Using analytical methods to study financial statements
Questions:
1.Explain how your results influence your planning decisions for the audit for the year ending 30 June 2015.
2.Explain why it is a risk and how it may affect the risk of material misstatement in the financial report.
3.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.
The information provided in the financial report of DIPL is based on development of the audit plan. The audit plan has been further seen to be considered as per the particular guideline followed during the undertaking of the audit process. In general, this particular this has helped the assessor in considering the audit cost at a reasonable level and assists in the aversion in the misunderstanding along with clientele. The analytical approach to the financial considerations of DIPL has been referred by dissemination of the information in the financial declarations of the company. The main process of the evaluation analytical approach has been considered based on the specific approach of the financial declarations, accountants and the financial analysts which has been seen to be vital in making business decisions.
The analytical approach has been further based on the common sizing with the analysis of the reference point. This has been conducive in the comparison of the financial statements as per different period in different corporations. The ratio analysis has been based on the comparison of the financial declarations in the planning of the audit (Mahmoud HOSSEINNIAKANI, Inácio and Mota 2014).
Explanation of the way the results influence planning decisions for the audit
The planning decision results has been considered for the audit planning and is necessary for the various types of the results of the analytical approach taken into consideration for the disseminating information based on financial statements. The different outcomes of the ratio has been evaluated as per current ratio of the firms for DIPL. This has been computed as 1.42 in 2013, 1.46 in 2014 and 1.5 in 2015. The profitability aspect of the ratio of calculated as per 0.068 in 2013, 0.60 in 2014 and 0.06 in 2015. The profitability ratio based on the profit margin has been further able to reveal the position of the net income earned by the firm in compared to the net sales from DIPL. Despite of this, the assessor needs to understand whether the expenses are low or high and the management is having the requirement to curtail the budget and time. The favourable and the unfavourable changes in the ratio can be factor has been further based on the factor as per the audit assessment and soundness in the financial position. Similarly in 2015 and 2013 the solvency ratio has been identified to be 0.62 and 0.21 (Yasin and Nelson 2013).
Identifying two fraud risk factors relating to misstatements
The several types of the important factors in the auditing have shown several incidences of material misstatements in the financial announcements of a particular concern. The systematic and the unsystematic risks have been considered from the financial misstatements and the financial declarations of the corporation. The various types of the risks detected has been considered based on the both financial as well as non-financial factors. Nevertheless, an evaluator might consider it as demanding to detect certain risks. The risks identified may be linked to the various types of the other risks correlated to omission and diverse errors and the diversified nature of the errors in business operations of DIPL (Sultana et al. 2015).
Based on the given scenario, the numerous transactions are particularly omitted by the accountants otherwise the management of the DIPL Corporation. This can sequentially be directed for the various types of the inconsistency particularly with the essential planning along with the sales activities. Furthermore, the evaluations based on the financial declarations which have been revealed based on accomplishment of the profit from the revenue generated from sales. The analysis of the present case has been able to reveal that the IT implementation process has been generated with particular issues. DIPL is not seen to be having adequate staff to handle the execution process and the execution from the installation and carrying out of the reconciliation and the testing of new arrangement by the end of year (O. et al. 2013).
The various considerations for the recording of the cash receipts have been considered as per the finance professionals of the company and the inherent risk has not been properly handled. The staff member has been able to follow an appropriate sequence for properly registering the sequence of account receivables (Kubuabola 2013).
Risk and way it might affect the risk of material misstatement in the financial report
The different types of the inherent risk have been considered based on the susceptibility and the particular consideration of the material misstatement.
Excessive pressure on employees and management- The Excessive workload of the members of the staff of the corporation has further led to poor bookkeeping. The certain attributes has been considered mainly based on the issues such as encountering of poor liquidity, poor operating outcomes and various types of the cash flow issues (Hummel, Schlick and Fifka 2017).
Risks of errors or else incorrect misrepresentation- The identified remains has been further seen to be based on intricacy and the errors of the risk which have been misrepresented simultaneously.
Integrity of the entire management- DIPL management has been essentially seen to lack the required integrity and the expectation to prepare for the reputational loss in the entire business community.
Unusual pressure on management- At times the existence of the incentives for the management has been based on the exits incentives for the misstatements in the pecuniary declarations.
Nature of entity business- The aforementioned facets may be further seen to be affected base on the various types of the consideration which has been seen to be related to inherent risk of the business entity for the business entity for the analysis of the audit planning structure. DIPL has led to the growth of the business through major economic competitive circumstances. (Wade et al. 2017).
