Analytical Review And Risk Assessment For DIPL For The Audit Of Year Ending 30 June 2015

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 for DIPL

1.The analytical procedure is an effective tool used by the auditor to perform risk assessment and identification of misstatement in the financial statement. The process consists of an evaluation of the financial information through analyzing the relationship between financial and non-financial data. It helps in investigating identified fluctuation or relationship data inconsistent with other information (Knechel & Salterio, 2016).  The procedure is used throughout the audit process and is conducted for three purposes which are a preliminary analytical review, substantive analytical review, and final analytical review.

The preliminary analytical review is performed to obtain to create an understanding of the business and its environment to determine the nature and assess the risk of material misstatement to determine the timing of audit procedure and developing audit strategy and program. The substantive is used when the auditor considers that the transaction is to be examined in details to reduce the risk of material misstatement at the assertion level. The final analytical review examines the overall financial statement at the end of the audit process to check that they are consistent with auditor understanding of entity (Parker, et. al., 2013).  The process is followed when any irregularities are found and to overcome the same with the detailed examination. The Auditor generally makes the choice of the audit procedure on the basis of internal control system. If the Auditor of the DIPL finds that the internal control system of the company is weak then they have to widen the scope of the audit and make the use of the different process to detect fraud. On the other hand, if the auditor finds that the company is having strong internal control system than they can limit the scope of their audit.

The order of DIPL needs to identify the audit procedure which will hold in a detailed examination of the financial statement. The process will help in obtaining the evidence to check the authenticity of the financial statement and create a relationship between financial and non-financial data. The process involved comparing the data of past year and identifies the trend to check the authenticity of the financial statement.

The Analytical procedure will help the auditor of the DIPL to identify fraud and error in the financial statement and make proper reporting over the same. So the auditor while framing the audit plan of the DIPL needs to include an analytical procedure to conduct the audit in an effective way. The Auditor of the DIPL is examining the previous three-year financial statement to identify the fraud and error and frame adequate reporting over the financial statement of the entity (Nicoll, 2016).  The part of the financial statement over which management needs to focus is-

Financial Statement Items and Fraud Risk Factors

Inventory: There is also a huge increase in inventory during the year 2015 so the auditor should check why the stock was left unsold during the year. The Auditor needs to check the inward and outward slip to obtain the information over the stock. Also, the company is quickly converting its raw material into sales so needs to identify why the increased stock was left with the company.

EBook storage fees: The Company is charging storage fee from the publisher of 12 months in advance which is apportioned to the different period. The auditor needs to check that the company has effectively charged the fee over the different periods as per the rules stated in accounting standard.

Bad Debts: From the data of the past three years it was identified that the Bad debts of the DIPL have increased over the past three year which is a matter of the concern. For this, the auditor needs to make the effort to identify the reason of the same and identify the measure followed by the company to overcome the same. Also, the auditor needs to check the authenticity of few of the transaction by obtaining the verification from the debtor.

Cash: The Auditor needs to check the availability of cash with the company as their huge chances of fraud in the area. The Auditor needs to check the actual cash balance held by the company and evidence of transaction which is made in cash during the year.

Employee payment: The auditor should check payroll register to ensure that right payment are made to employees. Also, he needs to ensure that the company is maintaining proper records of working with the employees.

Revenue from E - book: To check the revenue received from the E-book the auditor needs to check the company is maintaining proper transaction ID for each of the transaction and the receipt of the same is correctly recorded in the financial statement of the entity (Moroney, et. al., 2014).

The application of the analytical process will help the auditor of DIPL to identify the key areas always detailed examination needs to be conducted to ensure appropriate financial reporting of a business transaction. The procedure is adopted only over the few of the area of the business where there is use probability of Fraud and error. The procedure also helps the auditor and of training understanding over the effectiveness of internal control system followed by the company while recording business transactions. If the auditor finds that the internal control system of the DIPL is strong then he would avoid detail examination (Demartini & Trucco, 2016).  On the other hand, if the auditor finds that the internal control of the company is weaker then he would examine each of the transaction in detail. So the auditor needs to make the use of the different procedure at the time of audit for the purpose of reporting over a business transaction.

