Risk Analysis and Auditing in Pental Limited - Research Proposal Example

Risk Analysis and Auditing, Pental Limited Student’s Name: University: Course: Instructor: Date: Executive Summary The purpose of the audit is to ensure the financial statements assertions indicated reflect the true representation of facts as stated by Boritz, Carnaghan and Alencar (2014). The audit will specifically deal with the assertions made regarding assets, liabilities and equity. The audit will investigate whether the assets, liabilities and equity are managed effectively, efficiently and fairly. The specific objectives of auditing Pental limited are to evaluate management control framework regarding assets, liabilities, and equity with respect to compliance with accounting standards, policies, and regulations. At the initial stage of the audit, the report will conduct a risk analysis in order to prioritize, identify and evaluate risks associated with assets, liabilities and equity management. The risk analysis will be based on examining of accounting policies, manuals, regulations and standards that applies to the management and accounting of assets, liabilities and equity on results of preliminary interviews with those responsible for accounts management, and data analysis. The methods and criteria that will be used will be based on the risks identified. The audit will be for the period ended 28th June 2015. The audit methodology that will be used in this report will be a review of documentation, interviews with the personnel handling the receivables and data analysis. Statement of Assurance The audit will be conducted according to the Australian Auditing Standards. The report will complete appropriate and sufficient audit procedures .The audit will give professional judgment based on gathered evidence and the conclusions will be given in this report. Comparison of situations as they happened while conducting the audit using the established criteria will be the basis for the conclusion. Introduction Pental Limited is a publicly-listed company on the Australian Stock Exchange (ASX), (“ASX-List”, 2016). The company manufactures and sells cleaning household products. Established in 1954 as Pental Soap, the company is the largest brand of soap in Australia. In 2003, Pental soap was acquired by Symex Holdings Ltd, a publicly listed company, and Symex became Pental Limited. The company has an asset base worth about $98.8 million as at 28th June 2015. (“Annual- Report”, 2015) Pental Limited company has a variety of products including; Personal care products such as bathing soap, toothpaste etc Kitchen washing soaps for dishes Soaps for laundry among others. Pental limited classifies Plant and equipment, Goodwill, Deferred tax assets, and other intangible assets as non-current assets. Cash and cash equivalents, inventories trade and other receivables and other financial assets are classified as the current assets. Trade and other payables, current tax payables, borrowings, short-term provisions and other financial liabilities are classified as current liabilities by Pental Limited. Deferred tax liabilities and long-term provisions are classified as the non-current liabilities. The equity structure of Pental Limited comprises of Issued capital, Accumulated losses, and reserves. Financial Information Strategy Pental Limited financial information strategy requires every subsidiary to record revenues using accrual accounting. This means the recording are done when sales take place or when a service is provided. Previously, subsidiaries used cash basis in recording revenues i.e. upon payment of a deposit. Financial System Assets, liabilities, and equity are captured by a system called MERLIN financial system. Pental Company uses the system for entering payments, invoicing, adjustments and interest, invoicing and writing off debts as stated by Miccolis, Hively and Merkley (2000) Risk Analysis This analysis is based on examination of the manuals, standards and policies that govern assets, liabilities and equity management, and from data gathered from subsidiaries financial system. The accountants’ will also be interviewed. The risks identified will then be evaluated with the probability of their occurrence and their effect to Pental’s activities. The table below (Table 1) reveals that the risks evaluated does not have an impact on Pental assets, liabilities and equity. Table 3: Matrix showing the relationship between risk and management of assets, liabilities and equity Impact Low Medium High High Invoicing problems Lack of sufficient controls Medium Unauthorized issuance of high debts Unauthorized or unjustified write offs Low Inefficient amortization of goodwill Inefficient depreciation of asset Unauthorized sale of assets Unauthorized withdrawal of cash from bank Not writing off uncollectible debts Assigning incorrect amounts for the provision of bad debts Probability Objectives and Scope The main aim of this audit is to evaluate Pental’s effective, fair and efficient use of assets, liabilities, and