Case Study On Double Ink Printers Ltd (DIPL) - Audit Planning, Risk Assessment, And Fraud Factors Essay.

Required:

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

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

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.

Analytical Procedures at Planning Stage

Auditing is the important aspect of every company working anywhere in world. By doing audit of Financial Results present by the company, the auditor authenticate the results of company which has be used by third party present in internal and external environment in their decision making about the affairs of the company. It shows that role of audit and auditor is important for everyone for management of the company who is presenting the information and for users who uses the information presented by the company. 

This report has been prepared to assess the compliances which the auditor should do at the planning stage of the audit or at the actual working stage of the audit in conducting audit. The report has been divided in different parts so that the purpose of the report can be easily communicated. The report has started with executive summary and introduction containing the purpose and structure of the report. The next part dealt with the analytical procedures which an auditor should adopt while doing planning the audit based on the past years results of the company. The other part explain what are key risk factors which an auditor should think over at the planning of the audit of company and the chances of in the financial results of the company with the presence of these factors. The next part of the report what can be fraud factors which are present in the company which can lead to manipulation of results in the company and how the auditor should taken care of these factors in conduct of audit of that company. The report has been ended with proper conclusions and recommendation about the auditor’s role in Double Ink Printers Limited. The report has been framed using information and facts present on secondary data sources available online.

An audit procedure at planning stage contains Analytical procedures which are of two types Primary Analytical Procedure and Substantive Analytical procedures. Analytical procedures at the planning stage of audit helps in the auditor to understand the business nature of the Company for which the audit has to be done by auditor. Auditor can understand different changes that happened in the business in the period under consideration of the audit and what are key risk factors that can affect the financial results of the company. These factors help the auditor in planning stage to identify the areas that can be taken care in depth (ACCA, 2016). 

Assessment of Risk Factors in Planning Stage

Double Ink Printers Limited is the company for which the analytical procedures has to done by auditor to understand the way the audit can be planned so that all the key areas containing high element of risk can be covered during audit. For doing analytical procedures first requirement is to understand the business nature of the company. The company DIPL is engaged in printing business of different books and articles for different users. The company is providing the services of printing to different book publisher, magazines owners and different advertisement company. The company is taking raw material from home countries and foreign countries on 50% basis so that quality of printing can be maintained. The company has maintained e portal of different material which can be print by company so that person can identify the material online and place the order of printing. 

Analytical procedures as per ISA 300 at the time of planning stage defines the procedures that can used by the auditor to identify the potential risk situations by analyzing trends and ratios which can be calculated from past years financial data. In the case of DIPL, the following trends and ratios helps the auditor to plan the audit and influenced the planning decisions for the year the ending 30^th June 2015:- 

1. Non operating Expense – Foreign Exchange Loss –The auditor has taken into consideration that 50 % purchases of raw material are from foreign countries having currency different from home country currency. So there is possibility of foreign exchange gain or loss every year. DIPL has record $ 38,500 in 2013 and $ 49,750 in 2014 as Foreign Exchange Loss but in 2015 the management of company reported zero loss or gain on foreign transaction which should consider by auditor in planning stage.
2. Current Ratio in relation to Loan: - The Company has Current ratio 1.42: 1 in 2013 and 1.47 in 2014 in relation 1.50:1 in 2015 as calculated in Appendix. The company has taken a loan of $ 7.5 million in 2015 on a condition that the company should maintain the current ratio of 1.5: 1 which creates alarming situation for auditor at the planning stage to think and plan the audit accordingly (Anastasia, 2015).
3. Debt Ratio and Net Profit Ratio :- The DIPL report Debt to Equity ratio 1.13:1 in 2015 as compared to 0.41:1 in 2013 as shown in Appendix. Showing that the debt has been increased by the company and more funds are ploughed in the business to earn high profits but Net profit ratio was 6.90% in 2013 and 6.84% in 2015 showing the adverse effect of funds on the company profitability. The audit should consider this point while identifying the procedures for audit (Weiss, 2014).
4. Allowance of Doubtful Debts and Account Receivables:-DIPL has reported $ 2, 40,000 as doubtful debts provision in relation to debtor of $ 53, 13,309 in 2015 as compared to $ 210,000 as doubtful debts on $ 4, 53,000 debtors in 2014. It shows high variation in provision for debtor to have errors chances in taking accounting estimate with regards to debtors.
5. Change in Accounting Policy: - DIPL management has changed the policy in relation to provision for obsolesce of inventory. The auditor should consider this fact at the time planning stage that the company is assuming no normal wastage at all from 2015 (Cooper , 2015).

From the above, it can be clearly understand that the Financial results presented in Financial Reporting by company management can highly influenced the decisions of the auditor and audit team at the planning stage.

