Audit Planning for Financial Statements

This assignment requires you to develop an audit plan for a company's financial statements. Specifically, it emphasizes the need to examine inventory balances and ensure proper controls are in place. Additionally, the assignment stresses the importance of evaluating equity balances for potential inflation. The impact of the control environment on the audit plan is also crucial to consider, particularly regarding inventory management and accounts payable accuracy.

Running head: AUDIT, ASSURANCE AND COMPLIANCE
Audit, Assurance and Compliance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Application of Analytical Process of Financial Information.......................................................2
Impact of Analytical Methods on Audit Planning.......................................................................6
Answer to Question 2......................................................................................................................6
Answer to Question 3......................................................................................................................8
Answer to (a)...............................................................................................................................8
Answer to (b)...............................................................................................................................9
References......................................................................................................................................11

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Answer to Question 1
Application of Analytical Process of Financial Information
Different kinds of analytical procedures are there for the analysis of the financial
information. Ratio analysis is considered as one of those major mechanisms of analytical
procedures (Healy & Palepu, 2012). In case of DIPL, ratio analysis is used for the analysis of the
financial information of the company.
Profitability Analysis: The profitability ratio analysis of DIPL:
Ratio 2013 2014 2015
Gross Profit Ratio 17.55% 16.13% 15.20%
Net Profit Ratio 6.90% 6.08% 6.84%
Operating Profit Ratio 19.82% 19.18% 19.12%
Return on Assets 18.25% 14.41% 11.37%
Return on Equity 25.78% 21.25% 24.26%
Table 1: Profitability Ratios of DIPL
(Source: As created by Author)
From the above analysis of the profitability ratios of DIPL, the following facts can be
observed:
 The gross profit ratio has decreased from 2013 to 2014 that is from 17.55% to 16.13%.
Further decreases can be seen in 2015 that is 15.20%.

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 The operating profit ratio of the company decreased from 2013 to 2014 that is from
19.82 to 19.12%. In the year 2015, it has further decreased to 19.12%. There has been a
massive decreases in the operating profit as the company did write back the allowance
for the inventory in an undesirably manner; in addition, there have been rise in the
storage fees.
 In case of the net profit of the company, it can be seen that the despite of a fall in the net
profit from 2013 to 2014, there has a rise in the net profit in the year 2015. The savings
in the tax expenses of the company leads to the increase n net profit in the year 2015. In
addition, there was an increase in the interest expenditure in 2015 (Higgins, 2012).
 There was a decrease in return on equity from 2013 to 2014 that is from 25.78% to
21.25%; after that, there was an increase in 2015 to 24.26%.
Liquidity Analysis: The liquidity ratios are shown below:
Ratio 2013 2014 2015
Current Ratio 1.42 1.47 1.50
Quick Ratio 0.83 0.94 0.85
Table 2: Liquidity Ratios of DIPL
(Source: As created by Author)
From the above analysis, the following facts can be observed:

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 Improvement in the liquidity position of the company can be seen in the year 2015 and it
can be judged with the help of current ratio. In the year 2013 and 2014, the current ratios
of DIPL are 1.42 and 1.47. In 2015, the ratio is 1.50.
 According to the quick ratio analysis of DIPL, in 2015, there have not been many
improvements in the liquidity position of the company. In the year 2013, the quick ration
of the company was 0.83 and it has been increased in 2014 that is 0.94. In 2015, the
current ratio further decreased to 0.85 (Bodie, Kane & Marcus, 2014).
Efficiency Analysis: The efficiency ratios of DIPL are discussed below:
Ratio 2013 2014 2015
Inventory Turnover Ratio 12.50 11.84 8.82
Debtors Turnover Ratio 13.78 8.73 8.57
Table 3: Efficiency Ratios of DIPL
(Source: As created by Author)
The evaluation of efficiency ratios shows the following facts:
 Massive fall in the inventory turnover ratio can be seen over time span of three years.
From 2013 to 2014, the inventory turnover ratio of the company decreased from 12.50 to
11.84 that is a massive fall. Further large decline can be seen in the inventory turnover
ratio in 2015 that is from 11.84 to 8.82. This significant margin of decline shows the
ineffective inventory management of the company (Brigham & Ehrhardt, 2013).

