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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. 
Answer:
1 Applying analytical procedures to the financial information for DIPL for the last three years

In this given question, it properly explains about analytical process that is present in the financial report for company such as DIPL. The financial report of company helps in developing a plan for audit activities (William, Glover and Prawitt 2016). The audit plan is used as a specific guideline that should be followed while undertaking the audit function. It is important for the assessor to check over costs of audit at reasonable level as well as assisting in reducing misunderstanding with the customers. Analytical approach should be used to the financial declarations for the firm DIPL that means to the process of dissemination of the information that are accessed from financial declaration of the business enterprise. The given process needs to be evaluated by utilizing a variety of mechanisms. On using the analytical approach, it is important to analyze financial declarations where various accountants and financial analysts collect information that helps in arriving at final decision-making activities (Becker, Stead and Stead 2016). 

Analytical approach of common sizing mainly aims at evaluating the financial declarations to a common specific point. It further help in making the comparison with the financial statements for given period of time. It is the responsibility of the assessor to look at different line of items that are already mentioned in the financial report and check the reporting types (Soh and Martinov-Bennie 2015). For instance, it is all about how items are registered like net assets as well as net liabilities that goes along with owner equity as shown in the financial reporting and examining the digression on comparing to normal activities. Furthermore, benchmarking is one of the analytical procedures that are present at the time of analyzing plan of audit. In addition, variation of actual financial declaration from the benchmark aims at identifying deviation and cause for any of detected variance for determining actual problem.

Therefore, ratio analysis is one of the important tools that is used for essential analytical approach for comparing financial declarations and assessing the plan of audit activities.

Clarify how the results can manipulate scheduling decisions for the audit for the year ending 30th June 2015 

Particulars

2013

2014

2015

Profit margin

0.068

0.60

0.06

Solvency ratio

0.62

0.44

0.21

Current ratio

1.42

1.46

1.50

Table: Ratio Analysis of DIPL

(Source: Created by Author)

In this question, it mainly explain the results of the planning that had been done at the time of audit planning that influences the results of the analytical approach that is adopted for getting access to information from the financial statements (Simnett, Carson and Vanstraelen 2016). Ratio analysis helps in getting information about the financial position of any business organization. Profitability ratio is one of the ratios that represent the profitability margin as well as profits earned for organization and looks at the overall performance of firm. The profitability ratio of DIPL for three years starting from 2013 to 2015 is 0.068, 0.60 and 0.06. Next is the current ratio that helps in assessing the liquidity position of DIPL for three consecutive years and arrives at 1.42 (2013), 1.46 (2014) and 1.5 (2015). The ideal current ratio is 2:1.

Solvency ratio is calculated for DIPL for three consecutive years and it arrives at 0.62 (2013), 0.44 (2014) and 0.21 (2015). Comparing the results of ratio for three consecutive years help in getting access to overall cash flow that remains adequate for meeting both short-term as well as long-term liabilities for DIPL

It is the responsibility of the assessor to understand the relative position of the firm for three consecutive years as well as analyzing the factors that leads to undesirable or unfavorable condition of business enterprise (Marques, Santos and Santos 2016).

Identifying two inherent risk factors that arise from the nature of DIPL trade process

In this particular question, it is required to identify two inherent risks that are faced by DIPL in their business operations (Louwers et al. 2015). The material misstated figures are present in the financial declarations of business and this is one of the significant factors at the time of conducting audit as well as attracts serious concern. It is important to identify the financial declarations as mentioned in the financial statements that get accustomed to various types of systematic and unsystematic risks. These statements portray true and fair view of financial statement of business that can be either financial or non-financial. It is important for the assessor for evaluating different types of risks (Becker, Stead and Stead 2016).

Inherent risk is one of the risks that leads to significant errors that result from activities, operations as well as environment and nature of accounts. There are various types of risk that have significant impact on the financial statements. These types of risk relates to identifying the risk that cannot be predicted by the bookkeepers after correlating to omission as diverse errors (Kend, Houghton and Jubb 2014).

