Auditing and Assurance in Australia

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and assurance in Australia
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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

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

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.