Performance, Governance and Internal Control Procedures
- Prepare a vertical analysis of the income statement and balance sheet of Buzzard Ltd based on revenue and net assets respectively, for 2009 and 2010.
Vertical analysis of the Income statement based on revenue:
|for the year ended 31 December 2010|
|Cost of sales||100444||86.92%||80632||84.20%|
|Profit for the year from continuing operations||3||1170||1.01%||2944||3.07%|
|Income tax expense||–||–|
|Profit for the year||1170||1.01%||2944||3.07%|
Vertical analysis of the balance sheet based on net assets:
|as at 31 December 2010|
|Total non-current assets||42,200||123.34%||29522||89.34%|
|Trade and other receivables||10||18,202||53.20%||16634||50.34%|
|Cash and cash equivalents||4||0.01%||12||0.04%|
|Total current assets||23,908||69.88%||20790||62.92%|
|Borrowings and finance leases||12||6,000||17.54%||–|
|Accruals and deferred income||14||1,264||3.69%||1380||4.18%|
|Total non-current liabilities||8,620||25.19%||2888||8.74%|
- Prepare a horizontal analysis of the income statement, balance sheet, and the segmental analysis from note 1 to the accounts, using 2009 as base 100.
Horizontal analysis of the income statement:
|for the year ended 31 December 2010|
|Notes||2010||2009||Increase or Decrease|
|Cost of sales||100444||80632||19812||24.57%|
|Profit for the year from continuing operations||3||1170||2944||-1774||-60.26%|
|Income tax expense||–||–|
|Profit for the year||1170||2944||-1774||-60.26%|
Horizontal analysis of the balance sheet:
|as at 31 December 2010|
|Notes||2010||2009||Increase or Decrease|
|Total non-current assets||42,200||29522||12678||42.94%|
|Trade and other receivables||10||18,202||16634||1568||9.43%|
|Cash and cash equivalents||4||12||-8||-66.67%|
|Total current assets||23,908||20790||3118||15.00%|
|Borrowings and finance leases||12||6,000||–|
|Accruals and deferred income||14||1,264||1380||-116||-8.41%|
|Total non-current liabilities||8,620||2888||5732||198.48%|
Horizontal analysis of the Segmental analysis:
|Revenue||Increase or Decrease||Profit before tax||Increase or Decrease|
|Class of business|
|Rest of Europe||5290||3746||1544||41.22%|
iii. Prepare a value added statement for the income statement for 2009 and 2010 and a vertical analysis of the value added statement for both years.
Value added statement for the income statement:
|Value added statement|
|Add: Income from other services||314||76|
|Less: Cost of Bought–in-goods and services||100444||80632|
|Gross Value Added (GVA)||15424||15210|
|Net Value Added (NVA)||7642||10468|
Vertical analysis of the value added statement:
|Vertical analysis of Value added statement|
|Add: Income from other services||314||0.27%||76||0.08%|
|Less: Cost of Bought–in-goods and services||100444||86.92%||80632||84.20%|
|Gross Value Added (GVA)||15424||13.35%||15210||15.88%|
|Net Value Added (NVA)||7642||6.61%||10468||10.93%|
- Prepare a report on the financial performance and the financial position of Buzzard Ltd that makes extensive use of the analyses that have been prepared in (i), (ii), and (iii) above. In your report, you must interpret and consider the organisations practices with respect to complying with corporate governance requirements, organisational policy, and financial delegations and accountabilities. Describe how the organisation meets policy and relevant financial legislation
Based on vertical analysis of income statement, it can be interpreted that financial performance of the firm declined from year 2009 to 2010 as there is a decline trend in gross profit, operating profit, and profit for the year after tax in respect to the sales. The reason is the increase in cost of sales from 84.20% to 86.92% based on sales. From the vertical analysis of balance sheet, it can be interpreted that there is an increase in current and fixed assets from year 2009 to 2010 in respect to the net assets (Brigham and Ehrhardt, 2013). Reason is that the firm purchased more intangible assets and inventories. In addition, there is an increase in current and non-current liabilities but not as much as assets that contributed to the increase in net assets. It allowed the firm to make additional investments and leave excess profits in the bank account of the firm rather than calling a dividend reflecting from increase in retained earnings (Gigler et al., 2014).
