macro project

Preliminary Inherent Risk Assessment

The company’s accumulation of high accounts receivables- The company maintains a system that leads to increased debtors whom some of them may not be in position to meet their debts. It’s the major reason as to why the company has an increased provision for bad debts. Creditworthiness of new customers’ approval is authorized by one person and the criteria used is not known to any other person. It’s not appropriate that only one individual does this as she may deny rather eligible debtors for those who would find it hard to pay their debts in time. This is also the reason as to why the accounts receivables collections is very poor.

Failure to increase the floor area: The Company has been piling a greater number of inventories and the increase would require increase in the floor area. The items returned may have been tampered with at the warehouse due to congestions. There is a high possibility of sending the clients wrong amounts of inventories as the warehouse clerk’s copy of the sales order is usually discarded. Here, they aren’t held accountable for any materiality. The warehouse’s system is generally not organized in a good manner and record keeping is very poor.

The management’s cash receipts endorsement to different departments- Issues dealing with cash are highly critical and they should be specifically handled by the cashier and not the receptionist, then to the secretary-treasurer and then the accountant. This is the work that should be done by the accounting department only and it has nothing to do with the receptionist and the secretary-treasurer. This is very risky especially when it’s clearly noticed that cash has declined significantly in the current period.

The company’s overreliance on computer software for all transactions. The use of such systems requires greater audit evidence as such systems can be highly manipulated at any time. It’s not a guarantee that they are always correct as they require regular upgrades and are easily vulnerable to risks. The software is only accessible to the selected few individuals. Several different software is used instead of using a simple software that multitasks all the various processes. This will guarantee easy retrieval.

Preliminary Analytical Procedures

Days Inventory Increase –Days inventory increased by 19 days in 2015Prelim. This is a large one-year increase and increases the risk of obsolete inventory. We should give some additional attention to valuing the inventory under the lower of cost of market rule.

Accounts Receivable Increase – The accounts receivables had received a percent increase of 41.11 increase which is very high. Though the days cash receivables had increased by 7%, the increase shows that the company is not collecting debt more effectively and it’s a major contributor to the write-offs and increased bad debts.

Accounts Payable Increase- There is a very great increase in the day’s cash payables and accrued liabilities from 23.0 to 50.8 days. This shows that the company’s credit obligation policies have become a bit more lenient and the accumulation of much credit and it simply means that the company is not in a good position to meet its obligations as and when they are due.

Decrease in cash & cash equivalents- Cash had decreased greatly by 50.71% and the net cash conversion cycle had decreased from 69 to 66.8. The decrease in cash is very risky given the fact that cash is the most liquid asset of the firm which is very essential in the short-term operating activities.

Increase in payroll taxes and other expenses- The increase in payroll taxes payable by 104.55% is an indication that the no. of employees has increased greatly and it’s very essential to determine whether the company is cost effective or not.

Preliminary Materiality

Balance Sheet – The cash decreased by a very high percentage of 50.71% which means cash flows aren’t managed well and the inflows are not used well and their high misstatements involving cash. There’s a very high increase in the account’s receivables by 41.11% and the inventories by 63.50%. There is a very high increase which call as the company’s accounts receivable turnover is very bad. The inventories are also increasing by a very high percentage which is not at an acceptable level. The percentage of increase in accumulated depreciation is also high, 33.33% while that on plant is at 9% which is an acceptable level. Depreciation is used in determining the operating cash flows and its misstatement can be due to a wrong method used. They should preferably use the straight-line method throughout. Another item that also increased significantly is the accounts payables by an abnormal increase of 167.36%. The rate at which the company pays its debt is thus extremely very poor. The payroll taxes had also increased very highly by 104.55% which is extremely very high, while the income taxes reduced greatly by 86.35%. The income had increased and so could the income taxes payable. These two amounts pose greater risks and they should have followed a similar trend and are therefore not within acceptable levels.

Income statement – In most cases, companies do not include items such as the sales discounts, sales returns, and bad debt expenses in their income statements. These are items that are highly uncertain and may not be correctly reported. Therefore, having sales returns increase by 52.5% is not so a good picture. The payroll tax expense and the payroll tax payable doesn’t compare well. In the balance sheet there was an increase of 104.5% while the paid expense has increased slightly by 15%. The petty cash book items reported in the income are also not supposed to be reported separately but as cash & cash equivalents balances. If the balances in the petty cashbook do not match, then there’s a high risk of materiality. The company is also not paying income tax liability as and when it’s due, but the paid amounts had increased by 49.35%. The interest coverage is also very poor as the interest had increased by 32%. The materiality level is generally very high.

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