Case Study B: Audit Planning and Risk Assessment for API (ACC568)

This case study focuses on the audit planning and risk assessment for Always Precise Instruments Pty Limited (API), a manufacturer and supplier of small arms military equipment. The assignment begins with an analysis of financial ratios, including current ratio, quick asset ratio, return on equity, return on total assets, gross margin, marketing expenses, and times interest earned. The analysis highlights trends and potential areas of audit risk. The second part of the case study identifies internal control weaknesses within API, such as inadequate purchase order approval, lack of defined key business cycles, unauthorized transactions, no oversight and review, and inadequate physical security. For each weakness, the assignment outlines potential audit risks and suggests specific audit procedures to mitigate those risks. The case study provides a comprehensive approach to audit planning, risk assessment, and the evaluation of internal controls within a manufacturing company.

Answer 1
Ratio Analysis Audit risk Audit procedure to
reduce risk
Current ratio The current ratio has
been increased as
compared to last
year. The increase
may be because of
the increase in
inventory levels and
the accounts
receivables.
Sales and accounts
receivable are
recorded:
• That do not relate
to valid
sales/shipments
• At the incorrect
amount
• In the incorrect
period.
Invoices are
generated only upon
matching the
purchase order and
shipping documents,
completing a 3-way
match. The 3-way
match process is
performed within an
ERP system that
identifies the
purchase order and
shipping document
and generates an
invoice within
established
tolerances.
Quick asset ratio The quick ratio has
been increased
because there has
been an increase in
sales in the current
period.
Sales are recorded
prior to all necessary
revenue recognition
criteria being met.
Sales agreements are
reviewed by
personnel with the
requisite experience
to determine if the
revenue recognition
criteria are met.
Return on equity % Return on equity is
decreased as there is
a decrease in the
percentage of gross
margin, also
Inventory is received
and not recorded in
the inventory
system.
Physical inventory is
counted periodically
and discrepancies
are investigated and
corrected within the

marketing expenses
have also been
increased.
inventory records.
Inventory sheet
based on the
physical inventory
count is also
reconciled to the
general ledger
account with any
differences, if are
any are being
recorded as a book
inventory to physical
inventory
adjustment.
Return on total
assets %
Return on total
assets is decreased
as there is a decrease
in the percentage of
gross margin, also
marketing expenses
have also been
increased.
Inventory may be
removed from
inventory records
and recorded as a
cost of sales upon
shipment prior to the
transfer of
ownership.
Management
reviews and
approves the journal
entry and supporting
documentation for
inventory and cost of
goods sold for goods
that have been
shipped prior to the
transfer of
ownership.
Gross margin % Gross margin
percentage has been
dropped due to
pressure from
overseas sellers.
Going concern can
be affected in the
long term.
The auditor should
have a proper check
on the accuracy of
revenue from sales
and other items.
Marketing expense
%
Marketing expenses
have increased as the
government started
Operating expenses
are:
• Recorded for
Accounts payable
and operating
expenses are

buying from the
overseas seller. In
order to establish
itself, it is promoting
its business
transactions that did
not occur
• Not recorded for
transactions that did
occur
• Recorded at
incorrect amounts.
recorded
automatically by the
ERP system upon
matching the
purchase order,
completed service
order, and the
invoice received,
completing a 3-way
match.
Admin
expenses/sales %
Admin expenses
have shown a little
downward trend as a
percentage of sales,
as sales are
increased and admin
cost is a type of
fixed cost.
There can be
chances of admin
expenses hidden just
to increase the net
profit margin.
Check on all
invoices carefully
with respect to
accuracy and
completeness.
Times interest
earned
Seems like the ratio
has decreased. The
company may have
bought additional
funds
Interest expenses
relating to debt may
be got hidden or
parked into some
other general ledger
account.
The auditor should
check the loans and
advances register
carefully and see if
any loan has been
granted to the
directors of the
company in
pursuance to the
section.
Days in inventory Inventory holding
period has increased.
Inventory may be
overstated.
The auditor should
observe the physical
count procedure
carefully and should
do the stock count

