Pran & Partners Audit Risk Report: Don Ltd and Rumpt Ltd Analysis

This report, prepared for Pran & Partners, assesses the audit risks associated with Don Ltd and Rumpt Ltd, two sportswear retail companies. The analysis is based on a preliminary review of financial ratios from 2015 to 2018, including current ratio, quick assets ratio, operating cash flow ratio, days in receivables and payables, inventory turnover ratio, and debt-to-equity ratio. The report identifies key areas of risk, such as the decreasing quick ratio and operating cash flow, and the increasing days in receivables and payables. These trends are categorized as control risks or inherent risks, impacting the companies' going concern status and financial health. The discussion elaborates on the potential causes and implications of each risk factor, highlighting the importance of effective internal controls and risk management strategies. The report concludes by emphasizing the need for further investigation and audit procedures to address these identified risks.

Running head: AUDITING AND ASSURANCE IN AUSTRALIA
Auditing and Assurance in Australia
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Areas of Risk and Types of Risk.....................................................................................................2
Discussion........................................................................................................................................2
References........................................................................................................................................4

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Areas of Risk and Types of Risk
Sl. No. Areas with Risk Concern Types of Risk
1 Both Don Ltd and Rumpt Ltd has have decreased in
quick ratio in the recent years. This is a worrying
sign for these companies since their going concern
status may be in danger.
It is related to control risk.
2 There is decrease in operating cash flow ratios of
both of these companies in the recent years which is
an area of risk.
It is related to control risk.
3 Days in receivables of these companies have
increased in the recent years leaving a concern for
the business related to audit risks.
It is related to inherent risk.
4 Days in payable of these two companies have also
increased that indicates towards the presence of risk.
It is related to inherent risk.
Discussion
1st Risk – Decrease in quick ratio denotes that both these companies are lacking cash and other
quick assets to pay off their current business obligations. This can lead to business failure of both
Don Ltd and Rumpt Ltd and can endanger the going concern status of these firms. This can be
considered as the control risks because the internal control of these companies has failed in
detecting the decrease amount of cash and other quick assets in their business operations
(Knechel & Salterio, 2016).
2nd Risk – As per the above discussion, decrease in operating cash flow ratios in these two
companies indicates that these companies have generated less cash in the recent years by using
their operating activities. It states that these two companies are deriving cash from non-core

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activities. This can be considered as control risk due to the fact that the internal control of these
companies have failed in detecting the fact that these two companies were using non-core
activities for generating the required cash (Griffiths, 2016).
3rd Risk – Increase in days in receivable in these two companies indicates that these companies
were taking more time to collect the dues from their debtors. This can be considered as inherent
risk that cannot be controlled by the internal control of these companies. Some of the key reasons
for this can be the adoption of different sales approach that can be extended customer credit
facilities, introduction of different range of products, presence of economic issues resulting
customers to pay more slowly, deterioration of credit control and others (Johnstone, Gramling &
Rittenberg, 2013).
4th Risk – It can also be seen that there is increase in days in payable of these two companies
which indicates that these two companies were slowing the payment to their creditors. This can
be considered as inherent risk since it has relation with the days in accounts receivable. Increase
in days in receivables is affecting the payment to the creditors of these two companies. In
addition, this increase can be the reason of pressurizing the suppliers by these companies
(Coetzee & Lubbe, 2014). The managements of these two companies do not have any control on
these risk factors.

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References
Coetzee, P., & Lubbe, D. (2014). Improving the efficiency and effectiveness of risk‐based
internal audit engagements. International Journal of Auditing, 18(2), 115-125.
Griffiths, P. (2016). Risk-based auditing. Routledge.
Johnstone, K., Gramling, A., & Rittenberg, L. E. (2013). Auditing: a risk-based approach to
conducting a quality audit. Cengage learning.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.