence, there must be application of a set of best practices and procedures for the minimization and prevention of the errors and frauds creeping within the organization. Furthermore, there must be separation among the role of the employees for reducing or diminishing the manipulation and alterations among the processes of the organizations. There must also be a check on the approval procedures of the management and the other processes and functions of the organization (Weygandt et al., 2015).

Communication within the Audit process: There must be an interaction among the management and the professionals along with the employees for maintaining the success of the firms by diminishing the frauds and errors within the surroundings of the firm. The auditors provide the latest knowledge and awareness about the processes and the technologies of the current times, towards the management and the other staffs of the organization. Along with the auditors, the management and the other staffs of the organization is also required to carry on the process of the communication in an effective manner (Knechel & Salterio, 2016).

Answer to Question 3

Part 1: CAAT Techniques

There is a wide range of Computer Aided Auditing Techniques and three among them constitutes:

1. Embedded audit software:

The program of audit that has a process of the being implanted within the accounting system of the client is termed as the embedded audit software. The function of the approach considers the intention and implementation of the specific policies that are similar in comparison to the audit software. The program also includes the advantages of the possibility of the amendments and the modifications within the software, as per the auditor’s wishes and requests. The instrument and technique will encompass the allowance of congregation and attainment of the requisite data on the definite dealings towards the testing done at the prospective and future times (Pedrosa & Costa, 2012).

2. Test data:

The test data technique considers the creation of a model i.e. a replica or dummy of the aspired software of the audit. The auditors create such model to study the consequences of the evaluation of the implications of the desired models in the clients accounting system. The accuracy and the reliability of the duplicate model are put under test to detect and prevent the material misstatement if any are present within the organization. The major operations and functions of the company are put under necessary test and control for detecting the unintentional or intentional errors present in the systems. The errors generally take account of the numerical inaccuracy that exists in the bills or the data under the batch controls (Robert, 2015).

3. Audit software:

The procedures or the policies under the audit software technique carry on the inspection and analysis of the system of the client. It has an ability of the modifications, alterations or packaging the software of the purposes and objectives of the client systems. There can be an examination and the study of the procedures. The same does not take account of the methods like computation of the ratios, random sampling and creation of the necessary benchmarks. The techniques also take into consideration the track of the dealings of the computer systems (Effiok, 2014).

References

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Simons, R. (2013). Levers of control: How managers use innovative control systems to drive strategic renewal. Harvard Business Press.

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