Analyzing DIPL's Financial Report For The Audit Of Year Ending 30 June 2015

Read the Case Study on Double Ink Printers Ltd (DIPL) and answer the following 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.

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.

Applying Analytical Procedures to DIPL's Financial Report Information

Analytical process is considered to be one of the adequate information providing systems, which allows the company to develop adequate audit plan.  The use of the audit plan mainly allows the auditor’s relevant steps that need to be conducted complete the audit operation. Arens, Elder and Beasley (2014) mentioned that with the help of audit plan, auditors are able to control and maintain the overall audit cost, which is needed to complete the overall audit procedures. However, DIPL need an adequate analytical approach for reviewing the overall financial information, which has been declared by the organisation. The analytical approach only allows the financial analyst and auditors to understand overall performance of the organisation and make relevant accounting and financial decisions. Furthermore, with the help of common size analytical approach, individuals are able to evaluate the financial declaration that has been conducted by the organisation. In this context, Arens et al. (2016) stated that the evaluation and comparison of different financial reports allows the financial analyst to understand the trend of the organisation.

There are different ways in which financial analyst and Accountants are able to evaluate the financial report of an organisation. The major analytical process that could be used by the analyst is the Benchmarking. This method directly allows the analyst to compare the financial condition of an organisation to its peers. Relevant variance could be identified with the help of benchmarking process, which could directly pinpointing causes of the variance and performance between the company and its competitors. Furthermore, the use of ratios also allows the financial analyst to evaluate the financial information provided by an organisation.  The evaluation conducted by the ratios allows the organisation to compare the performance of the organisation with not only its competitors but also with the previous fiscal year performance. According to Becker, Stead and Stead (2016), ratios are considered to be one of the measures, which are used by auditors and analyst to evaluate performance of the organisation in different timelines.

The above table many helps in identifying the relevant ratios such as current ratio, profit margin, and solvency ratio for DIPL. Relevant improvement in the current ratio is seen, whereas decline is seen in both profit margin and solvency ratio from 2013 to 2015 (Cohen and Simnett 2014). The analytical process mainly identifies the relevant expenses, income, and effectiveness of the budget that is used by the organisation. Ratios are one of the adequate analytical tools that could be used by the auditors in conducting analysis of DIPL.

Furthermore, the use of ratios mainly allows the organisation to understand the actual financial performance of the organisation. The auditor's would eventually detect the actual financial health of the organisation and its trend with the help of financial ratio. Use of ratios also allows the analysis to understand the desirable and undesirable condition what the company's current financial position. However, the current case of DIPL is relatively undesirable, as the organisations performance has rapidly declined over the period of three years. The performance of the organisations have deteriorated over the period of three fiscal years, which directly imposes the overall corrective measures that needs to be conducted by the organisation for increasing its future performance (Cohen and Simnett 2015). Thus, it could be evaluated that the above mentioned reasons have relevant significance, which forces the organisation to use analytical process on its financial information.

Identifying Inherent Risk Factors Arising from DIPL's Business Operations

There are two types of inheritance that could be identified from the operations of DIPL, which is hindering the operational capability of the organisation. However there are certain risk that could be evaluated first to understand the risk factors that is hampering the operations of the DIPL. Evaluation of a case study mainly helps in understanding that the accounts department of the organisation have conducted different types of omission in Record Keeping.  The omissions of the transaction mainly increase the inconsistency in the planning and marketing phase for the organisation. Moreover, it is seen that the organisation failed to achieve the targeted revenue and profit level, which was set by the analyst. The other risk comprises of the inconsistency and ineffectiveness of the company's management, which is hampering the overall operations of the organisation (Earley et al. 2016). Moreover, management was not able to comprehend the risk identified from micro and macroeconomic factors such as economic, political, and social. Therefore, declining profit margin and revenue mainly increased the inheritance risk of the organisation.

The second inheritance risk mainly comprises of the employees currently working in DIPL, who are not having the adequate experience and proficiency level to increase productivity of the organisation. The evaluation of the study mainly states the inexperienced employees working in DIPL, which could increase mistakes that might directly raise the inheritance risk. Another way of finding the inheritance risk is by evaluating succession of the so, which was conducted by an ineffective process (Eilifsen et al. 2013). This has directly influenced inheritance risk of the organisation, which is affecting its operation and productivity. Furthermore, the organisation does not have adequate workforce to handle the business operations, which is also the reason why accountant are not able to record all the transactions and are making relevant  omission. The second inheritance risk that could be identified from the case study is mainly the business operations of the organisation.

From the evaluation of the case study it is seen that poor bookkeeping is been conducted due to excessive workloads imposed by the organisation. Furthermore, there is a lack of adequate interpretation by the management, which increases the inheritance risk of the organisation. Both the identified inheritance could directly increase the material misstatement in the annual report, which in turn could reduce viability of the financial statement (Junior, Best and Cotter 2014).

The risk from fraudulent activities conducted by staff can be identified from the case study, where implementation of new system could eventually help in monitoring activities of the employees. For the more there is a problem with the valuation of raw materials, which is conducted on average cost method. The average cost method is relevantly not adequate, as the actual cost is higher than the average cost, which does not allow the organisation to determine the actual expenses conducted in purchasing the raw materials (Louwers et al. 2015). There is a relevant risk that can be seen in the financial reporting process, which needs to be evaluated by the auditor during the audit procedure.

Reference and Bibliography:

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