Questions
Analytical procedure to the financial declaration of the corporation DIPL can assist in developing the overall audit plan. However, this audit plan can be taken into account as a specific directive that need to be tracked during the period of carrying out the audit (Duncan and Whittington 2014). Particularly, audit plan assists assessors in sustaining audit costs at reasonable stage and helps in avoiding misinterpretation and miscommunication with the client of the company.
Analytical tactic of common sizing assists in evaluating financial statements to a certain common point of reference (Baylis et al. 2017). However, this in order helps in undertaking a comparative assessment of financial pronouncements in terms of diverse time period otherwise in terms of different companies. Appraisers can consider different kinds or categories of items stated in the financial declaration, check the manner of presenting pecuniary reports. For instance, the manner of recording items namely net assets elsewise liabilities together with equity of different owners in the financial reporting. However, variance of financial declaration from specific point of reference assists in the process of recognizing the deviation and at the same time assist in evaluating the overall cause of the detected variance in a bid to understand the main reason (Homb et al. 2014). Furthermore, the technique of analysing using key financial ratio can be regarded as a suitable analytical method that can be aptly utilized for the purpose of comparing different financial pronouncements and at the same time analysing specific plan of financial audit.
Illustration of manner in which financial outcomes can influence on audit plan decisions
In essence, specific outcomes of planning decisions for audit planning can be especially affected by the analytical tactic adopted for deciphering information from the pecuniary statements. For instance, results of the ratio analysis enumerated based on the financial declaration of the company DIPL is as presented below:
|
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 |
Appropriate evaluation of the financial condition can be essentially undertaken using key financial ratio used in this case namely profitability ratio, liquidity ratio and the solvency ratio. The profitability condition depicted by the profit margin ratio stands at 0.068 during the year 2013, however, the same financial ratio improved to 0.60 during the financial year 2014. Thereafter, the same declined to 0.06 in the following year 2015. Again, solvency ratio enumerated for DIPL reflects the fact that the ratio has declined from 0.62 in 2013 to 0.44 in 2014 and further to 0.21 in 2015. Again, the current ratio calculated for the firm is observed to be 1.42 in the year 2013, 1.46 during the year 1.46 and 1.50 during the period 1.50. Thus, this financial ratio analysis helps assessors in comprehending the fact whether expends of the entire corporation are sensible and whether the overall costs incurred are extremely high (Glover et al. 2016). This in turn also assists in understanding the resources of the corporation and the way the corporation can undertake necessary measures to limit any kind of unfavourable incidence.
Answers
2. There are different risk categories involved in the process of audit and is necessarily founded on specific incidence connected to material misstatement indifferent pecuniary or else economic pronouncements of particular business concern. However, it can be hereby recognised that there exists diverse classes of unsystematic risk that can point out towards different types of risks identified from financial pronouncements of the business. Again, there also exists different categories of other risks that can be functional for both financial along with different non-financial facets that in due course can be avoided in a specific corporation (Arens et al. 2016). This in turn can help in representing both true as well as fair view of different kinds of economic declarations. Nevertheless, the appraiser might possibly find it quite demanding to detect specific risks. There exists diverse classes of correlated risks that might arise due to omission together with different range of errors along with mistakes that are necessarily unthinkable for different bookkeepers.
|
Category of Risk |
Description |
|
Inherent Risk |
As per the current case it can be hereby mentioned that there exists business transactions that are sometimes omitted by mistake by diverse accountants of the company. Analysis of financial statements of the firm divulges the fact that the company DIPL has failed to attain the desired level of profit and failed to acquire revenue from the company’s sales. However, this might perhaps be due to failure of the administration of the corporation to detect particular necessities, failure to evaluate diverse macro as well as micro features that are within the purview of soci0-economic as well as political matters. Thus, this consequently revealed from the poor figure on sales and this in line led to the occurrence of inherent risks (Knechel and Salterio 2016). Besides this, members of the staff of the organization have also increased the entire inherent risks. Analysis of the current case reveals the fact that owing to inadequate experience along with proficiency level of workers, the overall inherent risks of the corporation have increased. The non-skilled workers can augment the overall inherent risks as they are certain to commit certain errors for example, inaccuracies due to exclusion that again directs towards falsely presented pecuniary declarations (Houghton and Campbell 2013). Diverse environmental aspects leads towards certain inherent risk. This primarily occurs due to rapid transformation and specific issues connected to method of assessment of inventory, hard competition in the common market accompanied by deficiency of sufficient capital. |
|
Inherent Risk |
In addition to this, process of analysis of present case on DIPL divulges about diverse complexities together with intricacies present in the process of CEO selection as well as succession, appropriate technique of selection alongside effortlessness of transition contains inherent risk (Green and Zhou 2013). Therefore, initiation of procedure without adhering to the strategy, commencing the procedure late, improper association with the CEO and parting of diverse candidates might perhaps direct the way towards inherent risks. Furthermore, registering receipts of cash by finance authorities of the corporation might also make the way for inherent risks if not appropriately controlled. Carrying out detailed registration of earned revenue from the specific e-book, considering republication of textbooks in the forthcoming period can give way to inherent risks because of complication of the procedure (Reding et al. 2013). |
Way in which the risks might affect material misstatement in financial declaration
Identified inherent risks can be regarded as the proneness of a specific assertion in relation to material misstatement.
