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Question
Write a report on a Auditingin about 3000 words with refernce Auditing and Assurance in Australia
Answer
Question1
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Ratio |
Analysis |
Audit risk |
Audit procedure to reduce risk |
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Current ratio |
This ratio establishes the relationship between the current assets and the current liabilities of the company. It is of paramount importance that an effort is being made to ensure that sufficient amount of current assets are present with the company for the purpose of meeting its current liabilities as and when they occur in the business (Zhou, Simnett& Green, 2016). The company budgeted for a current ratio of 1.54 for the period of 2018. During the same time the ratio that is clocked by the entity is 1.64. There is an increase in the value of the ratio of the entity during the period of one year. This means that the company is investing its valuable cash into its current assets. The increase in the current ratio of the company is a good sign for the company from the perspective of maintaining its liquidity but at the same time it also means that significant portion of the company’s resources are not getting invested in such places or ventures which will help the entity to earn increased rate of return (Soh&Martinov-Bennie, 2015) |
It has to be noted that a ratio below the figure of one usually causes the risk of going concern for any entity (Ying & Patel, 2016). But, in this instance it is seen that the entity has been able to maintain its ratio above one. So there is no apparent cause of alarm in respect of its going concern assumption. But, there is a risk of non-payment due to the increase in the risk of the ratio |
The terms of the payment of the current liabilities of the entity needs to be checked thoroughly (Sutherland, 2017). This will help in the determination of the compliance of the company with respect to the payment being made on the due date.
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Quick asset ratio |
The budgeted quick asset ratio and the ratio that was prevalent for the year 2017 are same. This suggests that the company is satisfied with the level of current assets available with itself for the purpose of the mitigation of very short term liabilities as and when they occur (Simnett, Zhou & Hoang, 2016). The ratio has increased over the period of one year. This suggests increased ability of the company to meets its very short term liabilities as and when they occur. Though this is a very good sign from the perspective of liquidity for the company, this also suggests increased amount of investment in the working capital of the company. This leads to decreased amount of returns on a significant portion of the entity’s resources |
It has to be noted that a ratio below the figure of one usually causes the risk of going concern for any entity (Simnett, Carson &Vanstraelen, 2016). But, in this instance it is seen that the entity has been able to maintain its ratio above one. So there is no apparent cause of alarm in respect of its going concern assumption. But, there is a risk of non-payment due to the increase in the risk of the ratio |
The terms of the payment of the current liabilities of the entity needs to be checked thoroughly. This will help in the determination of the compliance of the company with respect to the payment being made on the due date (Simnett& Huggins, 2015).
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Return on equity ratio |
This ratio establishes the relationship between the net profits earned by the company and the equity ratio that is being utilised by it for the purpose of financing. As per the budget the ratio should be equal to 18.4% for the period 2018. The ratio amounted to 16.6 in the previous year. The increase in the budget suggests that the management of the company was expecting an increased amount of revenue generation for this year. The actual ratio that is clocked by the entity amounts to 14.7. The decrease in the ratio suggests that the amount invested by the equity shareholders in the capital structure of the entity is not being utilised properly by the company for the purpose of earning increased returns. This is not good news for the stakeholders for the company as the entity is failing to meet the expectations of the stakeholders of the company (Sam &Tiong, 2015) |
One of the audit risks that are associated with this is the presence of any serious concerns that has been brought forward by the shareholders. In addition to this the company’s ability to generate profitability for its shareholders in the future is also an audit risk |
The present rate of return that is being given out by other companies operating in same industry has to be determined. After the determination of the same, deviation will also have to be calculated. Auditor will have to ascertain that it is possible on the part of the company to cover up the gap in the performance in the recent future.
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Return on total assets ratio |
This ratio establishes the relationship between the total assets and the net profit that is earned by the company. The results of the ratio establish the ability of the company to generate profit by making optimum utilisation of the total assets that are held by the entity. The ratio amounted to 14.9 in the year 2017. The budgeted figure for the same in this year amounted to 16%. The actual figure that is clocked by the entity amounted to 12.5%. The decreased amount of ratio that is clocked by the company for the relevant period of time is a matter of grave concern for the shareholders as it shows the inability of the entity to earn increased amount of revenue for the company. The company must strive to increase its ability to earn profits by making optimum utilisation of its fixed assets over the period of time (Podger et al., 2018) |
One of the audit risks is the inappropriate usage of the assets by the company (Rao, 2017) |
It has to be checked that whether the entity has put in place any kind of measures to ensure effective and efficient utilisation of resources (Rahim &Idowu, 2015).
