Analyzing DIPL's Financial Performance, Risk Factors And Fraud Risks

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.

Analyzing DIPL's Financial Performance

Analytical procedure is a part of auditing process which involves calculation of key financial ratios which enables to compare and analyse the performance of the company. It helps the auditor to form an overall opinion on the financial statement that whether they are showing true and fair view or not. It helps in comparing the past performance of the company with the present performance. The financial statements should be consistent so that it can create a better understanding of the firm. As audit is an independent examination of the financial statements, the auditor is able to give an opinion that there is a presence of material errors in the financial statements or not. The auditor must find out the reasons if there is any major changes or inconsistency found while examining the financial statements (Basu, 2009)..

The auditor finds out some important financial ratios in order to compare the financial data of the company over the years. As per the case study that has been provided to us, the key financial ratios of DIPL are shown below along with the analysis (Blank, 2014).:

It is always a positive sign if the gross profit increases over the years as it is a result of efficient working of the company. We can see that the gross profit percentage has been decreasing over the years i.e. 1% every year for the past three years. This shows that the profit earned by the company is decreasing which may be the result of inefficient working. There may be many other factors which would have affected the gross profit percentage.

The current ratio of the company shows the ability of the company to pay off its short term liabilities with the help of its current assets. The current ratio is considered to be a type of liquidity ratio. Current ratio is considered good when it is equal or greater than 1. It has been shown in the above table that the current ratio has been increasing over the years which is considered favourable. However, Quick ratio shows more appropriate liquidity position than the current ratio as it includes the amount of inventories which may not be converted into cash immediately. Therefore, we can say that the quick ratio of the company helps us in determining the cash readily available with the company to meet its short term expenses (Boynton & Johnson, 2006). The quick ratio of the company is presently 0.84 whereas in the previous year it was 0.94 which shows that there is a decline in the good liquidity position of the company. The company may face certain obstacles in paying off its short term obligations.

Debt is a liability in the balance sheet of a company. The debt equity ratio is favourable only when it is considered low. The debt equity ratio of the present year is 0.61. If the debt equity ratio in any cases exceeds 1 then the loan provider may recall the amount of loan. In the current year the company had to spend a huge fund on the IT system but still the retained earnings shows an increment. Therefore, there is a possibility that there is any manipulations made.

DIPL's Business Operations: Inherent Risk Factors

This ratio is calculated in order to ascertain the capability of the company to pay off the interest. As we can see in the above table that the interest coverage ratio has fallen drastically over the years we can see there is a huge burden on the company to pay interest (Cahill & Kane, 2011)..

It is very important whether the financial statement contain any misstatements or not. Therefore, in the procedure of audit in order to find out this risk assessment procedure has to be followed. Inherent risk can be defined as those risk which results in lack of information or presence of misleading information (Knechel, Salterio & Ballou, 2017)..

Based on the case study of DIPL ltd, in which the books has been closed on 30^th june every year. Two risk were identified on performing the risk assessment procedures:

Mistakes are very common when a huge number of transactions comes into play. However, In the case of DIPL Ltd it has been observed that the cashier of the company records the cash receipts in the register when he opens the mail. There is a huge chance of making mistake or negligence of the mail which would leas to omission of recording the cash receipt (GUPTA., 2016).

The cashier can at anytime manipulate and take personal benefits by deleting the mail and claiming that the money has been used in the workings of the company only.

It is the everyday job of the cashier to download the cash receipt of the previous day and sent it to the clerk in the accounts department (Horngren, 2017).. It is not safe to leave all the cash present in the hands of one person as there lies a risk of defalcation. There also lies a possibility that the clerk and cashier team up to manipulate the cash in hand.

There are certain points that has to be kept in mind while assessing the risk involved in manipulation of inventories:

We all know that the inventories are received by a person in charge in the warehouse. The person in charge maintains the record of the quantity of inventory and there is no second party involved who keeps a record of the same (Messier, 2016). It is possible that the person who records make certain manipulation so that he could gain some personal benefits out of it (Griffin, 2009).

If there is no regular stock check in the warehouse the entire year then there may be many wrong acts going on such as theft (Hooks, 2011). This will come before the eyes of the higher management at the end of the year when there is a proper check and any difference in the quantity may be then regarded as discrepancy.

Fraud means any activity performed in an organisation whether internally or externally intentionally in order to get a illegal advantage. It is commonly noticed that the fraud is done by the internal members of the company(Ramaswamy, 2015). There are certain factors that show the pressure of committing fraud, such factors are known as fraud risk factors. The presence of fraud risk factors depends upon the presence of following three factors: Incentives, opportunities and Attitude.

The following fraud risk factors were identified while studying the case study of DIPL limited (Khan and Jain, 2013).:

The board found that it was now really very important to make the accounting system of the company computerised so it pressurised the IT department of the company to install the advance system to make work much easier and faster. It was observed by the manager of the IT department that there was a huge mess because of lack of training and also because there was no proper testing done (Whittington & Pany, 2016). As it was a truly new thing for the company there was a very little knowledge about it. The reasons are here below:

• There may be many fraudulent activities performed in the past which the people may try to cover up by stating a reason that there was a loss of transaction while transferring data from the books to the computers (PAVAN, 2014). In such a case, the management would be blamed and the people involved in the fraud will be in a safe side.
• There may be certain accounts that were manipulated in the past such as cash accounts, so the messed up accounts may give them an illegal advantage which is surely not justifiable.
• According to the case study, we know that there was an introduction of the new internal audit team in the company. Therefore, the people involved in fraud may be at a risk that they will be caught and so they thought of introducing a new IT system so that they could save themselves.

DIPL ltd.had incurred huge expenses this year against which it had to raise a loan of 75 lakhs.

• The company has increased its estimated life from 20 years to 30 years which is against the policy that is adopted by the company. This is done so that the company could manipulate the depreciation charged on the asset as we know that increasing the estimated life would decrease the depreciation for the year. The company has also incurred a huge expenditure of Rs 76,50,000 which was not a requirement but has been acquired to depict a sound financial condition of the company so that there is no obstruction in raising funds in the near future.
• The company printed medical books in huge quantities in advance although when it was printed in the journal that there may arise a validation of a new theory and so the books may become obsolete. The company also took over another firm known as Nuclear Publishing Ltd by paying off for its asset net of liabilities (Pitt, 2014). The company took over the company so as to maintain its reputation in the industry.

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