2019 Audit Theory and Practice: Audit Report on API's Finances

This report presents an audit analysis of Always Precise Instruments Pty Limited, focusing on financial performance and internal controls. The analysis includes a detailed examination of various financial ratios such as current ratio, quick ratio, return on equity, return on total assets, gross margin, marketing expenses, administrative expenses, times interest earned, days in inventory, days in accounts receivable, and debt to equity ratio. Each ratio is assessed for its audit risk level and the corresponding audit procedures. The report also identifies and evaluates internal control weaknesses, proposing audit procedures to mitigate the associated risks, particularly in the areas of purchase order generation and inventory management. The report concludes with an overview of the audit process and its significance in risk management, providing insights into the company's financial health and operational efficiency.

AUDIT THEORY AND PRACTICE
2019

Audit
Executive Summary
The organizations in the present scenario are bound to have a high level of audit procedure
because it is in direct tune to the company’s functioning. The audit procedure is a mandate
that helps the company to function effectively. In this report, analysis of the items has been
done together with the audit procedure. Further, internal control and weakness has been
studied in the light of Always Precise Instruments Pty Limited.
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Audit
Contents
Introduction...........................................................................................................................................3
Requirement 1.......................................................................................................................................3
Requirement 2.....................................................................................................................................10
Requirement 3.....................................................................................................................................14
Conclusion...........................................................................................................................................15
References...........................................................................................................................................16
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Audit
Introduction
Audit strategy, as well as the process of audit plays a dominating role in the identification of
risks of material nature in the organization. This can help the company in steering ahead in
the area of complications and challenges. This report stress upon the fact that audit is an
essential function of the organization and plays a dominating role is the process of risk
management (Wright & Charles, 2012). The report further sheds light upon the mechanism
of risks management together with the process of internal control. Internal control weakness
can hamper the movement of the company and it is though the audit function that the same
can mitigated.
Requirement 1
Ratio Analysis Audit
Risk
Audit
procedure
Current ratio: This ratio is very useful for calculation of short term liquidity
position of the organization. Liquidity is the state of an
individual on an organization to repay the debts as soon as
possible. After observing the business of Always Precise
Instruments Private Limited it can be stated that the higher
volume of sales and reduced trade receivables make it necessary
for the organization to have an increasing current ratio so that
they can increase the cash flows which will further help them to
increase the sales. In order to make it possible for the
organization to improve the sales and decrease the debts at the
same time, it is very necessary for the company to improvise the
cash flow position so as to move the current assets and liabilities
at the same pace. This will keep the organization free from any
kind of loans because of which it can earn more revenue. For the
year 2018, it was observed that the current ratio improves from
1.54 to 1.64 which is very appreciable in nature. This ratio is not
sufficient in accordance with the industry average but the small
Low Risk In this
scenario
analytical
procedure
should be used
by the auditor
to compare the
current assets
and current
liabilities.
The ratio
comparison
should be
same over the
period of time
unless the
company
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Audit
woman attraction from the past year has made sufficient
budgetary changes. Hence, this becomes an area with low risk.
altered the
position.
Quick asset
ratio:
The quick ratio is also termed as the asset test ratio. It can be
calculated by comparing the total of liquid assets to a total of
liquid liabilities. It was observed for the year 2018 that the quick
ratio of the company improved just like the current ratio. Also
after analyzing this, it can be suggested that the current assets are
sufficient in order to fulfil the debts of current liabilities or they
are moving at a much-increased rate when compared to the
current liabilities which is very good for the organization. It is
very important for the order to check the current ratio and quick
ratio of the organization Always Price Instruments Private
Limited because of their increasing rates which may further help
the organization to improve the cash and cash equivalents and
also remove the debts. Hence, this can be termed as a low-risk
area.
Low Risk Similar
observation
will be made
in this case
where the
auditor should
have an
analytical
procedure. A
comparison
with the
previous year
data will fetch
a good
response in
terms of
evaluation.