equity and minimizing the risk incurring losses. The audit objectives are to; Assess framework of controls with regard to management of assets, liabilities, and equity, and to Assess whether the company complies with applicable accounting standards, policies and regulations. Methodology The audit will combine the use of interview from relevant personnel, documented material and analysis of data as secondary sources in order to meet to meet the audit objectives. Interviews The interviews will the relevant accounting personnel from all subsidiaries will be conducted to evaluate current practices, whether the controls are in place, and the challenges encountered by the personnel in performing their duties. Documentation Review The audit will use the year 2014 and year 2015 reported statement of financial statements, annual reports, and the documents will be attached to this report for references. Data Analysis The audit conclusions of Pental representations on assertions will also be based on data analysis sourced from the financial system. The audit will not conduct the audit of files of Pental limited. The transactions involving the assertions will be downloaded from the systems and analysis be done with the assistance of computer software and programs on data analysis. Findings and Recommendation Debts Recovery Collection actions; The rules of Pental Limited stipulate that subsidiaries must pursue the receivables collection vigorously, (“Annual- Report”, 2015) The measures to collect receivables must be timely, cost effective and appropriate. However, the audit shows that Pental limited does not seem to strictly comply with the requirement. Generally, monthly accounts statements regarding debtors are generated and issued to the clients with unpaid balances with the company. The accounts statements are produced three months prior to the invoice date. The policy of Pental debt collection period is 90 days. However, after 90 days, the treatment of balances is treated differently from one accountant to another. In some cases, the debt collectors initiate a follow after the lapse collection period of 90 days while others have to contact the managers for the way forward. In offices, there is no clear mechanism on follow-up. The interviews revealed that some offices required a more detailed procedure on how to carry on debt collection after the lapse of 90 days. Issues such as the point at which collection agency can be used to collect the debt, the roles of managers and debt collectors should be clear on debt collection. This will give the right procedure for debt collection and follow-up. The audit reveals that there is an efficient method of follow-up by the subsidiaries. This increases the risk that the amounts owed will not be recovered but written off at some point in the accounting period. Recommendation The senior accountant should; Take the necessary actions in recovering or writing off debts that have more than 365 days, and Pass a guideline to be used by all subsidiary offices on debt collection and the responsibility of every personnel be well defined to enable a follow-up. The guideline should also contain the methods of collection to eliminate the confusion of who is to take charge when a debt is due for collection. The Guidelines on Writing off Bad Debts Wright and Berger (2011) stated that at times, some debts prove to be uncollectible due to the lapse of time of a reasonable time frame or other uncertain events such as the death of the debtor. In such a case, the accounting officer and the management decide to write off that debt and consequently remove it from the accounts receivables records. The write-offs must be approved the authority and signatures appended to the agreement decision as Kachelmeir, Majors and Williamson (2014) stated. In practice, Pental uses financial system to write off bad debts. The rule of recording a write off is the use of ‘adjustment’ function, (“Annual- Report”, 2015). This is the rule of passing a write off in financial systems of Pental Limited. However, accounts receivable can be written off by either creating a credit note or using another adjustment type of transaction. The audit required investigating whether the methods of write off follows the right procedure for approval through effective control. Using Adjustments in Writing Off of Bad Debts The financial system provides a control on the level of adjustments in Pental Limited, and limitation of the amount of adjustment allowed. The limits are based on the type of financial system use i.e. the clerk, sales and officer levels of employment. The uses are classified according to their involvement and level of employment in Pental Company. Access authorization is by the supervisor, the system administrator, head of the module and the regional coordinator. The table below (Table 2) shows the limits with respect to the level of employment. Table 2 Employees Access type Limit of adjustment Supervisors in accounting department Officer $1500 Accounting clerks Clerk $300 Direct