AJ Lucas Group Limited is one of the leading construction, engineering, and mining companies in Australia. The company’s increased success can be attributed to its successful expansion strategies that has expanded the company’s presence in the European market. A look through the company’s financial statements for the period ended 2016 reveals some concerns that should be addressed. The first concern is related to the accounts payable. Although there was a small decline in the accounts payable, the payable level was not good for the sustainability of the business. (AJ Lucas Group Limited, 26). Another concern is on the accounts receivable. Compared with the year 2015, the company’s accounts receivable declined by over $1 million. Continued decline in the company’s accounts receivable could frustrate the management’s efforts of promoting revenues from sales (Johnson and Neter, 272).
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The third concern for the company is related to the inventories account. Although there was a small increase in inventory in 2016, the company recorded a decrease in total revenues from sales. This could mean that there is a communication problem between the procurement department and the sales department. The increased stagnation of inventory could also mean that the marketing department is not doing enough to promote the company’s products. The fourth concern is related to the company’s cash and cash equivalents account. Cash levels declined sharply in 2016 from $15.955 million in 2015 to $6.866 in 2016 (AJ Lucas Group Limited, 27). The sharp decrease in cash could mean that the management has a cash flow management problem. The decrease in cash levels could also mean that there are cash loopholes that should be investigated. The firth concern is related to sales and collection cycle account. The increasing purchases and diminishing sales could mean that the management is having a problem managing inventory (Johnson and Neter, 274). To gain financial stability, increases in purchases should be supported by subsequent increases in sales.
Preliminary Audit Plan and Audit Procedures
Accounts of Concern
Audit Procedures
Check List
Accounts Payable
Check whether ordered materials were delivered in the agreed amounts and dates.
Examine payment receipts to make sure that amounts paid were correct and there were no errors in quotations.
Carry out reconciliation procedures to check whether ledger transactions in the accounts payable are in unison with the figures recorded in the general ledger (Gay and Simnett, 397).
Accounts Receivable
Check whether the summary figures included in the accounts receivable report are also reflected in the general ledger.
Examine invoices included in the accounts receivable report to make sure that they are correctly billed (Gay and Simnett, 398).
Inventory Account
Conduct a cut-off analysis to make sure that items included under extraneous inventory are excluded when counting the inventory physically.
Carry out a physical inspection of the inventory to make sure that all items are correctly identified by the inventory department.
Carry out a reconciliation of the inventory count with the summary values included in the general ledger.
Cash and Cash Equivalents Account
Use confirmation to directly verify balances in bank accounts.
Apply reconciliation testing to reconcile cash balances in the bank balance and the balance in the book.
Use classification in finding evidence for the correct classification of cash and other cash equivalents.
Sales and Collection Cycle Account
Apply test of controls to ensure that all sales invoices have serial numbers and that all invoices are linked to customer statements.
Apply transaction testing to check whether the amount of sales in the financial statements are correct. Verifying individual transactions will help in promoting accuracy.
Review purchases order to ensure that there are no incidences of fraud, especially regarding write-offs.
Gay, Grant E., and Roger Simnett. Auditing and assurance services in Australia. McGraw-Hill Book Company, 2005.
Johnson, Johnny R., Robert A. Leitch, and John Neter. “Characteristics of errors in accounts receivable and inventory audits.” Accounting Review (1981): 270-293.
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