on his own in order
to physically verify
the stock quantity.
Days in accounts
receivable
As sales have been
increased, so the
accounts receivables
also got increased,
which is the reason
why the current ratio
got increased too.
Debtors may be
inflated, as to
increase the net
profit.
The auditor should
do subsequent
testing of the debtors
in order to identify
whether the cash has
been actually
received or not.
Debt to equity ratio:
1
Time interest earned
ratio has decreased,
that is the reason
debt-equity ratio has
increased, maybe the
company has bought
some extra funds.
Company may have
a solvency problem
in the near future.
The auditor should
carefully assess the
lender from whom
the loan has been
taken and check
where the interest
payments are been
made.
Answer 2
Internal control weakness Audit risk Audit procedure to
reduce risk

A purchase order is not approved
by anyone. It is always system
generated.
Inadequate
documentation / records
The documentation gives
verification of the
essential trades. It is the
commitment to working
up authentic cash related
records. Cash related
files should be pre-
numbered to ensure all
trades are recorded and
spoke to. This will
thwart recording of a
comparable trade twice,
as there should not to be
any duplicate numbers in
your system. With
genuine numbering of
documentation,
following files that relate
to catching up
request/cases and request
from customers or
owners of prior trades
will be basic. Fitting
documentation would
doubtlessly give pleasing
reactions to most, if not
all, budgetary trade-
related request. Plus,
adequate documentation
will encourage the route
toward get-together
budgetary records and
completing appraisal

shapes.
The procedure not there if barcode
scan failed
Key business cycles not
properly defined
Administrators and
owners don't see the
need to make made
methodologies and
systems or basically even
basic flowcharts
portraying the key
business shapes, as some
privately-owned business
frames appear,
apparently, to be
uncomplicated. This, at
any rate, is probably a
champion among the
most unused control
gadgets where the most
regard can be
incorporated with little
effort. A feasible
framework can change
business goals and help
set up the best work on
working techniques. As
associations have
different focus zones,
different cycles will be
fundamental to your
business anyway for
most associations the
going with methods will
be essential.
Arrangements and

Accounts Receivable,
Cash Management,
Banking Procedures,
Purchases, and Accounts
Payable. For a business
selling items, stock
controls will be a
noteworthy cycle.
Recording key controls
in all of these cycles will
give straightforwardness,
consistency, and
unequivocal occupations
and obligations in all of
these cycles can without
quite a bit of a stretch be
consigned to express
individuals. At whatever
point improvements and
changes are made to your
systems, laborers can
quickly be instructed,
arranged, and raised to
speed.
Transactions are not authorized
properly and checked properly with
regards to accuracy
Lack of control with
authorization of
transactions
Endorsement of
purchases should occur
before the duty of
benefits. Dependent
upon the degree of the
business, measurements
of intensity can be
familiar with a better
crash the risk of

inappropriate spending.
For example, with
solicitations over explicit
dollar regard, say $1,000,
more than one reference
should be gotten which
could inevitably decrease
your general utilization.
Endorsing of trades
before setting orders
gives the owners/chiefs
the opportunity to
evaluate particular
purchasing options, and
guarantee things or
organizations got will
support the business
targets.
The master file can be amended by
the master clerk without any maker
and checker concept
No oversight and review Business people usually
get so connected with the
ordinary errands of the
business that they will
when all is said in done
negligence performing
basic study
methodologies. Business
visionaries should take
some time and
excitement for the cash
related records. This is a
noteworthy piece of
coercion expectation.
Not a lot of time is

required to review month
to month livelihoods,
utilization reports, stock
reports, spending versus
genuine totals, and
change reports. Having
an extra active procedure
will give the owner huge
analysis on how the
business is performing
and where any potential
issue zones or poor
execution zones may
exist. Review of the cash
related records is an
essential part and
commitment for the
better fundamental
initiative. The repeat of
the review of cash
related data depends
upon the volume of
trades and kind of
business, in any case, the
review of budgetary data
should, generally, be
driven on a month to
month premise.
Quantities are not counted by the
system itself. So, these are
dependent on the physical count
check
Dated or ineffective
information systems
Usually, autonomous
organizations continue
running on lean
resources and by no time
is routinely spent