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 Same as above, there is a massive fall in the debtor turnover ratio over the three years. In
2013, the ratio stood 13.78 that decreased to 8.73 in 2014 and further decreased to 8.57
in the year 2015.
Solvency Analysis: The solvency ratios of DIPL are shown below:
Ratio 2013 2014 2015
Debt Equity Ratio 0.41 0.47 1.13
Debt to Total Assets 0.29 0.32 0.53
Interest Coverage Ratio 28.96 28.39 4.68
Table 4: Solvency Ratios of DIPL
(Source: As created by Author)
The analysis of solvency ratios of the company discloses the following facts:
 From the year 2013 to 2015, rise in the debt to equity ratio can be seen that of from 0.41
to 1.13. This particular analysis shows the dependency of DIPL on the external funds in
the year 2015 and this aspect contributed to the increase in the financial risk of the
company.
 In the year 2015, the debt to total assets of the company stood 53% that is higher than the
result in the years 2014 and 2013.
 In the year 2013 and 2014, the interest coverage ratio of DIPL was almost 28 times.
However, massive fall in the interest coverage ratio can be seen in 2015 as it became 4.68

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times. The rise in the financial risk can is the contributor towards the fall in the ratio
(Brigham & Houston, 2012).
Impact of Analytical Methods on Audit Planning
 In the year 2015, there is not any development in profitability situation of the company.
More falls in the profitability ratio in future can endanger the going concern capacity of
the company. Thus, detailed analysis and evaluation of the company is needed.
 There is an increase in current ratio in 2015. The writing back inventory loss allowance is
the main contributor of this increase. There is a need for the explained evaluation of the
inventory allowances of the company.
 There is a fall in the efficiency level of the company. It indicates the inefficiency level of
the management of the company. Thus, for the efficient handling of the current assets of
the company, the current solvency position of the company needs to be analyzed and
evaluated (Vogel, 2014).
 From the ratio analysis, it can be seen that there is an increase in the financial risk of the
company. Thus, all the factors related with this risks need to be analyzed and evaluated in
order to reduce the financial risk of the company (Weil, Schipper & Francis, 2013).
Answer to Question 2
Business risks can be described as the probability regarding the incapability of the
business organizations for the achievements of their business aims and objectives. Various
reasons lead to the incapability of the business organizations; and these in capabilities can be
categorized as external and internal factors of the business environment (Zamboni & Litschig,

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2013). The following discussion well describes the risk factors that can be raised from the
business operations of DIPL.
I. Financial Risk: Financial risk is one of the major risks in the organizations. Financial risk
refers to the incapability of the business organizations for reimbursing their long-term liabilities
within the mentioned timeframe. The rise in the external liabilities increases the organizational
financial risks (Christoffersen, 2012). In case of DIPL, it can be seen that there is a significant
rise in the debts in comparison of equity in the financial year of 2015. In addition, it can also be
seen that there is a rise in the liabilities regarding payment of the fixed interests and this
increased the burden of loan repayment of the company within the provided time. Thus, it can be
said that the financial risk of the company will be increased in case the company do not have the
financial capability to repay the business liabilities (Kou, Peng & Wang, 2014).
Material Misstatements in the Financial Reports: There is a fare probability that the business
organization will try to influence their financial records in order to control the debt to equity ratio
and current ratio of the business as per the agreement with the money lending institutes. For the
maintenance of the desired current ratio, the management can increase the current assets by
increase the value of the receivables, inventories and others. In addition, in order to maintain the
desired debt to equity ratio, the company can manipulate value of equities by increasing the
amount of retained earnings (Jones, 2012).
II. Risk of Information Technology: Several risks are raised from the implementation of the
information technology in the company. Deficit in the implementation of information technology
may create adverse effect on the business organization. For the computerization of accounting
systems along with the general ledger system, DIPL made implementation of the new as well as

