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Auditing and Assurance in Australia

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Added on  2023/03/17

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This report provides advice to a senior auditor on audit planning and risk reduction strategies for Always Precise Instruments Pty Limited. It includes suggestions for improving financial ratios such as current ratio, quick asset ratio, return on equity, return on total assets, gross margin, marketing expense, administrative expense, times interest earned, days in inventory, days in accounts receivable, and debt to equity ratio.

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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
MEMORANDUM
To: Wayne Wiadrowski
From: Audit manager, Samway Baker Fitzgerald
Subject: Providing suggestions to the senior auditor
Purpose of this report is to provide advice to senior auditor regarding audit planning of Always
Precise Instruments Pty Limited that deals with manufacture and supply of small arms that is
used for military equipment. Considering the given information suggestions are as follows –
Answer to Question 1
RATIO ANALYSIS AUDIT RISK AUDIT PROCEDURE TO
REDUCE RISK
Current
Ratio
In terms of the
company’s point of view
the company’s liquidity
position has reached a
new level. From the
ratio analysis, it is
observed that the
company’s current ratio
has increased from 1.54
in 2017 to 1.64 in 2018.
From the current ratio it is
evident that the current
assets amount more than
the current liabilities. It
signifies that the company’s
working capital is not
managed properly due to
which the company’s
current assets is more than
the current liabilities.
The very thing needed is the
analysis of the working capital
plan and the approval of the
working capital plan. Due to
insufficient checking in the
working capital plan this kind of
problem arises. If this checking
process being revised then the
company will have balance
working capital.
Quick
Asset Ratio
The required quick asset
ratio will be 1 but
instead it is seen than the
company’s quick asset
ratio is below 1 in both
2017 and 2018. Though
it is observed that the
company’s quick asset
ratio has increased from
0.87 to 0.91 but it is still
low than the ideal quick
asset ratio.
Quick asset ratio includes
the quick asset that is cash,
cash and cash equivalent
and accounts receivables.
The lower quick asset ratio
than the ideal number
means that the company has
went through either
misstatement of quick asset
ratio or the amount
recorded for the cash, cash
and cash equivalent and
accounts receivables are
The auditor must go through the
cash balance of the company and
must reconcile the cash balance
of the company with bank
records with the cash book for
confirming the actual cash
balance. The credit sales period
allowed by the company should
be matched with the accounts
receivable so that the company
should have the company can
have the credit sales period
reconciles with the accounts
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2AUDITING AND ASSURANCE IN AUSTRALIA
recorded at lower amount
than it actually should be.
receivables.
Return on
Equity
It can be observed that
the company has 14.7%
of return on equity in the
year of 2018 and in the
2018 budget the return
on equity has 18.4%.
The return on equity
percentage is also lower
than the 2017. The
return on equity is lower
from 2018 budget,
which was set according
to the industry standard.
From the analysis, it can be
said that the company has
done more expenses than it
was expected and hence the
company’s return on equity
has decreased from the
industry standard and the
budgeted percentage, which
was being set in the
beginning of 2018. On the
other hand it can be said
that the equity has been
maximize due to which it is
showing that the company’s
lower amount of
borrowings.
The auditor must go through all
the expenses incurred by the
company and mostly see the
expenses which are large in
nature are incurred by the
company during that accounting
year. The auditor must also sheds
light on the attached document of
the company where incurring of
expenses is mentioned. Auditor
also must go through other
financial statement so that the
equity balance should be
confirmed.
Return on
Total
Assets
In the case of return on
total asset, it is also
observed that the ratio is
lower than the budget of
2018. In unaudited part
of 2018 it is seen that the
company has 12.5% of
return on Total asset and
in the case of 2018
budget it was expected
to have 16.0%. In 2017
it was 14.9% which is
higher than the
preceding year. The
return on total asset is
lower than the industry
benchmark.
In this case also it can be
said that the expenses of the
company has increased.
