Running Head: Marco Appliances Inherent Risks 1

Running head: MARCO APPLIANCES INHERENT RISKS 1
Marco Appliances Inherent Risks and Control Design Project
Student’s Name
Institutional Affiliation
MARCO APPLIANCES INHERENT RISKS 2
Marco Appliances, Inc. WP B.2.1

Inherent Risk and Materiality Memo Initials Date
Prepared
Reviewed
Preliminary Inherent Risk Assessment
 The management policy of maintaining large inventory to meet customer demand -

The auditee supports extensive stocks to facilitate sales. However, this increases the risk
of obsolete inventory due to slow turnover. Assessing the value of outdated inventory
involves management judgment and increases the risk that inventory valuations will get
overstated. Thus, I would recommend careful scrutiny of Marco’s inventory valuation
allowance based on the lower of cost or market rule.
 The transaction process - Based on the information available, once a sales requisition
gets received as recorded by the sales clerks. It gets approved by the Controller. The
approval gets taken to the warehouse for dispatch of the goods to either the contractor or
their representative. The warehouse clerk dispatches the goods after printing delivery
advice, after which the bookkeeper bills the customer after receiving the delivery advice
from the warehouse. Marco Appliance gets exposed to risk as the customer can decide
default payment on goods bought on credit. Since the sales get recorded once made, it
could lead to overstating the business revenues, thus material misstatement of the
financials.
 Admission of new customers – the Controller being the only person allowed to set up new
customers in the system could lead to bias. The Controller could decide to admit his friends
or relatives on credit terms who are not credits worthy. As such, it would result in revenue
overstatement as sales get recorded once made and not when payment for the goods gets
received. In case of high default risk, it would lead to misstatement of the financial
statements.
 Background check on their employees – The business only checks references for any
prospective employee but no criminal record of the employee or any other background
check. The lapse exposes the company into employing persons with questionable character
and people who would end up defrauding the company. Such people have the capability of
defrauding the company and covering their tracks by overstating financials thus causing
material misstatement in the financial statements
 Lack of segregation of duties – The Controller, performs critical roles without external
checks, which could lead to fraud. For instance, he admits the new clients and the sole
approver of sale requisition. The business risks get exposed to approving bad accounts.
Secondly, once the Secretary/ Treasurer prepares the bank reconciliation, she only shares
with the Marketing Manager, who on reviewing returns the reconciliation to the Secretary/
Treasurer for filing. The reconciliation should be counter checked by another person who
has Accounting and finance knowledge and not marketing, after which gets presented to
the Board for ratification. Such weak control exposes the financial statements to gross
misstatement.
Preliminary Analytical Procedures
 Day’s cash in inventories - The day’s cash in stock increased from 52 days in 2018 to
70.6 days in 2019. It takes longer to convert inventory into cash. As such, the business
cash flow gets constrained, and the operations of the business get curtailed. It could lead to
obsolete stock, and therefore the company needs to adopt a method of valuing the
inventory (Braiotta, 2010).
 Accounts Receivable – Increased substantially in 2019, from $ 301,713 to $ 425,755. The
huge increase poses a risk of some of the credit sales, turning to doubtful debts and getting
written off. As such, the business should employ a stringent method of allowing credit,
such as having guarantors in case of failure to pay.
 Cash and cash equivalents – The business had increased activity in 2019, yet cash
reduced to $10,667 from $22,045 in 2018. Cash is the most liquid asset required for day to
day running of the business, and it poses a significant liquidity risk of being unable to meet
daily financial obligations (Graham, 2015).
 Day’s cash in payables and accrued liabilities – increased days in the business paying its
creditors could portray a negative picture to its financier. A financial institution would
view it as an inability to meet its short-term obligations as agreed. Therefore, the business
should work on maintaining its cash in payables within the credit period (Puncel, 2008).
Preliminary Materiality
 Balance Sheet – Based on the requirements on the International Accounting Standards, the
auditor has a duty to set materiality eves on various parameters in the financial statement
(Bellandi, 2018). For instance, for this particular business, in a range of 1% - 2% of total
assets, I would choose 2% due to the few individuals involved in the transaction, hence
high risk of material misstatement. In this case 2% of total assets would be $1,380,934 =
$27,619
 Income statement – Due do the high risk of material misstatement as a result of a few
individuals involved in handling the transactions, which pose a high risk. In a range of
0.5% to 1% of sales revenue, I would choose 1% for the purposes of evaluating
materiality, which translates to $3,307,873 = $33,079
References
Pears, R., & Shields, G. J. (2016). Cite them right: the essential referencing guide. London:
Palgrave Macmillan.

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What risks are associated with Marco Appliances' inventory management policy?

What control weaknesses are identified in Marco Appliances' sales process?

Running head: MARCO APPLIANCES INHERENT RISKS 1

Marco Appliances Inherent Risks and Control Design Project

Marco Appliances, Inc. WP B.2.1

Preliminary Inherent Risk Assessment

 The management policy of maintaining large inventory to meet customer demand -

Preliminary Analytical Procedures

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