Audit Risk Analysis of API: Internal Controls, Ratios, and Procedures

This report, prepared as a memorandum to Wayne Wiadrowski, analyzes the audit risks associated with Always Precise Instruments Pty Limited (API). It examines various financial ratios, including current ratio, return on equity, return on total assets, gross margin, marketing expenses, sales expenses, times interest earned, days in inventory, days in accounts receivable, and debt-to-equity ratio, comparing them to industry benchmarks and identifying potential misstatements. The report details audit procedures to address these risks, such as testing account balances, verifying capital, analyzing sales figures, and assessing inventory and debt management. Furthermore, it highlights internal control weaknesses related to the company's reliance on its system for purchase orders and inventory management, emphasizing the associated risks and recommending mitigation strategies. The analysis aims to provide a comprehensive understanding of API's financial health and guide the auditor in forming an informed opinion on the company's financial statements.

Running head: Auditing and Assurance
Auditing and Assurance
Name of the Student
Name of the University
Author Note

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Auditing and Assurance
Memorandum
To: Wayne Wiadrowski
From: Audit Manager
Date: 8th May, 2019
Subject: Analysis of the audit risk in the ratio and internal control of API.
Purpose of the Memo
The first responsibility of the auditor is to check whether the financial statement are showing
true and fair view or not. It is their duty to know to check all the details of the company and
also to give proper opinion of the company financial statements and to check whether there is
any fraud is going in the company or not. In the given case it can be seen that auditor of
Always Precise Instruments Pty Limited is performing the audit and using the financial ratio
as a base to judge the potential risks in the business and what are the audit process which can
be taken by them in the same. It also include the internal control weakness of the company
and also the sampling size which is been used by the auditor in regards with the audit process.
The different aspects of the company are been shown in the coming table which are listed
below:
Audit Risk and their Audit Procedures
Ratio Analysis Audit Risk Audit Procedure
Current
Ratio
The current ratio has
been increase as in
current year is 1.64
which is a very good
sign that the company
is able to make their
liquidity position
better in compare to
previous year
(Chambers and Odar
2015). It is because of
High amount in
current asset or low
value of current
liability
As the company current
ratio is been less than the
industry benchmark so it
can be because
misstatement in the
balance of the asset and
liability so the company
must have alter their
value so it can show a
decrease or increase in
the current ratio De
(Simone, Ege &
Stomberg 2014).
The procedure which
the auditor should carry
it should apply test of
control as it should
verify the account
balance of both current
asset and liabilities so
that it can know where
there is material
misstatements in the
company (DeFond &
Zhang 2014).
Quick
Ratio
As per the data given
this clearly show that
the company have
increase in the quick
ratio as in 2018 it is
0.91 which is good in
There can material
misstatement in the quick
ratio as it help the
company to get more
number of investors by
seeing the quick ratio
As the auditor should
perform test of control
method as it should
verify the changes
properly in regards with
quick asset and current

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Auditing and Assurance
compare to 2017 0.87
so it show company
has increase its cash
asset more so this is a
good symbol as they
can easily able to pay
their short term
liability easily and
effectively (Donelson,
Ege & McInnis 2016).
increase so the company
may have done alter the
value to show a good
ratio to the financial user
of the company
(Furnham & Gunter
2015).
liability so that it can
know the reason of the
increase in the current
ratio.
Return on
Equity
The return on equity
has been decreased in
the current year as in
2018 it is 14.7 but in
2017 it was 16.6 so it
show that the
company have
increase the capital
and due to these the
ratio have been
decrease in the current
year
As the ratio is also
decrease in compare to
the benchmark of the
industry so this signify
that there is a risk of
material misstatements as
showing low amount
return on equity help
them to reduce the profit
as it can be because they
have increase in the
capital so this ratio got
decrease in the current
year (Gay & Simnett
2012).
The auditor should do
the verification of the
capital and the rate
which is been used by
the company as it will
help them know how
the company is able to
increase the capital in
the company and the
reason behind of the
increase in the equity
capital (Gerakos &
Syverson 2015).
Return on
Total
Assets
The given data shows
that the company has
decrease in the return
on total asset as in
2018 it was 12.5 but
in 2017 it was 14.9 so
this show the
company is unable to
do the proper
utilization of the asset
and as a result it is
having a decrease in
the ratio.
As it is seen that the
company ratio is also
below the industry
benchmark so it is a risk
and as the management is
not able to do the fuller
utilization of the asset
and so it is the reason
that the ratio has been
decreased in the
company an directly
affect the earning of the
company (Griffiths
2016).
The auditor should do
in-depth analysis of the
company accounts and
the transaction related
to the asset so that it can
able to know the real
reason why the
company is unable to do
fuller utilization of the
assets (Hall 2015).
Gross
Margin
As per the data given
it can be clearly seen
there is a huge
decrease in the ratio in
the current year as in
2018 it is 6.5 but in
2017 it is 10.3 so this
There can be material
misstatement in the
company as the company
must have stated wrong
amount of sale so that it
can decrease the gross
profit of the company
Auditor should carry
test of control under this
situation as the sale
should be tested by the
auditor and also should
check the market
demand so that it can

