Analytical Procedures? Why Common-Size Financial Statement?

Analytical procedures are an important part of the audit process and  it’s consist of evaluations of financial information made by auditor and a study of plausible relationships among both financial and nonfinancial data. Analytical procedures range from simple comparisons to the use of complex models involving many relationships and elements of data. For auditor when planning and evaluating the analytical procedure, they should understand financial relationships through the company’s client and generally requires knowledge of the client and the industry/industries in which the client operates.

Analytical procedures purposes, there are:

·        Comparable of financial information within the prior periods to know whether it’s improved or not.

·        Anticipated results like for example, budgets, or forecasts including extrapolations from interim or annual data

·        Relationships among elements of financial information within the period

·        Information regarding the industry in which the client operates, like or example, gross margin information

·        Relationships of financial information with relevant nonfinancial information

In order to meet the purpose of analytical procedures, it’s necessary for the auditor to make calculations and identify comparison of the financial information within the client’s company that being audited. And the comparison itself can be made by these five ways:

•         Absolute Data Comparisons

•         Common-size Financial Statements

•         Ratio Analysis

•         Trend Analysis

•         Compare Financial Information with Nonfinancial Information

Now, I’m going to just focus on the 2^nd point whicih is the common-size financial statements.

Common-size financial statement is a  financial statement which is displayed the all items as a form of percentages or a common base figure. This financial statement allows the auditor to make a comparable between companies or between time periods of a company. The values on the common size statement are expressed as percentages of a statement component, such as revenue.

This is the example of Common-size Financial Statement

References:

-         https://www.stock-analysis-on.net/NYSE/Company/Nike-Inc

-         http://www.investopedia.com/terms/c/commonsizefinancialstatement.asp

-         http://www.netmba.com/finance/statements/common-size/

Created by:

Lalita Nadya Amalia

C1L014O14

International Accounting

Jenderal Soedirman University

Internal Control on Zara Resources Inc

Zara Resources Inc is a mineral’s company focusing its main effort on its forge lack gold project in Ontario, Canada.

Based on our group discussion, we think that Zara Resources Inc is quite good in implementing the internal control, it’s proved by the financial report which has no fraud detection and misstatement. Moreover,  the other evidence is this company use the accounting policy which is IFRS in making the estimation and assumption on reported their amounts of assets, liabilities, revenue, and expenses for the period. This company is established in 2012, and this audit report is produced in 2014, so it means that the company is basically good since its established.

This is group assignment, and my group consist of:

·         Lalita Nadya  A.            C1L014014 (this is me)

·         Junika Pentarosa         C1L014025

·         Lintang Maharani        C1L014028

International Accounting

Jenderal Soedirman University

COSO Internal Control-Integrated Framework

COSO Cube Integrated Framework (Updated)

What is COSO?

COSO, the Committee of Sponsoring Organizations of the Treadway Commission, is a private sector initiative established in 1985 by five financial professional associations. COSO’s goal is to improve the quality of financial reporting  through a focus on corporate governance,  ethical practices, and internal control. COSO’s Internal Control—Integrated Framework (Framework) enables organizations to effectively and efficiently develop systems of internal control that adapt to changing business and operating environments, mitigate risks to acceptable levels, and support sound decision making and governance of the organization.

Definition of Internal Control According to COSO

A process, effected by an entity's  board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives. The categories of internal control, there are:

•           Effectiveness and efficiency of operations
•           Reliability of financial reporting
•           Compliance with applicable laws and regulations

Components of Internal Control

Internal control consist of eight integrated components according to the updated COSO:

1.     Internal Environment

      It’s made the guidelines for how risk is viewed and addressed by     people on an entity, including risk philosophy and risk appetite,       their ethical values, and the environment in which they do the        work activities.

2.     Objective – Setting

It must exist before management can identify the potential events affecting their good results, so that entity must ensure that management has in place a process to set objectives and that the chosen objectives support and align with the mission of the entity itself or not and are consistent with its risk appetite.