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Gross Margin |
It is one of the most important ratios as this shows the profitability of the company FO the relevant period of time by establishing the relationship between the sales and the profit that is earned by the company (Moroney & Trotman, 2016). The profit figure clocked by the entity for the year 2017 amounted to 10.3. The budgeted figure for the same in the current year is 10.8. The actual percentage of profit that is earned by the company amounted to 6.5. It is seen that the profitability of the company has reduced significantly over the period of one year. The company has even failed to clock its budgeted profit for the relevant period of time. Such significant decrease in the profitability of the company over the period of one year can be major source of concern for the shareholders. The primary reason for the same is that without making adequate amount of profit it will not be possible on the part of the company to sustain itself over long period of time |
One of the audit risks is whether the company is failing to meet the various benchmarks under which the market is currently operating (Laing & Hoy, 2018) |
One of the major steps to be taken up by the auditor will be to find out whether there is any significant increase in the cost of production in the recent times.
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Marketing Expense |
The figure of the marketing expenditure has decreased over the period of one year. The amount of marketing expenditure in the previous year amounted to 3.8 and the budgeted figure of the same in this year amounted to 3.6. The actual amount of budgeted expenditure amounted to 4.4. The marketing expenditure that is incurred by the company was even more than the budget prepared by the management of the company (Knechel &Salterio, 2016) |
One of the audit risks is that whether the amount invested by the entity is giving out the desired results or not. Whether the increase in performance as projected by the entity due to this expenditure actually achieved |
The auditor must obtain reasonable assurance that the marketing expenditure that is incurred by the entity is having a positive effect on the profitability of the entity.
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Administrative expense |
The administrative expenditure that was incurred in the last year amounted to 3.6. The budgeted expenditure that is prepared by the entity for this year amounted to 3.4. The actual amount or percentage that is clocked by the entity for this year amounted to 3.4. The company has been able to reduce its expenses in respect of administrative purposes. The same has been achieved by the entity by making sure that the amount incurred is equal to the budget prepared by the management of the company |
One of the audit risk associated with this figure is the over utilisation of the resources of the entity in this respect |
The auditor must ensure that adequate steps are being taken up by the entity to reduce the expenditure that is incurred by the entity in respect of administrative expenditure.
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Times interest earned |
This is a measure that determines the relation between the net profits and the interest payment to be made by the entity for the relevant period of time. The higher will the times of interest earned higher will the company’s ability to maintain its liquidity in the longer period of time. The figure clocked by the company in the last year amounted to 4.6. The budgeted figure of the same in the current year equalled 6.3. The actual figure that is clocked by the entity amounted to 3.6. This shows that the ability of the entity to pay its interest in has reduced significantly over the period of one year. It is unable to click even the budgeted figure that has been ascertained by the management of the company (Jones, 2016) |
One of the audit risks that are present is the compliance with the various terms and conditions that is associated with the payment of the interest related to the loans and borrowings taken up by it from various sources (Kend, 2015) |
The auditor will have to be checking the reasonability of the interest rates that are being paid by the entity by comparing the same with the rate of interest that is prevalent in the market under the same conditions.
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Days in inventory |
This figure shows the number of days the production of the company stays with the entity. The longer the inventory stays with the company higher will the loss of the company with respect to the investment made by it in the working capital. It should be the aim of the entity to reduce the number of days in the inventory. The last year figure of the entity amounted to 32.9 days. The budgeted figure of the same in this year amounted to 32.2. The actual figure that is clocked by the entity in the present year amounted to 34.9. It is seen that the management of the company has been planning to reduce the number of days in the inventory but the same has increased over the period of one year |
One of the significant risks that are present in this is ineffective control over the inventory by the entity |
The steps to be taken up by the auditor of the company will include determination of the reason for the increase in the number of days in the inventory i.e. whether it was accidental or deliberate. The inventory of the entity will have to be checked for existence as well as quantity valuation.
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Days in accounts receivable |
This figure shoes the number of days required to get cash from the debtors of the company. The lower the period the higher will be the benefit for the company. The last year figure of the same amounted to 51.5. The budgeted figure of the same for the same period amounted to 49.8 and the actual figure that is recorded by the entity for the same amounted to 53. It is seen that though the management of the company plans to reduce the number of days the same has increased significantly over the period of one year |
One of the major audit risks that are concerned with this is the poor application of credit control methodologies by the management of the entity |
It is required on the part of the auditor to find out the reason for delayed payment on the part of the customers. Another factor is whether the entity is earning interest on the amount that is outstanding from the customers.