evaluating information
systems. Putting time
around there could
incorporate numerous
efficiencies as time goes
on. Summary the
structures in your
business and the key
execution gauges you
need from each. Working
efficiently anyway these
will empower you to stay
engaged and capable.
Various simple to utilize
programming structures
are out there which could
abbreviate handling and
working cycles - and are
not excessively costly to
work.
A client information system is
unable to provide the required stock
information and security to the
stock on day to day basis
Lack of physical &
logical security
Absence of physical
security of business
resources and assets will
result in the misfortune
and harm to resources
and assets. Access to
outfit, unimportant cash,
and check stock should
be restricted to
appropriate individuals
and set away or verified
a fitting secure zone. PC
hardware and systems

ought to be secret key
ensured and PC
passwords should be
changed within a
specified period. Having
firewalls and defensive
gadgets or programming
on PC frameworks is a
significant segment to
help anticipate security
ruptures. Assurance of
individual data and
banking data are winding
up progressively
significant with the
expansion in danger of
personality/Mastercard
robbery. Individual and
representative
information ought to
ideally be encoded and
put away in secure
organizers.
Production controller can also
amend the master file.
No formal ethical
policies and procedures
This control may not
have all the earmarks of
being noteworthy for the
accomplishment of a
business, anyway
without clear principles
on the usage of the
business assets and
wants, similar to
genuineness and ethics

from agents, associations
can open themselves to
inefficient angles and
misappropriation of
advantages. A code of
ethics is an open
revelation of the way
where an affiliation
works. A carefully
created and adroit ethics
procedure can fill in as a
correspondence vehicle
that reflects huge
characteristics and
destinations of the
business. It can give
guidelines of how
laborers ought to oversee
potential awful direct
just as misappropriation
of advantages and can
give game plan regard to
association regards and
obligations.
Accounts clerk file can be amended
by the production controller also.
Job roles and
responsibilities not
clearly defined
Delegates are your most
critical assets and as a
private endeavor, you are
very reliant on your
specialists. They are
delegates with
customers, suppliers, and
contenders. For this
beneficial resource to

being amazing in your
business, you should
give a reasonable course
and describe fitting
occupations and
commitments with
respect to each agent.
Occupation
employments and
commitments should be
clear and in a perfect
world be recorded as a
printed version. This will
encourage the route
toward detaching
commitments discussed
in the accompanying
section. New laborers
will quickly have the
alternative to reference
back to their
commitments and
understand their
occupations better.
The staff of stores is also
purchasing the raw material and
also issuing the good received note
Lack of separation of
duties
Private companies are
powerless to
misrepresentation by
their very own
representatives as
independent ventures
may have a couple of
workers with numerous
jobs. Every

representative ought to
have explicit
employment duties,
ideally recorded as a
hard copy to guarantee
there is no disarray in
relegated work jobs and
obligations. By and
large, doling out various
individuals the
obligations of approving
exchanges, recording
exchanges, and keeping
up the authority of
related resources, for
example, money and
charge cards
accommodates
progressively successful
inside control and less
open doors for
misappropriation of
advantages.
There is no control relating to the
protection of the information
system used, as data backup is not
there.
Inadequate disaster
recovery, backups, and
business continuity plans
The essentialness of
fortifications and
business congruity are
ordinarily under-
complemented. Systems
can be arranged so that
back-ups are performed
thusly and constantly.
Fortifications should be
made reliant on trade

volume and set away off-
site. To re-influence data
to can be anguishing,
repetitive, or not
practical in any way
shape or form. Business
Continuity plans plot
how recovery will be
drilled if there ought to
emerge an event of a
calamity. Whole deal
control power outages or
unsettling influences,
working environments
not available for broad
stretches of time, and
loss of staff on a
tremendous scale are not
all that wonderful and
can happen. Getting
ready for cataclysms
before they strike is
fundamental to the
survival of your
business. A disaster
recovery plan regularly
includes an emergency
plan, calamity recovery
plan, and a congruity
plan.