3.     Event Identification

The internal control should identify the internal and external events which is affecting the good result of an entity’s objectives and also distinguish between risks and opportunities.

4.     Risk Assesment

It involves a dynamic and iterative process for identifying and assessing risks to the achievement of objectives. Risks to the achievement of these objectives from across the entity are considered relative to established risk tolerances. Thus, risk assessment forms the basis for determining how risks will be managed.

5.     Risk Response

Management of the entity should selects risk responses in order to avoiding, accepting, reducing or sharing risk which aligned with the entity’s risk tolerance and risk apetite.

6.     Control Activities

Is the actions established through policies and procedures that help ensure that management’s directives to mitigate risks to the achievement of objectives are carried out.

7.     Information and Communication

     Information is necessary for the entity to carry out internal control responsibilities to support the achievement of its objectives. Communication is the continual, iterative process of providing, sharing, and obtaining necessary information.

8.   Monitoring

    Ongoing evaluations, separate evaluations, or some combination of the two are used to ascertain whether each of the eight components of internal control, including controls to effect the principles within each component, is present and functioning.

References:

-          http://info.knowledgeleader.com/bid/163293/what-is-the-coso-enterprise-risk-management-framework

-          https://www.protiviti.com/sites/default/files/united_states/insights/updated-coso-internal-control-framework-faqs-third-edition-protiviti.pdf

-          https://www.coso.org/Documents/COSO-FAQs-May-2013-branded.pdf

Created by:

Lalita Nadya Amalia

C1L014014

International Accounting

Jenderal Soedirman University

Internal Control on Audit Process

• Definition of Internal Control

In the Accounting Theory, internal control can be defined as a process, which is influenced by human resources and information technology systems, which are designed to assist organizations in achieving a particular goal or objective.

In short, the definition of internal control is the way of human resources who helped by information technology to make sure that the organization or entity is running based on the goal that will be achieved by the organization itself and also to detect the fraud that might happen so that they can minimize it.

• The Purpose of Internal Control

To ensure the management of organization or entity to ensure that:

1. The goals set will be achieved.

2. The financial statements produced by the organization can be trusted

3. The oganization activities is running in accordance with the applicable laws and regulations.

4.  Prevent loss or waste processing resources by the organization.

5. Provide information on how to assess the performance of the company and the management company as well as provide information that will be used as a guide in planning.

• Why Internal Control is Important in Auditing Process?

In my opinion, internal control is important in the auditing process because to audit an entity, at first the auditor must know  the internal conditions itself in that entity, whether the management control is  good, monitoring among the members of is running well, whether the company has been carrying out its activities in accordance of laws and regulation which is existing or not, or the financial statements that produced absolutely true which is no miss calculation or fraud, and etc. To know the information of intern conditions of the entity that being audited, the auditor may know it by internal control of the entity itself. If the entity's internal control is good, then the work result and its financial statements can be justified. However, if the internal control of the entity is not good, then the auditor must do the extra work to find for evidence, in case of that entity have been operated out of the control, laws, and regulations. Internal control itself can help the auditor to obtain information that will be used as a planning guide in the assessment that will be given to shareholders. In addition, it is impractical for the auditor to perform auditing in whole or in detail for almost all of thr entity’s transactions in a limited time and cost.

• How to Test the Internal Control of an Entity?

To test whether the internal control in an entity is  running well or not, the entity should make a restrictions for the size of what things  will be controlled or in other words, entity must have an SOP (standard operating procedures) in carrying out their work activities. For example, if the entity want to control the management members in their attendance, the entity must prepare the tools absence and make a limit of how many times that  members can do absence within a year. Another example, in making a product, an entity must have a limit to how much resources will be used in making the product itself so that it can be clearly measured and minimize loss of resoures.

References:
- https://pcaobus.org/Standards/Auditing/pages/auditing_standard_5.aspx
- https://uiowa.edu/audit/what-are-internal-controls

Created by:
Lalita Nadya Amalia
C1L014014
International Accounting
Jenderal Soedirman University