Inherent Risk Factors for DIPL

2.The auditor at the time of the creating the audit plan should consider the way he would examine all the risk which will create impact over his reporting over the financial transaction. The auditor needs to have the check over the inherent risk which may arise in spite of the stronger internal control system. The inherent risk is the risk of the material misstatement in the financial statement which may arise due to error or omission. The Inherent risk is higher in the situation where there is a high degree of judgment or estimate or a lot of complexity involved in the business transaction. For identifying the inherent risk the auditor needs to examine the transaction which is rapidly changing. Also, he needs to examine the misstatement in the previous year transaction to avoid the similar mistake again (Lessambo, 2016). The risk generally occurs due to the omission of recoding business transaction due to the complexity involved in the process. The Two inherent risks which may occur at the DIPL are as follows-

Recording Inventory – The auditor of the DIPL needs to conduct the detail examination of the way inventory is managed by the company as in spite of strong internal control system there is the huge probability of error. The company is acquiring the resources from Australia and Asia which creates complexity and may lead to the error at the time of recording the financial transaction. Also, the company is maintaining an allowance for the obsolesce inventory. The company if fails to make the right estimate in the area than it will create impact over the reporting of the business transaction. During the year end, the company closes the warehouse from 28 to 30 June for the purpose of stocktaking and invoices the sales on June 27. This may lead to the stock left unsold and in transit which may create impact over the reporting of the financial statement and can also lead to error (Chong, 2015).  So the auditor needs to effectively examine the transaction which has occurred around June 27 to avoid the occurrence of the fraud.

Cash receipt – The other area in the DIPL where there may be the possibility of the inherent risk is on the recording of the cash receipt made by the company. The DIPL is receiving some of the payment by cheque through mails where the cashier Judy Bones records the transaction in the inward remittance and then bank the cheque and advice about the payment to the Gay Chan for posting the same in the accounts receivables. There may be a possibility that the Judy Bones fails to report the transaction as she has sole control over the mail which may lead to error in the reporting of the financial transaction. As there is a lot of complexity involved in the process of receiving payment from the email so the situation may cause inherent risk. The auditor needs to examine the certain transaction which is received by emails to check that they are adequately reported and recorded by Judy Bones.

Inventory Recording

3.a)The auditor is the process which is conducted to identify that the financial statement presents the true and fair position of the company. The auditor conducts the detail examination of the financial transaction of the business to avoid the misstatement and fraud in the financial reporting of the entity. The DIPL in spite of strong internal control system has the possibility of occurrence of the fraud. The factor which creates the possibility of the fraud in DIPL are-

Acquisition of the Nuclear Publishing Ltd (NPL) – There is the possibility that the fraud may be incurred by the DIPL at the time of acquisition of NPL which has a large range of specialized medical textbook. The possibility of the frauds may be that the acquisition of the company may be related party transaction. There is huge possibility that there will be a change in the theory which may lead to NPL medical textbook being obsolete (Chen, et. al., 2014). So the auditor needs to examine the check over the major transaction incurred by the company in the recent past and the impact they may create over the working of the company.

Inventory – another area where there is the possibility of the occurrence of the fraud at the DIPL is at the time of managing inventory. The Company is receiving the resources from a different country so there is a lot of complexity involved at the time of recording the purchase of raw material. Also, the company at the time of valuation of the stock closes the warehouse on 29 to 30^th June. So there is a possibility that the company in order to report increased sales may dispatch the goods in transit which will cause a reduction in the closing stock.

So the Auditor needs to conduct the detail examination of the area and plan the audit accordingly to prevent the occurrence of fraud.

b) auditor of the DIPL should make the changes in the process of the audit as per the situation and the possibility of the fraud. If the auditor finds that there is the possibility of fraud than he should examine the financial statement in a detailed manner. In the situation of inventory if the auditor finds that the internal control system of the DIPL is inappropriate (Chen, et. al., 2014).Then the auditor would analyze each of the transaction in a detailed manner to find that whether the management or the employee has committed fraud at the time of reporting of the inventory. Also of the management fails to provide the relevant data or not support the auditor during the process than the auditor can frame qualified opinion over the financial state of the entity. The auditor can frame clean report if finds that the management has supported at the time of audit and provided evidence for each of the suspicious transaction. Also, the auditor should have a regular check over the major transaction which has been incurred in the near future that whether they are not related party transaction or are incurred to fool the customer.

References

• Chen, S. H., Olson, D. L., & Wu, D. D. (2014). Business Intelligence in Risk Management: Some Recent Progresses.
• Chong, G. (2015). International insurance audits and governance. International Journal of Accounting & Information Management, 23(2), 152-168.
• Demartini, C., & Trucco, S. (2016). Audit risk and corporate governance: Italian auditors' perception after the global financial crisis. African Journal of Business Management, 10(13), 328.
• Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
• Lessambo, F. (2016). The International Corporate Governance System: Audit Roles and Board Oversight. Springer.
• Moroney, R., Campbell, F., Hamilton, J., & Warren, V. (2014). Auditing: A Practical Approach. Wiley Global Education.
• Nicoll, P. (2016). Audit in a democracy: the Australian model of public sector audit and its application to emerging markets. Routledge.
• Parker, R. H. (Ed.). (2013). Accounting in Australia (RLE Accounting): Historical Essays(Vol. 58). Routledge.