On the basis of the horizontal analysis, it can be determined that there is an increase in revenue from year 2009 to 2010 but due to high increase in cost of sales and operating expenses like distribution costs and administrative costs, company faced a significant decline in gross profit, operating profit, net profit for the year. In addition, there is also an increase in assets and liabilities with net assets from year 2009 to 2010 showing improving ability of the firm to meet its current and non-current obligations (Gigler et al., 2014). There is no increase in share capital but retained earnings increased during this period allowing the firm to expand its business and retain higher profits in its accounts. On the other hand, there is a significant increase in non-current liabilities up to 198% and in tangible assets up to 42% showing need to adopt control measures.
From segmental analysis, it can be determined that the firm’s performance in terms of revenues increased in automotive segment by 20.66% from 2009 to 2010. In addition, the firm performed in all areas including local, rest of Europe and Japan. However, it highly well performed in Rest of Europe as compared to other geographical areas. Based on value added statement and its vertical analysis, it can be stated that the difference between sales and cost of sales gave the value added by the organization. The firm distributed this value added to employee benefits, interest of loans and retained earnings for expansion of the current business and depreciation amount (Weygandt et al., 2015).
On the basis of this, it can be stated that organization’s practices with respect to complying with corporate governance requirements, organisational policy, and financial delegations and accountabilities cannot be said effective. It does not provide dividends to its shareholders that may raise concerns for them for further investment. Some of investors like to get regular dividends on investment but the firm does not provide dividend that does not show proper corporate governance. At the same time, no dividend policy may affect the firm’s returns due to low trust among the investors regarding the regular returns. In addition, cost sales and operational costs increased during 2009-2010 showing improper policy to control cost of operations and maximize the shareholders’ wealth. At the same time, the basis of accounting is the historical cost method used by the company. This method is not superior to fair value accounting method because fair value method reflects current situation in the market and provides users with more current financial information and visibility (Gigler et al., 2014). Under GAAP, straight line depreciation method is the most appropriate because it is the simplest to calculate and results in fewer errors with staying consistent. At the same time, accounting polices related to government grants, inventories and work in progress, foreign currencies and, revenues and warranties for products are according to the financing standards and legislation (Weil et al., 2013).
- Create one internal control procedure based on the financial performance of Buzzard. Develop a corresponding implementation timeline.
Internal control procedure:
Based on financial performance of Buzzard, it can be stated that there is no proper governance due to not providing dividends to the shareholders. In addition, costs of operations are getting higher that result in the decline in profits for the firm. The following internal control procedure can be followed by the firm:
|Internal control procedure||Timeline|
|Risk assessment||1 month|
|Control environment||2 months|
|Control activities||2 months|
|Information & communication||15 days|
Task 2 – Internal Control Procedures
According to Buzzard Group, the main objective of internal control procedure is to provide effectiveness in the operations as well as also provide efficiency. Additionally, the organization should also provide reliability in the financial reporting for reducing the potential risk. In this, the organization also has the objective of compliance with applicable laws, rules, and regulations to control activate (Cheng et al., 2013). Buzzard Group is responsible to prepare the budget, define accounting policies, focus on government grand, show the revenue, provide warranty for products, etc. Additionally, in order to review the pertinent policies and procedure, Buzzard ltd records the accounting system to provide a satisfactory budget. The collection and deposit responsibilities are also taken by the management by the recording of cash receipts and entries of general & ledger. In the segregation of duties, Buzzard also monitors the investment market values and provides adequate performance for investment acquisition (Klamm et al., 2012). The company also includes custody procedure where negotiable and non- negotiable securities are owned as well as legal documentation for evidence. The accounting procedure of the company maintains the accounting records in the investment department as well as in accounting department.
