Analyzing Financial Ratios Of DIPL Over The Last Three Years In Essay.

Question 1: As an auditor, you are conducting your preliminary analytical procedures based on the background information for DIPL contained in the case. Apply analytical procedures to the financial report information of DIPL for the last three years. Explain how your results influence your planning decisions for the audit for the year ending 30 June 2015.
Question 2: You are conducting your risk assessment of DIPL, as part of the planning for your audit for the year ended 30 June. Identify two inherent risk factors that arise from the nature of DIPL’s business operations. Explain why it is a risk and how it may affect the risk of material misstatement in the financial report.
Question 3: As part of your audit of DIPL for the year ended 30 June 2015, you are considering the risk that fraud may have occurred (a) Based on the background information for DIPL contained in the case, identify and explain two key fraud risk factors relating to misstatements arising from fraudulent financial reporting to which DIPL may be susceptible. (b) Explain how the risk factors identified in (a) above would affect the conduct of the (a) audit.

Tools Used for Analytical Procedure

Analytical procedure helps auditors in conducting preliminary analysis of the audit plan. While undertaking the audit, it is required by organization to have audit plan in place that would guide them in accomplishing their tasks. It will also help in maintaining unreasonable costs of audit. Various tools are used by auditors in carrying out audit plan and this involves common sizing, ratio analysis and benchmarking. Common sizing helps the auditors in making comparison of financial performance of organizations at two different point of time and it also helps in comparing the performance between tow respective entities. Tools of ratio analysis help in identifying the financial trend and financial position of organization. Benchmarking is another tool that helps auditors in identifying the deviation between actual and expected results and the causes of factors that leads to that (Arens et al. 2016).

For evaluation of financial statements and gaining analytical review of the financial performance of DIPL for last three years, auditor would apply the ratio analysis tool.

Table 1: Liquidity ratios
Ratio	2013	2014	2015
Current Ratio	1.42	1.47	1.50
Quick Ratio	0.83	0.94	0.85

Liquidity analysis of DIPL is depicted in above table and two types of ratio that is calculated are current ratio and quick ratio. There has been marginal improvement in liquidity position of company.

Current ratio increased from 1.42 in year 2013 to 1.47 in year 2014 and 1.5 in year 2015 year respectively.  From figure, it is depicted that liquid assets of DIPL have not improved as the ratio stood at 0.94 in year 2014 that reduced to 1.5 in 2015 year.

Table 2: Solvency Ratios
Ratio	2013	2014	2015
Debt Equity Ratio	0.41	0.47	1.13
Debt to Total Assets	0.29	0.32	0.53
Interest Coverage Ratio	28.96	28.39	4.68

The solvency analysis of DIPL is depicted by calculation of solvency ratio. Under this, three ratios are calculated that is debt equity ratio, debt to total assets and interest coverage ratio. The debt to equity ratio for financial year 2013 stood at 0.41 and ratio increased to 0.47 in year 2014 and then further declined in year 2015 to 1.13. It is indicative of the fact that the financial risk of DIPL has increased due to its continued reliability on loan borrowed. There has been continuous increment in debt to total assets and the ratio stood at 0.29 in year 2013, 0.32 in year 2014 and 0.53 in financial year 2015 respectively. Interest coverage ratio has witnessed a drastic decline in year 2015 to 4.68 and the ratio stood at 28.96 in year 2013 and 28.39 in years 2014.

Table 3: Efficiency ratios
Ratio	2013	2014	2015
Inventory Turnover Ratio	12.50	11.84	8.82
Debtors Turnover Ratio	13.78	8.73	8.57

Efficiency analysis of DIPL is analysing using the calculation of efficiency ratio. Under this, two ratios are calculated that is inventory turnover ratio and debtors’ turnover ratio. Inventory turnover ratio of DIPL has continuous declined over the period of three years. Ratio stood at 12.50 in year 2013 and it declined further to 11.84 in year 2014 and further to 8.82 in year 2015 respectively. Debtor turnover ratio of DIPL has also witnessed decline over the period of three years. Ratio stood at 13.78 in year 2013, this further reduced to 8.73 in year 2014 and 8.57 in year 2015.

Impact of Identified Ratios on Audit Plan

Table 4: Profitability Ratios
Ratio	2013	2014	2015
Gross Profit Ratio	17.55%	16.13%	15.20%
Net Profit Ratio	6.90%	6.08%	6.84%
Operating Profit Ratio	19.82%	19.18%	19.12%
Return on Assets	18.25%	14.41%	11.37%
Return on Equity	25.78%	21.25%	24.26%

The profitability ratio of DIPL is ascertained by calculating net profit ratio, gross profit ratio, operating profit ratio, return on assets and return on equity. Comparability analysis of the profitability ratio is done in above table. Gross profit ratio has declined over the period of three years. Ratio stood at 17.55% in year 2013, 16.13% in year 2014 and it further decline to 15.20% in year 2015 respectively. Operating profit has also witnessed decline but by fewer amount, ratio stood at 19.82% in year 2013 and it declined to19.18% in year 2014 and then to 19.12% in year 2105 respectively. Decline in operating ratio is due to increase in fees of e book and writing back of allowance in year 2015 for inventory obsolescence. There has been decline in return of equity to shareholders from year 2013 to year 2015. ROE declined from 25.75% in year 2013 to 21.25 in year 2014 and ratio further improved to 24.26% in year 2015 respectively. There has also been decline in return on assets. ROA stood at 28.25% in year 2013 that reduced to 21.25% in year 2014 and further reduced to 11.37% in year 2015 respectively. Net profit has remained constant and there was fluctuation only by fewer amounts. Net profit for year 2015 stood at 6.84% as against 6.08% in year 2014.