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Auditing and Assurance
show that the
company is unable to
get proper sale in the
current year and as a
result the ratio got
decrease. It is because
of low amount of sale
or high cost expenses.
and able to save amount
of tax from it
(He ,Zeadally & Wu
2018)
assume about the sale
amount which is there
in the financial
statement and can
conclude whether they
are any material
misstatement or not
Marketing
Expenses
There is high increase
in the marketing
expense of the
company as in 2018 it
is 4.4% but in 2017 it
is 3.8% so this is
increase and it will
directly affect the net
profit of the company.
As there is high amount
of marketing expenses is
there this signify that the
company must done
some material
misstatement in the
expenses it must have
overstated the expenses
as it is also increased in
compare to industry
benchmark so this show
company is able to get
high amount of the
expenses which not a
good sign in regards with
the net profit of the
company (King 2014).
The auditor should
carry test of control
methods as there is an
increase in the expenses
so the auditor should
verify the invoice and
also should check
whether the expenses
are done in some other
cases are not been
included in this
expenses.
Sales
Expenses
As per the data it is
clear that there is a
decrease in the ratio as
in 2018 it is 3.4% and
in 2017 it is 3.6% so
this the good sign that
the company is able to
control the expenses
and as a result it will
able to increase the
overall profit of the
company.
As the company expense
is even low compare to
the industry benchmark
so there can be a risk of
material misstatement in
the account and the
company may have
decrease the value of the
expenses so that it can
able to show an increase
in gross profit and can
misstated it to the
financial user of the
company (Knechel &
Salterio 2016).
Auditor should use test
of details method in this
scenario as it should
check the details of the
invoice of the sale so
that it can conclude
about the fairness of the
expenses and can check
the reason of material
misstatement.
Times
Interest
Earned
The data show that the
company have got a
decrease in the ratio as
in 2018 it is 3.6 but in
2017 it was 4.6 so this
show that the
As per the given scenario
it can be say that there is
material misstatement in
the ratio and as it help
the company to decrease
their borrowing cost and
Auditor should perform
different process in this
case as it should able to
check all the borrowing
details so that it can
know what are the

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Auditing and Assurance
company is unable to
get sufficient earning
and as a result of it the
company is unable to
make proper
repayment of the
borrowing done by
them.
also it directly affect the
earning capacity of the
company (Kumar &
Sharma 2015).
amount which is going
to be pay by the
company and the reason
why they are unable to
pay the required amount
in the current year.
Days in
Inventory
There is increase in
the day in the current
year as in 2018 it is
34.9 and in 2017 it is
32.9 so it is company
is increasing its
inventory stock so this
signify that the
company is able to
make the inventory
perform very well in
the business.
There can be material
misstatements in the
inventory as the company
may have increase the
cost of the inventory so
that it can able the gross
profit of the company (Li
et al., 2016).
Auditor should carry
test of control method
in this case as it will
help them to know what
are the reason of
increase in the
inventory and how the
company y manage to
such increase and it also
help them to know the
reason for material
misstatement in the
company.
Days in
Accounts
Receivable
There is an increase in
the account receivable
of the company which
indicate that the
company is giving
more time to the
debtors to pay back
the money as it help
them to increase the
sale by changing the
payment tenure of the
company.
There is misstatement in
the accounts as the
company may have
increase the sale but they
may have overstated the
account balance and as a
result the company have
done material
misstatement in the
financial statement of the
company (Lin et al.,
2014).
Auditor should check
test of control methods
as it should as it should
check the internal
control weakness of the
company as this will
help them to get an
overview of the
inventory system and
also it will help them to
know the reason of
material misstatements
in the accounts.
Debt to
Equity
Ratio
There is an increase in
the debt ratio of the
company so this
signify that the
company have got an
increase in the debt
and so as a result this
ratio has been
increased.
As it have got some
misstatements in the debt
so it can be risk in the
audit process so the
company may have over-
valued the long term
liability so that it can
show an increase in the
debt ratio of the company
and can able to influence
financial user to invest in
Auditor should access
the debt of the company
and should check all the
details regarding the
dent so that it can know
the reason of the
increase in the debt
amount also it help
them to know the
material misstatement
in the company.