Control with appropriate levels of personnel- The organizational control is based on the level of the personnel. For this, the personnel procedure and control of the company is properly authorizing, approving and documenting. The wages and salary, termination of any employee, payroll deduction, etc are also included in the personal control. Most of the time, it is seen that the supervisors take time for review and approval of the salary and wages. The control environment of Buzzard is helpful for the employee where they are managed by the supervisor (Appleyard et al., 2014). It has positive control environment that influences on the outcome of the company. But, this controlled environment is necessary for providing discipline and effective structure to the internal control. The control environment of Buzzard ltd also includes different factors like ethical values, integrity, the competence of people, etc. The transactions of the company are also tested to define that all the transactions are appropriate or not. The findings of the company are shared with the senior management to successfully provide their outcomes. Some recommendations are also provided to the senior management to resolve the issues that are facing the organization. This internal control procedure also helped to determine the weakness of Buzzard for this the organization has identified different corrective actions to timely provide solutions.
|1||In the week first, the budget and planning will be designed.|
|2||The significant transaction classes are documented by the use of the financial statement. For this, the transaction receipts will be collected|
|3||In this week, all the collected documents will be understood by the management to provide effective control system.|
|4||View and document sample transactions for the internal control|
|5||Define the results and change the document for risk assessment|
|6||Discuss outcome with the management and other superior to improve the performance|
It is recommended that the risk areas can be mitigate by the proper management of the financial documents. Additionally, strengthen and weakness areas of the company should also be indicated in the formal report to identify issues.
Appleyard, I., Lundeberg, T. and Robinson, N., (2014). Should systematic reviews assess the risk of bias from sham–placebo acupuncture control procedures?. European Journal of Integrative Medicine, 6(2), 234-243.
Brigham, E.F. and Ehrhardt, M.C. (2013). Financial management: Theory & practice. USA: Cengage Learning.
Cheng, M., Dhaliwal, D. and Zhang, Y., (2013). Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?. Journal of Accounting and Economics, 56(1), 1-18.
Gigler, F., Kanodia, C., Sapra, H. and Venugopalan, R. (2014). How Frequent Financial Reporting Can Cause Managerial Short‐Termism: An Analysis of the Costs and Benefits of Increasing Reporting Frequency. Journal of Accounting Research, 52(2). 357-387.
Klamm, B.K., Kobelsky, K.W. and Watson, M.W., (2012). Determinants of the persistence of internal control weaknesses. Accounting Horizons, 26(2), 307-333.
Weil, R.L., Schipper, K. and Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. USA: Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E (2015). Financial & Managerial Accounting. USA: John Wiley & Sons.
- BUDGETS AND PLANNING
|A) SEGREGATION OF DUTIES|
1) Are responsibilities for collection and deposit preparation functions adequately segregated from those for recording cash receipts and general ledger entries?
2) Are responsibilities for cash receipts functions adequately segregated from those for cash disbursements?
3) Are responsibilities for disbursement preparation and disbursement approval functions adequately segregated from those for recording or entering cash disbursements information on the general ledger?
4) Are responsibilities for the disbursement approval function adequately segregated from those for the disbursement, voucher preparation, and purchasing functions?
5) Are responsibilities for entries in the cash receipt and disbursement records adequately segregated from those for general ledger entries?
6) Are responsibilities for preparing and approving bank account reconciliations adequately segregated from those for other cash receipt or disbursement functions?
7) If EDP is used, is the segregation of duties principle maintained within processing activities?
1) Do collections procedures provide for the following?
a) Timely deposits of all receipts?
b) Controls at each collection location, to assure timely deposit and accurate recording of collections?
(i) Mail opened by two people or at least segrated?
(ii) Remittances by mail listed in duplicate at the time the mail is opened?
(a) Listing prepared by a person other than the one opening the mail?
(b) One copy of the listing forwarded, with the money, to the cashier?
(c) Other copy attached as supporting documentation to the accounting transaction?
(d) A third person periodically comparing the list with the deposit record?
(iii) Amounts of currency contained in each item of mail verified by a second person?
(iv) Documents enclosed with currency machine date stamped or dated and initialed by the employee opening the mail?
(v) A secure area provided for processing and safeguarding incoming cash receipts?
(a) Access to the secured area restricted to authorized personnel, only?
(b) The secured area locked, when not occupied?
(vi) Cash protected by using registers, safes, or locks and kept in areas of limited access?
c) Timely notice of cash receipts at separate collection locations given to a central accounting department?
(i) Cash received at branch locations transmitted to the central office or to the State Treasurer through the banking system?