Return on
equity %
Return on equity percentage is set to indicate the net profit after
tax as a percentage of the net worth of the organization. For this
particular case of Always Precise Instruments Private Limited, it
was observed that day equity return for the year 2017 was 16.6%
while the budgeted return on equity was stated to be 18.4%. The
unaudited figures were amounting to 14.7% but the industry
average is observed to be 17.3% because of which it doesn't
seem favourable for the organization. This value clearly suggests
that the management of the organization is not able to achieve
the target or goals certified by them in the budget. Hence, this
will call for an evaluation and study so that the projected area
can be clearly observed for vulnerabilities because of which the
company has failed to achieve the targets. Hence, this area will
Moderate
Risk
An
observation
should be
done by the
auditor in the
area of equity
return. An
evaluation and
study needs to
be done so
that the
projected area
can be clearly
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Audit
be of moderate risk. observed for
vulnerabilities
Return on
total assets %
The percentage of return on total assets is said to depict the
percentage of the total amount of assets that are present in an
organization. For Always Precise Instruments Private Limited,
this percentage was budgeted to be at 16% but actually, the
company was able to maintain only 12.5%. When compared to
the last year's figure of 14.9%, it can be stated that there was an
observable decline which is not good for the organization. The
increase in current ratio and quick ratio is good for the
organization but if at the same time the return on assets is
decreasing then it is very inefficient for the organization. This
area should be studied carefully because the increase in current
assets should also lead to an increase in the return on total assets.
Hence, this area constitutes of moderate risk.
Moderate
Risk
As it
constitutes
moderate risk,
the auditor
should
perform
Analytical
procedure that
will help in
knowing the
real cause
behind the
drop in the
ratio of ROA.
Gross margin
%
The gross margin percentage of the gross profit percentage is the
total operating profit percentage of inventories which is
accounted for before non-trading and non-operating items. For
Always Precise Instruments Private Limited it was observed that
the gross profit percentage had declined miserably to 6.5% which
was budgeted to be 10.8% after analyzing the previous year’s
data which stated the value of gross margin percentage to be
10.3%. The organizational strategies of the company clearly
stated that they wanted to improvise the sales but it is not
valuable for the company if there is a decrease in the gross
margin percentage. Hence, this area calls for a detailed analysis
of the auditor so that it any kind of risk present can be identified.
This area calls for high risk.
High Risk As this area
consists of
high risk, the
auditor needs
to follow a
diagnostic
procedure
where the
figures of the
last years
should be
compared and
an analysis be
done. the
reasonableness
in the sales
value needs to
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Audit
be ascertained.
Marketing
expense %
The marketing expenses percentage is the value which
determines the expenses that are being incurred by the
organization while selling or distributing the products. This value
includes various types of advertisement costs, selling costs,
distribution costs and packing costs. Always Precise Instruments
Private Limited, it can be stated that the marketing expense
percentage was budgeted to be 3.6% but actually amounted to
4.4% it which was previously 3.8%. Hence, this area constitutes
of low-risk.
Low risk Here the
auditor needs
to have the
reasonable
tests that will
help to know
the shortfalls.
A study of the
initiatives
undertaken by
the company
in terms of
marketing
procedure will
help to know
the differences
(Rezaee &
Kedia, 2015).
Admin
expenses/sales
%
The administrative expenses are the costs which are incurred by
the organization to fulfil the administrative activities like the
executive’s salary, director’s remuneration, etc. The budgeted
value for administrative expenses percentage was 3.4 % of the
sales which was similar to the actual figure. Hence, this area is
stated to have a low risk.
Low Risk The same is
with the
administrative
cost. Under
this head, the
auditor needs
to use the
procedure of
reasonable
tests that will
actually
differentiate
the operating
data with the
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Audit
one that is
attained
(Roach, 2010).
Times interest
earned
The times of interest earned amounted to 3.6 times which was
budgeted to be at a level of 6.3 Times. Previously, in the last year
figures, it was 4.6 times while the industry average is stated to be
at 4.2. Therefore, this can be a very important cause that can
reduce profits and increase the debts of the organization. Hence,
this area constitutes a high risk (Parrino, Kidwell & Bates,
2012).
High risk As it is an area
of high risk
the auditor
should use the
analytical
procedure that
will help in
knowing the
changes that
happened in
the times
interest earned
and to trace
the weakness
in the area.
