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Internal Control Audit And Compliance

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Question:

Discuss about the Internal Control Audit and Compliance.
 
 

Answer:

Introduction:

Double Ink Printers Limited is mainly dealing in the printing business where it provides printing material on-demand basis for their customers that includes printing of magazines as well as books and at the same time, also provide advertising materials to the publications, educational as well as advertisement industries. The company has also provided the required printing materials to both large as well as small publication industries from their manufacturing units in order to accomplish the requirements of customers on on-demand basis at various time scales.

It is analysed from the case study that the DIPL is following both formal as well as professional methods in order to represent their financial information in report and more effective manner. This type of financial information is fruitful for different external auditors as well as other stakeholders in order to review both non-financial and financial information so that reasonable or desirable outcomes can be obtained for the company and also enables them to take efficient financial decision in order to enhance the overall business operations for the company (Duncan and Whittington, 2014). Further, this analytical approach plays more significant role for the auditors in order to effectively evaluate financial information or data according to the different audit measures as well as standards for accessing the financial information for the organizations. This also suggests adequate measures for different risks associated with financial aspect and at the same time, also analyses required changes associated with business management perspectives in order to effectively present the financial information at all satisfactory levels as per financial needs for the companies.    

The professional auditors are following formal processes in order to access the desired financial information or data so that can effectively review the overall business using the analytical approaches and at the same time, variances are also analysed within business performances during different time durations. In analytical process, critical evaluation for different business activities has been done in order to avoid fraudulent activities within the business perspective that enables the business organizations to navigate their business performances as per latest marketing trends that enable the organization to remain competitive in different marketing conditions (Homb et al, 2014). In the same manner, this approach has been applied on the business operations of DIPL in order to effectively review and access their financial information that enables the company to analyse their financial performance and also helps them to reduce their risk level in business operations so that able to make more opportunities in the marketplace to perform their business in more efficient manner. The comparison of financial balances, trend analysis and ratio analysis as per business perspectives are important aspects for an analytical approach.

 

The different phases have been categorised for analytical procedure in order to audit on basis of qualitative assurances. These include,

The mapping remains starting phase for analytical procedures that mainly includes planning stage according to which financial information is examined or analysed as per future requirements of business that enables the companies to perform other stages of procedures so that effectively establish efficient auditing process for the companies to review their overall business performance (Nalewaik and Mills, 2016). As per the case study, DIPL is mainly engaged to evaluate financial data as per analytical process where auditors named Kathy and Steward are given responsibility to deliver audit reports to committee. This committee will supervise auditing process and ensures that all the financial data is reliable or relevant and presented using standard accounting norms for the effective audits. This phase also enables the companies to record their inconsistencies within business operations and acquire in-depth analysis for financial information so that can make significant financial decisions.     

This stage is mainly concerned for data measurement using the analytical procedures. This phase is designed in such manner that certainly enhances reliability for auditing process in order to perform auditing assurance management in effective manner (Lad and Dahl, 2014). This helps the organizations to take adequate financial decisions in order to enhance their overall business operations with maintenance of accounting standards.

The financial performance over different time duration for DIPL can be effectively evaluated using the ratio analysis.

From this table, it is analysed that liquidity ratio, profitability ratio, capital structure ratio as well as efficiency ratio are used for analysing the financial performance of DIPL over three years. From current ratio, it is analysed that this ratio has increased from 1.42 to 1.50 in year 2015 that indicates that ability of DIPL to pay their shorter debts is rapidly increasing which has really strengthened its liquidity position. Quick ratio has also been increased from 2013 to 2015 at 0.85 which indicates that liquidity position of DIPL is becoming stronger to satisfy their liabilities as compared to overall assets (Chambers and Odar, 2015). The financial performance of DIPL has been lowered as witnessed from the profitability ratio which has been reduced from 9.85% in 2013 to 7.04% in 2015 which indicates that margins of profit for DIPL has been reducing since 2013. It is also analysed that operating margin for profits is also decreased which shows that expenses for DIPL is rapidly increasing that provides negative impact on net profit generation for the company.

Further, it is also analysed that gross profits for DIPL has been reduced as observed from profitability ratio which has created complicated business situation for DIPL in order to perform their business operations (Knechel and Salterio, 2016). In addition, sales revenues for DIPL has been decreased from 3.74 in 2013 to 2.20 in year 2015 which indicates that share value for DIPL has been reduced in these three years which has reduced the sales revenues as compared to the employed capital within the DIPL.

 


From all the above discussion, it is analysed that liquidity ratio of DIPL is rapidly increased which has affected the overall financial performance of company that has also made it difficult for company to remain competitive in such marketing conditions. It is investigated from the ratio analysis that profits for DIPL has been reduced in 2015 as compared to 2013 which is not a good sign for growth and business expansion of the company in the near future. The financial performances of companies play significant role in order to attract more stakeholders for business involvement in direct or indirect manner. The net profits as well as gross profits for DIPL has also been reduced which has lowered business value of the company (Graham, 2015). The review made on the auditing process will enable the company to analyse their financial performance in effective manner and can take adequate measures to reallocate all their financial resources. This will help DIPL to maintain and control their financial activities as per auditing standards that will certainly help the company to enhance their overall business operations in terms of financial performance as well. Further, BDO finance has granted loan to DIPL for which DIPL needs to pay their debts by maintaining 1.5 debt ratios in order to overcome their present financial condition. But, debt / equity ratio for DIPL is about 1.13 in 2015 which has prevented the company to pay all their shortcomings to BDO finance on on-demand and will certainly impact their financial position in the current conditions.    

