Application Of Analytical Procedures To The Financial Report Information Of DIPL Essay: Identification Of Inherent Risk Factors.

Application Of Analytical Procedures To The Financial Report Information Of DIPL?

Analytical processes to the financial report information of DIPL can help in developing the plan of audit. This plan of audit can be considered to be a particular guideline that need to be followed at the time of undertaking the audit. In particular, this assists the assessor in maintaining costs of audit at a reasonable level and assists in averting misunderstanding with the clientele. Analytical approach to the financial declarations of the firm DIPL refers to the process of dissemination of the information from the financial declaration of the firm. This process of evaluation can be carried out by utilizing a variety of mechanisms. However, by using an analytical approach of analysing financial declarations, different accountants as well as financial analysts can decipher information in order to help in arriving at vital business decisions.

Analytical approach of common sizing helps in analysing the financial declarations to a common reference point. This in turn help in comparing the financial statements in terms of different period of time or else in terms of different corporations. Assessors can take into consideration the different line of items mentioned in the financial report, check their way of reporting. For example, the way of registering items such as net assets or else net liabilities along with owners’ equity in the financial reporting of the firm and the examine the digression from the normal. Benchmarking that is regarded as an analytical procedure can be utilized for analysing audit plan. Variance of actual financial declaration from the benchmark helps in recognizing the deviation and assists in analysing the cause of the detected variance in order to determine the root cause.

In addition to this, ratio analysis can be considered as an appropriate analytical approach that can be used for comparing financial declarations and assessing plan of audit.

The results of the planning decisions for the audit planning is necessarily influenced by the results of the analytical approach adopted for disseminating information from the financial statements. For example, outcomes of the ratio analysis namely, current ratio of the firm DIPL is calculated to be 1.42 in 2013, 1.46 in 2014 and 1.5 in 2015. Again, profitability ratio that is the profit margin calculated to be 0.068 in 2013, 0.60 in 2014 and 0.06 in 2015. This profitability ratio can reveal the condition of the net income earned by the firm as compared to the net sales of the firm DIPL (Duncan and Whittington 2014). However, this too can help the assessor to understand whether expenses are low or else high and whether the management of the firm have the requirement to curtail budget and at the same time expends of the firm. The favourable or else unfavourable changes in the ratio can be used as a factor of reference for assessment /audit of the soundness of the financial health and overall financial condition of the firm DIPL. Again, for instance, the use of solvency ratio calculated to be 0.62 in 2013, 0.44 in 2014 and 0.21 in 2015 helps in understanding the desirable as well as undesirable trends in the financial condition of the firm. Similarly, comparison of the ratio over the three year period can help in understanding whether the overall flow of cash of the corporation is adequate enough to meet both the short as well as long term liabilities of the corporation DIPL. The assessors can understand the relative position of the firm over the three year period and analyse the factor that led to the undesirable or else unfavourable condition of the corporation (Nalewaik  and Mills 2016). 

Explanation of the way the results influence planning decisions for the audit

As such, there are several important factors in auditing that comprises of incidence of material misstatements in the financial announcements of a specific concern. However, it can be hereby make certain that there are different forms of systematic along with unsystematic risks that reflect the way towards financial misstatements in the financial declarations of corporations. However, the detected risks might possibly be due to both financial as well as non-financial factors that eventually can avert a specific corporation for reflecting a true as well as fair view of pertinent financial declarations. Nevertheless, an evaluator might perhaps find it demanding to detect certain risks. William Jr et al. (2016) opines that identified risks may well be linked to different risks correlated to omission along with risks of diverse errors that is unthinkable for a specific bookkeeper. In essence, this can be regarded as the inherent risk that might arise from nature of business operations of DIPL.

According to the given study, it can be hereby made certain that there are numerous transactions that are particularly omitted by the accountants otherwise the management of the corporation DIPL. However, this can sequentially direct lead towards inconsistencies particularly owing to the ineffectual planning of essentially the marketing along with sales activities. Furthermore, evaluation of the financial declarations of the firm also reveals the fact that the firm has failed to accomplish the preferred profit level from the revenue from sales (Hayes 2014). Particularly, this might be due to the management failure of the firm in identification of specific requirements and consequent adjustment of the functionalities of the corporation. Thus, it can be hereby concluded that the business organization has failed to analyse different micro as well as macro-economic facets that might perhaps be in existence in the form of economic, political along with social factors. This is subsequently reflected in the poor sales figure of the firm and led to diverse inherent risks (Arens et al. 2016).

Apart from this, the workers of the firm DIPL have also escalated the overall inherent risks. Due to lack of experience and proficiency of employees in the corporation, the inherent risks of the corporation have escalated substantially. This is because accomplishment of a specific business concern depends on the competency of the members of the staff. The non-proficient workforces can enhance the inherent risks since they are bound to commit mistakes for instance, the errors of exclusion that further leads the way towards the misstated pecuniary announcements (DeFond and Zhang 2014)

Inherent Risk Factors due to nature of business operations

Again, other significant facets that contribute towards the inherent risks can be categorised into different sections specifically, environmental along with external facets, material misstatements in previous periods along with falsified exercises. Different environmental facets that direct the way towards inherent risk comprises of swift alterations in which there might be issues associated to valuation of inventory, stiff competition in the generic market along with shortage of adequate capital (Knechel and Salterio 2016). In addition to this, the corporation also undertake material misstatements that might perhaps direct towards inherent risk in the upcoming period.

