Get Instant Help From 5000+ Experts For
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing:Proofread your work by experts and improve grade at Lowest cost

And Improve Your Grades
myassignmenthelp.com
loader
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Guaranteed Higher Grade!
Free Quote
wave

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

Preliminary Analytical Procedures for DIPL's Financial Report Information

Analytical procedures are the procedures performed by the auditor at the end of the year in order to help the auditor create overall opinion regarding financial statements in his report. It is done to ensure that the financial statements are in the perspective of the firm’s auditor. It helps to distinguish between financial and non-financial information, and also to differentiate between this year's and the previous year’s financial information (Basu, 2009). If any inconsistency or any physical changes are seen, then the auditors may interrogate with the administration or those charged for it or proceed with the administration of auditing charges in the audit process so that the detailed study of their observations is inconsistent. According to the DIPL case study, the main fundamental ratios are calculated for the analytical procedure so that the planning can be prepared based on this approach: -

The current ratio of the current year is 1.50, comparing to the previous years, which is 1.42 for 2013 and 1.47 for 2014, which indicates favorable conditions because the current ratio indicates the liquidity of the company. However, the true sign of the liquidity of company is a quick ratio, because the amount does not contain inventories which are done in order ensure that cash available in the form of goods cannot be immediately converted into cash. However, the current year's quick ratio is 0.85, which is less than that of the previous year 2014, which is 0.94, that means the real cash is not available very much in hand if in this case, the company have to clear its short-term transactions  (Blank, 2014). This is not a good sign because the percentage of cash in hand has decreased significantly in comparison to last year, which is an estimate of unusual proceedings or company expenses than last year.

According to Equity percentage and Return on EPS calculation, profit before tax is Rs. 3059299 in 2015 but income tax is showing the amount of money as Rs. 87116 which is not possible without any unnecessary change. It can also be done to show high net earnings as the EPS for the current year is of about Rs. 132 but for the previous years, the EPS was as low as Rs. 104.85 for 2013 and Rs. 101.84 for the year 2014. It is necessary to evaluate this type calculation of PAT (Profit After Tax) because the income tax calculation is very low, which can be used to display high EPS so that the company can fulfill their sole objective of earning a profit by winning the investor's trust. Also, these calculations of net earnings can be made high so that their return on equity percentage increases as compared to the previous years because it states the amount of return the investors receive on their investment.

Inherent Risk Factors Arising from DIPL's Business Operations

The only calculation of debt to equity ratio is for the current year which is 0.61. The company is in a situation with the loan giver where if it doesn’t maintain a current ratio of 1.5 and debt-equity below 1, then the loan giver is going to take the amount back.
In the case of pressure, it may be seen that in order to show huge shareholders equity balance, the company printed in the books that the income tax liability was about Rs. 87116 for a profit of Rs. 3059299.In comparison to the previous year, there is an abnormal increase in the value of retained income even after facing huge expenses in this current year such as the new IT system, takeover of a new company named Nuclear Publishing Ltd., purchase of fixed assets in bulk, etc. thus, a detailed observation should be done in such a case

The danger of material misstatement refers to the risk that the financial statements have been erased or a physical change may have occurred. The auditor has to detect the risk of physical mistake at two levels:

At the financial level:

Here, the identity of risk is completely relative to financial statements as a whole because it covers risks such as incompetent control system, lack of capital required to continue the business, unusual pressures, unusual transactions, hasty decisions, etc.

At the Assertion level: Here, two types of risks are involved - The underlying risk that refers to the risk is caused by errors or fraud which are physically false and may be stated individually or in aggregate and have a material effect other than the failures of control.Control risk refers to the risk that indicates physical misconceptions existing in the books because it cannot be separated or stopped to enter in the accounts of business books by the internal control system, which in turn indicates the risk due to the failure of controls in the firm (GUPTA., 2016).


