Analyzing Financial Statements And Identifying Inherent Risks For DIPL

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

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.

Implementation of analytical procedures to monetary assertions of firm DIPL

Proper implementation of analytical procedures to different pecuniary assertions of the firm DIPL can support the process of improvement of the audit design. Fundamentally, audit plan can reflect specific directive that need to be tracked during a specific time of executing the audit practise. Fundamentally, stratagem of assessment also aids auditors in backing up audit expenses at sensible stage and aids in illustrating misapprehension together with miscommunication with diverse customers of specific firm.

Inspective tactic of common sizing backs evaluation of financial assertions in a specific manner. This way of analytical procedure also aids management of firms to work on carrying out comparative evaluation of economic assertions of firms from the perspective of different periods (different phases of time) or else from the perspective of different business concerns. Appraisers can also tell about different categories otherwise classes of elements recognized in the financial statements and help in examining the manner of disclosing diverse economic pronouncements (Chou 2015). As such, the mechanism of considering diverse elements of economic statements for example, net assets as well as liabilities together with shareholders’ equity (Simnett et al. 2016). Nonetheless, modification in the financial statements considered from a specific point of view backs the development of the system of identifying the aberration, thus, this aids the process of analysis of the reason behind the deviation for gaining a deep understanding as regards the main intent (William Jr et al.  2016). In essence, this is mainly because this technique can be appositely executed for analysing financial reports and all at the same time analysing comprehensive idea of financial analysis.

Specific outcomes of planning for preparation as well as presentation of audit can be exclusively effected by the exploratory tactic undertaken for the purpose of translation as well as making out information from different reports published by the firm (William Jr et al.  2016). For instance, results of the analysis of key financial ratio enumerated based on pecuniary reports is hereby tabulated below:

Critical evaluation of the financial reports of the firm DIPL helps in understanding the financial health as well as financial condition of the firm. The above table reflects the profitability condition of the firm suing the profit margin ratio. Profit margin ratio is documented to be 0.068 during FY 2013, while this ratio increased to around 0.60 in the FY 2014 and further escalated to o.06 during the subsequent year. This reflects an improvement in the financial condition from the perspective of profitability. Again, the solvency ratio documented to be 0.62 during the FY 2013 declined to around 0.44 in 2014. Furthermore, this ratio also decreased to about 0.21 in FY 2015. Current ratio recorded to be 1.42 in 2013, 1.46 in FY 2014 and 1.50 in FY 2015. Thus, significant financial ratio assessment aids in comprehending whether disbursement of the entire business are properly effective and whether all-inclusive costs of the firm is remarkably high. In accordance with the present business case, it can thus be stated that audit of financial reports of the firm can hereby help in examining the assets, reserves as well as possessions of the firm. This also helps in recognizing the pattern in which the firm can carry out necessary actions to limit any type of adverse happenings (Simnett et al. 2016).  

Detailed discussion of the way economic fallouts can affect audit process

2: There are different categories of risk recognized in the process of audit and can be related to material misstatements in financial reports. Even so, it can be mentioned here that there remains different categories of unsystematic risk that can pull the attention to different types of risks recognized from financial proclamation of business concerns. Besides this, there also exists miscellaneous categories of risks that can also affect the business operations and thus needs to be avoided by firms (Messier et al. 2014). Fundamentally, this can assist in indicating both true and fair view of different classes of economic announcements. Inherent risks might occur in this case. This inherent risk is the risk that essentially occur owing to error or else omission in a pecuniary reports because of a feature excluding control failure. However, in a monetary assessment, inherent risk is utmost probable to happen when dealings are intricate, or in circumstances that need a high magnitude of judgment as regards financial approximations. The auditor might plausibly find it very hard to detect the certain risks. There also exists certain risks that occur because of exclusion of certain factors together with certain faults or mistakes that are unlikely to be committed to be committed by different expert accountants (Louwers et al.  2015).

The table below presents different types of inherent risks that might be faced by the business concern DIPL along with detailed illustration of the same.

Possible reasons behind occurrence of inherent risks related to material misstatements in the financial pronouncements of the firm include:-

• Too much work related stress and overload of work on employees along with the management of the firm
• Risk of carrying out tasks by professional accountants in a faulty or erroneous manner that might lead to misrepresentation in the financial statements (Elder et al. 2011)
• Trustworthiness of the complete management and board (Glover et al. 2016)
• Strain on the entire management of the firm
• Features and nature of functionality of operations of the business concern (Edgley et al.2015)

3: Fraud risks can essentially lead to loss of assets and reserves of the corporation DIPL. In essence, discontentment of employees owing to excessive stress of work can direct employees to contain different fraudulent arrangement (Arens et al. 2016). In addition to this, expectancies of administration of corporation as regards financial results and to achieve a certain level of performance can also lead to occurrence of different incidence of fraud (Chou 2015). Added to this, there too occurs the necessity to communicate financial result that in line can help in evading risks reflecting made-up affirmations (Baylis et al. 2017).

Consistent with the given business case, it can be hereby mentioned that exercise of approximation of inventory of specifically raw material at precise average cost was not proper as the charge of paper was substantially beyond the average cost (Edgley et al. 2015). In addition to this, risk of recognizing fraudulent deeds involved in executing accounting arrangement using IT in tasks of book keeping can be presumed by observing diverse arrangements at different phases (Duncan and Whittington 2014). At the inception, the risk associated to the registering economic assertions can be recognized by undertaking inquiry of financial assertions by assessors, outlining schemes of control directly.

References

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

Baylis, R.M., Burnap, P., Clatworthy, M.A., Gad, M.A. and Pong, C.K., 2017. Private lenders’ demand for audit. Journal of Accounting and Economics.

Chou, D.C., 2015. Cloud computing risk and audit issues. Computer Standards & Interfaces, 42, pp.137-142.

Christensen, B.E., Glover, S.M., Omer, T.C. and Shelley, M.K., 2016. Understanding audit quality: Insights from audit professionals and investors. Contemporary Accounting Research, 33(4), pp.1648-1684.

Duncan, B. and Whittington, M., 2014, September. Compliance with standards, assurance and audit: Does this equal security?. In Proceedings of the 7th International Conference on Security of Information and Networks (p. 77). ACM.

Edgley, C., Jones, M.J. and Atkins, J., 2015. The adoption of the materiality concept in social and environmental reporting assurance: A field study approach. The British Accounting Review, 47(1), pp.1-18.

Elder, R.J., Beasley, M.S. and Arens, A.A., 2011. Auditing and Assurance services. Pearson Higher Ed.

Glover, S.M., Prawitt, D.F. and Messier, W.F., 2016. Auditing and Assurance Services: A Systematic Approach 10th.

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

Knechel, W.R., 2016. Auditing: Risk and assurance. Routledge.

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

Messier, W.F., Glover, S.M. and Prawitt, D.F., 2014. Auditing and Assurance Services: A Systematic Approach; Diterjemah oleh Denies Priantinah, Linda Kusumaning Wedari, 2014. Salemba Empat. Jakarta.

Simnett, R., Carson, E. and Vanstraelen, A., 2016. International Archival Auditing and Assurance Research: Trends, Methodological Issues, and Opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.

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