sales representatives Sales Nil However, the workers can exceed this limit by recording several adjustments below the limit but the total amount will exceed the limited. Write off Using a Credit Note Credit note adjusts the value in the invoice as Kozloski and Messier (2011) concluded. It can either increase or reduce it the value. A credit note can be used to correct an error in the invoice, Bowlin (2011). The regulation of this access in Pental Limited is that only accounting clerks can access this. Contrary to adjustments, the credit notes need no authorization for their use. The audit reveals that there is no documentation of credit notes. The audit concludes that the write-off management and control is not sufficient. Therefore, the audit results do not confirm the authorization made before the write-off were recorded in the financial system. In conclusion lack of effective monitoring of risk and recording of write-offs increases the risk of not complying with accounting standards, policies and regulations as required by International Financial Recording Standards (IFRS), Bruynseel, Knechel and Willekens (2013) Recommendations The accountants from all subsidiaries should; Ensure they send the guidelines of writing off bad debts to the senior accountant for approval Regular monitoring of credit notes and ensuring bad debts to be written off are approved Suggest the level of authorization so that bad debt could be handled at a central point upon approval. Segregation of Duties It is Pental’s policy that every subsidiary sets a mechanism of internal controls for accounting for accounts related to assets, liabilities and equity, as well as the division of duties with regard to maintaining of accounting records, reconciliation of cash and bank balances, a collection of debts, granting of credits among others. The findings of the audit indicate that the duty segregation from one subsidiary to another varies. For example, in a given subsidiary, an employee entitled to handle deposits in the financial system and bank reconciliation, in another subsidiary, the same employee covers all issues relating to assets. The difference in methods of operation can be attributed to lack of communication, lack of resources and lack of departmental procedures from one subsidiary to another. Every subsidiary operates on its own procedure contrary to the Pental’s policies and regulations. In such circumstance, errors are expected to occur and detection would be difficult. In subsidiaries with the lack of enough resources for segregation of duties, other control measures can be used as Cohen, Krishnamoorthy and Wright (2008) suggested. . Revenue Appropriate Recording Generally, Accepted Accounting Principles requires income to be accounted for during the financial year it pertains as stated by Casterella, Jense and Knechel (2010). It requires to be recorded when it is earned but not the time of receipt. The audit process reveals that revenue from a customer referred to as important by the company is recorded at the time of deposit not when the transaction was initiated. The method implies that revenue for two months i.e. at the start and at the end of the fiscal year are non- accounted for and this violates the Generally Accepted Accounting Principles. This shows that the figures indicated at the financial statements will be affected by this fault in internal control. Conclusion The main importance of this audit report is to ensure the financial assertions indicated in the financial statements are managed effectively, efficiently and fairly and the degree of Pental’s compliance of accounting standards, policies and regulations. The major observations indicate that Pental Group Limited assets, liabilities and equity comply with the regulations required. However, the management of some assets such as accounts receivable has certain anomalies. Therefore, the management should take steps in order to improve its efficiency in handling assertions. References Armour, M. “Internal Control: Governance Framework and Business Risk Assessment at Reed Elsevier,” Auditing: A Journal of Practice and Theory, Supplement 2000, pp. 76- 81. Audrey A. Gramling, Edward F. O'Donnell and Scott D. Vandervelde. (2013) An Experimental Examination of Factors That Influence Auditor Assessments of a Deficiency in Internal Control over Financial Reporting. 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(2011) Strategic Analysis and Auditor Risk Judgments. AUDITING: A Journal of Practice & Theory 30:4, 149-171. Steven J. Kachelmeier, Tracie Majors and Michael G. Williamson. (2014) Does Intent Modify Risk-Based Auditing?. The Accounting Review 89:6, 2181-2201. William F. Wright and Leslie Berger. (2011) Fraudulent Management Explanations and the Impact of Alternative Presentations of Client Business Evidence. AUDITING: A Journal of Practice & Theory 30:2, 153-171. http://www.asx.com.au/asx/research/listedCompanies.do http://www.pental.com.au/images/site/pental/annual-reports/Pental_2015_Annual_Report.pdf Read More