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Debt to equity ratio |
This ratio determines the level of usage of debt by the company in its capital structure. The higher will be the debt, the higher will be the risk of insolvency on the part of the company. The last year figure of the same amounted to 0.52. The budgeted figure of the same amounted to 0.43 and the actual figure that is clocked by the entity in the present year amounted to 0.61. It is seen that the debt used by the entity in the last one year has increased |
The increased amount of debt increases the risk of insolvency. |
The terms and conditions of the payment of the amount taken as loan needs to be gone through by the auditor. |
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Current ratio |
This ratio establishes the relationship between the current assets and the current liabilities of the company. It is of paramount importance that an effort is being made to ensure that sufficient amount of current assets are present with the company for the purpose of meeting its current liabilities as and when they occur in the business (Zhou, Simnett& Green, 2016). The company budgeted for a current ratio of 1.54 for the period of 2018. During the same time the ratio that is clocked by the entity is 1.64. There is an increase in the value of the ratio of the entity during the period of one year. This means that the company is investing its valuable cash into its current assets. The increase in the current ratio of the company is a good sign for the company from the perspective of maintaining its liquidity but at the same time it also means that significant portion of the company’s resources are not getting invested in such places or ventures which will help the entity to earn increased rate of return (Soh&Martinov-Bennie, 2015) |
It has to be noted that a ratio below the figure of one usually causes the risk of going concern for any entity (Ying & Patel, 2016). But, in this instance it is seen that the entity has been able to maintain its ratio above one. So there is no apparent cause of alarm in respect of its going concern assumption. But, there is a risk of non-payment due to the increase in the risk of the ratio |
The terms of the payment of the current liabilities of the entity needs to be checked thoroughly (Sutherland, 2017). This will help in the determination of the compliance of the company with respect to the payment being made on the due date.
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Quick asset ratio |
The budgeted quick asset ratio and the ratio that was prevalent for the year 2017 are same. This suggests that the company is satisfied with the level of current assets available with itself for the purpose of the mitigation of very short term liabilities as and when they occur (Simnett, Zhou & Hoang, 2016). The ratio has increased over the period of one year. This suggests increased ability of the company to meets its very short term liabilities as and when they occur. Though this is a very good sign from the perspective of liquidity for the company, this also suggests increased amount of investment in the working capital of the company. This leads to decreased amount of returns on a significant portion of the entity’s resources |
It has to be noted that a ratio below the figure of one usually causes the risk of going concern for any entity (Simnett, Carson &Vanstraelen, 2016). But, in this instance it is seen that the entity has been able to maintain its ratio above one. So there is no apparent cause of alarm in respect of its going concern assumption. But, there is a risk of non-payment due to the increase in the risk of the ratio |
The terms of the payment of the current liabilities of the entity needs to be checked thoroughly. This will help in the determination of the compliance of the company with respect to the payment being made on the due date (Simnett& Huggins, 2015).
|
|
Return on equity ratio |
This ratio establishes the relationship between the net profits earned by the company and the equity ratio that is being utilised by it for the purpose of financing. As per the budget the ratio should be equal to 18.4% for the period 2018. The ratio amounted to 16.6 in the previous year. The increase in the budget suggests that the management of the company was expecting an increased amount of revenue generation for this year. The actual ratio that is clocked by the entity amounts to 14.7. The decrease in the ratio suggests that the amount invested by the equity shareholders in the capital structure of the entity is not being utilised properly by the company for the purpose of earning increased returns. This is not good news for the stakeholders for the company as the entity is failing to meet the expectations of the stakeholders of the company (Sam &Tiong, 2015) |
One of the audit risks that are associated with this is the presence of any serious concerns that has been brought forward by the shareholders. In addition to this the company’s ability to generate profitability for its shareholders in the future is also an audit risk |
The present rate of return that is being given out by other companies operating in same industry has to be determined. After the determination of the same, deviation will also have to be calculated. Auditor will have to ascertain that it is possible on the part of the company to cover up the gap in the performance in the recent future.
|
|
Return on total assets ratio |
This ratio establishes the relationship between the total assets and the net profit that is earned by the company. The results of the ratio establish the ability of the company to generate profit by making optimum utilisation of the total assets that are held by the entity. The ratio amounted to 14.9 in the year 2017. The budgeted figure for the same in this year amounted to 16%. The actual figure that is clocked by the entity amounted to 12.5%. The decreased amount of ratio that is clocked by the company for the relevant period of time is a matter of grave concern for the shareholders as it shows the inability of the entity to earn increased amount of revenue for the company. The company must strive to increase its ability to earn profits by making optimum utilisation of its fixed assets over the period of time (Podger et al., 2018) |
One of the audit risks is the inappropriate usage of the assets by the company (Rao, 2017) |
It has to be checked that whether the entity has put in place any kind of measures to ensure effective and efficient utilisation of resources (Rahim &Idowu, 2015).
