Audit Risk Report - Analysis of DON & RUMPT Ltd. Financial Statements

This report assesses the audit risks associated with DON Ltd. and RUMPT Ltd., two retail sportswear companies, for the financial year ending June 30, 2018. As part of the audit process conducted by Pran & Partners, the report analyzes key financial ratios, including current ratio, quick assets ratio, operating cash flow ratio, days in receivables, inventory turnover ratio, days in payables, and debt-to-equity ratio, over a four-year period. The analysis identifies areas of inherent and control risks, such as fluctuations in liquidity ratios and increasing days in receivables and payables, which could impact the accuracy of the financial statements. The report highlights specific risk areas for each company and provides insights into the potential for misstatements, emphasizing the importance of careful examination of these trends during the audit process. The report concludes by summarizing the key risks and recommending further investigation to ensure the financial statements are accurate and reliable.

Running Head: AUDITING
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Name of the Student
Name of the University
Author Note

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Table of Contents
Audit Risk..................................................................................................................................2
Answer to Question 2.............................................................................................................2
Reference....................................................................................................................................4

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Audit Risk
Answer to Question 2
The areas in which there risk concerns in the financial statements are presented in
following table:
DON Ltd.
Ratios Risk
Current Ratio Inherent Risk
Quick Assets Ratio Inherent Risk
Days in Receivables Control Risk
Inventory Turnover Ratio Inherent Risk
Days in Payables Control Risk
Figure 1: Risk Ratio of DON Ltd.
RUMPT LTD.
Ratios Risk
Days in Receivables Control Risk
Days in Payables Control Risk
Figure 2: Risk Ratio of RUMPT Ltd.
The current ratio of DON ltd. from the year 2015-2018 shows the major fluctuations.
Liquidity ratio is calculated for measuring the company’s ability for paying the short term;
liabilities. The trend from 2015-2016 shows that there was increase in the liquidity position
of the company but it has decreased in the year 2017-2018. It is recognized as inherent risk
area because there is the chance of mistaken in the current assets and the liabilities (Knechel
& Salterio, 2016). The quick ratio also possesses inherent risk because of major decline in the
quick ratio. The ideal quick ratio is 1:1, but the trend shows decline in 2018. The days in
receivables also shows there is control risk prevailing in the company because the days taken

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by the company is increasing drastically over the years. Moreover, Inventory turnover ratio
of the company is also increasing drastically which possess control risk because there may be
the chances of inherent risk. The days in payable refers to the days taken by the company to
pay bills. It is the risk are that constitutes control risk because the trend from the year 2015-
2018 shows that every year the days taken by the company for the payment is increasing to
large extent (Yoon, Koogduin & Zhang, 2015).
In case of RUMPT Ltd., there is control risk in case of days of receivable and days of
payables. In case of days in receivables, the trend shows that there is drastic increase in the
days for receiving amount against sales done. Hence, this needs to be checked because it
possesses control risk of the company. In addition, the second risk area of this company is
days in payables. The company days for paying against the purchases is drastically
increasing, it shows there is control risk in this area (Knechel & Salterio, 2016).
Hence, these are the areas, which must be considered and action should be taken
against these risk.

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Reference
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.
Yoon, K., Hoogduin, L., & Zhang, L. (2015). Big Data as complementary audit
evidence. Accounting Horizons, 29(2), 431-438.