Question 1:

A) Quick Assets Ratio:

Quick assets ratio means those assets which are readily convertible
into cash.
Quick Assets ratio = Liquid Assets
Current Liabilities
Liquid assets includes cash, marketable securities, and net accounts
receivable. It helps to provide a better picture of companys
liquidation position. If a ratio greater than 1 it is said that there is an
enough cash in order to pay current liabilities.
FCPL average ratio is 1.13 while its audited 2015 data and
unaudited 2016 data is constant of 1.45. FCPL industrys audited
and unaudited ratios are higher than its industry ratios. It indicates
that company is investing its resources into working capital which
may be profitable.
B) Inventory Turnover ratio:
Inventory turnover ratio measures the frequency with which
inventory is consumed in a year. It is calculated as:
Days in inventory = 365
Inventory Turnover
If the ratio is higher than it is said to be better entity at liquidating
inventory. Audited and unaudited Inventory turnover of FCPL has
higher than inventory average so it is generally considered to be
desirable. Auditor needs to check the inventory level which should
not reduce very low up to deliver dates which is likely to increase
sales turnover.
C) Debt to equity ratio:
The ratio indicates what portion of the entitys capital come from
debt. Lower the debt pressure on entity, lower the ratio.
Debt to equity ratio = Total Liabilities
Shareholders equity
Debt to equity ratio of FCPL has less than its audited and unaudited
ratios which is 2.1 to 1.5. It means company is using less leverage
and has a strong equity position. Auditor will consider the trend in
decline debt to equity ratio over time. Auditor will also compare a
client debt equity ratio in response with similar industrys debt
equity ratio.
D) Gross Profit Ratio:
It shows the percentage of profits generated by sale of products or
services before selling and administration expenses. It provides
indication of companys product pricing and product mix. It is
calculated as:
Gross profit ratio = Gross Profit
Net Sales

In FCPL industry the audited 2015 and unaudited 2016 ratios are
higher, which is 0.45 than the industry ratio with 0.35. If the ratio is
higher it means the company has good financial health and it helps
to efficient in selling and distribution process. If there is a variation
in ratios, it may lead auditor to examine sales and cost of sales in
details.
E) Times interest earned ratio:
The interest earned ratio measures the percentage amount of
income that can be used to measure interest expenses in future. It
is also called coverage ratio which indicates its current operation to
pay interest due on its entitys debt obligation. It is calculated as:
Times interest earned ratio = Net profit interest and taxes
Interest expenses
FCPL times interest earned ratio of industry average is 5 which is
less than Audited and unaudited ratios. It indicates that increase in
ratio reduces the audit risks which may needs further investigation
to determine the actual cause. In this case, auditor will not need to
do further additional work on going concern assumption.
F) Potential Weakness of Ratio analysis:
Kinney (1987) states that materials misstatement has not been
significantly affected by certain ratios. To evaluate the accurate
data auditor needs to be careful and not calculate in isolation. The
components are unfavourable because the ratio may be favourable.
In order to calculate correct ratio it should be examined the related
ratios. One of the negative trend is account receivable and
inventory may get obsolete.
G) FCPL business Risks:
The business risk of FCPL is associated with expansion of its
business in Melbourne. It does impact on its debt, liquidity; interests
and how it is going to affect its cash flows, return on equity, funds,
and finance are concerned with its risk.
Question 2
Strength in internal control:
1) Efficient recording system: All the transactions are promptly and
accurately recorded by Eva. As Eva checks all the goods in storage
and if it is not provided Eva promptly checks online and order.
Afterwards, she emails a copy of online order to all pharmacies. Eva
checks all goods received at her pharmacy against the order she
has placed and instantly she entered into inventory system as well
as she recorded into cloud based accounting system.
2) Reconciliation: FCPL reconcile its bank account each week which is
strength to its company. It helps to manage its cash transaction
whether it has the overflow or cash sort.

3) Payment Identification: in order to protect the payment system,

FCPL uses the login identification to access the system. Login
identification is through a login system and its protected password
and payment is recorded.
4) Perpetual inventory system: All sales are transacted through cash
or EEFTPOS which updating perpetual inventory system and cash at
end of day is registered through the link of accounting software.
5) Management decision making and business process: The
accounting system may include dashboard in order to make efficient
and effective decision making for business process which can be
customized by David.
Weaknesses

Centralised
buying operation

Financial
Assertions at risks
or not met
Rights and
Obligation

David approves
the invoices for
payment and
loads for bank.
David himself
reconciles bank
statement which
may cause to
fraud or
misleading of
transaction.
Eva files the order
alphabetically

Classification

Access to the
accounting
system from any
computer through
internet
connection.

