Question 1: Applying Analytical Procedures to DIPL’s Financial Reports
The preparation of plan of audit is provides with substantial support with the implementation of analytical procedures. In the event of carrying out the audit plan of DIPL (Double Ink Printers limited), auditors would be provided with the required instructions and directions. For averting any confusions that may rise with the clients while carrying out audit and to maintaining the audit cost at specified level, audit plan assist in doing so. Objective of auditor while carrying out audit of financial declarations provide by DIPL is to give reasonable assurance that they are free from frauds and material errors. Analytical procedures is the evaluation of financial statements of organization by analysing the plausible relationship between nonfinancial and financial data. Analytical procedures will enable obtaining reasonable assurance by providing reasonable assurance that in order for financial declarations tobe made in conformity with the reporting standards, there is no requirement of making material modifications. Application of analytical procedures comes with underlying premise that plausible relationship is expected to exist in contrary conditions (Abidin and Baabbad 2015). Auditors would assisted in planning nature, extent and timing of audit procedures.
There are specific mechanisms through which the evaluations of financial statements are done. Accountants and financial analyst are assisted in taking accounting decisions with the help of analytical tool that assists them. Analytical produce of common size statements helps in the dissemination of the financial statements from the referring points that is pertinent. Common size statement analysis helps in making the comparison of the financial performance of an organization over two different period and comparison of two statement of tow organizations. Some benefits arise from the common statement analysis that helps in differentiating financial statements from specific timelines.
Several lines of items that is used in the preparation of financial statements needs to be checked by accountants and financial analysts while adopting the analytical procedures. Some of the items can be adjudicated while detouring them at the time of investigation that includes owner liabilities and equity along with assets. Benchmarking is another method of analytic procedure of audit analysing the existing variance or deviation in preparing financial statements (Kritzinger and Barac 2017). Another primary tool that can be used for carrying out analytical procedure is ratio analysis. Ratio analysis helps in measuring the trend of financial performance over the period. Auditors would able to ascertaining the performance trend of organization that will help in assessing the presented financial declaration.
Question 2: Identifying Inherent Risks Arising from DIPL’s Business Operations
|
Particulars |
2013 |
2014 |
2015 |
|
Profit margin |
0.068 |
0.60 |
0.06 |
|
Solvency ratio |
0.62 |
0.44 |
0.21 |
|
Current ratio |
1.42 |
1.46 |
1.50 |
Three types of financial ratio that is current ratio, profit ratio and solvency ratio is depicted in the table that will assist the auditor in identifying the financial performance trends and at the same time disclosing the factors that might have contributed to fall or increase in debt amount or any expenses. Using the tool of ratio analysis would help the auditor in recognizing whether the expenses or costs incurred are reasonable enough to stand the overall costs. In event of any uncertainties or some unfavourable happenings, whether the management of organization have sufficient resources in place to handle such circumstances (Strawser 2013).
|
Ratio |
Explanation |
Audit impact |
|
Current ratio |
Current ratio of DIPL on other hand, has witnessed an increase sine year 2013. Current ratio for financial year 2015, 2014 and 2013 stood at 1.5, 1.46 and 1.42 respectively. This would depict whether he current assets have been enough to meet the short term obligations of DIPL. |
Financial accountants and analysts are provided with the opportunity of financial position of DIPL over the time of three years. Feasibility of prevailing financial position and health of organization can be easily evaluated by auditors by utilizing this tool. This would help in conducting the audit by proper procedures. |
|
Profitability ratio |
It can be seen from the table that profitability ratio for three consecutive year that is financial year 2015, 2014 and 2013 was reported to be at 0.06, 0.06 and 0.068 respectively. |
Fall in ratio would help auditors in ascertaining the reason of decline that may be due to any excessive expense or fall in sales value. This will help in depicting the amount of net profit in relation to net sales value. |
|
Solvency ratio |
Now, looking at the figure of solvency ratio, there was a consistent fall in the value since year 2013. Solvency ratio for 2015 stood at 0.21, for year 2014 stood at 0.44 and for financial year 2013, value stood at 0.62 respectively. Fall in solvency ratio is indicative of the fact that proportion of debt to equity of DIPL has reduced. |
This would assist auditors in determining the unfavourable and favourable movement of the organization in terms of its financial stability. Cash flow of organization has been ascertained in terms of cash flow and maintaining it at adequate level for meeting long term and short term obligations. |
Identification of two inherent risk factors that would arise from the nature of operation of business of DIPL:
The overall operations of business of DIPL would results in generation of certain types of risk while carrying out audit procedures. Financial declaration of organization can be affected by inherent risks that may lead to material misstatement. After the evaluation of case study, it was ascertained that some of transactions has not entered by the management and this has been directly linked with the inconsistencies that was existing with sales and marketing department in organization (Coetze and Lubbe 2014). Assessment of report and various financial statements, it was found that targeted level of net revenue and profit was failed to accomplish. Two inherent risks associated with the business operations of DIPL are depicted in following table.
