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Analyzing ASA 520 for DIPL

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 fromfraudulent financial reporting to which DIPL may be susceptible.

1.ASA 520 “Analytical Procedures deals with the requirements regarding corporation legislative provisions.” Further, it provides an explanation regarding the application of analytical procedures as the substantive procedure.  It provides assistance to the auditor to perform responsibility relating to performing analytical procedures at the end of audit and forming an overall conclusion on financial statements (Krahel and Titera, 2015). Procedures which are required to be taken as an auditor for designing and performing substantive procedure have been specified in this standard. It has been specified in this standard that fluctuations and relationship which is not in compliance with other data or differs from forecasted figures by a significant amount should be investigated in detail.

In case of DIPL following steps will be taken for accomplishing analytical procedure and complying ASA 520

Assessing accounts and developing expectation on individual basis

The main accounts in which possibility of risk is more in case of DIPL Ltd is Purchase and Inventory, Cash, Receivables, Foreign exchange loss & Bad debts. It is necessary to assess that the new method for recording inventory which has been adopted by company represent books of accounts in more appropriate form or not. Further, in case of bad debts, it is necessary to ascertain whether they are actual or not. For assessing the same, it should be checked that has been claimed as bad debt has been actually reduced from the account or not.

Assessing the difference between expected figures and actual figures

Ratio and Analysis are the most appropriate approach for ascertaining that whether any significant difference between expected or budgeted and actual figures exists or not.

Profitability Ratio

Profitability Ratios

Year I

Year II

Year III

Turnover

34212000

37699500

43459500

Gross Profit ratio

17.55%

16.12%

15.19%

Net Profit ratio

6.89%

6.07%

6.83%

From above figures, it can be assessed that sales of DIPL Ltd have an increasing trend. However gross profit of the company has decreasing trend. Thus it is required to be assessed in detail to ascertain the reason for the difference. In case of profit ratios, no significant fluctuation can be observed. It might be possible that sales have increased, but the products on which higher profit can be earned have not increased significantly (Knechel and Salterio, 2016).In the same manner, liquidity and risk ratios should be assessed, and results should be compared in appropriate manner to assess the significant difference.

Inherent Risk in DIPL

Forming conclusion on the basis of significant assessed difference

In the present case of DIPL, as a difference exists in case of gross profit ratio; thus the same should be referred to the management and discussed in detail. The auditor should not directly rely on the explanation provided by the management but should make an effort to find other proofs as the base of explanation.

Trend Analysis

It is part of analytical procedures which is referred as technical analysis of predicting the future movement of figures based on past data. An appropriate idea can be attained that whether the figures are in accordance with expected figures or not. In the present case of DIPL Ltd, trend analysis of following major accounts have been conducted in order to attain appropriate evidence for the formation of opinion on financial accounts.

Particular

Year I

Year II

Year III

 

Accounts Receivable

2482500

4320000

5073309

Increase in comparison to previous year

1.74

1.17

 

Sales

34212000

37699500

43459500

Increase in comparison to previous year

1.10

1.15

 

Bad Debts

150000

195000

210000

Increase in comparison to previous year

1.3

1.08

From above analysis, it can be assessed that there is a major increase in accounts receivable in year II. However, the same increase has not been assessed in year III. It means that higher credit sales have been made in year II; this account needs to be assessed that whether the same policies have been followed by the company on continuing basis. Turnover has increased, but gross profit has not increased, rather it has decreased in comparison to previous years, thus the same required to be assessed in detail for ascertaining the reason behind it.

Salaries

1965000

2190000

2445000

Increase in comparison to previous year

1.11

1.12

A nominal increment has been assessed which is usually due to inflation. Thus it can be said that it genuine increase.

Inventories

2256188

2671362

4180500

Increase in comparison to previous year

1.18

1.56

In year three a major increase can be assessed, the reason behind the same is a change in policy relating to inventory valuation. A detail valuation, as well as other evidence, are required to ascertain whether the change is appropriate or not.

2.Inherent risk can be specified as a risk due to an error or omission in the financial statement, and the reason behind the same is other than the failure of control. Usually, inherent risk occurs when transactions are complex, and they require a high degree of judgement in order to conclude an appropriate conclusion (Cannon and Bedard, 2016). In accordance with provision provided in ASA 200; an auditor is required to assess the nature of business while examining control risk and inherent risk. The results which are generally found are in case inherent, and control risk is high, efforts are made to keep detection risk lower; in order to keep the overall audit risk low.