- Extreme pressure on workforce as well as management (Christensen et al.2016)
- Risks of errors in addition to inaccurate misrepresentation
- Reliability of the complete administration
- Pressure on management
- Nature of business
3. It can be hereby mentioned that fraud risk directs the way towards significant losses of assets due to incidence of fraud. However, discontentment of workers stemming from extreme work pressure can prompt the members of the staff to engage in the act of fraudulent actions. Furthermore, anticipations of the specific management as regards financial results and expectations to achieve particular level of performance directs the way towards occurrence of fraud risk (Kilgore et al. 2014). In addition to this, there are occurs the necessity to pronounce particular financial results that in turn can help in averting risks of presenting falsified statements.
|
Risk |
Description |
|
Fraud risk |
This risks might perhaps take place due to the engagement of the dissatisfied workers in different fraudulent activities. In this particular case on functionalities of the firm DIPL focuses on the excessive pressure of the board to acquire a new system for accounting. However, it can be hereby mentioned that this too much pressure on the members of the staff to undertake the task of installing the new technologically advanced and IT induced system of IT might perhaps direct the way towards fraudulent actions (Chou 2015). Subsequently, this refers to the fact that the workers might perhaps get involved in diverse fraudulent actions and manage the process of settlement in an inappropriate manner and consequently commit material misstatement. Nevertheless, this current case study also explicates illustratively that the inappropriate process of dealing with the entire process of executing the work of installing the new system of accounting might turn to inappropriate appropriation of specific business transactions during the closing of the year (Pizzini et al. 2014). Again, this sequentially might possibly direct towards occurrence of incidence of loss owing to material misstatement along with fraud risk. |
|
Fraud risk |
Besides this, another risk that might perhaps stem comprises of fraudulent actions involved in the process of preparation as well as presentation of financial pronouncements. Particularly, at the time when there is extreme anticipation from outside sponsors to announce particular financial facts otherwise to attain particular performance targets by the management leads to risk of material misstatement (Svanström 2013). In addition to this, attainment of specific goals in a bid to qualify to procure debt also involves huge risk of unfitting financial declarations. However, declarations as regards the financial condition of the corporation DIPL divulges about the revenue of the corporation and this represents the fact that the company has raised the overall revenue of the firm during the specific period that is between the year 2013 and the year 2015. Besides this, the calculated gross profit along with the net profit can also be observed to have risen. Nevertheless, the current case study divulges the fact that this specific corporation DIPL has garnered loan worth 7.5 million from the organization BDO Finance. Apart from this, this case under consideration also replicates that this specific loan has a specified loan contract that calls for the need of maintaining a particular current ratio of roughly 1.5 together with debt equity ratio lesser than 1. Thus, this in turn reflects that these factors necessitates the business firms to keep a certain financial ratio that subsequently can help in acquiring credit. Therefore, this can consequently lead to different fraudulent activities and direct the way towards inappropriate representation of financial condition. Essentially, failure of the business to maintain the specific yardstick can in due course make the corporation non-qualified to obtain funds from BDO Finance. |
As per the given case study, it can hereby mentioned that procedure of valuation of diverse inventory of raw material at specific average cost was not appropriate as the current paper cost was substantially over and above the average cost. Again, risk of detecting fraudulent activities engaged in the process of execution of accounting system using information technology in the process of accounting can be undertaken by observing diverse actions at different stages (Edgley et al. 2015). Initially, the risk associated to reporting economic declarations can be detected by undertaking analysis of financial declarations by diverse assessors, tracking systems of control periodically.
Reference
Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.
Baylis, R.M., Burnap, P., Clatworthy, M.A., Gad, M.A. and Pong, C.K., 2017. Private lenders’ demand for audit. Journal of Accounting and Economics.
Chou, D.C., 2015. Cloud computing risk and audit issues. Computer Standards & Interfaces, 42, pp.137-142.
Christensen, B.E., Glover, S.M., Omer, T.C. and Shelley, M.K., 2016. Understanding audit quality: Insights from audit professionals and investors. Contemporary Accounting Research, 33(4), pp.1648-1684.
Duncan, B. and Whittington, M., 2014, September. Compliance with standards, assurance and audit: Does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.
Edgley, C., Jones, M.J. and Atkins, J., 2015. The adoption of the materiality concept in social and environmental reporting assurance: A field study approach. The British Accounting Review, 47(1), pp.1-18.
Glover, S.M., Prawitt, D.F. and Messier, W.F., 2016. Auditing and Assurance Services: A Systematic Approach 10th.
Green, W. and Zhou, S., 2013. An international examination of assurance practices on carbon emissions disclosures. Australian Accounting Review, 23(1), pp.54-66.
Homb, N.M., Sheybani, S., Derby, D. and Wood, K., 2014. Audit and feedback intervention: An examination of differences in chiropractic record-keeping compliance. Journal of Chiropractic Education, 28(2), pp.123-129.
Houghton, K. and Campbell, T., 2013. Ethics and auditing (p. 354). ANU Press.
Kilgore, A., Harrison, G. and Radich, R., 2014. Audit quality: what’s important to users of audit services. Managerial Auditing Journal, 29(9), pp.776-799.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Pizzini, M., Lin, S. and Ziegenfuss, D.E., 2014. The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), pp.25-58.
Reding, K.F., Sobel, P.J., Anderson, U.L., Head, M.J., Ramamoorti, S., Salamasick, M. and Riddle, C., 2013. Internal auditing: Assurance & advisory services. IIA Research Foundation.
Svanström, T., 2013. Non-audit services and audit quality: evidence from private firms. European Accounting Review, 22(2), pp.337-366.
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