Analysis Of Financial Performance And Risks Of Department Of Business Administration

Discuss about the Department of Business Administration.

Auditors are able to plan their audit by conducting preliminary analysis using analytical procedures. Such plan helps in cutting unreasonable cost associated with audit and clarifies any facts for accomplishing the verification of financial declaration of DIPL. There are many analytical procedures available to auditor for carrying out analysis and this involves common size analysis, benchmarking and ratio analysis. Application of ratio analysis tool would help auditor in providing information about trend of financial performance of organization (Boone et al. 2017).

For the analysis of financial performance, auditor uses ratio analysis tool. Analysis is done by calculation profitability, liquidity, solvency and efficiency position of company.

The above table depicts profitability position of DIPL over the period of three years. It involves calculation of gross profit, net profit ratio, return on assets, return on equity and operating profit margin. Gross profit ratio has decreased since year 2013. Ratio stood at 17.55% in financial year 2013 as compared to 16.13% and 15.2% in year 2014 and 2015 respectively. Net profit ratio stood at 6.9% and 6.08% in year 2013 and 2014 as against 6.84% in year 2015. There was significant decline in return on assets from 18.25% in year 2013 compared to 11.37% in year 2015. Return on equity declined from 25.78% in year 2013 to 24.26% in year 2015.

Liquidity analysis is evaluated by calculating current ratio and quick ratio. Liquidity position of DIPL has marginally improved since year 2013. Current ratio of DIPL stood at 1.42 in financial year 2013, 1.47 in year 2014 and 1.5 in year 2015 respectively. On other hand, quick ratio has initially increased and subsequently decreased in year 2015. Ratio stood at 0.83 in year 2013 as compared to 0.94 and 0.95 in year 2014 and 2015 respectively.

Solvency position of DIPL is analysed by calculating by interest coverage ratio, debt to equity ratio and debt to total assets. Debt to total assets of DIPL stood at 0.29, 0.32 and 0.53 in year 2013, 2014 and 2015 respectively. Figures represents that there has been decline in ratio since year 2013. There has been increase in debt to equity ratio to 1.13% in year 2015 compared to 0.41% and 0.47% in year 2014 and 2015 respectively. Interest coverage ratio has fallen significantly to 4.68% in year 2015 compared to 28.96 and 29.39 in year 2013 and 2014 respectively. 

Efficiency analysis is calculated using ratios such as inventory turnover and debtor turnover ratios. Inventory turnover ratio has declined to 8.82 in year 2015 compared to 12.5 and 11.84 in year 2013 and 2014 respectively. Debtor turnover ratio of DIPL has reduced significantly to 8.57 in year 2015 as against 8.73 and 13.78 in year 2014 and 2013 respectively. Fall in efficiency ratio depicts that DIPL has been efficiently utilizing their assets.

It is evidence from the analysis of case study that the financial transactions would be subjected to manipulation and there is a possibility of inflating the value of assets. Staff members would get engaged in manipulation of financial declarations in order to meet requirement of lenders and investors. It is also evident from the given case that management of organization has the inflated the retained earning value and accounts receivable for meeting the prescribe current ratio level (Chiu et al. 2014). There has been manipulation in value of payables for maintaining debt ratio.

Workers responsible for reconciliation of accounting software find it difficult to maintain balance between exiting ledger system and employed novel accounting system. Inappropriate recording of some financial transactions have material statement of financial declarations (Byrnes et al. 2015). Furthermore, the periodicity concept of accounting is not properly followed by DIPL that has further added to material misstatement.

It is essential on part of auditors to plan audit in such a way that they are able to reduce the impact of any associated risk to minimum possible level. For evaluation of financial statements, it is required by auditors to make investigation of financial data presented in terms of assets as well as liabilities. Balance of inventories should be investigated and they should check for any improper recording of transactions. Different activities in operational phase of organization should also be evaluated and their reliability should also be determined. While planning audit, it is required to evaluate each and every steps of recording transactions of inventories. Fraud risks would help in modifying audit plan to conduct faithful opinion of their financial declarations (van Buuren et al. 2017).

References:

Boone, J.P., Khurana, I.K., Raman, K.K., Chen, L.H., Chung, H.H.S., Peters, G.F., Wynn, J.P.J., Chen, Y., Knechel, W.R., Marisetty, V.B. and Truong, C., 2017. Auditing: A Journal of Practice & Theory A Publication of the Auditing Section of the American Accounting Association.

Broberg, P., Umans, T. and Gerlofstig, C., 2013. Balance between auditing and marketing: An explorative study. Journal of International Accounting, Auditing and Taxation, 22(1), pp.57-70.

Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. and Vasarhelyi, M., 2015. Evolution of auditing: from the traditional approach to the future audit. Audit Analytics, 71.

Chiu, V., Liu, Q. and Vasarhelyi, M.A., 2014. The development and intellectual structure of continuous auditing research. Journal of accounting literature, 33(1), pp.37-57.

Hardy, C.A. and Laslett, G., 2014. Continuous Auditing and Monitoring in Practice: Lessons from Metcash's Business Assurance Group. Journal of Information Systems, 29(2), pp.183-194.

Krahel, J.P. and Titera, W.R., 2015. Consequences of big data and formalization on accounting and auditing standards. Accounting Horizons, 29(2), pp.409-422.

Moroney, R. and Trotman, K.T., 2016. Differences in Auditors' Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research, 33(2), pp.551-575.

Quick, R., 2016. [Besprechung von Aufsätzen] Stewart, Jenny, Kent, Pamela, and Routledge, James: The Association between Audit Partner Rotation and Audit Fees: Empirical Evidence from the Australian Market. Auditing: A Journal of Practice & Theory (No. 84660). Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).

van Buuren, J., Koch, C., van Nieuw Amerongen, N. and Wright, A., 2017. Evaluating the Change Process for Business Risk Auditing: Legitimacy Experiences of Non-Big 4 Auditors. Auditing: A Journal of Practice and Theory.

Zhang, J., Yang, X. and Appelbaum, D., 2015. Toward effective Big Data analysis in continuous auditing. Accounting Horizons, 29(2), pp.469-476.