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Auditing and Assurance
the company (Newton et
al., 2015)
Inventory Internal Control Weakness and Risk associated with them
Internal Control Weakness Audit Risk Audit Procedure
The company is solely
depend upon the system in
regards with the generation
of the purchase order so is it
is a weakness, if there is any
problem in the system than it
will directly affect the
company and may dispute
may occur in the same
(Reeves, Culverwell &
Wittman 2017).
The audit risk in the given
case is that as the system
does not work properly so it
may happen the over or
under purchase order may
be generated and that can
affect the requirement of the
company and as a result it
will have to incur loss in
related to the same.
Testing of the internal
control should be the audit
process. As it should verify
the system properly so that it
can able to get them a good
amount of reason to trust the
system and also it should
able to make the error and
omission which happen due
to the internal control
weakness.
The company is totally
depend upon the system in
regards with the generation
of the purchase order so it is
consider as an weakness as
if the system is not working
properly than it can affect
the purchasing order of the
company (Sandvig et al,.
2014).
Audit risk in the present
case is that it can severely
affect the production
process as a result of it the
company may have to suffer
losses as it they are unable
to get details of the
production order so they not
able to do proper purchase
and as a result it will impact
on the business of the
company.
The risk associated in the
case is control risk so the
auditor should test the
system of the company and
also it should take necessary
steps so that the efficiency of
the system so that it can
know the amount of the error
which the company system
can make.
The system of company
automatically select the
suppliers as per the latest
update so it is consider as a
weakness as if the system
got some problem and
selected wrong supplier so it
will affect the company as
they may to pay high
amount of goods which they
could have got in low price.
This can directly affect the
relation of the raw material
and finished goods as if
they unable to get required
amount of the raw material
they will not able to make
any finished goods and it
will make a loss in the
business (Wang, Li & Li
2014).
The risk is associated with
the situation is control risk
and the auditor should able
to do substantive procedure
so that it can check the
system periodically and also
keep a record of its
efficiency so that it will
directly affect the company
and can know the reason of
material misstatements in the
account.
Company had given the
password of its master file to
the clerk so it is consider as
an internal control weakness
As it is not its responsibility
still it have given the
password so that it can
easily manipulate the
Auditor should carry test of
control method as it should
check all the details in the
master file so that it can

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Auditing and Assurance
as there is no need to
provide the person with the
password as its duty is just
to make the copy of the
purchasing order.
account and make material
misstatement in the
accounts (Wang, Li & Li
2015).
know whether there is any
error or omission in the file
or not and can also know
whether there are any
manipulation which is been
done by the clerk in the same
Company had given access
to the production controller
in regards with the printing
of order as well as master
files so it is an internal
control weakness as it can
easily manipulate the master
files by issuing false
production orders.
The risk is very high as the
production controller can
easily manipulate the files
and can show less amount
of the production compare
to real production so this
directly affect company
production and can also
affect the cost of goods sold
by the company (Wang et
al., 2015).
The auditor should observe
the production controller and
also should take necessary
steps to find whether it have
manipulated the files or not
and what are the reason
company gave it both access.
Company have gave
password of both printing of
material as well GRN of
finished goods to the store
staff so this is a weakness as
the it can easily manipulate
the same and also it should
verify those and can change
as per the needs of the
company.
The risk is there as it can
directly affect the company
purchase of raw material as
well as production of
finished goods (Yu et al.,
2015).
The auditor should carry its
process it should check why
the company have gave it the
access of both as it should
give access to a two different
person so that no
manipulation of the accounts
can take place.
Company master files is
been accessed by many
people so it is an internal
control weakness as there is
no confidentiality so any one
can issue or change the
name of suppliers and can
affect the company financial
position (Zhang, Yang &
Appelbaum 2015).
The risk is related to the
production process and it
can be directly manipulated
by the employee of the
company and which can be
the reason that the company
will not be able to run a
smooth flow of business in
the same (Yuan & Yu
2015).
The auditor should ensure
that the company should give
the password to a single
person so that it can able to
make no manipulation in the
account and the production
process of the company can
run smoothly
Company does not include
the count of the stock so it is
consider as an internal
control weakness as if they
do not record the count than
The risk which is there in
the same is that affect the
company inventory
statement and can also
reflect it in the company
financial position.
Auditor should clearly check
all the stock as should record
all the transaction as it
should include its inventory
count and help them to make
an entry of the stock which
help the management to
know the details of the stock
in the company

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Auditing and Assurance
proper record will not be
able to be maintained by the
company (Gay & Simnett
2012)
.
Methods of Sampling in the Audit process
Assertion Which Population Sample Selection
Method
Justification for
Sample Selection
Method
Existence The population which the
auditor should take into
consideration is the
inventory of the company
as it got the high amount
of risk in the account. The
auditor should make
sample in regards with the
purchase of the raw
materials as it will give it
a scope to know the
details of each transaction
and also it allow them to
verify this account
properly
The nature of the
assertion in selection
in the selection
method as the
auditor Wayne
select the random
sampling method in
the context of the
purchase order of
the company and
also it help them to
get more size of
sample in regards
with the inventory
The selection is the
random selection
process which help the
auditor to get more
amount of sample size
and also it help him to
know the inventory
more easily and
effectively.
Completeness The assertion state that the
financial book of the
company is been made
properly and had complete
amount of the transaction
as it include all types of
the transaction and also
give a proper view of the
company financial
accounts
As per the nature,
the sample method
should be systematic
method of sampling
and help the auditor
to check the files
easily as in this the
population is been
divided in to small
parts.
It is the easiest
method of sampling as
per the auditor choice.
This help the auditor
to identify the
appropriate amount of
the sample as it will
take into consideration
about the raw material
of the company and
also the finished
goods.

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Auditing and Assurance
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