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Auditing and Assurance in Australia

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Added on  2023/03/17

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This report addresses the key issues in planning the audit for Always Precise Instruments Pty Limited and provides suggestions to the audit senior. It discusses ratio analysis for identifying audit risk and suggests audit procedures to reduce risk. It also covers audit controls and procedures for reducing risk in inventory management and supplier selection.

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Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and assurance in Australia
Name of the student
Name of the university
Student ID
Author note

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1AUDITING AND ASSURANCE IN AUSTRALIA
MAMORANDUM
To: Wayne Wiadrowski
From: Audit manager, Samway Baker Fitzgerald
Subject: Addressing suggestions to the senior auditor
Objective of this report is addressing the key issues in planning the audit for Always Precise
Instruments Pty Limited. Suggestions will be provided to the audit senior who are in process of
planning the audit for the mentioned entity. Issues highlighted in the given case will be
considered in providing suggestions.
Question 1
Ratio analysis for identifying the audit risk
Ratio Analysis Audit risk Audit procedure to reduce
risk
Current
ratio
current ratio of the
company for the year is
signifying that though
the current ratio of the
entity is comparatively
better as compared to
previous year as well as
the budget, it could not
achieve the industry
benchmark
Lower current ratio as
compared to industry
benchmark is indicating
that the company is not
able meet its required
liquidity position. It
involves the risk that the
company is not able to
generate sufficient current
assets for maintaining its
liquidity position.
The auditor shall verify the
current assets movement as
well as current liabilities
movement to assure that
both are in order. Any
significant difference in any
of the current assets or the
current liabilities shall be
verified with the
management.
Quick
assets
ratio
Quick ratio of the
company for the year is
signifying that though
the it is comparatively
better as compared to
Lower quick ratio as
compared to industry
benchmark is indicating
that the company is not
able meet its required
The auditor shall verify the
current assets movement as
well as current liabilities
movement to assure that
they are managed as per
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2AUDITING AND ASSURANCE IN AUSTRALIA
previous year as well as
the budget, it could not
achieve the industry
benchmark
liquidity position. Further,
higher proportion of
current assets are blocked
in inventories
requirement. For instance,
receivables are collected on
time and payables are paid
on time. Further, the
inventory register and
physical stock shall be
verified to ensure the
balance of inventory.
Return on
equity
Return on equity for
2018 is lower as
compared to budget and
previous year.
Moreover, it could not
even reach the industry
benchmark.
Lower return on equity
signifies there has been
misstatement regarding the
expenses that led to lower
net earnings. Apart from
that, amount of equity may
have been recorded at
higher that actual amount
for showing less amount of
borrowings
Each of the major expenses
shall be verified with
associated documents. The
auditor must also check that
major expenses are properly
authorized by the concerned
person. Further, the share
issue details shall be
verified to confirm the
amount of equity.
Return on
assets
Return on asset for 2018
is lower as compared to
budget as well as
previous years ROA.
Moreover, it could not
even reach the industry
benchmark.
Lower ROA indicates
higher amount of expenses
and lower amount of
profit. Hence, likelihood is
there the expenses may
have been overstated.
Another risk is that the
assets register has been
misstated
Asset register shall be
verified to confirm the
balance of asset. Further,
each of the major expenses
shall be verified with
associated documents. The
auditor must also check that
major expenses are properly
authorized by the concerned
person.
Gross
margin
Gross margin for 2018
is significantly lower as
compared to budget as
Significant fall in gross
margin indicates lower
sales or higher cost of
The auditor shall verify the
purchase orders and the
quotation received from the
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3AUDITING AND ASSURANCE IN AUSTRALIA
well as previous years
ROA. Moreover, it is
significantly low as
compared to the
industry benchmark.
sales. Likelihood is there
that the COS has been
misstated and recorded at
higher amount
suppliers for raw material to
ensure that the supplier
offering lowest price is
placed with the order.
Further, the sales registered
shall be checked to verify
that all the sales have been
recorded at appropriate
amount.
Marketing
expenses
Marketing expenses for
the year ended 2018
was higher as compared
to the both budget as
well as previous year.
Further, it was higher
than the industry
benchmark.
Higher marketing
expenses are signifying the
risk of overstatement.
Likelihood is there that the
expenses have not been
incurred as per the
requirement.
Marketing expenses shall be
verified with associated
documents. The auditor
must also check
reasonableness of the
expenses and that the
expenses are properly
authorized by the concerned
person.
Admin
expenses/
sales
Admin expense was less
than the industry
benchmark. Further, it
was as per the budget
and lower as compared
to the previous year.
Lower admin expense is
indicating that the entity
was able to lower the
expenses against the
sales generated
Admin expenses remains
fixed until there is change
in the number of
employees to whom the
salaries are paid, reduction
in rent and office utilities.
Risk is there that all the
expenses those are
supposed to be recorded
have not been recorded
The auditor shall verify
each head of admin
expenses and reason of
reduction. Any unusual or
significant changes shall be
justified through associated
documents. Further, the
admin expenses shall be
reconciled with the
financial statements to
ensure that all the expenses
have been recorded at
proper amount.