(ii) Branch personnel restricted to making cash deposits, only?
d) Daily reported receipts at separate collection locations compared to records of a general accounting department?
e) Restrictive endorsements placed on incoming checks as soon as received?
f) “Not sufficient funds” checks delivered to someone independent of those processing and recording cash receipts or reconciling cash/bank statements?
g) Established procedures for follow-up of “not sufficient” checks?
h) If checks received are forwarded to be used as posting media to customers’ accounts, controls to ensure checks are returned promptly for deposit?
i) If payments are made in person, receipts controlled by cash register, prenumbered receipts, or other equivalent means?
j) Receipts accounted for and balanced to collections records daily?
k) Prenumbered forms accounted for , including a record of voided forms?
l) Facilities for protecting undeposited cash receipts?
m) Adequate records maintained to assure correct handling and final disposition of items held in suspense?
(i) Suspense accounting eliminated by direct deposit of money to the correct fund, as much as possible?
(ii) Delay of deposits avoided by making sure fund distribution is immediately determinable?
2) Do disbursements procedures provide for the following?
a) Control over warrant, sight draft, or check-signing machines, as to signature plates and usage?
b) Procedures providing for immediate notification, as applicable, to banks, State Treasurer, and State Controller, when warrant or check signers leave the unit or are otherwise no longer authorized to sign?
c) Furnishing invoices and supporting documents to the signer prior to signing the warrant or check to help assure funds are disbursed only for authorized purposes; and to help assure laws, rules, and regulations are followed?
d) Setting reasonable limits on amounts payable by facsimile signature?
e) Requiring two signatures on warrants or checks over a stated amount?
f) Maintaining signature plates in the custody of the person whose facsimile signature is on the plate, when the plate is not in use?
g) Using plates only under the signer’s control and recording of machine reading by the signer or an appropriate designee, to ascertain all signed warrants, sight drafts, or checks are properly accounted for by comparison to document control totals?
h) Direct delivery to the mail room of signed warrants or checks, making them inaccessible to persons who requested, prepared, or recorded them?
i) Prohibiting the drawing of warrants or checks to “cash” or “bearer”?
j) Controls to ensure all payments are made on a timely basis and in accordance with all purchase orders and contracts?
k) Controls to ensure duplicate payments are not made?
(i) Are original invoices (no copies) totaling the amount of the disbursement attached to each voucher before payment?
l) Controls to ensure each cash disbursement is properly vouchered and approved by the proper authorities before the disbursement occurs?
3) Do custody procedures provide for the following?
a) Maintenance of controls over the supply of unused and voided warrants or checks?
(i) Are monthly physical inventories taken of blank stock by the custodian and a responsible supervisor?
b) Proper authorization of bank accounts?
c) Periodic reviews of and formal reauthorization of depositories?
d) Controls and physical safeguards surrounding petty cash funds?
e) Maintenance of adequate fidelity insurance coverage?
f) Maintenance of separate bank accounts for each fund, or if not adequate, adequate fund control over pooled cash?
4) Do detail accounting procedures include the following?
a) Procedures ensuring collections and disbursements are recorded accurately and promptly in the correct fund or account?
b) Procedures for authorizing and recording inter-bank and inter-fund transfers and providing for proper accounting for those transactions?
5) Do general ledger procedures provide for the following?
a) Delivery of bank statements and paid warrants or checks in unopened envelopes directly to the employee preparing the reconciliation?
b) Procedures for steps essential to an effective reconciliation, particularly considering the following?
(i) Comparison of warrants, sight drafts, or checks in appropriate detail with disbursement records?
(ii) Examination of signature and endorsements, at least on a test basis?
(iii) Accounting for numerical sequence of warrants, sight drafts, or checks used?
(iv) Comparison of book balances used in reconciliations with balances in general ledger accounts?
(v) Comparison of deposit amounts and dates with cash receipt entries?
(vi) Footing of cash books?
c) Review and approval of all reconciliations and investigation of unusual reconciling items by an official not responsible for receipts and disbursements, including recording evidence of the review and approval, by signing the reconciliation?
d) Periodic investigation of checks outstanding for a considerable time?
- FINANCIAL REPORTING