Fraud Factors in DIPL

Processing of data in new IT system:It has been assessed on the basis of provided facts that the new system works on the fully computerized manner and the whole accounting process is integrated into it. Even though the management is not satisfied with the system, it has been accepted and implemented without assessing in detail (Arens& et al. 2016). The risk existing in present scenario is an inherent risk. The reports, calculation and another statement which have been prepared with the new IT system required to be checked manually for ascertaining the existing errors. Further, for assessing whether all transaction has been considered by the new system before preparing financial statement; dummy entries can be entered, and its effect on financial statement can be assessed.


E-book Revenue:DIPL Ltd, receive proceed on e-book sale and pay a specified commission to the publisher. As the whole transactions are done online, there is no audit trail present in this transaction through which adequate audit proof can be ascertained that whether all the transactions have been recorded or not (Vona, 2011). Further, whether the commission which has been paid is computed in an appropriate manner or not also needs to be assessed in detail. It also comprises complex transaction as the storage fees have been recognised in the monthly fees are invoiced and the fact that it has been charged in advance for twelve months is not considered while recording the transaction (MironiucRobu&Robu, 2012). As income is an important variant of financial statement and before providing an opinion regarding it auditor has to be sure for this account. The methods and procedure which are adopted by the company for recording these transactions are to be checked in detail to understand its nature. The auditor will make detail check in this account and provide opinion on the basis of adequate audit evidence which has been obtained during audit procedure.

3.ASA 240 states that it is auditor responsibility regarding the fraud in an audit of financial report, assessing the issues relating to fraud factors of risk in a business, fraud can be stated as abroad perception for the principle of Standard of Australia’s Accounting Standard, as auditor is disturbed regarding the fraud factor as it will lead to misstatements in the financial reports intentionally or unintentionally (Kaptein, 2012). In ASA 240 it has been mentioned that the factors of fraud refer to a situation that pushes fraud commitment or gives the opportunity to commit a fraud.

Conclusion

Some key fraud factors of risk are enumerated as below with their impact on the auditing conduct:

Force on the organization to implement new information technology systems:

At present, DIPL management has been forced in order to implement new information technology systems. The IT manager has complained against this matter many times, regarding the installing of the system. Therefore the whole management having several issues, as it leads to an opportunity to fraud and gets advantage. The similar will impact the procedure of auditing being applied by the auditor in order to evaluate the efficiency of the system, CAAT tools can be applied by the auditor for considering the system transparency (Barton, 2008). Thus, determining all transactions is contained during the preparation of company’s financial statement: model transactions can also be entered into the system, and the effect of that can be the assessed on the financial system. Discussion with publishers can be made, or a statement can be requested in order to verify the payments.

Lack of internal control system due to poor supervising of control:

In DIPL there is inappropriate internal control system so as to assess the existing obligation are effectively used by the management. The similar may lead to income identification high correlated to the real revenue (Barth, Landsman& Lang, 2008). The factor of fraud can also influence the auditing procedure been applied by the auditor, if the reports given by management regarding the several activities and operations of the business (William Jr, Glover&Prawitt, 2016). Improved recognition must be required by the auditor for verifying the management’s accounts or presenting the concerned issues. The risk fraud factors will impact the procedures of auditing to be implied for giving appropriate outlook regarding the DIPL financial statements.

References

Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E. 2016. Auditing and assurance services. Pearson.

Barth, M.E., Landsman, W.R. & Lang, M.H., 2008. International accounting standards and accounting quality. Journal of accounting research. 46(3). Pp.467-498.

Barton, A., 2008. Professional accounting standards and the public sector—a mismatch. Abacus. 41(2). Pp.138-158.

Cannon, N. and Bedard, J.C, 2016. Auditing challenging fair value measurements: Evidence from the field. The Accounting Review.

Kaptein, P. S., 2012. Ethics Management: Auditing and Developing the Ethical Content of Organizations. Springer Science & Business Media.

Knechel, W.R. and Salterio, S.E. 2016. Auditing: Assurance and risk. Taylor & Francis.

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.

Mironiuc, M., Robu, B. I. &Robu, A. M. 2012.The Fraud Auditing: Empirical Study Concerning the Identification of the Financial Dimensions of Fraud. Journal of Accounting and Auditing Research and Practice,2.

Vona, W. L. 2011. The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems. John Wiley & Sons.

William Jr, M., Glover, S. &Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.

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