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4AUDITING AND ASSURANCE IN AUSTRALIA
Times
interest
earned.
Reduction in times
interest earned indicates
that the entity is left
with lower amount of
operating profit to meet
the interest expenses.
Times interest earned
for 2018 is lower as
compared to budget and
previous year.
Moreover, it could not
even reach the industry
benchmark.
Reduction in times interest
earned indicates that
interest expenses have
been increased. Likely risk
is that the operating
expenses have been
overstated that led to less
available amount for
meeting interest expenses.
Further, the interest
expenses may be
overstated due to
overstatement of
borrowings
The auditor shall check
each head of operating
expenses and reason of
increase. Any unusual or
significant changes shall be
justified through associated
documents. Further, the
borrowings document shall
be verified with the
repayment schedule, rate of
interest and amount
borrowed and shall ensure
that the interest payments
are in order.
Days in
inventory
It is indicating that the
company is taking more
time to replace or sale
its inventory as
compared to the
industry benchmark.
Further, the efficiency
of the company as
compared to the
previous year has been
deteriorated.
It is signifying the risk that
the stocks are not properly
maintained by the entity.
For instance, the
inventories are not stocked
as per market demand or it
was not efficient in
making sales. Likelihood
is there the entity is
holding the stock to create
fictitious demand.
Basis on which the
inventories are stocked shall
be checked with the
underlying system of the
entity for stocking the
inventory. Sales trends over
the past years also shall be
verified to assure that the
inventories are stored as per
market demand. Further,
the physical stock count
shall be taken by the auditor
to confirm the balance of
inventories.
Days in
account
receivable
It is indicating that the
company is taking more
time to collect its dues
It is signifying that the
company is efficient is
collecting dues on time.
Auditor shall verify the
sales register to confirm the
balance of credit sales along
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5AUDITING AND ASSURANCE IN AUSTRALIA
from the debtors as
compared to the
industry benchmark.
Further, the efficiency
of the company as
compared to the
previous year has been
deteriorated.
Further, chances are there
that some of the
receivables are unpaid
though the credit terms
already expired. Chances
are also there that the
irrecoverable debts are
included under receivables
rather than recognizing as
bad debts.
with the details of name of
debtors, credit period
allowed, amount of sales
made on credit. The credit
sales and credit period then
shall be matched with the
receivables balance.
Further, the bad debts
account shall be verified to
assure that all the
receivables those are
established as
unrecoverable have been
included in bad debt rather
than including it under
receivables.
Debt to
equity
ratio
Debt to equity ratio for
2018 is significantly
higher as compared to
budget as well as
previous years D/E
ratio. Moreover, it is
significantly high as
compared to the
industry benchmark.
High D/E ratio is
signifying that leverage
position of the entity
has been deteriorated.
Higher amount of debt
indicates the company is
more exposed to interest
risk. Likelihood is there
that the company
overstated the borrowing
to show lower equity and
taking benefits of tax on
interest payment. Further,
it may be case that the
entity is failing in repaying
the borrowing as per
repayment schedule.
Borrowing related
documents shall be verified
with the details of lender,
repayment schedule, rate of
interest and amount
borrowed and shall ensure
that the repayments are in
order. Further, it shall be
verified that the borrowings
are reasonable and raised
after obtaining proper
authorization from
appropriate authority.
Question 2
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6AUDITING AND ASSURANCE IN AUSTRALIA
Audit control Audit risk Procedure for reducing risk
For supporting the stock takes,
inventory system produce the
complete stock listing that
includes stock code, cost per
unit, total quantity held, total
cost per stock item and
quantity held by the location.
It does not record the quantity
purchase and quantity sold
related records. Hence,
likelihood is there that the
purchase and sales quantity
are misstated for hiding any
theft or fraud.
The auditor shall suggest the
management to include the
purchase and sales quantity in
the stock listing that will
enable to confirm the stock
balance trough matching with
the perpetual records
Production controller has
access to printing of
production order as well as
amendment to the master file.
Production control has the
authority to make changes in
the finished goods inventory
and raw material inventory.
Production controller is in a
place to misstate the inventory
as he is in charge of both
amendments in master file as
well as pointing the
production order. For instance,
if he changes the production
order while printing it the
same error or fraud can be
balanced through misstating
the inventory.
Access to printing the
production order and access to
amendment to master file shall
be segregated between 2
persons so that the person
printing the production order
will not be in a position to
suppress the fraud through
making changes in the
inventory level.
Store staff are authorised to
print the purchase order and at
the same time they have
access to print the GRN for
the raw material. Further No
GRN copy is prepared for the
supplier to confirm the
quantity received by the store
staffs matches with the
quantity sent by the suppliers.
Same staffs having access to
purchase order printing and
GRN printing provides scope
of fraud. For instances,
purchase order printed for 500
units, goods received are of
500 units, however, the GRN
prepared for 400 units.
Further, as no GRN copy is
prepared for the suppliers, it
will not possible to confirm
the quantity of GRN with the
The auditor shall suggest to
prepare another copy of GRN
to be forwarded to the supplier
that will ensure that the
quantity of goods send and
received are matched. Further,
the responsibility of printing
the purchase order and
printing GRN shall be
segregated