Ratios	Impact of identified ratios on audit plan
Current ratio	Analysis of current ratio will help auditors in identifying the reason behind the fall in value and the factors that are hampering the liquidity position of DIPL. It can be ascertained by auditors that the improvement in liquidity position has resulted from writing back the allowance for inventories (Cannon and Bedard 2016). The responsibility of the management to manage their decline the current assets should be recognized and the reasons should be ascertained.
Solvency ratio	Solvency ratio depicts that financial risk of DIPL has increased in recent year. It needs to be disclosed by auditors whether the information for the same has been provided in the financial declaration or not. It also helps in identifying the factors that is desirable and factors that are undesirable for financial performance of DIPL.
Profitability ratio	Reasons attributable for falling of profitability of organization should be ascertained. It depicts the net income earned by organization and whether the management is taking sufficient steps for managing their profitability position (Hayes et al. 2014).
Efficiency ratio	This particular ratio enables auditors in understanding performance of assets overtime and helps in identifying the factors that leads to their improvement or deterioration.

Inherent risk factors that arises from the nature of operations of business:

Inherent risks	Explanation
Risks arising from the employment of information technology system	Certain issues are generated by the process of implementation, installation and reconciliation of novel IT system. DIPL does not have enough staff to handle the implementation process and existing staffs lacks knowledge and experience required or reconciliation of the system. There were certain transactions that were not appropriately apportioned as revealed by the initial testing of the accounting system. Organization would be adversely affected if there is any deterioration of the accounting system. The integration of general ledger system into the novel accounting system also poses several threats to DIPL. Inherent risks would also arise due to improper recording of cash transactions and there have been improper recording of baking statements (DeFond and Zhang 2014). All this would lead to some types of inherent risk to situation of DIPL.
Financial risk arsing from improper recording of transactions and debt covenants.	Accountants and clerks of DIPL have omitted several accounting transactions that would lead to direct and ineffective planning of different departments of organization. Organization is also in endangered position relating to the amount of loan they have borrowed and this is because of increased in outside liabilities. With increase in loan amount borrowed the financial risks of DIPL is increasing. Over the period of last three years, it can be ascertained from the above mentioned figure reacted to solvency ratio that the amount of loan borrowed in proportion to the equity have been increasing. There is high change that the company will not make timely payment of the loan amount taken that is the principal amount along with the interests. Long term solvency position of company is highly threatened as the company has high probability of not making timely payments to their creditors (Stojanovic and Andric 2016).

Impact of risk identified above on audit plan and material misstatement on financial statements:

It is certainly possible on part of organization that there will be manipulation in recording of the financial transactions relating to cash payment and recording of inventories. There is existing pressure from the management of company and investor to maintain ratios at certain level in order o avail loan amount and to provide them with satisfactory return. They are required to maintain current ration and solvency ratio at particular level and for there have been in inclusion of inflation and deflation in recording of asset and liabilities respectively. It has been analysed from the given case study that for maintaining debt ratio at pr4escribed level, DIPL has inflated their retained earning value and for maintaining asset ratio they have inflated the value of their current assets by inflation the amount of receivables.

Maintaining the balance between existing software and the new accounting software is somewhat difficult on part of management as well as worker who are responsible for handling their reconciliation. Moreover, there were inappropriate recordings of transactions that have led to material misstatement of financial statements. DIPL has further not followed the periodicity concept in accounting and this has resulted in inaccurate representation of the financial and profitability position of organization (Barton and Bruder 2014).

Inherent Risks

Identification and explanation of two fraud risks that would arise from fraudulent financial reporting of DIPL are as follows:

Fraud risks	Explanation
Risks of financial reporting fraud	The risk in financial reporting might arise due to lack of segregation and improper definition and description of job. Account payable clerk of DIPL has the responsibility of recording the transactions as well as making entry for same in the accounting statement. There exist the risks that there can be manipulation in recording of inventories by showing fewer amount received when actually more inventories are received and thereby influencing the recording of cash transactions. Fraud would be escalated because DIPL does not have proper system of documentation.
Fraud due to pressure on staffs for meeting management and shareholders expectation	Financial department of company is highly pressurized from the management and creditors for maintaining prescribed level of dent and current ratio. They have been asked to maintain current ratio around 1.5 and debt ratio should be less than one. If the company fails to meet these criteria, then there would be adverse impact on their operations (Griffin and Wright 2015). Therefore, for meeting the criteria, DIPL would manipulate several recording of transactions and they would reflect financial declarations improperly.

The audit plan should be planned in a way that there can be minimal risks and they can be reduced to some possible extent for ensuring that there are smooth operations of business activities. Auditors are required to verify the balance of current liabilities and current assets by evaluating the financial statements. It will help in disclosing any act of inflating the data. Hence, a proper verification of data is essential for preventing fraud activities and planning the audit. Furthermore, the inventories balance in the financial statement should also be verified and checked in order to ascertain that there is not any improper recording of the same. In order to ascertain whether account payable clear has done any manipulation in recoding, it is required by auditors to keep tract of the amount of inventories received and amount that is sold on each particular day. There should be monitoring of activities in different operational phases for detecting any risks that exists in financial operations. Moreover, the evaluation process of inventories also needs to be verified. Auditors are required to evaluate and analyse each items that would help in planning the audit (Boone et al. 2017). 

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