|
Inherent risk |
Reason for risk to be inherent |
Risk of material misstatement |
|
Incorrect interpretation resulting from pressure of management and stakeholders. |
Reason for this particular inherent level of risks is the inappropriateness and mismanagement of operations of business. Some of the influence concerning macro and micro economic factors was not being able to assess by management such as political, economic and social factors. Therefore, the inherent risk level is linked with the falling profit and declining revenue of organization. Sales and marketing activities of organization can be inappropriately planned resulting form inconsistencies in their activities. Moreover, there can be failure on part of management to make the required or needed adjustments by identifying them specifically. There can be macro or miro economic facets that might be existing in the form of social, political events that might not be properly analysed by business. Diversity in inherent risks is also reflected in the poor sales figure. Some of other factors that would attribute to the inherent risks arose from the valuation of inventories, required capital shortage and inflexible competition prevailing in generic market. Some of the material misstatement might be undertaken by organization resulting from the misinterpretation of certain type of activities (Arens et al. 2015). In addition to this, some of inherent risks might arise from the installation and reconciliation of the new accounting system. |
Carrying pout of day to day task by employees has become a difficult job after the employment of novel accounting system. It is certainly possible that there exist some incentives of oat of management that might lead to misstatement in the declarations of financial statements. There has been considerable escalation in the level of inherent risks resulting from lack of proficiency and experience of employees. Such employees are bound to make some mistakes in recording of financial transactions and in installation of the accounting system that might lead to eruption of some sort of errors. |
|
Nature of business entity |
DIPL might be facing competitive circumstances that would lead to their growth along the economic line. Risks of inventory obsolesce is faced by entities that is fast changing and are adapting to latest technology. As in the case of DIPL, any rapid changes in the products offered by organization would very quick makes inventories obsolete. Risk also arises due to the improper valuation of inventories as such valuation might be inappropriately done by management and employees working therein (Titer 2013). This type of risk is inherent in the nature of business entity. |
Auditors will be able to conclude that the inherent level of risk concerning the business nature is very high. This has high chances that the transactions would not be properly recorded or maintained. There would be the risks of materially misstating the financial declarations or information. Probability that the transactions recorded in the financial statements are not in compliance with the financial accounting framework that would lead to fraud or errors in their presentation. It can be explained with the help of an instance, that is the cost of inventories are assigned on the method of valuing inventories that is not acceptable under particular reporting format or standard. All these can make the financial statements and their components materially misstated. Whenever organization does not have any internal control, the risks of financial information being materially misstated are reasonably higher. The process of carrying out audit and determining the level of risks involves is also dependent upon the identification of any other inherent risk in previous or current period (Wang and Cuthbertson 2014). |
Two types of fraud risks associated with the material misstatement arising from fraudulent activities of financial reporting that is susceptible to DIPL are as follows:
|
Types of fraud risks |
Impact of identified risks in conducting audit |
|
Workers getting involved in some fraudulent activities |
DIPL has been experiencing shortages of workers and they have been forced to work on the installation of the novel accounting system. Fraud in DIPL might arise due to excess workloads on existing employees for carrying out the tasks if installing and reconciliation the process of accounting system. All this would results in creation of dissatisfaction among employees that might force them to engage in the fraudulent activities. Certain transactions of organization can be carried are recorded in appropriate way resulting from inappropriate handling the implementing the information technology of the updated accounting system. Fraud may also arise due to the workers not having sufficient knowledge to run and install the machines and this would create a sense of dissatisfaction among employees and making them indulge in fraud activities (Appelbaum et al .2017). |
|
Risks of fraud concerning financial reporting of DIPL |
An organization has high risk of making improper financial declarations and announcement due to the pressure from management and external stakeholders to maintain or declare particular and prescribed financial announcements. Organization might be required to maintain specific level of debt for gaining amount of loan or debts by the financial institution or loan provider. Credit rating agencies would ranks the organization depending upon their credibility and all these might pressurize organization to make inappropriate declarations of financial information. Financial transactions can be materially misstated due to the pressure of shareholders and management for maintaining particular level of returns. By analysing the DIPL financial statement for period 2013 to 2015, it can be seen that revenue has increased over the years. Total assets have also increased over the year. After conducting the analysis of case study, it was found that acquisition of loan by DIPL has been asked by lending institutions to maintain a particular level of debt ratio and it should not be more that one and this indicates that financial position of organization is stable. All such requirements by stakeholders would force the organization to engage in some fraudulent activities by manipulating the transactions figure and leading to fraud (Niemi 2013). |
References:
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Appelbaum, D., Kogan, A. and Vasarhelyi, M.A., 2017. Big Data and analytics in the modern audit engagement: Research needs. Auditing: A Journal of Practice and Theory.
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