Ratios 20X5 20X4
Operating profit margin 1.81% 4.6%
Payables payment period 64 Days 81 Days
Audit Risk Auditor’s
Response
Receivables:
Magpie Co has a number of corporate customers Discuss with the
who buy goods on 90day credit terms and the level of management regarding
receivables which are overdue for payment has the accounting treating of
increased from the prior year. However, the finance director allowance for receivables
does not intend to make any further allowance for receivables to confirm whether the
as overdue payments are becoming common in the industry. allowance is increased as
In addition, receivables collection period has increased from 101 days to some of the receivables
149 Days. are irrecoverable.
There is a risk that receivables from some customers may be recoverable. Review post year cash
Therefore, an allowance of receivables should be recognised. receipts to confirm if the
receivables balances have
There is also another risk that the allowance or receivables may not be been properly cleared
recognised. after the year end.
Therefore, receivables may be overstated and allowance for receivables Obtain external
understated. confirmation from a
sample of receivables.
Payables payment:
The payables ledger clerk has carried out supplier statement
reconciliations during the year and in a number of instances the supplier
statements have shown a balance owing by the
company which is higher than the balance on the
list of individual supplier balances.
These differences have been
included as reconciling items on the supplier statement reconciliations by
payables ledger clerk, but no further work
has been performed on these differences.
In addition, Payables payment period has decreased
from 80 days to 64 days.
There is a risk that some of the inventories
purchased at the year-end may not be recorded
in the company accounts and therefore cut off is incorrect.
Therefore, trade payables and cost the sales being understated.
Gross Profit: Compare the current year
direct expense and
The gross profit margin of the company has increased from 44% to 50% operating expenses with
and the operating profit margin have decreased from 4.6% to 1.8%. prior year data and
investigate for any
There is a risk that the direct expense can be misclassified as indirect significant variances.
expense or direct expense may be omitted.
Therefore, the cost of sales will be understated and overhead expenses will
be overstated.