Days in
inventory
The number of days for which the inventory was on hold was
also observed to increase to 34.9 against the budgeted level of
previously in the last year figures this amounted to 32.9. Hence,
this area is suggested to have a low risk.
Low risk The trend
analysis can
be used by the
auditor to
understand
why the days
in inventory
increased
(Peirson et. al,
2015).
Days in
accounts
receivable
A total number of days for which the account receivables were
observed are 53 while the deposited level was 49.8 days. The
industry average for this is supposed to be 46.9. For Always
Precise Instruments Private Limited, total debt collection is very
High risk The auditor
should assess
a trend line of
bad debt
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Audit
ineffective in value and hence is unable to meet the budgeted
efficiency levels. Hence, this area requires special attention of
the auditor. Therefore, this area is suggested to have high risk.
expenses and
the amount
should depict
a relation with
sales. If that
does not
happen then it
might be a
wrong practice
by the
management.
Debt to equity
ratio: 1
The debt to equity ratio is the ratio which helps to determine the
external liabilities that are being made by the shareholder's fund.
It can also be understood as the total debt that can be fulfilled by
one unit of equity. For Always Precise Instruments Private
Limited it can be stated that the debt to equity ratio was 0.61
which was higher than the budgeted level of 0.43. The industry
average for the debt to equity ratio is observed to be the
combined decrease in interest with time even after increased debt
makes it necessary for the auditor to analyze this part carefully
(Needles & Powers, 2013). Hence, this area is stated to constitute
a high risk.
High risk The auditor
should use
trend analysis
of the bad
debt
expenses. If
this is not
accurate then
management
might not
recognize the
bad debts at a
correct point
of time
(Peirson et. al,
2015).
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Audit
Requirement 2
Internal control weakness Audit risk Audit procedure to reduce
risk
Generation of purchase order: it has
been known that the stock is
automatically generated for purchase
once the raw materials fall below 70%
of month’s prior usage. If any kind of
mishap or non-attendance to the
producers of raw materials is made in
the files, then the stock will either not
be generated at all or will be generated
incorrectly which will not meet the
requirements of the factory. Hence, if
the file is not maintained correctly then
the stock can be overvalued or
undervalued because of irregular
attention (Matthew, 2015).
This area
constitutes of
moderate or low
risk because of
the effect that can
be observed on
the purchase
orders and
inventory value
which can affect
the
administration of
the business that
is conducted by
the organization.
The best way is to check the
employees to have correctly
calculated and update the
raw material consumption
that is being made by the
factory.
Recipe of raw material: the boxes of the
raw materials that are supplied to the
organization are being scanned into the
system so that they can be recorded.
There are no physical quality
verification systems present in the
organization which can lead them to
receive inferior quality goods without
any notice.
This area
constitutes of low
or moderate risk
but it can affect
the quality of the
raw materials
which will
ultimately affect
the quality of the
finished goods
(Hoffelder,
Proper physical verification
of the stock should be
conducted so that quality
can be checked at equal
intervals of time (Matthew,
2015). Also, the quantity of
the goods should be checked
regularly.
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Audit
2012).
Lack of emergency inventory options:
internal control system of the
organization is said to have options for
emergency inventory. There can be
situations where the supplier is not able
to fulfil the demand of the raw material
required by the organization and at the
same time, the inventory at the
warehouse exhausted. This can lead to a
situation where the company may face
huge loss because of the exhausted
stock aero material (Gay & Simnet,
2015).
High or moderate
risk is involved
because this can
affect the value
of the inventory
is direct because
of which the
administration of
business can be
hampered.
The emergency stock level
should always be maintained
in order to prevent the
organization from future
problems.
Production of finished goods- the order
is generated after the total value of the
finished goods fall below 60% of the
previous month sales. There may be
situations where the demand may arise
and certainly because of which the need
for finished goods will arise. And the
company may not be able to accept such
unnatural big order.
This area
constitutes of
high or moderate
risk because it
can affect the
sales department
of the
organization
drastically.
