Addressing Specific Audit Situations in Auditing and Assurance in Australia

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and Assurance in Australia
Name of the Student
Name of the University
Author’s Note

1AUDITING AND ASSURANCE IN AUSTRALIA
Memo
5th May, 2019
To: Wayne Wiadrowski
From: Audit Manager of API
Subject: Addressing Specific Audit Situations
There are certain issues in the financial ratios in Samway Baker Fitzgerald (API) along with
the presence of certain weaknesses in the internal control of the firm. The following
discussion involves in identifying the rations that can lead to audit risk and the correct audit
procedures to address them. In addition, it also shows the internal control weaknesses that can
contribute to audit risk and the audit procedures to mitigate these risks. The last part discusses
about the sampling method in line with the audit assertions.
Identification of Potential Audit Risk and Audit Procedures to Reduce these Risks
Ratio Analysis Audit Risk Audit Procedures
to Reduce Risk
Current Ratio There is an increase
in the current ratio
from 2017 to 2018
which is lower than
the industry
benchmark. This
indicates towards the
increase in current
assets of API as
compared to the
current liabilities.
This aspect reflects
the strategy of the
This increase in the
current ratio of API
indicates towards the
decrease in short-
term debt of the
firms which is the
target of the firm for
remaining
competitive and
profitable in the
market. It indicates
towards the potential
audit risk where the
It is needed to
review the ratio over
several reporting
period. More
specifically, the
auditor is needed to
check the current
assets and current
liabilities along with
the details of their
transactions so that
any kind of
misstatements can

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company to improve
the working capital.
management of API
may artificially
increase their current
assets for showing
decrease in debt
position (Amir,
Kallunki & Nilsson,
2014).
be identified.
Quick Assets Ratio There is an increase
in this ratio in 2018
from 2017 which
indicates that API is
converting their
receivables in cash
in quick manner for
covering up their
current business
obligations. Quick
asset ratio less than
the industry
benchmark is a
concern for API
since they do not
have adequate quick
assets to pay off
their business
obligations.
This can be a
strategy of the
management of API
to reduce the
receivables by
converting them into
quick assets and it is
an audit risk. In
addition, quick asset
ratio less than
industry benchmark
poses the risk of
going concern
position of the
company (Asongu,
2013).
The auditor is
needed to verify the
balances of cash
collection from the
receivables so that
overstatements in
quick assets can be
identified. In
addition, the auditor
is needed to review
the quick assets in
order to verify
whether the
company has
adequate quick
assets to maintain
the going concern
position (Asongu,
2013).
Return on Equity Decrease in return
on equity can be
seen in 2018 as
compared to 2017
which supports
API’s strategy to
This aspect creates
the potential audit
risk where the
management of API
may have overstated
the balance of equity
The required audit
procedure would be
to review the register
for issuing equity
share along with
checking the

3AUDITING AND ASSURANCE IN AUSTRALIA
reduce debts for
staying competitive.
It indicates towards
the decrease in debts
of the company due
to the increase in
equity share capital.
capital so that total
debts can be
decreased in the
books.
resolution of the
Board of API in
order to ensure
whether there is any
overstatement on the
equity share capital
of the company or
not (Freedman &
Nutting, 2015).
Return on Total
Assets
It can be seen that
there is decrease in
this ration in 2018
from 2017. It
indicates that the
total assets of the
company have
increased due to the
decrease in profit. It
is also lower than
the industry
benchmark.
This can lead to
potential audit risk
where the
management of API
may have
understated the
profit as a part of
their strategy to
remain competitive
in the market. This
has led to the
increase in total
assets of the firm
(Ghosh & Tang,
2015).
The appropriate
audit procedure in
this case would be to
test the vouchers as
well receipts of the
purchase and sale of
assets with the aim
to determine
whether there is
actual increase in the
profit in the current
year. This would
also help in
determining the
understatement of
profit.
Gross Margin Major decrease in
gross margin can be
seen in 2018 from
2017. This gross
margin of API is
also lower than the
industry benchmark.
Decrease in sales
This can lead to the
audit risk of
understatement in
sales as well as
overstatement of
expenses for
showing less gross
profit margin. The
The main audit
procedure for the
auditor would be to
review the sales
balance of API at the
end of 201 along
with checking the
sales vouchers and