Audit Risks of API: A Memo

Running head: AUDITING
Auditing
Name of the Student:
Name of the University:
Author’s Note:

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AUDITING
Memo
To: Wayne Wiadrowski
From: The Audit Manager
Date: 8th May, 2019
Subject: Discussion Regarding Audit risks of API
Purpose and Scope
The financial statement of a business needs to be audited by a competent auditor so as to ensure
that the financial statements are showing true and fair view. In the case of Always Precise
Instruments Pty Limited (API) also the financial information regarding the business needs to be
appropriately presented. The memo is prepared to highlight the potential audit risks which has
been reveals while applying ratio analysis and interval control procedures for inventory. The
memo would also be discussing sampling tests which is applied by the business for collecting
essential audit evidences. The findings and the risks which ratio analysis and internal control has
revealed would be presented in a table format:
Key Ratios Analysis Audit Risks Audit Procedures
Current ratio The current ratio shows
a relationship between
current assets and
liabilities of the business
(Kumar & Sharma,
2015). There has been a
significant increase in
current ratio which
suggest that there is an
increase in the current
assets of the business or
decrease in current
The major risks
which can be
related with
current assets is
that the same
might be misstated
in the financial
statements which
would affect the
financial position
of the business.
An instances can
Test of details is
required audit procedure
regarding the particular
risks which is faced
during the audit process.
The auditor needs to test
the documents related to
the payments related to
acquisition of current
assets and liabilities of
the business. The current
assets and liabilities of

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AUDITING
liabilities of the
business.
be provided of a
company which
would try to
coverup its
liquidity crisis by
portraying
favourable current
ratio.
the business needs to be
appropriately presented
in the annual reports of
the business.
Return on Equity The ratio analysis shows
that there is a slight
decrease in this asset for
the year 2018 and the
estimate is even lower
than industry
benchmark. This is
mainly due to fall in the
profits of the business
which has resulted in
fall in returns available
to equity shareholders.
Any misstatement
in the profit and
loss account can
affect the profits
of the business and
lead to variances
in the ratio.
Similarly, a
decrease or
misstatement
associated with
equity capital can
also affect the
ratio.
Test of details is
associated with the
accurate audit procedure
which is applied by the
auditor for assessing
whether there is any
material misstatement or
not. The auditor of the
business also needs to
check the books of
accounts and all other
relevant document in a
detailed manner so that
the same are accurately
represented (Peytcheva,
Wright & Majoor,
2014). A proper scrutiny
of the above documents
would reduce the risks
considerably.
Quick Asset Ratio The estimate which is
demonstrated in the
analysis shows an
The potential audit
risk which can be
identified is
The auditor of the
business needs to apply
test of details and test of

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AUDITING
increase in the same.
The management of the
company is maintaining
its quick assets so that
the current liabilities of
the business can be
effectively met.
material
misstatement in
the current assets
and current
liabilities as the
same might be
overstated or
understated
thereby affecting
the accuracy of the
financial
statements of the
business.
control which is related
to assessing the assets
and liabilities of the
business (William Jr,
Glover & Prawitt, 2016).
The auditor needs to
appropriately assess
whether the accounts are
representing true and
fair view and whether
the same is not
materially misstated by
the business.
Return on Total Asset As per the ratio analysis
which is shown in the
case, there is a slight
decrease in the return on
assets estimate of API in
2018 which suggest that
the company is not using
the assets of the business
appropriately and
thereby the same is
affecting the profits of
the business (Zakari,
2013).
The major risks
which can be
identified in such a
case is material
misstatement in
valuing the assets
of the business or
misstatement in
disclosing the
profits of the
business. A
misstatement of
profit would
decrease the ratio
which is the case
in the present
scenario.
The auditor need to
apply test of details as
proper review is
required for every
account balances
associated with the
assets of the business
and transactions which
are undertaken by the
management of the
company. This
procedure would
appropriately help the
auditor to check the trail
of transactions and
thereby collect
appropriate evidences
whether the financial