Due to which the company
has lower return on total
assets. The expense made
on the repairs and
maintenance of the asset
has not been capitalized
properly.
The auditor must go through the
each expense properly and must
analyze the expenses. The
company must also check the
documents and the expenses,
which are adhere along with it.
The auditor should also go
through the large expenses made
in that accounting period of the
company. The auditor must also
check whether the proper
valuation is made on the assets
by using depreciation,
maintenance costs and other
costs associated with it. The
auditor shall also check the
depreciation method which is
followed while doing
depreciation.
Gross
Margin
From the company’s
report it can be seen that
the company has 6.5%
of gross margin in the
year of 2018 whereas the
according to the industry
standard and the
From the above analysis of
ratio it can be seen that the
gross profit is decreased a
lot than in the year 2017
and also from the budget in
2018. The reason for such
downfall may be the
The auditor must go through
each document associated with
the cost of goods sold and the
production requirement. The
auditor must his eyes on the
documents associated with the
supply and must observe that the
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3AUDITING AND ASSURANCE IN AUSTRALIA
percentage fixed in the
year 2018 it is 10.8%. It
can be clearly seen that
the company has lower
gross margin. It is also
observed that the
company’s margin in the
year 2017, it was 10.3%.
From the data it is
observed that the
company’s gross margin
has gone down
drastically.
reduction of the sales
revenue or there is a
considerable increase in
Cost of Goods Sold for that
accounting year. It also
possible that the increase of
cost of goods sold have
been increased more for
recording lower amount of
profit. There also prevails
the possibility that the
company’s wastage level in
terms of the inventory is
pretty high.
price receive and prices paid.
The auditor must also go through
the documents related with
inventory management where he
should see the strategy applied
for inventory management for
the checking of wastage level.
Marketing
Expense
In the year of 2018, the
marketing expense for
the company has
increased to 4.4%
whereas the percentage
set in the budget of 2018
was 3.6%. The
marketing expense is
also greater than the
previous year where the
market expense was
3.8%.
The marketing expense has
reached a new height more
than it is expected in the
budget. It is more than the
industry standard. After
observing the analysis of
marketing expense ratio it
can be safely put forward
that the company has
exploit the marketing
expense more than it is
planned.
The auditor must go through bill
and the document, which are
associated with the marketing
expense. The document must
check the increased in costs and
it is be observed the
authorization with the marketing
expense. The auditor should also
go through the expenses incurred
by the company associated with
the marketing expense.
Administrat
ive
Expense/Sa
les
Administrative expense
is similar to the budget
created by the company
for the year of 2018. The
company has also seen
that the administrative
expense has been
decreased from the last
year.
The administrative expense
is fixed for every company.
The reduction in
administrative expense
means that the company has
not recorded any one of
other expense.
Auditor must go through all the
documents of previous year and
the current year and find the
reason behind the reduction of
the administrative expenses.
Times
Interest
Earned
Time interest earned
signifies the operating
profit left with the
company for matching
the interest expense. It
can be seen that the time
interest earned has gone
down lower in 2018 than
in 2017. It is also lower
It can be said that the
company may have
included the factious
interest expenses for
factious borrowings.
Another thing may also
happen the company’s
management must have
reported more amounts in
Auditor should go through the
document adhere with the new
borrowings and previous
borrowings. The operating
expenses shall be checked very
properly because the company
has gone through the operating
profit of the company.

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4AUDITING AND ASSURANCE IN AUSTRALIA
than 2018 budget. the time interest earned and
reduced the operating profit
of the company.
Days in
Inventory
This ratio explains the
time spend by the
company for selling the
inventory or replacing
the inventory.
The risk for increased in
days of inventory is that the
company has not perform
well in selling the product.
In this case the inventory
stock will rise high.
The auditor shall go through the
inventory management process
and the auditor must check the
sales structure of the company so
that it can be evident where the
company is having problem.
Days in
Accounts
Receivable
It can be analyzed that
the company has 53.0 in
2018 and in 2018 budget
is 49.8 and it also higher
than the value of 2017.