3.Identification and explanation of two key fraud risk factors relating to misstatements arising from fraudulent financial reporting
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Asset Loss |
The indicated risk has been seen to lead to the considerable amount of losses pertaining to the asset for the fraud. The dissatisfaction of the workforce has been further seen to be based on the employees who can induce the involvement in the fraud. Furthermore, the expectations from the investors to report for the financial outcomes or particularly based on the management to consider the specific performance based targets, which leads to high risk of fraud. This has been further seen to be considered based on the declaration of the specific financial outcomes in averting the guarantees generated. |
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Fraud incidence for workforce engagement |
The various types of the fraud risk has been seen to be associated to the operations of the firm DIPL. Some of them have been seen with the main operations pertaining huge pressure from particularly the board to acquire a novel accounting system. The excess pressure from the employees has been carrying the installation process of new IT systems which might lead to accounting fraud. This has further revealed that the employees may get engaged to the fraudulent activities and handle the reconciliation process and subsequently material misstatement. The case study has further focused on the incidences of improper handling of the process for the implementation of information technology and the improper allocation of certain transactions at the end of each year. This may further lead to losses pertaining to material misstatement and risk of fraud. |
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Financial reporting fraud |
The financial reporting of the fraud has been identified as another risk component. During the time of excessive pressure it has been seen that outside financiers can declare on the specific announcements on financial management to meet certain goals to qualify for the acquisition of the debt. The high risk has been further seen to be based on the improper financial announcements. The financial position of the DIPL has depicted that the various considerations for the revenue has shown an increasing trend from 2013 to 2015. Furthermore, the total assets and the current assets of DIPL have also increased considerably increased. Moreover, the gross profit has been also considerably increased in the period of 2013 to 2015. The various types of other consideration for the study has been able to focus on the loan amounting to 7.5 million particularly in the loan agreement made maintain the current ratio of 1.5 and the along with this debt equity of the company has been seen to be lower than 1. This requirement has been able to relate to the various types of the considerations made from the improper reflection of the financial position. The company has failed with the various types of the reflection which is related maintain the definite benchmark which can make the company non-eligible for the finance of the BDO finance. |
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Unsuitable average cost |
Based on the given case it has been sees that the valuation of the different raw material inventory at a certain average cost was not appropriate as the present cost was not suitable because the cost of paper was more than the average cost. The risk of the fraudulent actions has been further seen to be persistent with the consideration of new IT system which can be monitored based on different activities at different phases. The risk of the financial reporting has been further seen to be based on the evaluation of the financial statements and monitored at the same time (Geertse et al. 2015). |
References
Geertse, T. D., Holland, R., Timmers, J. M. H., Paap, E., Pijnappel, R. M., Broeders, M. J. M. and den Heeten, G. J. (2015) ‘Value of audits in breast cancer screening quality assurance programmes’, European Radiology, 25(11), pp. 3338–3347. doi: 10.1007/s00330-015-3744-x.
Hummel, K., Schlick, C. and Fifka, M. (2017) ‘The Role of Sustainability Performance and Accounting Assurors in Sustainability Assurance Engagements’, Journal of Business Ethics, pp. 1–25. doi: 10.1007/s10551-016-3410-5.
Kubuabola, S. (2013) External Quality Audit, External Quality Audit. doi: 10.1016/B978-1-84334-676-0.50005-4.
Mahmoud HOSSEINNIAKANI, S., Inácio, H. and Mota, R. (2014) ‘A Review on Audit Quality Factors’, International Journal of Academic Research in Accounting Finance and Management Sciences, 4(2), pp. 243–254. doi: 10.6007/IJARAFMS/v4-i2/861.
Sultana, N., Singh, H., der Zahn, V. and Mitchell, J.L., 2015. Audit committee characteristics and audit report lag. International Journal of Auditing, 19(2), pp.72-87.
Yasin, F. M. and Nelson, S. P. (2013) ‘Audit Committee and Internal Audit: Implications on Audit Quality’, International Journal of Economics, Management and Accounting International Journal of Economics Management and Accounting, 20(122), pp. 187–218. doi: 10.1108/02686909310036223.
Wade, L., Acquarola, N., Hall, A., Sjollema, P. and O’Sullivan, M., 2017. Audit of dense fine speckled ana patterns detected by indirect immunofluorescence in a clinical immunology laboratory. Pathology, 49, p.S114.
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