Evaluation of the current case of DIPL reflects the fact that the complexities as well as difficulties involved in the process of succession of CEO also involves inherent risk. Essentially, succession of CEO can be considered to be different and the candidates are extremely individual (Louwers et al. 2015). However, there are several risks that are inherent in the process of succession of CEO, quality of procedure of selection together with ease of transition as process is handled. So, commencement of the process without complying with the strategy, initiating the process late, inadequate involvement of the CEO and departure of candidates leaving the company might possibly lead to inherent risks.

Analysis of the given case reveals that the process of implementation of the novel IT system generated certain issues. DIPL did not enough number of staff to handle the process of execution and installation and carry out the reconciliation as well as testing essentially before the new arrangement prior to the end of the year. Again, initial testing revealed that certain transactions undertaken were not accurately apportioned to the correct time period. Thus, this led to the material misstatement owing to inherent factors that is necessarily error or else omission in a specific financial declaration (Eilifsen et al. 2013).

Furthermore, the recording of the cash receipts by the finance professionals of the company might perhaps lead to inherent risks if not properly handled. The members of the staff need to follow a proper sequence so that accounts receivables are properly registered and accounts receivable ledger need to be properly maintained. In addition to this, the bank reconciliation also needs to be properly recorded thereon (Cannon and Bedard 2016). Again, registering the revenue generated from the e-book, taking account of reprint of textbooks if required in the upcoming period can lead to diverse inherent risks due to complexity involved in the process.

Environmental and external facets

In addition to this, process of valuation of different raw material inventory at particularly average cost was not suitable since the present cost of paper was considerably above the average cost.

Risk and way it might affect the risk of material misstatement in the financial report

The identified inherent risks can be considered as the susceptibility of a particular assertion in association to material misstatement.

Excessive pressure on employees and management: - Excessive workload on members of the staff of the corporation leads to poor bookkeeping. This leads to certain attributes namely propensity to encounter cash flow issues, poor operating outcomes along with poor liquidity (Barton and Bruder 2014).

Risks of errors or else incorrect misrepresentation: - There remains reliability and intricacy owing to risks of errors as well as misrepresentation simultaneously.

Integrity of the entire management: - Management of DIPL essentially lacks requisite integrity and thereafter they are also expected to be prepared for reputation loss in the entire business community (Beasley 2015).

Unusual pressure on management: - Sometimes it happens that there exists incentives for management that leads to misstatement in the pecuniary declarations (Barton and Bruder 2014).

Nature of entity business: - DIPL also leads to growth to major economic along with competitive circumstances. Again, these facets might affect the overall inherent risk of business entity for analysing audit planning structure in an effective way (Beasley 2015).

Identification as well as explanation of fraud risk related to material misstatement

As rightly indicated by (), fraud risk leads to considerable losses of assets owing to fraud. The dissatisfaction of the workforce owing to excessive workload of the employees can induce them to involve in fraud. In addition to this, expectations from different investors to report specific financial outcomes or particularly by management to attain specific performance targets leads to high fraud risk. There also remains strong pressure to declare specific financial outcomes in a bid to avert generating the guarantees.

The major fraud risks that might occur owing to the operations of the firm DIPL include workforce engages in fraudulent actions due to higher level of dissatisfaction of employees. The given case study on the operations of DIPL mentions that there remains huge pressure from particularly the board to acquire a novel accounting system. This excessive pressure on the employees to carry out the process of installation of the new IT system for accounting might lead to fraud. This implies that the employees might engage in fraudulent activities and handle the procedure of reconciliation in an improper manner and subsequently material misstatement. The case study also illustrates that the improper handling of the process of execution of the implementation of the information technology for the accounting system led to improper allocation of certain transactions around the end of the year. This in turn might lead to loss due to material misstatement and fraud risk.

Material misstatements in previous periods and falsified exercises

Another fraud risk that might occur include the risk of financial reporting fraud. At the time when there is excessive expectation from outside financiers to declare specific financial announcements or else from management to meet specific performance targets or else to meet certain goals to qualify for acquiring debt, there remains high risk of improper financial announcements. The statement of financial position of the company DIPL shows that the revenue of the company has increased over the period 2013 to 2015. In addition to this, the gross profit as well as the net profit has also increased. Furthermore, the current assets and total assets of the corporation DIPL has also escalated. However, the case study reveals that during the year 2015, the company has acquired a loan amounting to 7.5 million particularly from BDO Finance. Besides this, the case study also reflects the fact that this particular loan has a specific loan agreement that requires DIPL to maintain a present a current ratio of around 1.5 along with a debt equity of approximately lower than 1. This shows that this requirement might pressurize the company to maintain the financial ratio so that they can acquire the credit. Therefore, this might lead to fraudulent actions and lead to improper reflection of financial position. In essence, failure of the company to maintain the definite benchmarks can again make the company non-eligible to acquire finance from BDO Finance.

According to the given case, it can be hereby stated that process of valuation of different raw material inventory at particularly average cost was not suitable since the present cost of paper was considerably above the average cost. Risk of identifying fraudulent actions involved in implementation of the new IT system can be carried out by monitoring different activities at different phases. The risk of financial reporting can be detected by carrying out evaluation of financial statements by assessors, monitoring control mechanisms from time to time.

References

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Barton, H. and Bruder, N., 2014. A guide to local environmental auditing. Routledge.

Beasley, M.S., 2015. Auditing cases: An interactive learning approach. Prentice Hall.

Cannon, N. and Bedard, J.C., 2016. Auditing challenging fair value measurements: Evidence from the field. The Accounting Review.

DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2), pp.275-326.

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.

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

Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.

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

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

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

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