Discussion Regarding Audit Risks of API

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

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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 need to show true and fair view regarding the financial
position of a business in order to ensure that the opinion of the investors is not affected in any
manner due to such an aspect. The business of Always Precise Instruments Pty Limited (API)
also need to adhere to such principles so that appropriate measures can be taken by the
management of the company in this respect. The memo would be stating facts which are
considered regarding the sampling tests which is applied by the business for collecting essential
audit evidences. The analysis of the ratios and risks they posses to the business are appropriately
discussed in the table below:
Key Ratios Analysis Audit Risks Audit Procedures
Current ratio The current ratio is a
representation of the
liquidity position of a
business and
considers the assets
and liabilities which a
business possesses.
As per the business
scenario in 2018, a
significant increase in
current ratio is seen.
This may be due to
increase in current
It is possible that the
current assets of the
business might be
materially misstated
and thereby this
would also mean that
the financial
statements of the
business are showing
an appropriate view
of the financial
position of the
business (Broberg,
Test of details is to be
performed by the
auditor for
ascertaining whether
the current assets
balances which is
projected in the
annual report of the
business is showing
true and fair view of
the financial situation
or not. The auditor
needs to test all the

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assets of the business
in relation to current
liabilities of the
business.
Umans & Gerlofstig,
2013).
relevant documents
which are associated
with payment of
current liabilities and
ensure that both
current assets and
current liabilities of
the business are
appropriately valued.
Quick Ratio The quick ratio is an
extension of the
current assets but the
same deals with
assets which are more
liquid in nature and
the ratio signifies
how well the
management of the
company can take
care of the most
immediate liabilities
of the business.
Any misstatement of
the current assets of
the business would
also affect the quick
ratio and therefore it
would also affect the
financial position of
the business.
The auditor of the
company needs to
apply test of details
and test of control
while assessing the
balances of the
current assets and
liabilities of the
business
(Appelbaum, Kogan
& Vasarhelyi, 2017).
The auditor needs
apply verification
process for ensuring
that the assets are
properly valued and
presented in the
annual reports of the
business.
Return on Equity The ratio
demonstrates a
relation between the
Any misstatement of
any income or
expense items can
The most accurate
audit procedure
which can be applied

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profits which is
generated by the
business and equity
capital used for
generating the profits.
As per the analysis,
there has been an
decrease in the
estimate and the same
is shown to be lower
than industry
average. This may be
due to fall in profits
of the business.
affect the profit of the
business and
therefore the financial
position of the
business is also
affected. A decrease
or misstatement
associated with
equity capital can
also affect the ratio.
in such a case is Test
of Details which
would effectively
analyse whether the
financial statement is
misstated or not in
terms of income or
any expense items.
The auditor of the
business also needs to
check the books of
accounts and all other
relevant document in
a detailed manner to
avoid any audit risk
which may arise.
Return on Total Asset This ratio is
considered to be one
of the indicators of
the success of the
business. The ratio
shows that there has
been a decrease in the
estimate of API in
2018. This is also an
indicator that the
management of the
company is not using
the assets of the
business
appropriately.
The main risk which
is identified in case of
this ratio is material
misstatement in
valuing the assets of
the business or it is
also possible that the
profit of the business
might be misstated.
Therefore, it can be
said that the financial
statement is not
showing true and fair
view of the business.
Performance.
The auditor needs to
apply Test of details
process as the same
would assess every
transaction related to
income or expense
items of the business
for ensuring that they
are accurate in nature.
The auditor would
also be adopting
verification process
for valuing the assets
of the business in
order to give him