The production controller
should always be ready for
the generation of production
orders so that the future of
the organization can be kept
secured (Geoffrey, Joleen,
Kelli & David, 2016). The
production controller should
also keep in mind the auto-
generation of the production
order.
The production orders are observed to
be sent only to the raw material store so
as to pick up the slips that are to be
filled up by the production controllers.
The third copy should also be generated
so as to keep it in the stores as a record
of the finished goods. This will help the
This area
constitutes of low
risk and does not
affect the
administration of
business at large
Three copies of the
production order should be
made in order to keep the
proper required of the
finished goods. The first
copy should be handed over
to the raw materials to II to
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Audit
store manager to know the expected
delivery date of the next lot of finished
goods so that he could manage stock in
his department accordingly.
scale. the department head and the
third to the general
administrator of the business
so that a clear and
transparent view can be
created.
Selection of supplier of raw material
and finished goods- it is very important
for the organization to choose the
supplier of the raw material and
finished goods so that an efficient
system can be maintained in the
organization. The supply should be used
on the basis of the price and the
delivery that has been made by them in
the past. Any kind of vulnerabilities or
false present in their orders should be
properly judged before placing the
order. The first letter is very important
for the organization to check the prices
of the products so as to make
development in its organization by
generating proper revenue. Also, proper
time value analysis should be taken into
consideration so as to estimate the gap
between the date of purchase of order
and the date of scanning of goods
received (Coram, Mock, Turner &
Gray, 2012). The goods that have been
sent to the organization may consist of
deflated value goods because of which
it is necessary for the organization to
This area
constitutes of
moderate risk
because it affects
the
administration of
the business
carried out by the
organization with
respect to the raw
material
purchased by it
and the finished
goods that are
being produced.
The suppliers can be asked
for a quotation so that they
can be screened on a timely
basis on the basis of the
prices, time periods and
other factors stated by them
in their quotations (Elder,
Beasley &Arens, 2010)
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Audit
have a more lucrative and efficient risk
management system (Cappelleto, 2010).
Orders of the organization are generated
to the suppliers and subcontractors and
our further recorded on the master files
of the organization. This master file is
controlled by the production manager in
which records both raw materials and
the finished goods inventory. Hence, it
is very important for the supplier to
provide the raw materials and finished
goods at lower prices and small time
that so that the efficiency of the
organization can be improved. By
making proper amendments the
suppliers can also reduce the risk of
undue advantages for the services that
are being offered by the organization
(Cappelleto, 2010). Therefore, the risk
of collision between the production
control and the supplier arise in such
situations.
This area
constitutes of
moderate risk
because of the
vulnerability
present between
the relationship
of the production
manager and the
supplier.
Time to time to review
should be conducted in order
to see whether the correct
option has been chosen for
purchasing the goods or not
(Carcello, 2012).
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Audit
Requirement 3
Assertion Which population? Sample
selection
method
Justification for the
sample selection
method
Completeness Finished goods-they should be checked
in order to determine if they have been
completed in time and with proper
benchmarks and framework or not
(Baldwin, 2010). Also, physical
verification should be done in order to
test the degree of reliability and quality
so that the desired standard can be met.
Random Categorising the
finished goods stock
into category A, B or
C and random
sampling from
category A, B and C
after applying ABC
analysis.
Existence Raw material- the raw material should
be stocked in the departmental stores
physically so that they can be verified
for their existence. The existence of the
material is very important for the
organization because it will help them
to convert them into the finished goods.
Also, the quality of the raw material is
very important to be administered
because they will ultimately affect the
quality of the finished goods.
Random Categorising the raw
material stock into
category A, B or C
and random
sampling from
category A, B and C
after applying ABC
analysis.
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Audit
Conclusion
It is important for the auditor to ascertain the accounts of the company in an in-depth manner
because a difference can lead to potential issues. Therefore, each item of the accounts needs
to be carefully analysed. It is imperative that the auditor should take appropriate actions
where the difference arises. In case, an account does not have the proper evidence then the
same must be highlighted with a footnote. The risk management strategy depends entirely
upon the role of the auditor because it is the duty of the auditor to identify the material risks
in the business. The corrective actions need to be provided by the auditor to rectify the
mistakes that are present.
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Audit
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