According to the given question, the two aspects contained in DIPL can be described in the following two points: 

The Company evaluates raw materials according to the weighted average method. Now, the valuation of the inventory directly affects the profitability of the company, because the incorrect evaluation overstates or closing stock gets worse, resulting in higher or lower profits (PAVAN, 2014). For example, the closing stock is 20 units, whose opening stock is.100 units of Rs. 1000 and purchase 200 units of Rs.3000.After the average method, the stock valuation is Rs. 13.34 per unit, that is the closing stock of Rs. 267 but in fact, it is the purchase of 20 units where the cost of one unit is Rs. 15 and so, the valuation value of the closing stock should be Rs. 300. Thus, by following the average method, the lower closing stock price will be shown that will lead to a decrease in overall profit. However, in the board meeting of June 2015, the company had decided to change its valuation method based on the FIFO basis, which points to the cases that it is trying to hide the money earned out of the wrong valuation of inventory. In addition, by doing so, there is an increase of about 56% in inventory value, which indicates the high finishing stock value as compared to the 2014 data, which shows high returns and thus shows the company's better and stronger position which will help it for smooth future funding or to win the trust of the investor or to satisfy the debtor that the company's earnings are a satisfactory (Horngren, 2017). 

Fraud Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting

There are a lot of factors within the unit which indicates that the company is under unusual pressure or a certain type of error or fraud, which the company is trying to hide from its people.Such pressures can be described in the following points:

In January 2015, the company appointed a new internal audit team, while its books were closed in June.This is doubtful because, in the middle of the year, such a step is adopted as it may have been adopted to identify fraudulent activities that management already has an intuition about. Also, its CEO changed in the same month. Thus such changes have to be further investigated by the management and with the previous CEO (Griffin, 2009).

A loan of Rs. 7.5 million from BDO finance was taken from the company. It spent a huge amount on the property but at the same time, it adopted a new IT system in the unit and even took a company named Nuclear Publishing Ltd., despite the fact that the purchase price of the plant and equipment already exceeds the load amount. Thus, the purpose of the loan and expenditure made by the company is not appropriate. Also, it points to the unusual pressure that some fraud risk factors do exist (Pitt, 2014).

This is the responsibility of the auditor to follow their duties in such a way that to ensure proper assurance that the financial statements are given to be true and fair, and also that the information given in the statement is free from any misconstrued error and fraud (Hooks, 2011). Fraud is a legal determination theory and the auditor is expected to not have enough expertise to make such legal determination. Instead, the auditors are considered with the determination of the misunderstandings of two things wrongly arising from it: First, from fraudulent financial reporting and secondly, by misappropriations of assets. Fraud risk factors are such situations that are generally present where there is a fraud. These are the following conditions which may encourage a fraud risk factor:

Management or workers are encouraged to have an incentive or under pressure;

Things are adequate to provide opportunity for conducting fraud; and

Fraudsters involved are capable of rationalizing fraudulent activities carried out by them.

According to the study of the case given by DIPL, two identified frauds due to which the financial reporting of the company is due, also for which the company is considered as an anesthetic and it has an effect on the performance of audit report are as follows (Knechel, Salterio & Ballou, 2017):

Auditing Implications of the Fraud Risk Factors Identified

Recognition of storage fees from 'E-book facilities’: The company used to charge an annual "storage fee" to the publishers to keep their e-books on its website.

However, these storage charges were due 12 months in advance and were fully accredited in the month of their invoice, despite the fact that they are being recognized in advance, thus, misinterpretation of accounting theory. The revenue recognition concept says that revenue is to be recognized only when it is being earned, which means either goods have been provided or services have been performed (Messier, 2016). Thus, without really providing a service or without actually completing the service period, revenue for such months will not be considered and will be treated as 'advance from the publishers' under current liabilities. However, the meeting of the board came to the conclusion of income identification only after the completion of the transaction. However, due to the internal audit team, this change had come and it may have to be covered for previous wrong beliefs because of which higher revenue is shown in the market so that it can show a strong position in the market.

