Audit Risks from Ratios and Internal Control and Sampling Method of API

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of the Student
Name of the University
Author’s Note

1AUDITING THEORY AND PRACTICE
Memo
To: Wayne Wiadrowski
From: The Audit Manager
Date: 8th May, 2019
Subject: Audit Risks from Ratios and Internal Control and Sampling Method of API
Purpose and Scope
It is needed for the auditors to analyse as well as examine the financial statements of the
companies with the aim to find any kind of material misstatements due to frauds and errors.
The same is applicable in the case of Always Precise Instruments Pty Limited (API). The
main purpose of this memo is to discussion about the potential audit risks in API from ratio
analysis and internal control regarding inventory. In addition, it discusses about the sampling
methods for the audit of API. These aspects are showing the following discussion in table
format.
Audit Risks from Ratios and Audit Procedures
Ratio Analysis Audit Risk Audit Procedures
Current Ratio There is an increase
in the current ratio
of API. This ratio is
less than the industry
benchmark. The
reason can be the
increase in current
assets or the
decrease in current
liabilities.
The potential audit
risk in this case can
be the misstatement
in the current assets
and current
liabilities, for
example decrease or
increase in the
current assets or
liabilities from the
management’s end
(Knechel & Salterio,
2016).
Test of details is the
required audit
procedure in this
particular risk where
it is needed for the
auditor to test the
details of the
documents related to
the payment and
acquisition of the
current assets and
liabilities. This audit
procedure will help
in demonstrating the
correct values of the
current assets and

2AUDITING THEORY AND PRACTICE
liabilities (Gay &
Simnett, 2012).
Quick Asset Ratio The provided
information
demonstrates
increase in this
ration in the current
year. It implies that
API is converting
their current assets
in the quick assets in
less time so that the
current liabilities of
them can be met.
Material
misstatements in the
quick assets or quick
liabilities can be
considered as the
potential audit risk
in this case which
can involve the
overstatement of the
quick assets or
understatement of
the current liabilities
(Gay & Simnett,
2012).
Audit procedure in
this case include the
test of details and
test of control
related to the quick
assets and liabilities
where the auditor is
needed to test the
accounting books
and entries related to
the quick assets and
liabilities so that the
auditor can identify
the misstatements in
the quick assets and
liabilities
(Johnstone,
Gramling &
Rittenberg, 2013).
Return on Equity There is a decrease
in this particular
ratio in the year
2018 and this ratio
in API is less than
the industry
benchmark. This can
be a reason of the
increase in the
equity capital of the
company or the
decrease in net
The presence of
misstatement in the
equity capital can be
the potential risk in
this situation that
can lead to the
decrease or increase
in this ratio. The
amount of debts can
be reduces by
misstating the equity
capital (Legoria,
Test of details
related is the correct
audit procedure in
this case where the
responsibility of the
auditor is to check
the accounting
books, record and
transactions related
to equity share
capital in order to
identify

3AUDITING THEORY AND PRACTICE
income. Melendrez &
Reynolds, 2013).
misstatements in
them. This will
reduce to this
particular risk.
Return on Total
Assets
There is a decrease
in this particular
ratio in API in 2018
which indicates that
the company has not
been able in
efficiently using
their assets in the
current year for the
purpose of profit
making.
Material
misstatements in the
account balances of
the assets of API can
be the potential audit
risk in this situation
due to the fact that
decrease in this ratio
is the indicator of
the earnings of the
firm (Gay &
Simnett, 2012).
Test of details is the
major audit
procedure in this
case where the
auditor is needed to
check the details of
the accounts balance
and accounting
transactions of the
company’s assets.
This procedure is
helpful in showing
the presence of
material
misstatements in the
asset balances
(Yoon, Hoogduin &
Zhang, 2015).
Gross Margin There is decrease in
the gross margin of
API in 2018. This
ratio is significantly
less than the industry
benchmark. The
main two reasons for
this decrease in this
ratio are decrease in
sales and increase in
cost of sales.
Misstatements in the
values of sales and
cost of sales are the
potential audit risk
in this aspect.
Keeping the gross
profit low can be the
motivation behind
this misstatement
(Moroney &
Trotman, 2016).
Test of details and
test of control are
the audit procedures
for this risk. Thus, it
is needed for the
auditor of API to test
all the transactions
relation to sales and
cost of sales, the
auditor is also
needed to test the