Accuracy

Completeness
and Valuation

Internal control
suggestion to
correct weakness
Segregation of
incompatible
duties and
responsibilities.
System of
authorisation,
recording, and
procedure.

It could have put

the order by its
suppliers name or
by date because it
is easily access for
payment.
There should be
one authorised
computer
comprised of
accounting system
software and
should not have
access for all.

Audit
Implications/
Steps

Cannot access of
changing the
password

Accuracy

Cash transaction
has higher risk

Accuracy and
valuation

No physical
stocks are
undertaken

Completeness
and Valuation

There should have

an automated
system to change
the password in
order to protect
from hackers.
Eftpos transaction
should be
encouraged and
cash transaction
should be daily
recorded in
respect with its
inventory.
There has no
system of
counting and
maintaining the
stock that may
causes stolen or
misplaced. It can
be monitored
through
surveillance
camera.

Question 3:
The COBIT framework identifies seven categories of threats to the
computer information system requirements of the entity are as follows:
1. Availability: Availability means whether the information can be
readily available when there is need or required by the business
process. For example, the risk of system break down or system
downtime.
2. Confidentiality: It means can sensitive or important information
protected from an unauthorized disclosure. It might get hacked or
the information might get leaked. For example, the hackers can
retrieved information from the server or networks.
3. Integrity: Information should be accurate and complete. The main
question arise is whether the information is accurate, complete and
valid in accordance to the business process or expectations. For
example, risks of failure of processing control.
4. Effectiveness: Is the provided information are relevant , appropriate
according to the business process as well as delivered in a timely,

correct , consistent and usable manner? (Gay & Simnett, 2015). For
example, Risks of giving an insufficient and inappropriate
information to management for decision making.
5. Efficiency: Whether the information provided are through optimal
use of resources or not becomes the risk in business process. For
example, risks of poor cost benefit analysis and analysis of
insufficient use of resources.
6. Compliance: Entity use information will compliance of laws,
regulations, and contractual agreements. Does it uses in
appropriately and in accordance manner? For example, risks of lack
of awareness of laws, regulation, agreements, and requirements
resulting in noncompliance of those requirements.
7. Reliability: It means whether the information provided to business
uses an appropriate information so that business can operate and
exercise its financial and compliance reporting responsibilities or
not. For example, risks of outsourcing failing to meet targets.
Categories

Availability

Confidentiality

Integrity

Evaluation of
business risks that
arises from
Information System
System break downif system breaks
down then there is no
availability of
information when
needed.
There is no
automated system of
changing password
so the cloud based
system gets hacked.
There is only one
person who approves
the invoices and
records the
transaction as well as
reconciles the
statement so it has
chances of
misleading the data
or transaction. In this
case, David who
approves transaction

Suggested control to
minimize risk in
Information system
by management
Management should
adopt and implement
the preventive and
transaction controls
like back up system.
There should have a
system of changing a
password regularly.

Implication on audit/
audit steps

Effectiveness

Efficiency

Compliance

Reliability

as well as records
transaction has a high
risks of fraud or
inaccurate of
transaction.
David, the company
accountant has to
download balance
sheet and profit and
loss statement each
month and this
information should
be customised into
accounting system
but he has failure to
do so as a result it
might have affect to
meet the needs of
board.
The information
provided by
company has not
utilised its proper
resources. There is
only one person who
is assigned for many
duties which includes
recording, storing,
ordering and
payment which
causes the high risks
of fraud and
misleading the data
or transaction.
Proper regulations
and laws are not
implemented by this
company. David who
is company
accountant records
the transaction and
approves invoices by
himself which is not
complied by law.
There is no proper
segregation of duties.
Eva performs the

There should have

some senior
accountant or any
authorized person to
verify and approve
for the invoices. It
reduces the risks of
fraud and misleading.

multiple duties at a
time. Eva checks the
goods at storage,
order and as well as
records inventory
system. Performing
many duties by one
person cannot give
the efficient
information.

References
Gay, G., & Simnett, R. (2015). Auditing and Assurance Services in Australia. Level
2,82 Waterloo road, North Ryde NSW 2113: Mc Graw- Hill Education
(Australia) Pty Ltd.