Answer 3
Assertion Which population? Sample selection
method
Justification for the
sample selection
method
Completeness Few of Depot’s Random A straightforward
irregular example
takes a little,
arbitrary bit of the
whole populace to
speak to the whole
informational index,
where every part has
an equivalent
likelihood of being
picked. Scientists
can make a
straightforward
irregular example
utilizing strategies
like lotteries or
arbitrary draws. A
testing blunder can
happen with a basic
arbitrary example if
the example does not
finish up precisely
mirroring the
populace it should
speak to
Convenience speaks
to the
greatestfavorable

position of
straightforward
arbitrary inspecting.
In contrast to
increasingly
confounded testing
strategies, for
example, stratified
arbitrary examining
and likelihood
inspecting, no need
exists to partition the
populace into sub-
populaces or make
some other extra
strides before
choosing individuals
from the populace at
irregular.
A basic irregular
example is intended
to be an impartial
portrayal of a
gathering. It is
viewed as a
reasonable method to
choose an example
from a bigger
populace since each
individual from the
populace has an
equivalent shot of

getting chosen.
Existence All High-Value Items High-value items are
selected because
they will cover the
entire population,
hence mitigating the
overall risk.
Stocktaking is the
tallying of available
stock. This implies
distinguishing each
thing available,
tallying it and
outlining these
amounts by the
thing. There may
likewise be a check
step, where the tally
results are contrasted
with the stock unit
includes in an
organization's PC
framework.
Stocktaking is a
typical prerequisite
of an intermittent
stock framework,
and may likewise be
required as a
component of an
organization's yearly
review.

To put it plainly, a
fundamental stock
taking outcomes in a
synopsis level record
that contains a
rundown of the
amounts available
for each stock thing
starting at a
particular point in
time. An
increasingly visit
type of stock-taking
is called cycle
tallying, which is
finished each day.
On the off chance
that an organization
utilizes cycle
tallying, the
distribution center
staff includes the
stock in a little
segment of the
stockroom and
matches its include
data against the
records in the PC
framework. On the
off chance that there
are blunders, the
distribution center

staff adjusts them
and furthermore
examines the basic
reasons why the
mistakes happened.
A functioning cycle
tallying project will,
at any rate, improve
the exactness
dimension of the
stock records, and
may even make it
superfluous to direct
a month-end
physical stock check.
An increasingly visit
type of stock-taking
is called cycle
tallying, which is
finished each day.
On the off chance
that an organization
utilizes cycle
tallying, the
distribution center
staff includes the
stock in a little
segment of the
stockroom and
matches its include
data against the
records in the PC
framework. On the

off chance that there
are blunders, the
distribution center
staff adjusts them
and furthermore
examines the basic
reasons why the
mistakes happened.
A functioning cycle
tallying project will,
at any rate, improve
the exactness
dimension of the
stock records, and
may even make it
superfluous to direct
a month-end
physical stock check.
With this
framework,
stocktaking is done
during the time
according to a pre-
decided game plan.
A-things might be
checked month to
month, B-things
tallied week by week
and C-things tallied
day by day. This
implies a ceaseless
stock tallying record
for everything is

kept up
demonstrating all
exchanges with the
goal that approvals
can be finished.
Examinations with
respect to any
disparities can be
spread throughout
the year and along
these lines right
thorough
investigation can be
accomplished. Year-
end records can
likewise be arranged
quickly if constant
approval is satisfied
according to a pre-
decided
arrangement.
There ought to be
negligible or no
effect on the tasks of
any stores as tallying
and approval is
finished during the
time-dependent on
never-ending stock
approval documents.
Any checks can be

finished all the time
of never-ending
stock reports against
the stock approval
document and
irregularities can be
recognized rapidly.