Fraud Factors & Audit Impact in DIPL

This assignment examines the impact of fraud risk factors on auditing procedures at DIPL, a company facing challenges with new IT systems and inadequate internal control. It highlights issues like forced IT implementations leading to opportunities for fraud and the lack of proper supervision contributing to potential revenue misrepresentation. The assignment emphasizes how auditors must adapt their procedures, using tools like CAATs, to verify financial statements and assess management's accounts in light of these risks.

Audit assurance and compliance

EXECUTIVE SUMMARY
ASA 520 specifies the requirements and provides other explanatory material relating
to application of analytical procedures as substantive procedures. An auditor requires
assessing the internal control, financial statement in detail in order to obtain sufficient
appropriate evidence for the purpose of providing opinion on the financial statement. Present
reports provides discussion relating to analytical procedures which have been applied for
assessing the financial account of DIPL Ltd. Ratio analysis and trend analysis have been
applied on important accounts in order to ascertain if any fraud or error exists in the system
of DIPL Ltd. ASA 240 deals with the responsibility of auditor relating to fraud and error in
an organization. In accordance with provision provided in ASA 200; an auditor is required to
assess the nature of business while examining control risk and inherent risk. The auditor will
make detail check in this account and provide opinion on the basis of adequate audit evidence
which has been obtained during audit procedure. At present, DIPL management has been
forced in order to implement new information technology systems. Therefore the whole
management having several issues, as it leads to an opportunity to fraud and gets advantage.
Improved recognition must be required by the auditor for verifying the management’s
accounts or presenting the concerned issues. The risk fraud factors will impact the procedures
of auditing to be implied for giving appropriate outlook regarding the DIPL financial
statements. It has been assessed in accordance with available facts that as the new system has
been incorporated by force and not at choice of management; possibility of fraud exists in
that case. Lastly, the manner in which same can be assessed have been explained.

TABLE OF CONTENTS
Question 1..................................................................................................................................3
Question 2..................................................................................................................................4
Question 3..................................................................................................................................5
Force on organization to implement new information technology systems:.........................5
Lack of internal control system due to poor supervising of control:.....................................6
References..................................................................................................................................7

QUESTION 1
ASA 520 “Analytical Procedures deals with the requirements regarding corporation
legislative provisions.” Further, it provides an explanation regarding the application of
analytical procedures as the substantive procedure. It provides assistance to the auditor to
perform responsibility relating to performing analytical procedures at the end of audit and
forming an overall conclusion on financial statements (Krahel and Titera, 2015). Procedures
which are required to be taken as an auditor for designing and performing substantive
procedure have been specified in this standard. It has been specified in this standard that
fluctuations and relationship which is not in compliance with other data or differs from
forecasted figures by a significant amount should be investigated in detail.
In case of DIPL following steps will be taken for accomplishing analytical procedure and
complying ASA 520 Assessing accounts and developing expectation on individual basis
The main accounts in which possibility of risk is more in case of DIPL Ltd is
Purchase and Inventory, Cash, Receivables, Foreign exchange loss & Bad debts. It is
necessary to assess that the new method for recording inventory which has been
adopted by company represent books of accounts in more appropriate form or not.
Further, in case of bad debts, it is necessary to ascertain whether they are actual or
not. For assessing the same, it should be checked that has been claimed as bad debt
has been actually reduced from the account or not. Assessing the difference between expected figures and actual figures
Ratio and Analysis are the most appropriate approach for ascertaining that whether
any significant difference between expected or budgeted and actual figures exists or
not.
Profitability Ratio
Profitability Ratios Year I Year II Year III
Turnover 34212000 37699500 43459500
Gross Profit ratio 17.55% 16.12% 15.19%
Net Profit ratio 6.89% 6.07% 6.83%
From above figures, it can be assessed that sales of DIPL Ltd have an increasing
trend. However gross profit of the company has decreasing trend. Thus it is required to be

assessed in detail to ascertain the reason for the difference. In case of profit ratios, no
significant fluctuation can be observed. It might be possible that sales have increased, but the
products on which higher profit can be earned have not increased significantly (Knechel and
Salterio, 2016).In the same manner, liquidity and risk ratios should be assessed, and results
should be compared in appropriate manner to assess the significant difference. Forming conclusion on the basis of significant assessed difference
In the present case of DIPL, as a difference exists in case of gross profit ratio; thus the
same should be referred to the management and discussed in detail. The auditor
should not directly rely on the explanation provided by the management but should
make an effort to find other proofs as the base of explanation.
Trend Analysis
It is part of analytical procedures which is referred as technical analysis of predicting the
future movement of figures based on past data. An appropriate idea can be attained that
whether the figures are in accordance with expected figures or not. In the present case of
DIPL Ltd, trend analysis of following major accounts have been conducted in order to attain
appropriate evidence for the formation of opinion on financial accounts.
Particular Year I Year II Year III
Accounts Receivable 2482500 4320000 5073309
Increase in comparison to previous year 1.74 1.17
Sales 34212000 37699500 43459500
Increase in comparison to previous year 1.10 1.15
Bad Debts 150000 195000 210000
Increase in comparison to previous year 1.3 1.08
From above analysis, it can be assessed that there is a major increase in accounts receivable
in year II. However, the same increase has not been assessed in year III. It means that higher
credit sales have been made in year II; this account needs to be assessed that whether the
same policies have been followed by the company on continuing basis. Turnover has
increased, but gross profit has not increased, rather it has decreased in comparison to previous
years, thus the same required to be assessed in detail for ascertaining the reason behind it.

