This essay seeks to examine five areas of heightened audit risk relating to the audit of the Havelock Company under study.
As a point of departure, the management commentary on credit and liquidity risks indicates existence of unsound control systems on revenues and the general expenditure of the company. This study will focus on the profitability, liquidity, financial leverage, working capital and valuation ratios. These instruments are essentially the reflection of the company’s financial position in terms of control system management. This follows that. analytical examination of the ratios will play a fundamental role in exhibiting the potential risks areas of Havelock Company (RODGERS, 2007).
These ratios include Gross profit margin, Operating margin and net profit margin. These ratios aid in investigating profitability status of an organization through comparison of the income aspects with sales. This follows that, upon examining and comparing Havelock Company’s profitability ratios of 2011 and 2012, auditing assumptions will be made consequently, identifying the possible risk audit areas (VOGEL, 2007).
The gross margin profit implies that the amount of sales revenue which remains after the cost of goods. The ratios above indicate the in 2011 the sales revenue left was significantly low compared to 2013. There is a shift from -0.36 to 0.07. This tells the auditors that the significant change should be widely investigated, particularly on the element of sales. The significant rate of the sales revenue remained might be investigated based on sale of goods of other brands from outside, hence creating a backlog of the company’s goods. This is a potential audit area for Havelock Company, which might be attributed to issues of disclosure (VOGEL, 2007).
These ratios aid in establishing the company’s capacity to meet its short-term debts. The current ratio for Havelock went down from 5.43 in 2011 to 2.88 in 2012.