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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.

Application of analytical procedures to the financial report

1.Application of analytical procedures to the financial report information of DIPL

The main types of the information provided in the report have been related to the different types of the developments in the audit plan. The plan for the audit has been further seen to be considered based on the audit cost at a reasonable level to consider the aversions which are related to the clientele. The main analytical approach has been further seen to be considered based on the different types the assumption which has been based on the various levels of the report which has been considered based on the dissemination of the information in the financial declarations (Kubuabola 2013).

The analytical considerations in the report have been considered with the downsizing of the analysis with the reference point. This has been further considered for the financial statement comparison for the various corporations. The main interpretations from the ratio have been further able to signify on the different types of the consideration which has been related to the audit planning (Ruhnke and Schmidt 2014).

Particulars

2013

2014

2015

Current ratio

1.42

1.46

1.50

Profit margin

0.068

0.60

0.06

Solvency ratio

0.62

0.44

0.21

Table 1: Ratio Analysis

(Source: as created by Author)

It has been further seen that the results has been considered as per the planning of the audit planning and it has been seen to be important for maintaining the analytical approach for the consideration of the financial statements. The main instance of the outcomes for the ratio has been considered with the current ratio of the firms for DIPL. This has been seen to be 1.42 in 2013, 1.46 in 2014 and 1.5 in the year 2015. The main form of the profit ration has been considered based on the 0.068 in 2013, 0.60 in 2014 and 0.06 in 2015. The important consideration for the profit margin has been able to depict the income earned thorugh the net sales from the DIPL (Ruhnke and Schmidt 2014). The assessor needs to under that the various considerations which have been seen to be conducive for understanding the expenses which has been seen to be bases on the concept of low or high in the management with the curtailment of the time and budget. The unfavourable and favourable changes relating to the factors have been considered based on soundness of the financial position and the audit assessment. In 2013 and 2015 the solvency ratio has been considered as 0.62 and 0.21 (Yasin and Nelson 2013).

2.Identification of inherent risk factors that arise from nature of business operations of DIPL

The main factors of the auditing have been shown with the several incidences with material misstatements in the financial announcement of a certain concern. The unsystematic and systematic risk has been further considered based on the financial declarations and financial misstatements of the corporation (Geertse et al. 2015). The main risks has been further detected based on the non financial and the financial factors. The evaluator may consider the detection of the risk which is seen to be based on the financial declarations which has been stated with the accomplishment from the profit and the revenue generated with the sales.  The present analysis has been able to evaluate on the risks correlated to the omission and diverse errors in the business operations (Lindeboom, van der Klaauw and Vriend 2016).

The accountants of the management and the total number of the transactions have been further seen to be considered based on the omissions by the management. This has been directed towards various types of the considerations revenue generated through the sales. The main considerations have been further seen to be based on the essential planning along with the sales activities (De George, Ferguson and Spear 2013).

The various types of the inherent risk and the way it can affect the material misstatement has been stated below:

  • Excessive pressure on employees and management
  • Risks of errors or else incorrect misrepresentation
  • Integrity of the entire management
  • Unusual pressure on management
  • Nature of entity business

3.Identification and explanation of two key fraud risk factors relating to misstatements arising from fraudulent financial reporting

Asset Loss

The main risk has been indicated with the considerable losses pertaining to the fraud. The dissatisfaction among the workforce will induce the fraud involvement (Gay and Simnett 2015). The various expectations have led to several types of the consideration which has been made as per the specified performance based targets, leading to increased nature of fraud (Beasley et al. 2011).  

Fraud incidence for workforce engagement

The main types of the fraud risk have been seen to be associated with the various types of the operations of DIPL. Some of them have been seen with the operations from the high pressure from the acquisition of novel accounting system. The increased amount of pressure from the employees has been able to carry installation process of the new IT systems which may be another reason for the various types of the fraudulent activities. Based on the case study it has been further determined that the process of IT implementation and improper allocation of the transactions is recognised at the end of each year (Al-Rassas 2015).

Financial reporting fraud

The fraud of financial reporting of the fraud has been further identified with another risk factor. At the time of the excessive pressure it has been seen with the specific announcement of the management to meet with the certain goals for qualifying with the debt acquisition process. The high risk of the financial announcements has been seen with improper financial announcements. The total assets and the current assets of the DIPL have increased considerably. The gross profit has been able to show the loan amounting to 7.5 million and the loan agreement to maintain the current ratio of 1.5. The debt equity ratio of the company has been further discerned to be less than 1. The various requirements have been further able to relate with the various considerations form the inappropriate reflection of the financial position (Mohd Yusof et al. 2014).

Unsuitable average cost

On the basis of the evaluation of the raw material and inventory, the average cost has been shown with the cost of paper which has been seen to be considerably more than the average cost. The fraudulent risk considerations have been further seen to be considered with the IT system, which has been able to monitor the activities of the phases. The financial risk has been also based on the evaluations of the different types of the financial statements monitored simultaneously (Beattie, Fearnley and Hines 2013).

References

Al-Rassas, A.H., 2015. Internal monitoring mechanisms and earnings quality: Empirical evidence from Malaysia (Doctoral dissertation, Universiti Utara Malaysia).

Beasley, M., Buckless, F., Glover, S. M. & Prawitt, D. F. (2011), Auditing Cases: An Interactive Learning Approach, 5th ed., Pearson Education Australia.

Beattie, V., Fearnley, S. and Hines, T. (2013) ‘Perceptions of factors affecting audit quality in the post-SOX UK regulatory environment’, Accounting and Business Research, 43(1), pp. 56–81. doi: 10.1080/00014788.2012.703079.

De George, E. T., Ferguson, C. B. and Spear, N. A. (2013) ‘How much does IFRS cost? IFRS adoption and audit fees’, Accounting Review, 88(2), pp. 429–462. doi: 10.2308/accr-50317.

Gay, G.E. and Simnett, R., 2015. Auditing and assurance services in Australia. 6th ed., McGraw-Hill Book Company.

Geertse, T. D., Holland, R., Timmers, J. M. H., Paap, E., Pijnappel, R. M., Broeders, M. J. M. and den Heeten, G. J. (2015) ‘Value of audits in breast cancer screening quality assurance programmes’, European Radiology, 25(11), pp. 3338–3347. doi: 10.1007/s00330-015-3744-x.

Kemp, S. (2016), Auditing Assurance and Ethics Handbook 2016 Australia, John Wiley & Sons Australia.

Kubuabola, S. (2013) External Quality Audit, External Quality Audit. doi: 10.1016/B978-1-84334-676-0.50005-4.

Lindeboom, M., van der Klaauw, B. and Vriend, S. (2016) ‘Audit rates and compliance: A field experiment in care provision’, Journal of Economic Behavior and Organization, 131, pp. 160–173. doi: 10.1016/j.jebo.2015.08.016.

Mohd Yusof, N. A., Lai, M. L. and Yap, B. W. (2014) ‘Tax non-compliance among SMCs in Malaysia: tax audit evidence’, Journal of Applied Accounting Research, 15(2), pp. 215–234. doi: 10.1108/JAAR-02-2013-0016.

Ruhnke, K. and Schmidt, M. (2014) ‘The Audit Expectation Gap: Existence, Causes, and the Impact of Changes’, Accounting and Business Research, 44(5), pp. 572–601. doi: 10.1080/00014788.2014.929519.

Yasin, F. M. and Nelson, S. P. (2013) ‘Audit Committee and Internal Audit: Implications on Audit Quality’, International Journal of Economics, Management and Accounting International Journal of Economics Management and Accounting, 20(122), pp. 187–218. doi: 10.1108/02686909310036223.

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