Weakness in Inventory Internal Control, Audit Risk and Procedures

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

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AUDITING
Memo
To: Mr Wayne of Always Precise Ltd
From: Auditing Manager
Date: 12th May, 2019
Subject: Discussion Regarding Audit risks of API
Purpose and Scope
The process of audit for Always Precise Instruments Pty Limited (API) is being conducted for
the purpose of analysing the financial statement and ensuring that the annual report of the
business is providing a clear view of the financial position of the business. The memo is
provided with explanation relating to the audit risks which is applicable on the ratios computed.
In addition to investigation into the workings of internal control system would also be done to
understand whether the same is working appropriately or not. The discussion regarding the ratios
is presented in the table below:
Ratios Analysis Audit Risks Audit Procedure
Current Ratio This estimate is a
sign for evaluating
the liquidity status of
the business and as
per analysis of the
current ratio of API
ltd for the year 2018,
there is a significant
increase in current
ratio is seen. This
may be because of an
increase in current
assets of the business
or a decrease in
The main risk which
arises from this
particular ratio
discrepancies is
related to
misrepresentation of
the current assets and
liabilities of the
business which would
ultimately affect
accuracy of reporting
of the business
Test of details is the
procedure which the
auditor should
considered while
going through all the
transactions of the
business which are of
immediate nature and
also checking the
values of short term
assets for assessing
whether there is any
risks present in the
same or mot

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AUDITING
current liabilities
might also have the
same effect
Quick Ratio The quick ratio of the
company is quite
similar to current
assets but deals with
more liquid assets
and liabilities. There
has been an increase
in these estimates as
well which might
suggest an increase in
quick assets or
decrease in quick
liabilities
The risk which is
connected with such
assets is risk of
material misstatement
which can affect the
flow of cash and
affect the cash
position of the
business disabling
them from meeting
current obligations.
The auditor must
proceed with test of
details and test of
control while
assessing the
balances of the assets
and liabilities of short
term nature and also
looking out flaws in
internal control
system which can
affect the reporting
framework of the
company.
Return on Equity The return on equity
estimate is shown to
have fallen in
comparison to
previous year but the
same is still lower
than industry average
of the business. This
estimate is considered
as important as
potential investors of
a business relies on
the estimate for
taking major
The main risk which
can be identified with
this estimate is that
the figures of profits
or equity capital
might be
misrepresented which
has a negative impact
on reporting of the
business.
The most accurate
audit procedure
which can be applied
in such a case is Test
of Details which
would help the
auditor to collect
appropriate audit
evidences to confirm
or deny whether the
financial statements
are free from material
misstatement or not
(Byrnes et al., 2018).

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AUDITING
decisions regarding
investments
The auditor needs to
check equity and
profit balances for
making appropriate
estimate regarding
the accuracy of the
financial statement.
Return on Assets The return on assets
estimate is an
important estimate as
the same is
considered by
investors and
therefore the same is
considered to be
important for a
business. The
estimate is shown to
have fallen in
comparison to
previous year
estimate which mat
be due to fall in
profitability or
overvaluation of
assets of the
company.
The risk relating to
audit deals with
material misstatement
in the balances of
income statement or
overvaluation of
assets (Vasarhelyi,
2018). Such kind of
risks would seriously
affect the financial
position of the
business and also the
profit of the business.
Test of details as a
audit procedure needs
to be applied as the
same would assess
every transaction
related to income or
expense items of the
business. The auditor
of the business also
needs to apply
verification practices
for appropriating
assessing the values
of the assets which is
shown in annual
reports (Christensen,
Glover & Wolfe,
2014). The auditor of
the business has an
important role in
assessing whether the
financial statements
are misstated or not.
Gross Profit Margin The gross profit The main risks which The main tests which