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innovative IT processes in the year 2015. In this process, the management of the company
created immense pressure on the IT department employees in order to conclude the new system.
Thus, it many happen that the employees take the route of fraud in order to cope up with the
immense pressure by the management of the company (Schwalbe, 2015).
Material Misstatements in the Financial Reports: It has been seen that the company failed to
perceive the equivalency in the current IT system. Issues can be seen of the inappropriate
allocation of the financial and accounting transactions of the year by the new IT system. The
accounting concepts along with the standards are not followed effectively. This whole process
leads to the inappropriate preparation of the financial statements of the company and it also leads
to the material misstatement of the financial reports of the company (Willcocks, 2013).
Answer to Question 3
Answer to (a)
As per the information of the provided case study of DIPL, there are fault full financial
practices in the organization that creates some major risk factors for the company. Two of these
risk factors are discussed below:
Risk Type Explanation
Debt Agreement
Risk
Massive amount of burden can be seen on the finance department of DIPL
so that all the dent agreements can be maintained. From the case study, it
can be seen that the company tool a loan of 7.5 million from BDO Finance
Limited in 2015 based on the following loan covenant:
The maintenance of a minimum 1.5:1 current ratio, and

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The maintenance of >1 debt to equity ratio.
In case the company fails to maintain the above discussed rations, the loan
will be withdrawn and this process will have adverse effects on the financial
position of the company. Thus, there is a possibility of manipulation of the
current assets in order to sustain the required current ratio. In the same way,
there can be possibility of influencing the retained earnings so that required
debt to equity ratio can be maintained (Arens, Elder & Mark, 2012).
Nature of Control
Environment
Another major factor of risk in the organization is the undefined explanation
of the job descriptions and ineffective segmentation of job responsibilities.
This process can lead to the financial fraudulent regarding the reporting of
financial reports. It can be seen that the accounts payable clerk is
responsible for maintenance of inventory and value of inventory. Thus,
there is a fare risk of alteration of additional inventory at the time of
inventory arrival. Apart from this, the absence of an effective
documentation system is becoming a price reason for accounting and
financial frauds (Gurran, Norman & Hamin, 2013).
Answer to (b)
The auditors need to develop the audit plan in such a manner so that the amount of risk
can be minimized or diminished in the most effective manner. The following discussion shows
the impact of risks in the audit planning:
1. Debt Agreement Impact on the Audit Plan: The amount of current assets and the amount of
current liabilities needs to be supportive to each other in an appropriate way in order to

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determine whether there is any presence of inflation in the current assets of the organization f
there is any deflation in the current liabilities of the organization. In the same manner, there is a
need for the examination of the equity balances in order to confirm the fact whether there is any
inflation in the amounts or not (Chou, 2015).
2. Control Environment Impact on the Audit Plan: There is a strong need to examine the
inventory balance of the company. There needs to be a harmonized process between the purchase
of inventory and the received quantity of inventory in order to verify the fact that whether there
is any alterations made in the accounts payable of the organization or not (Balaniuk et al., 2012).

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References
Arens, A. A., Elder, R. J., & Mark, B. (2012). Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Balaniuk, R., Bessiere, P., Mazer, E., & Cobbe, P. (2012). Risk based government audit planning
using naïve bayes classifiers. In Advances in Knowledge-Based and Intelligent
Information and Engineering Systems.
Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education.
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage
Learning.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage
Learning.
Chou, D. C. (2015). Cloud computing risk and audit issues. Computer Standards &
Interfaces, 42, 137-142.
Christoffersen, P. F. (2012). Elements of financial risk management. Academic Press.
Gurran, N., Norman, B., & Hamin, E. (2013). Climate change adaptation in coastal Australia: an
audit of planning practice. Ocean & coastal management, 86, 100-109.
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Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.

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Jones, R. (2012). Time to re-evaluate financial risk in GP commissioning. British Journal of
Healthcare Management, 18(1), 39-48.
Kou, G., Peng, Y., & Wang, G. (2014). Evaluation of clustering algorithms for financial risk
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Schwalbe, K. (2015). Information technology project management. Cengage Learning.
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Willcocks, L. (2013). Information management: the evaluation of information systems
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Zamboni, Y., & Litschig, S. (2013). Audit risk and rent extraction: Evidence from a randomized
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