The main risk involved
with the debts in accounts
receivable is that the
company will get the
amount from the debtors at
the designated time period.
The auditor shall go through the
document of credit period
provided to the debtor.
Debt to
Equity
Ratio
It can be analyzed that
the company has less
debt equity ratio all
throughout including the
budget and the previous
yea. The ideal ratio is 1
but the company has
0.61 debt ratio in 2018.
The risk, which is
associated with the increase
in debt, may be because the
company might report
factious borrowings for
evading tax.
The auditor must go through the
document made on the
borrowings.
Answer to Question 2
Audit control to be applied for reducing the audit risk –
Audit control Audit Risk Procedure to reduce risk
Purchase order contains
details like the date, address
and name of suppliers and
needed raw material.
However, it does not mention
the product name for which
the raw material is ordered.
Hence, in case there is change
in the market demand or
change in the requirement of
raw material it will not be
Raw material received may
not be useful for the purpose
of production of upgraded
product in accordance with the
demand.
Auditor shall check the system
followed by the entity before
placing any purchase order.
Further, the stock of raw
material shall be checked
before proceeding for any up-
gradation. The auditor shall
also perform the cost-benefit
analysis in case of up-
gradation with the existing
raw material stock
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5AUDITING AND ASSURANCE IN AUSTRALIA
possible to change accordingly
Purchase orders are generated
automatically by computer
while level of raw material
drops below 70%. However,
the requirement is not taken
into consideration before
placing the order.
If raw material is ordered
irrespective of the demand and
production, chances of
misstatement increases as
without requirement the raw
material will be kept idle in
the factory that will provide
space for misstatement or
theft.
The auditor shall check the
system followed by the
company for placing order. It
is mentioned that order is
automatically placed when the
material level falls below
70%. However, before placing
the order requirement shall
also be taken into
consideration. Further, the
company’s plan regarding
upgrading of product shall
also be considered as in case
of up-gradation type of
material required will be
changed.
While receiving the stocks of
raw material, barcodes
attached with delivery boxes
are scanned into system and
no manual system is followed
for receiving the material.
Instances may be there where
the barcode may not match
and the company will have to
reject the box in that case.
in such scenario where the
boxes are rejected owing to
mismatch of barcode, it will
hamper the production and
misstatement can be taken
place regarding purchase order
and receiving order
The auditor shall suggest the
company to appoint someone
who will be responsible for
manually checking the
delivery box so that no box
will be rejected in case of bar-
code mismatch and production
will run as per plan.
While receiving the raw
material 2 part GRN is
produced for matching with
the warehouse copy of the
purchase order and another is
for filing by the accounts
clerk. However, no copy is
prepared for sending to the
supplier for matching that the
quantity of goods received
indeed the same that is send
by the supplier.
It leaves the scope for
misstatement as if the
confirmation is not received
by the suppliers that the
quantity of goods received is
same that is send by the
supplier. Hence, it can happen
that for instance, the supplier
send 100 units and the
receiver signs for receiving 80
units. In such case, the
difference of 20 units will
never be caught.
The auditor shall verify the
entire system of receiving the
goods starting from purchase
order to receiving the order.
Auditor shall suggest the
entity to prepare one more
copy of GRN that will be sent
to the suppliers and will
ensure that quantity of goods
received is same that is send
by the supplier.
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6AUDITING AND ASSURANCE IN AUSTRALIA
Production orders are
generated automatically while
level of finished goods drops
below 60%. However, the
requirement and demand in
the market is not taken into
consideration before placing
the order.
If production order is placed
irrespective of the demand,
chances of misstatement
increases as without
requirement the finished
goods will be kept idle in the
warehouse that will provide
space for misstatement or
theft.
The auditor shall check the
system followed by the
company for production order.
It is mentioned that order is
automatically placed when the
finished goods level falls
below 60%. However, before
placing the order demand for
the goods shall also be taken
into consideration. Further, the
company’s plan regarding
selling of any new or
upgraded product shall also be
considered as in case of
upgraded product demand for
existing one will be reduced.