From the case study, it is noted that the accounts had omitted numerous transactions that was overlooked by DIPL management. There had been ineffective planning of sales as well as marketing activities that lead to inconsistencies. It is noted that analysis of financial declarations of DIPL favors the level of profits that is generated from revenue. Management can face the failure that needs adjustment in the functionalities as well as identification of requirements that is essential for maintaining the desirable profits. The business faced failure and they need to identify macro as well as micro economic factors in terms of social, political and others. DIPL had poor sales figures that can be seen in the inherent level of risk and leads to risk at the time of analyzing the financial declarations (Becker, Stead and Stead 2016).

There are different factors that lead to inherent risk into various sectors. Business enterprise can have material misstatement because of falsification of different items as well as external factors that concerns environment (Junior, Best and Cotter 2014).

Risk that affect the risk of material misstatement in the financial report 

There is various identified risk that need to be taken into consideration as susceptibility for given assertion in association with material misstatement. Some of the risk is as follows:

  • One of the identified inherent risks is excessive pressure on employees as well as management. It is noted that excessive workload on members of the staff members of business that leads to poor bookkeeping (Eilifsen et al. 2013). It gives rise to certain attributes for encountering cash flow issues as well as poor operating outcomes that goes along with poor liquidity.
  • One of the identified inherent risks is risk of errors or misinterpreted errors. Error or misrepresentation hampers intricacy as well as reliability.
  • One of the identified inherent risks is unusual pressure on management. It may take happen that management get incentives for their work and it is misstated in the pecuniary declarations.
  • One of the identified inherent risks is integrity of the entire management. DIPL management lack requisite integrity and expects to remain prepared for the loss of reputation in the overall business community.
  • One of the identified inherent risks is nature of entity business. The business operations at DIPL lead to growth to major economic along with competitive circumstances. In addition, there are various factors that lead to overall inherent risk of business entity that analyze audit planning structure in the most appropriate way (Arens et al. 2016).  
Part A
Identify two key fraud risk factors relating to misstatements that arise from fraudulent financial coverage to which DIPL may be susceptible 

An operating business entity may face substantial loss because of their assets that result from fraudulent activities. In addition, fraud in business takes place when workers are not satisfied and that leads to excessive workloads. Furthermore, business enterprise face high fraud risks because of the management as well as pressure from investors who reports related financial outcomes for achieving specific target (Cohen and Simnett 2014).

In this case study on DIPL, the company in real faces risk that take place from the nature how they operate and instigate the workers for engaging in fraudulent activities because of high level of dissatisfaction. It is because of the novel accounting system that had given rise to excessive workload as well as work pressure on the workers. DIPL faces fraudulent activities that give rise to excessive pressure on employees at the time of carrying out the installation process of IT system (Arens et al. 2015).  

Part B
Clarify how the risk factors recognized that influence the conduct of the audit 

It is the responsibility of the auditor to identify the risk that is associated with the implementation of novel IT accounting system for monitoring the activities at various levels. It is because of high cost of paper than its average costs, it leads to the process of valuation of raw materials as adopted by DIPL (Becker, Stead and Stead 2016). The auditors are responsible for carrying out ways for evaluating financial statements as well as monitoring various mechanisms for specific period. Therefore it helps in detecting the risks that are properly mentioned in the financial statements of any business enterprise.

Reference:

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

Arens, A.A., Elder, R.J., Beasley, M.S. and Jones, J., 2015. Auditing: The Art and Science of Assurance Engagements. Pearson Canada.

Becker, L.L., Stead, J.G. and Stead, W.E., 2016. Sustainability Assurance: A Strategic Opportunity for CPA Firms. Management Accounting Quarterly, 17(3), p.29.

Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing: A Journal of Practice & Theory, 34(1), pp.59-74.

Eilifsen, A., Messier, W.F., Glover, S.M. and Prawitt, D.F., 2013. Auditing and assurance services. McGraw-Hill.

Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.

Kend, M., Houghton, K.A. and Jubb, C., 2014. Competition issues in the market for audit and assurance services: are the concerns justified?. Australian Accounting Review, 24(4), pp.313-320.

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

Marques, R.P., Santos, H. and Santos, C., 2016. Evaluating Information Systems with Continuous Assurance Services. International Journal of Information Systems in the Service Sector (IJISSS), 8(3), pp.1-15.

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.

Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in environmental, social and governance assurance and consulting. Managerial Auditing Journal, 30(1), pp.80-111.

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

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