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7AUDITING AND ASSURANCE IN AUSTRALIA
goods received quantity.
Suppliers are automatically
selected by computer on the
basis of the delivery times and
latest price mentioned on
recent invoice. Here, the price
offered by the suppliers is not
given importance which is
considered as a major factor
while selecting the suppliers.
As suppliers with lowest
prices are not given
importance, it will create
possibility for the person in
charge to select the supplier
offering higher price in
exchange of commission or
some other benefit.
Auditor shall suggest the
management that the major
criteria for selecting the
suppliers shall be the price
offered by them and if all
other things are fine, the
supplier who is offering
lowest price shall be selected.
Further, one person shall be
appointed who will manually
look after the selection of
suppliers and updating the
latest price quoted by them.
When the finished goods reach
the level of lower than 60%,
the productions orders are
automatically generated. Here,
importance is not given to the
level of demand for the
existing goods for which the
purchase orders are placed.
If demand for existing goods
are not considering before
placing new order of chances
are there that the ordered
finished goods are kept
inactive. It will provide an
opportunity to the people in
charge to remove the finished
goods from warehouse and
commit fraud as the goods
which are kept inactive will go
unnoticed for long time.
The auditor shall suggest the
management to change their
order processing system as the
existing system does not
consider the level of demand
before placing new order.
Further, one person shall be
appointed who will be in
charge of keeping record
regarding movement in
demands and placing order
accordingly.
At the time of receiving raw
material, barcodes attached
with delivery boxes are
scanned. In case where the bar
code does not match with the
If owing to mismatch of
barcode with the master file
delivered goods are rejected, it
will have adverse impact on
production. Further, the
Auditor shall provide
suggestions regarding
appointing one person who
will look after the manual
procedure to match the
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8AUDITING AND ASSURANCE IN AUSTRALIA
master-file process of
scanning stops.
mismatched barcode box may
be kept by the receiver and
fraud may committed by the
person stating that the goods
returned due to mismatch.
received goods with the order.
Hence in case of barcode
mismatch goods will not be
rejected and production
process will run smoothly.
When the raw material level
reaches lower than 70%, the
purchase orders are
automatically generated. Here,
importance is not given to the
requirement for the production
and demand for the finished
goods for which the purchase
orders are placed.
If requirement factor is not
considered before placing the
order, raw material may be
kept inactive for long time.
Some of the raw material may
get damaged due to long time
store. It will further provide
opportunity to the person in-
charge for theft
The auditor shall suggest the
management to change their
order processing system as the
existing system does not
consider the requirement
before placing new order.
Further, one person shall be
appointed who will be in
charge of keeping record
regarding movement in
requirements and placing
order accordingly.
Purchase order includes the
details like supplier’s address
and name, date and need of
raw material. However,
quoted price by the supplier
are not mentioned anywhere.
There arise risk of mismatch
