Analysis of Audit Risk in Always Precise Instruments Pty Ltd

Always Precise
Instruments Pty Ltd
Memorandum
To: Wayne Wiadrowski
From: Audit Manager
Date: 8th May, 2019
Subject – Analysis of Audit risk
Scope and Purpose
The first and primary duty of the auditor is to find whether the company
financial statements are free from material misstatement or not and also to check
whether the company accounts are showing true and fair view or not. As per the
case of the company Always Precise Instruments Pty Limited, the aim of the
memorandum is to analysis of the audit risk which are there in the company
financial statements and the above analysis is been done on the basic of the ratio
of the company as well as the internal control testing. It also content the
sampling process, which used by the auditor for the same. The detailed analysis
shown below in table presentation.
Analysis of Audit Risk from Audit Procedure and Financial Ratio
Ratio Analysis Audit Risk Audit
Procedures
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Return on
Equity
It can be seen
that the company
return on equity
have been
decreased as in
2018 it is 14.7
but in 2017 it was
16.6 so it can
termed as bad for
the company. As
it is unable to
meet the
benchmark set by
the industry so
this signify that,
there is material
misstatement in
debt. The
increase is the
equity can be the
reason for the
decrease in the
ratio of the
company (Gay &
Simnett 2012).
Material
misstatement can
be a risk in the
ratio, it is the
reason of the
fluctuation of the
ratio, and it can
be because of the
company unable
to record all the
data related to
equity capital
(DeFond &
Zhang 2014).
As per ASA 500-
it will, carry the
process of the
audit is should
test the
accounting
process of the
company and
should verify
each transaction
so that it able to
minimize the
potential risk
(Auasb.gov.au,
2019).
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Quick Ratio It can be seen
that the company
is having a good
amount of quick
ratio so this
signify the
company is
having good cash
liquidity and can
pay off their
short term due
easily (Gay &
Simnett 2012).
Material
Misstatement can
be there in the
ratio as there can
be overvaluation
of the quick asset
or undervaluation
of short term
liabilities which
will create a
potential risk
(Knechel &
Salterio 2016)
As per ASA 330
it will identify
the material
misstatement the
auditor have to
check the entries
related to the
balance sheet so
that it can able to
know the reason
of the material
misstatement in
the balance sheet
(Auasb.gov.au,
2019).
Current Ratio The ratio of the
company is
increasing as in
2018 it is 1.64
but in 2017 it was
1.54 which a
good sign as it is
able to increase
its liquidity but
there is not able
to match the
industry norms so
company should
try to match it.
The increase in
the ratio can be
because of
increase in
current asset or
decrease in
current liability
(Gay & Simnett
2012).
The misstatement
can in the short
term liability or
current asset as
the management
may have
overvalued the
current asset or
undervalued the
short term
liabilities so this
increase the risk
in the company
(Furnham &
Gunter 2015)
As per ASA 450
-The auditor
should verify the
market value
with the book
value so that it
will able to now
the real value of
the asset abd
liabilities and
then it will able
to minimize the
material
misstatement in
the financial
accounts
(Auasb.gov.au,
2019).
3

Return on Total
Asset
It can seen that
the company is
not able to use
their asset
effectively as the
ratio has been
decrease as in
2018 it is 122.5
but in 2017 it was
14.9, so the
company is not
able to utilize it
properly in
regards with the
profit (Gay &
Simnett 2012).
Material
misstatement can
be a big risk in
the ratio as it
depend upon the
earning of the
firm so it can
affect the
decision of
investors (Hall
2015).
As per ASA 450
- The test, which
should carried by
the auditor, is
that it should
verify the asset
utilization
process so that it
able to know how
the company is
able use those
and is there any
material
misstatements in
the accounts
(Wang, Li & Li
2015).
Gross Margin It can be seen
that the company
is unable to
secure a good
business in the
current year
which is been
reflected by the
decrease in the
gross profit as in
2018 it was 6.5
but in 2017 it was
10.3 so it is not
able to match the
benchmark of the
industry. The
reason of
decrease is that
the company has
low amount of
sale and increase
Material
misstatement is
been found in
this case by
decrease in the
gross profit
company can
able to save some
amount of
taxation and it is
a potential risk in
the audit
(Griffiths 2016)
As per ASA 450
-The procedure
which the auditor
should check it
should check the
reason of
decrease in sale
by vouching sale
invoice and also
should vouch the
cost of that it can
know the reason
of increase in the
cost of the
company
(Auasb.gov.au,
2019)
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