Introduction
GPSA Limited which operates its business mostly in research and development of technologies relating to medical equipment manufacture and distribution of medical equipment; investment of surplus funds; and investment in the property market. Along with Morgan Fertilizers, GPSA is one of MYH’s most significant and longstanding clients which was incorporated in 1992 and has operated successfully and profitably since that date. As one of the long-lasting and significant client of at Miller Yates Howarth (MYH), so as a manager of MYH it comes to me do the audit and identify the most relevant factors for reducing the audit risk and internal control strength of GSPA Limited. Wide evaluation of the internal control and the ratios presented in the financial statements and other relevant information provided by my partner John Richards the procedures for are operated thoroughly.
Question 1
A. Accounts
Analysis
Audit Risk
Audit Step to reduce risk
Accounts receivable
Accounts receivable is one of the core factors whenever auditing activities are put on action. GPSA Limited has recorded days in accounts receivable 83.07 days in 2017 which is 23.04 more than the year 2016 and around 30 days more than 2015 which indicates things are going against the company’s operational efficiency in collecting receivables which indicates higher number of days the customer invoice is outstanding before it is collected.
Principal activities of GPSA research and development of technologies relating to medical equipment, manufacture and allocation of medical equipment, investment of surplus funds and investment in the property market makes it more complex to determine the accounts receivable of the company. Where material misstatement is very prone to occur in Accounts receivable.
To ensure this auditing risk reduction of accounts receivable analysis should be more neutral where I will assume neither the information are wholly correct or wrong and proper professional justification and auditing experience will be deployed . Accounts receivable check will be step by step through communicating with some of the sample parties of the firm to reduce the possibility of material misstatement and therefore the audit risk.
• Current investments
Current ratio and quick or acid test ratio shows higher than that of 2016 and 2015 which indicates lower current investment than the previous years which is the result of either from a downturn in commodity prices or fierce competition from overseas competitors which offers less scope for investing in current asset to GPSA Limited.
GSPA Limited basically research for designing and developing technologies related to medical equipment, manufacture and distribution and other related activities which is complex for auditors to assess the accurate result and financial outcome of the companies activity on current investment.
From the information and ratio analysis of GSPA Limited it becomes clear that with the complex activities and no internal audit available for the analysis and evaluation of internal monitoring and increasing the efficiency of accounting information it is mandatory to have internal audit procedure. For reducing the audit risk internal audit can play a vital role.
Property assets
Return on asset and equity shows lower ratios than the year 2015 and 2016 which indicates that GPSA Limited has increased its investment more in property assets than previous years. Return on asset represents approximately 7% and return on equity nearly 9% less than the previous years which indicates proportionately high investment on property asset.
Auditors analyse information from financial statement on sample basis which can be risky to assess relevant information due to the nature of GSPA Limited’s business activities. There is complication of recognizing the property as it is more complex due to the business operation type.
Representative sample selection
Auditing activities are operated on sample basis as there are time constraints in issuing the audited financial statement. As a manager in the audit division at Miller Yates Howarth (MYH) one of the famous auditing firms to reduce audit risk to a minimum level representative sample selection is most important issue to reduce the property risk issue.
Intangible assets
Intangible asset comprises fame, brand, goodwill, patent, trademark and others which helps organization to operate more successfully. With lower current investment, higher days in receivables, inventory, lower margin compared to 2015 and 2016 and fierce competition from overseas have negatively affected the intangible maintenance of GPSA Limited.
As mentioned earlier, auditors run their auditing activity based on the sample. Principal activities of GPSA research and development of technologies relating to medical equipment, manufacture and allocation of medical equipment, investment of surplus funds and investment in the property market are all complicated factors which can be error prone. In analysing Accounts receivable, Current investments
To reduce intangible asset determining problem internal audit, organizational reptaion and previous research and presentation of intangible asset should be reviewed carefully.
Research and development capitalization
In February 2016, more appreciated research for a new laser surgery device was commenced which brought a significant costs though. It seems unsuccessful as in April 2017 a competitor announced that it had successfully developed and patented a similar device the loaned amount of 5m seems to create huge burden to GPSA Limited.
GSPA Limited doesn’t have internal audit and hasn’t developed the internal control system since the previous year which can lead to a failure in detecting misstatement and correcting them due to the change in competitive market and several research, investment and other major activity financing and failure in research project and capitalization becomes complex
GSPA Limited is one of MYH’s most significant and longstanding clients so it is necessary to prepare most accountable and efficient audit report. To ensure this auditing should be more neutral where I will assume neither the information are wholly correct or wrong and proper professional justification and auditing experience will be deployed to reduce the possibility of material misstatement and therefore the audit risk
B.
GSPA Limited was incorporated in 1992 and has operated successfully and profitably since that date. With the expansion of its market in recent year and increased competitiveness in the market from overseas there are several risks an operational inefficiency have been identified through the analysis of ratios and additional information given by the internal control. Those are reported below with the reference of the ratios from unaudited financial statements:
Ratio
Analysis and comparison
Return on equity %
Return on equity indicates profitability to total equity of the firm. GSPA has decreasing return on equity is 11% less which is threatening to the firms reputation in mar
Return on total assets %
Return on asset also shows lower percentage than previous years. Which indicates return from per asset value is decreasing which is by 8% in 2016
Gross margin %
Somehow GSPA has high gross margin compared to the previous years. The reason behind this may be less material and research cost.
Net profit margin %
Net profit margin is 10% less than previous years. Gross margin may show higher but the periodic cost has significant increase which downs net profit margin.
Times interest earned
Times interest earned indicates the amount that is generated compared to interest. This is also decreasing for GSPA which is not good.
Days in inventory
Days inventory represents the time inventory remains unsold. It shows 33 days increase of days inventory which represents decrease in sales frequency.
Days in accounts receivable
It represents conversion of receivables to cash. The less it is the efficient the company’s cash management. It also represents negative performance of the firm.
Current ratio : 1
Current ratio indicates the ability to settle current debts. It is higher than previous years. This is a good indication for GSPA.
Quick asset ratio : 1
Quick asset ratio indicates the settlement of instant demand for settling debt. This stands to .8 which should be at least 1.
Debt to equity ratio : 1
Debt to equity ratio represents the amounts of debt firm is using compared to equity. This stands to 1.11 which was lower in previous years. This also indicates a risk for GSPA.