The Company had put excessive pressure on the IT department to set up new computerized systems in June 2015 when it closes its accounts. There was no clue at all about the fact that the employees are properly trained for their work, or whether the new system has been tested before properly or not (Ramaswamy, 2015). It just wanted to change its existing system, due to which transactions were being transferred from one system to another because of which many transactions were lost in this process. This action of management indicates the existence of fraud risk factors such as some fraudulent activity has been initiated and with the fear of internal audit teams which will definitely be able to rectify it, the replacement of the entire system with new IT system was management’s idea so that they can skip the transactions and declare it to transaction lost due to less knowledge or incapability of accounting system, IT department and the employees. In addition, the same action acts as an opportunity for employees or other members, who can take advantage of messed up accounts and thus, misinterpret the cash balances or conduct an activity which may help him to earn personal money on account of the firm and after all this blame the department for being so careless regarding the transfer of accounts from old system to the new accounting system (Khan and Jain, 2013). 

References:

Basu, S. (2009). Fundamentals of auditing. Delhi: Pearson.

Blank, R. (2014). The Basics of Quality Auditing. Hoboken: Taylor and Francis.

Boynton, W., & Johnson, R. (2006). Modern Auditing. Hoboken: John Wiley and Sons.

Cahill, L., & Kane, R. (2011). Environmental health and safety audits. Lanham, MD:Government Institutes.

Griffin, M. (2009). MBA fundamentals. New York, NY: Kaplan.

GUPTA. (2016). FINANCIAL ACCOUNTING FOR MANAGEMENT. [S.l.]: PEARSON EDUCATION INDIA.

Horngren, C., Datar, S. and Rajan, M. (2017). Horngren's cost accounting. Harlow, Essex, England: Pearson Education Limited.

Hooks, K. (2011). Auditing and assurance services. Hoboken, NJ: Wiley.

Knechel, W., Salterio, S., & Ballou, B. (2017). Auditing. New York: Routledge.

Messier, W. (2016). Auditing & assurance services. [Place of publication not identifiedMcgraw-Hill Education.

Khan, M. and Jain, P. (2013). Management accounting. New Delhi, India: McGraw-Hill Education (India).

Kumar, P. (2014). CA-IPCC Auditing and Assurance. Delhi, India: S. Chand Publishing.

Pitt, S. (2014). Internal audit quality. Hoboken: Wiley.

Ramaswamy, M. (n.d.). Finance for nonfinancial managers. 

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2021). Analyzing DIPL's Financial Report And Risks For Audit Planning: Q&A Essay.. Retrieved from https://myassignmenthelp.com/free-samples/hi6026-audit-assurance-and-compliance/immediately-converted.html.

"Analyzing DIPL's Financial Report And Risks For Audit Planning: Q&A Essay.." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/hi6026-audit-assurance-and-compliance/immediately-converted.html.

My Assignment Help (2021) Analyzing DIPL's Financial Report And Risks For Audit Planning: Q&A Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/hi6026-audit-assurance-and-compliance/immediately-converted.html
[Accessed 28 March 2024].

My Assignment Help. 'Analyzing DIPL's Financial Report And Risks For Audit Planning: Q&A Essay.' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/hi6026-audit-assurance-and-compliance/immediately-converted.html> accessed 28 March 2024.

My Assignment Help. Analyzing DIPL's Financial Report And Risks For Audit Planning: Q&A Essay. [Internet]. My Assignment Help. 2021 [cited 28 March 2024]. Available from: https://myassignmenthelp.com/free-samples/hi6026-audit-assurance-and-compliance/immediately-converted.html.

Get instant help from 5000+ experts for
question

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing: Proofread your work by experts and improve grade at Lowest cost

loader
250 words
Phone no. Missing!

Enter phone no. to receive critical updates and urgent messages !

Attach file

Error goes here

Files Missing!

Please upload all relevant files for quick & complete assistance.

Plagiarism checker
Verify originality of an essay
essay
Generate unique essays in a jiffy
Plagiarism checker
Cite sources with ease
support
Whatsapp
callback
sales
sales chat
Whatsapp
callback
sales chat
close