Internal Auditing

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Requirement 3: You are required to present the results of your evaluation of PGGs internal control systems to Mr Santa, General Manager of PGG.

On the basis of work carried out on the procurements, sales and maintenance cycles of PGG Ltd., I can conclude that:

- There are three business lines in the company to conduct its normal business services. The sales are through retail outlays in large cities and other sales representatives while maintaining service carries out in another department.

- Regulations are shown in normal activities. It is clear that the works done by the company are according to policies and procedures.

- There are checks designed through recording data, maintaining inventory, keeping deposit and reconciliation.

Risks also exist in operation of PGG and may cause consequences to the company:

- Policies and procedures are not well designed and have flaws. The checking and supervision procedures cannot function well as it is not done by separate and independent employees. The risk of mistakes remained high.

- Problems of segregation of duties appear in most of the company’s activities: purchasing, selling and maintaining. Employees or departments are responsible for multiple jobs. One involved in sales should not be involved in purchasing, and one in the warehousing daily custody ought not to take charge of checking warehouse record.

- Too much relying on outsourcing firms and transportation firm. The company lacks control and supervision over those firms and the accounts provided and the amount of payments collected may not be fair and accuracy.

In general, the risks in PGG are not negligible and can even cause fraud and other agency problems. The daily operation activities can be badly influence and bring losses to the company. Those flaws need to be improved and are not good for the acquisition.

Section B

Requirement 1: Explain why receivables accounts and inventory accounts may significantly impact audit risk, in general and more particularly in the case of Picus Ltd.

In a company’s financial position, the receivables accounts and inventory accounts are in assets, which means these two accounts increases the value of the company and both of them are in current assets. However, inventory and receivables are not real cash, if there are two many inventory and receivables, the company’s liquidity will be influenced in a bad way. When the company’s liquidity is influenced, auditors need to consider inherent risk and even going concern problems. In the case of Picus Ltd., the receivables amount occupies about 23.66% of the total revenue amount and the total amount of inventory in Picus is huge and even larger than non-current assets. When the company cannot generate its inventory into revenue or cash, the company may face liquidity problems and as a result, inherent risk will increase. Auditors need to make procedures to change plan and evaluate the risk.

Since the two accounts can cause some problems, companies need to monitor and control the amounts. In Picus Ltd., the company uses invoice discounting to encourage early payments but on procedures to control the amount of goods in inventory is disclosed. However, the receivable amount is high and this increases the control risk. Besides, some of the receivables may be doubtful debt, so appropriate allowance is needed. The calculation and control over the allowance may have problems and increase control risk.

Also, it is difficult for auditors to detect any misstatements in the two accounts. Some companies will report a higher amount of inventories and receivables to get a better financial position. In Picus, the inventory amount is huge and is impossible for auditors to exam every good. Auditors have to use sampling and the increase in sampling risk will increase the detection risks. So as to receivables, auditors has to choose some samples to exam and there is a chance that some amounts should not be included in this year’s report or there is a misstatement and auditors may ignore them due to sampling risks. The detection risk increases too.

Requirement 2: Make suggestions for audit procedures (list of audit tasks) for the audit cycle: inventories.

1. Inquire management on how does the control of inventory works.

2. Check the authorization policy. Make sure that recording items into system, maintaining inventory and counting inventory amount are done by independent employees.

3. Check the process used to calculate current stock value. Discuss does the method used appropriate, whether there are any changes on specific product or accounting policies used and their effects on inventory valuation.

4. Check whether the changes and adjustments are authorized and appropriate.

5. To ensure that the inventory system functioned well.

6. Check that whether there are procedures to prevent inventories wrongly send to customers or wrongly recorded by employees.

7. Observe the company’s physical inventory conditions.

8. Test the accuracy of the company’s physical inventory summery.

9. Trace the item recorded during the observation to the summery.

10. Make sampling check on inventories systems to ensure that the items checked are exist, valued accurately and are in correct locations.

11. Trace the quantities and value of inventory in other remote locations that are used as warehouses.

12. Check the write offs of excess, scrap or obsolete stocks and make sure that they are authorized.

13. Reconcile physical summery of inventory to the general ledger account balance. Investigate in some major items.

Requirement 3: Make suggestions for audit objectives for the audit cycle: trade receivables.

1. Ensure the classification and definitions of account receivables are correct.

2. Ensure that account receivables include all amounts that owed to company in the balance sheet.

3. Ensure all invoices to customers