between quoted price by the
supplier and price charged by
it and this may be taken as an
opportunity for the person in
charge to commit fraud while
making payments to the
suppliers.
Auditor shall suggest to
management to prepare 2
copies of purchase order one
for the suppliers and one for
itself. Copy prepared for itself
shall mention the price quoted
by the suppliers to avoid error
and misstatement while
making payment to them.
Question 3
Audit assertions related to completeness and existence is as follows –
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9AUDITING AND ASSURANCE IN AUSTRALIA
Completeness – it involves with the risk that the events and transactions those are
supposed to be recorded in the books of accounts have recorded. Further, all the
associated disclosures those were supposed to be included in financial statements have
been properly included.
Existence – it is the risk involved with balance sheet and income statement that the
balances appearing in the statements actually exist at the closing of accounting period.
Audit sampling is application of the procedure to lower than 100% of the items within the
population for providing reasonable basis based on which the conclusions can be drawn.
Assertion Which
population
Sample selection
method
Justification for sample selection
method
Completeness Raw material
for inventory
items
Monetary unit
sampling
This method will be used as it can be
used for determining the accuracy of the
financial accounts that is required for
completeness assertion. Under this
system the sample size is based on 2
classifications that is exception or no
exception. In the given case the auditor
will choose the sample from total 160
items of inventory. For instance, the
sample will be selected for the payable
balance of more than $ 10,000. This
selection can further be sorted for
misstatement amounting to $ 100, $ 200,
$ 500 or $ 1000. The auditor will
obviously select the items with high
amount of misstatement.
Existence Sub-contractors Random sampling As per this approach all the items within
the population have same chance of
selection. This technique is selected as it
will help in checking the existence of
balance required for the existence
assertion. Out of total 46 sub-contractor
and suppliers the auditor will select 60%
for audit that is 27 sub-contractors and
suppliers.

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Wayne should select sample for completeness assertion on the basis of amount of misstatement
for accounts payable. For example, total 160 inventory items are there, out of which the sample
will be selected for the payable balance of more than $ 10,000. This selection will further be
sorted for misstatement amounting to $ 100, $ 200, $ 500 or $ 1000. The auditor will obviously
select the items with high amount of misstatement and hence, the misstatement involved for
more than $ 1000 will be selected as sample
Wayne should select the sub-contractors from whom large amount of supplies are received. For
example, out of total 46 sub-contractor and suppliers the auditor will select 60% for audit that is
27 sub-contractors and suppliers. Among these the sub-contractors who supplied goods
amounting more than $ 20,000 should be selected as sample
Above mentioned suggestions are expected to help you preparing audit plan for Always Precise
Instruments Pty Limited.
Sincerely,
Emily Parker
Audit Manager, Samway Baker Fitzgerald
Email: emilyparker@sbf.com
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11AUDITING AND ASSURANCE IN AUSTRALIA
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