|
|
Gross Margin |
It is one of the most important ratios as this shows the profitability of the company FO the relevant period of time by establishing the relationship between the sales and the profit that is earned by the company (Moroney & Trotman, 2016). The profit figure clocked by the entity for the year 2017 amounted to 10.3. The budgeted figure for the same in the current year is 10.8. The actual percentage of profit that is earned by the company amounted to 6.5. It is seen that the profitability of the company has reduced significantly over the period of one year. The company has even failed to clock its budgeted profit for the relevant period of time. Such significant decrease in the profitability of the company over the period of one year can be major source of concern for the shareholders. The primary reason for the same is that without making adequate amount of profit it will not be possible on the part of the company to sustain itself over long period of time |
One of the audit risks is whether the company is failing to meet the various benchmarks under which the market is currently operating (Laing & Hoy, 2018) |
One of the major steps to be taken up by the auditor will be to find out whether there is any significant increase in the cost of production in the recent times.
|
|
Marketing Expense |
The figure of the marketing expenditure has decreased over the period of one year. The amount of marketing expenditure in the previous year amounted to 3.8 and the budgeted figure of the same in this year amounted to 3.6. The actual amount of budgeted expenditure amounted to 4.4. The marketing expenditure that is incurred by the company was even more than the budget prepared by the management of the company (Knechel &Salterio, 2016) |
One of the audit risks is that whether the amount invested by the entity is giving out the desired results or not. Whether the increase in performance as projected by the entity due to this expenditure actually achieved |
The auditor must obtain reasonable assurance that the marketing expenditure that is incurred by the entity is having a positive effect on the profitability of the entity.
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|
Administrative expense |
The administrative expenditure that was incurred in the last year amounted to 3.6. The budgeted expenditure that is prepared by the entity for this year amounted to 3.4. The actual amount or percentage that is clocked by the entity for this year amounted to 3.4. The company has been able to reduce its expenses in respect of administrative purposes. The same has been achieved by the entity by making sure that the amount incurred is equal to the budget prepared by the management of the company |
One of the audit risk associated with this figure is the over utilisation of the resources of the entity in this respect |
The auditor must ensure that adequate steps are being taken up by the entity to reduce the expenditure that is incurred by the entity in respect of administrative expenditure.
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Times interest earned |
This is a measure that determines the relation between the net profits and the interest payment to be made by the entity for the relevant period of time. The higher will the times of interest earned higher will the company’s ability to maintain its liquidity in the longer period of time. The figure clocked by the company in the last year amounted to 4.6. The budgeted figure of the same in the current year equalled 6.3. The actual figure that is clocked by the entity amounted to 3.6. This shows that the ability of the entity to pay its interest in has reduced significantly over the period of one year. It is unable to click even the budgeted figure that has been ascertained by the management of the company (Jones, 2016) |
One of the audit risks that are present is the compliance with the various terms and conditions that is associated with the payment of the interest related to the loans and borrowings taken up by it from various sources (Kend, 2015) |
The auditor will have to be checking the reasonability of the interest rates that are being paid by the entity by comparing the same with the rate of interest that is prevalent in the market under the same conditions.
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|
Days in inventory |
This figure shows the number of days the production of the company stays with the entity. The longer the inventory stays with the company higher will the loss of the company with respect to the investment made by it in the working capital. It should be the aim of the entity to reduce the number of days in the inventory. The last year figure of the entity amounted to 32.9 days. The budgeted figure of the same in this year amounted to 32.2. The actual figure that is clocked by the entity in the present year amounted to 34.9. It is seen that the management of the company has been planning to reduce the number of days in the inventory but the same has increased over the period of one year |
One of the significant risks that are present in this is ineffective control over the inventory by the entity |
The steps to be taken up by the auditor of the company will include determination of the reason for the increase in the number of days in the inventory i.e. whether it was accidental or deliberate. The inventory of the entity will have to be checked for existence as well as quantity valuation.
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Days in accounts receivable |
This figure shoes the number of days required to get cash from the debtors of the company. The lower the period the higher will be the benefit for the company. The last year figure of the same amounted to 51.5. The budgeted figure of the same for the same period amounted to 49.8 and the actual figure that is recorded by the entity for the same amounted to 53. It is seen that though the management of the company plans to reduce the number of days the same has increased significantly over the period of one year |
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