Risk analysis plays significant role as assessment tool which enables the business analytics to effectively analyse all the potential or possible risks that can affect financial performance as well as value-creation for business organizations within market conditions. This also enables the organizations to control all challenges or issues that can hamper business growth and opportunities. The organizations management are using various risk analysis methods in order to effectively examine and mitigate all potential threats or risks associated with the business operations (Pitt, 2014). The misrepresentations within financial statement of companies due to large business transactions and tedious process for preparation of audit reports are termed as the inherent risks. The fraudulent activities or mistakes to tackle financial information are other conditions due to which inherent risks are raised in business operations.

It has been analysed from the case study that audit risk and financial risk are two types for inherent risks which has been observed in DIPL that can certainly affect involvement of stakeholders as well as financial stability within the organization.

Audit risk is one of the most common inherent risks that can affect business operations of DIPL in terms of future perspectives. The misrepresentations within financial statements of companies are possible cause for audit risks (Seago, 2016). The newly appointed CEO of DIPL may give inadequate information to various auditors in order to achieve higher rewards from low taxes associated with financial performance of DIPL. Misrepresentation of financial data and inefficient data monitoring within financial statements are some possible factors that can cause audit risks within the organizations. 

Financial risks play significant role in the auditing process that can affect involvement of external and internal stakeholders within the organizations and may hamper financial position of the organizations. From the case study, it is analysed that business operations of DIPL are affected from financial risks which have been raised from lower value of business credibility, operational feasibility as well as profitability (Bepari and Mollik, 2015). The financial performance for DIPL has been reduced in 2015 that can impact possible business expansion and growth opportunities of DIPL. In addition, business of DIPL may also be affected from operational risks due to inadequate inventories for storage of print materials which has risen due to increase demand for specific print materials within the marketplace.

 

Factors for fraud risks:

From the case study, it is analysed that fraudulent activities including misrepresentations has been observed within the financial statements of DIPL. It has been investigated that new CEO, William Jackson is one factor that can make fraud within the financial statements of the company by misrepresenting the financial information to the auditors in order to achieve higher monetary profits or benefits within DIPL (Gaynor et al, 2016). DIPL itself can be indulged in fraudulent activities by wrong representation of their financial statements in strong position so that can maintain their liquidity to repay their loans in prescribed time limit. The risk factors are mainly associated with financial statements and auditing process or standards adopted within the organizations. From the case study, it has been analysed that new CEO appointed for DIPL may be one of the possible fraud factor that can raise risks for the financial performance of the company. The company mainly appoints the new CEO for increasing their financial performance as well as enhancing their overall business operations in the printing industry. It is also analysed from case that CEO can get profits of about 10% from his fraudulent activities within the financial statements of the company (Mahfuz, 2016). The revenue information has also stated that DIPL has also make wrong representation of their revenues as represented numerical value of 3,487,500 into 5,760,000 in the years of 2015 and 2014. It has been wrongly represented that the company has earned lower expense in the previous years is also one of major fraud risk factor observed in DIPL. It is also observed that profit before tax value has been decreased at the end of 2015 whereas, net profits has been increased in the same duration is complete fraud within the financial information.

 


Further, DIPL can also make fraud in liquidity ratios in order to get adequate loan from the financial organization, BDO finance. For that, the company has maintained their liquidity ratio at 1.5 in fraudulent manner in order to get the adequate loan otherwise the company will not be liable to take loan that will certainly affect all their strategic objectives and at the same time, will also hamper their overall business expansion and growth opportunities by maintaining their financial performance (Knechel and Salterio, 2016). This indicates that all the fraudulent activities will surely affect overall business objectives of DIPL and also affect their financial performances.

 

References:

Bepari, M. and Mollik, A. (2015) Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing. Journal of Applied Accounting Research, 16(2), pp.196-220.

Chambers, A. and Odar, M. (2015) A new vision for internal audit. Managerial Auditing Journal, 30(1), pp.34-55.

Duncan, B. and Whittington, M. (2014) 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).

Gaynor, L., Kelton, A., Mercer, M. and Yohn, T. (2016) Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), pp.1-22.

Graham, L. (2015) Internal Control Audit and Compliance: Documentation and Testing Under the New COSO Framework.USA: John Wiley & Sons.

Homb, N., Sheybani, S., Derby, D. and Wood, K. (2014) Audit and feedback intervention: An examination of differences in chiropractic record-keeping compliance. Journal of Chiropractic Education, 28(2), pp.123-129.

Knechel, W. and Salterio, S. (2016) Auditing: Assurance and risk.UK: Taylor & Francis.

Lad, P. and Dahl, R. (2014) Audit of the informed consent process as a part of a clinical research quality assurance program. Science and engineering ethics, 20(2), pp.469-479.

Mahfuz, A. (2016) Software Quality Assurance: Integrating Testing, Security, and Audit.USA: CRC Press.

Nalewaik, A. and Mills, A. (2016) Project Performance Review: Capturing the Value of Audit, Oversight, and Compliance for Project Success.USA: CRC Press.

Pitt, S. (2014) Internal audit quality: Developing a quality assurance and improvement program.USA: John Wiley & Sons.

Seago, J. (2016) A unified approach to compliance: businesses benefit from a proactive partnership between internal audit and the compliance function. Internal Auditor, 73(5), pp.49-54.

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