Salaries 1965000 2190000 2445000
Increase in comparison to previous year 1.11 1.12
A nominal increment has been assessed which is usually due to inflation. Thus it can be said
that it genuine increase.
Inventories 2256188 2671362 4180500
Increase in comparison to previous year 1.18 1.56
In year three a major increase can be assessed, the reason behind the same is a change in
policy relating to inventory valuation. A detail valuation, as well as other evidence, are
required to ascertain whether the change is appropriate or not.
QUESTION 2
Inherent risk can be specified as a risk due to an error or omission in the financial statement,
and the reason behind the same is other than the failure of control. Usually, inherent risk
occurs when transactions are complex, and they require a high degree of judgement in order
to conclude an appropriate conclusion (Cannon and Bedard, 2016). In accordance with
provision provided in ASA 200; an auditor is required to assess the nature of business while
examining control risk and inherent risk. The results which are generally found are in case
inherent, and control risk is high, efforts are made to keep detection risk lower; in order to
keep the overall audit risk low.
Processing of data in new IT system:It has been assessed on the basis of provided facts that
the new system works on the fully computerized manner and the whole accounting process is
integrated into it. Even though the management is not satisfied with the system, it has been
accepted and implemented without assessing in detail (Arens& et al. 2016). The risk existing
in present scenario is an inherent risk. The reports, calculation and another statement which
have been prepared with the new IT system required to be checked manually for ascertaining
the existing errors. Further, for assessing whether all transaction has been considered by the
new system before preparing financial statement; dummy entries can be entered, and its effect
on financial statement can be assessed.
E-book Revenue:DIPL Ltd, receive proceed on e-book sale and pay a specified commission
to the publisher. As the whole transactions are done online, there is no audit trail present in
this transaction through which adequate audit proof can be ascertained that whether all the

transactions have been recorded or not (Vona, 2011). Further, whether the commission which
has been paid is computed in an appropriate manner or not also needs to be assessed in detail.
It also comprises complex transaction as the storage fees have been recognised in the monthly
fees are invoiced and the fact that it has been charged in advance for twelve months is not
considered while recording the transaction (MironiucRobu&Robu, 2012). As income is an
important variant of financial statement and before providing an opinion regarding it auditor
has to be sure for this account. The methods and procedure which are adopted by the
company for recording these transactions are to be checked in detail to understand its nature.
The auditor will make detail check in this account and provide opinion on the basis of
adequate audit evidence which has been obtained during audit procedure.
QUESTION 3
ASA 240 states that it is auditor responsibility regarding the fraud in an audit of
financial report, assessing the issues relating to fraud factors of risk in a business, fraud can
be stated as abroad perception for the principle of Standard of Australia’s Accounting
Standard, as auditor is disturbed regarding the fraud factor as it will lead to misstatements in
the financial reports intentionally or unintentionally (Kaptein, 2012). In ASA 240 it has been
mentioned that the factors of fraud refer to a situation that pushes fraud commitment or gives
the opportunity to commit a fraud.
Some key fraud factors of risk are enumerated as below with their impact on the auditing
conduct:
Force on the organization to implement new information technology systems:
At present, DIPL management has been forced in order to implement new information
technology systems. The IT manager has complained against this matter many times,
regarding the installing of the system. Therefore the whole management having several
issues, as it leads to an opportunity to fraud and gets advantage. The similar will impact the
procedure of auditing being applied by the auditor in order to evaluate the efficiency of the
system, CAAT tools can be applied by the auditor for considering the system transparency
(Barton, 2008). Thus, determining all transactions is contained during the preparation of
company’s financial statement: model transactions can also be entered into the system, and
the effect of that can be the assessed on the financial system. Discussion with publishers can
be made, or a statement can be requested in order to verify the payments.

Lack of internal control system due to poor supervising of control:
In DIPL there is inappropriate internal control system so as to assess the existing obligation
are effectively used by the management. The similar may lead to income identification high
correlated to the real revenue (Barth, Landsman& Lang, 2008). The factor of fraud can also
influence the auditing procedure been applied by the auditor, if the reports given by
management regarding the several activities and operations of the business (William Jr,
Glover&Prawitt, 2016). Improved recognition must be required by the auditor for verifying
the management’s accounts or presenting the concerned issues. The risk fraud factors will
impact the procedures of auditing to be implied for giving appropriate outlook regarding the
DIPL financial statements.

REFERENCES
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services. Pearson.
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accounting quality. Journal of accounting research. 46(3). Pp.467-498.
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Concerning the Identification of the Financial Dimensions of Fraud. Journal of Accounting
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Systems. John Wiley & Sons.
William Jr, M., Glover, S. &Prawitt, D., 2016. Auditing and assurance services: A systematic
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