Selections of suppliers are
automatically done by the
computer based on their latest
price and the delivery times.
However, the comparative
prices are not taken into
consideration. Chances may
be here that the suppliers with
higher price may be selected
rather than selecting the
supplier with lower price
It will leave scope of fraud as
the concerned person may
commit fraud through taking
commission from the supplier
and fix the invoice in such
way that the suppliers with
higher price will be selected as
while selecting the suppliers,
price offered by them are not
taken into consideration.
While selecting the suppliers
the major criteria that shall be
input to the system is the price
offered by the suppliers. Apart
from the latest price and
delivery times, price offered
shall also be the criteria for
selecting the suppliers.
Further, apart from the
computer system, one person
shall be appointed who will be
held responsible for following
up manually the suppliers
selected automatically by the
suppliers.
Stores staff for raw material
has access to printing of
purchase order as well as
printing GRN for raw material
As the same staffs have access
to both printing of purchase
order as well as printing GRN
for raw material it will be
easier for them to commit
fraud or misstate the
quantities. For instance,
purchase order made for 100
units, received for 100 units,
Staffs shall be segregated for
those will have access for
printing of raw materials for
raw material and staffs that
will have access in printing of
GRN for the raw material. It
will reduce the chances of
misstatement as the same
person will not have access to

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7AUDITING AND ASSURANCE IN AUSTRALIA
however, GRN prepared for
80 units as the same staffs
have access to both. Further,
as the GRN is not prepared for
the suppliers, confirmation
will not be taken from them
regarding the quantity
received.
both. Auditor shall suggest the
entity to prepare one more
copy of GRN that will be sent
to the suppliers and will
ensure that quantity of goods
received is same that is send
by the supplier.
Answer to Question 3
Completeness assertion signifies the risk that all transactions those were supposed to be recorded
with regard to the income statement and balance sheet items have been recorded appropriately.
On the other side the existence assertion signifies the all the items recorded under income
statement and balance sheet are actually in existence on the concerned date.
Audit sampling is using the audit procedure on selected items within the transaction class or
account balance.
Assertion Which
population
Sample
selection
method
Justification for sample selection method
Existence Sub-
contractor
and suppliers
Systematic
selection
Under this approach the entire sampling units will
be segregated into sample size to create sample
interval. Auditor will start with the supplier who is
listed under number 4 and thereafter every 4th sub-
contractor in the list will be chosen for the purpose
of verification. In this process total 12 sub-
contractors will be selected for the purpose of
verification. Further, the balances due with each
subcontractors shall be reconciled with the balance
recorded in the creditor’s book and payment shall
be matched with cash and bank book to assure that
the balance appeared in the book matches with
associated documents.
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8AUDITING AND ASSURANCE IN AUSTRALIA
Completenes
s
Inventory
items for raw
material
Random
sampling
Under this approach each items of the population
has equal chance of getting selected. It will be used
for the 160 inventory items of raw material. Total
population size is 160, out of which 60% that is 96
items will be selected for verification. This
technique of sampling will be selected as it will not
partial to any particular item and each item will
have equal chance of selection. This approach
therefore will assure that all the transactions have
been recorded appropriately.
For the assertion involved with completeness Wayne is advised to choose the sample on the basis
of valuation that is the samples with large amounts. Verifying and analysing items with large
amounts will lessen likelihood of misstatement due to error and fraud.
For the assertion involved with existence Wayne is advised to choose the sample on number of
times order placed with them. Verifying and analysing the sub-contractors with large number of
placed orders will lessen likelihood of misstatement due to error and fraud.
I hope that the analysis made and suggestions provided above will be sufficient to assist you to
plan the audit for Always Precise Instruments Pty Limited
Maria Wilson
Audit Manager, Samway Baker Fitzgerald
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9AUDITING AND ASSURANCE IN AUSTRALIA
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