Auditing and Assurance

Running head: Auditing and Assurance
Auditing and Assurance
Name of the Student
Name of the University
Author Note

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Auditing and Assurance
Memorandum
To: Wayne Wiadrowski
From: Audit Manager
Date: 8th May, 2019
Subject: Analysis of the audit risk in the ratio and internal control of API.
Purpose of the Memo
The first responsibility of the auditor is to check whether the financial statement are showing
true and fair view or not. It is their duty to know to check all the details of the company and
also to give proper opinion of the company financial statements and to check whether there is
any fraud is going in the company or not. In the given case it can be seen that auditor of
Always Precise Instruments Pty Limited is performing the audit and using the financial ratio
as a base to judge the potential risks in the business and what are the audit process which can
be taken by them in the same. It also include the internal control weakness of the company
and also the sampling size which is been used by the auditor in regards with the audit process.
The different aspects of the company are been shown in the coming table which are listed
below:
Audit Risk and their Audit Procedures
Ratio Analysis Audit Risk Audit Procedure
Current
Ratio
The current ratio has
been increase as in
current year is 1.64
which is a very good
sign that the company
is able to make their
liquidity position
better in compare to
previous year
(Chambers and Odar
2015). It is because of
High amount in
current asset or low
value of current
liability
As the company current
ratio is been less than the
industry benchmark so it
can be because
misstatement in the
balance of the asset and
liability so the company
must have alter their
value so it can show a
decrease or increase in
the current ratio De
(Simone, Ege &
Stomberg 2014).
The procedure which
the auditor should carry
it should apply test of
control as it should
verify the account
balance of both current
asset and liabilities so
that it can know where
there is material
misstatements in the
company (DeFond &
Zhang 2014).
Quick
Ratio
As per the data given
this clearly show that
the company have
increase in the quick
ratio as in 2018 it is
0.91 which is good in
There can material
misstatement in the quick
ratio as it help the
company to get more
number of investors by
seeing the quick ratio
As the auditor should
perform test of control
method as it should
verify the changes
properly in regards with
quick asset and current

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Auditing and Assurance
compare to 2017 0.87
so it show company
has increase its cash
asset more so this is a
good symbol as they
can easily able to pay
their short term
liability easily and
effectively (Donelson,
Ege & McInnis 2016).
increase so the company
may have done alter the
value to show a good
ratio to the financial user
of the company
(Furnham & Gunter
2015).
liability so that it can
know the reason of the
increase in the current
ratio.
Return on
Equity
The return on equity
has been decreased in
the current year as in
2018 it is 14.7 but in
2017 it was 16.6 so it
show that the
company have
increase the capital
and due to these the
ratio have been
decrease in the current
year
As the ratio is also
decrease in compare to
the benchmark of the
industry so this signify
that there is a risk of
material misstatements as
showing low amount
return on equity help
them to reduce the profit
as it can be because they
have increase in the
capital so this ratio got
decrease in the current
year (Gay & Simnett
2012).
The auditor should do
the verification of the
capital and the rate
which is been used by
the company as it will
help them know how
the company is able to
increase the capital in
the company and the
reason behind of the
increase in the equity
capital (Gerakos &
Syverson 2015).
Return on
Total
Assets
The given data shows
that the company has
decrease in the return
on total asset as in
2018 it was 12.5 but
in 2017 it was 14.9 so
this show the
company is unable to
do the proper
utilization of the asset
and as a result it is
having a decrease in
the ratio.
As it is seen that the
company ratio is also
below the industry
benchmark so it is a risk
and as the management is
not able to do the fuller
utilization of the asset
and so it is the reason
that the ratio has been
decreased in the
company an directly
affect the earning of the
company (Griffiths
2016).
The auditor should do
in-depth analysis of the
company accounts and
the transaction related
to the asset so that it can
able to know the real
reason why the
company is unable to do
fuller utilization of the
assets (Hall 2015).
Gross
Margin
As per the data given
it can be clearly seen
there is a huge
decrease in the ratio in
the current year as in
2018 it is 6.5 but in
2017 it is 10.3 so this
There can be material
misstatement in the
company as the company
must have stated wrong
amount of sale so that it
can decrease the gross
profit of the company
Auditor should carry
test of control under this
situation as the sale
should be tested by the
auditor and also should
check the market
demand so that it can

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Auditing and Assurance
show that the
company is unable to
get proper sale in the
current year and as a
result the ratio got
decrease. It is because
of low amount of sale
or high cost expenses.
and able to save amount
of tax from it
(He ,Zeadally & Wu
2018)
assume about the sale
amount which is there
in the financial
statement and can
conclude whether they
are any material
misstatement or not
Marketing
Expenses
There is high increase
in the marketing
expense of the
company as in 2018 it
is 4.4% but in 2017 it
is 3.8% so this is
increase and it will
directly affect the net
profit of the company.
As there is high amount
of marketing expenses is
there this signify that the
company must done
some material
misstatement in the
expenses it must have
overstated the expenses
as it is also increased in
compare to industry
benchmark so this show
company is able to get
high amount of the
expenses which not a
good sign in regards with
the net profit of the
company (King 2014).
The auditor should
carry test of control
methods as there is an
increase in the expenses
so the auditor should
verify the invoice and
also should check
whether the expenses
are done in some other
cases are not been
included in this
expenses.
Sales
Expenses
As per the data it is
clear that there is a
decrease in the ratio as
in 2018 it is 3.4% and
in 2017 it is 3.6% so
this the good sign that
the company is able to
control the expenses
and as a result it will
able to increase the
overall profit of the
company.
As the company expense
is even low compare to
the industry benchmark
so there can be a risk of
material misstatement in
the account and the
company may have
decrease the value of the
expenses so that it can
able to show an increase
in gross profit and can
misstated it to the
financial user of the
company (Knechel &
Salterio 2016).
Auditor should use test
of details method in this
scenario as it should
check the details of the
invoice of the sale so
that it can conclude
about the fairness of the
expenses and can check
the reason of material
misstatement.
Times
Interest
Earned
The data show that the
company have got a
decrease in the ratio as
in 2018 it is 3.6 but in
2017 it was 4.6 so this
show that the
As per the given scenario
it can be say that there is
material misstatement in
the ratio and as it help
the company to decrease
their borrowing cost and
Auditor should perform
different process in this
case as it should able to
check all the borrowing
details so that it can
know what are the