Risk Assessment is the major procedures which have been performed by Auditor to have reasonable reasons for material misstatement in the financial results presented by the management of company so that further audit procedures can be framed by analyzing the impact of risk factors on the business operations and its results. The following are two inherent risk factors are presented in the DIPL business operations along with their influence and impact on the material errors in Financial reports of DIPL:-

1. Valuation of Inventory of Raw Material and Finished Goods :- The DIPL has major portion of its business operations in form of inventory and the company is valuing inventory on the Average Cost basis resulting the value of inventory of Raw material and Finished Goods at price lower than the current market value. The risk factor in this inventory is not valuing at current prices and valuation of inventory at the end of particular period is less as compared to actual prices. The chances of having high material misstatement can be there as management can manipulate the financial performance from business operations by valuing the inventory at fewer prices (Bedard and Graham, 2002).
2. Acquisition of Nuclear Publishing Limited (NPL):- The DIPL has acquired the business operations of NPL in September 2014 by giving the payment on the basis of net assets of NPL with the motive to earn high profits margins on sale of medical books of NPL. But in 2015 there are chances that the books of NPL will become outdated and no one will buy them in near future because of changes in medical industry. This is considered as major risk factor on DIPL as the company has done huge investment in taking NPL operations which is in danger situation. This risk factor can create chances of misstatement in the financial results by the management of the company in future as the company may face the shortage funds of lower profits (Gary, 2017).

Fraud Risk factors are the dangers situation which shows that chances of frauds in relation to financial results are there in the company. In DIPL, business operations understandability helps the auditor to identify the fraud risk factors to which the DIPL and its working are affected. The following are two key fraud risk factors which relate of false financial reporting by the company and their impact on the conduct of audit of auditor:-

7. External pressure on the DIPL management: -The company has taken a loan of work $ 7.5 million from BDO Finance Company for expansion of business operations. The loan has been taken on two conditions that the current ratio of DIPL will always be more 1.5:1 and Debt to Equity Ratio will always be less than 1:1 otherwise the loan amount will repaid by the DIPL management. The management has external pressure from BDO Finance and this will enhances the chances of material misstatement in the company financials and will influenced the management to value the current assets on higher side and this can be shown from allowances of doubtful debtors which has been decreased drastically in comparison to debtor balances in 2015.
8. Deviation from Accounting Treatment defined in AASB:-The AASB basic requirement to record income and expense are on accrual basis not on receipt basis. But DIPL are recording the storage fees on receipt basis and does not booking the accrual income as the fees are received in advance for whole of the year. This is creating the situation of risk or frauds on the part of Income to be disclosed in particular year as revenue in DIPL (Zimbelman, 1997).

From the above two factors which shows the susceptibility of frauds in Financial Reporting of DIPL will affect the conduct of audit. The auditor has to do substantive audit procedures in relation to above factors so that the option can be framed easily in effective and corrective manner.

Conclusion And Recommendation 

The financial reporting of every company plays a vital role in the decisions about that company. The financial reporting done by the management should such that the information present in the financial reports does not mislead the users of the company. The auditor has to perform different risk assessment procedures as compliance procedures before planning the audit of any company. In the case of Double Ink Printer the compliances in relation to analytical procedures, inherent risk factor and fraud risk factors helps the auditor to understand the nature of business of company and plan the audit accordingly so that correct opinion can be drawn from the financial results of the company. 

It is recommended from the report that the auditor should performed details analysis before the start of the audit by considering all the facts present in the company so that the risks can mitigate for material misstatement in financial reports and audit can be conducted in unbiased manner.

References 

ACCA, (2016), “Analytical Procedures”, available on https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html accessed on 20-08-2017 

Anastasia, (2015), “Financial Statement Analysis: An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/   accessed on 20-08-2017. 

Bedard, J.C. and Graham, L.E, (2002) “The effects of decision aid orientation on risk factor identification and audit test planning. Auditing: A Journal of Practice & Theory, 21(2), pp.39-56 

Cooper S, (2015), “A Tale of Prudence”, available on https://www.ifrs.org/Investor -resources/Investor-perspectives-2/Documents/Prudence_Investor -Perspective_Conceptual-FW.PDF   accessed on 20-08-2017. 

Gary S., (2017), “The Importance of Inherent Risk Factors: Auditor’s Perceptions”, Australian Accounting Review, Vol 3, Pp 38-44. 

Weiss D, (2014), “Faithful Representation” available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20Octobe r%202014.pdf    accessed on 20-08-2017 

Zimbelman, M.F.,( 1997) ,”The effects of SAS No. 82 on auditors' attention to fraud risk factors and audit planning decisions- Journal of Accounting Research, 35, pp.75 -97