Financial Statement Analysis and Audit Risks

This assignment delves into the financial health of DIPL, a company seeking a $1.5 million loan. It analyzes key ratios (current ratio & debt-to-equity) to assess DIPL's solvency and risk profile. The analysis highlights potential financial risks and audit concerns stemming from management's actions, including possible fraud to meet lending criteria or secure performance bonuses. The assignment emphasizes the importance of analytical procedures in auditing, such as balance comparisons and ratio calculations, for identifying potential issues and ensuring financial statement reliability.

Audit 1
Audit, Assurance, and Compliance

Audit 2
Table of Contents
Introduction:...............................................................................................................................3
Case Analysis:............................................................................................................................4
Question 1:..............................................................................................................................4
Question 2:..............................................................................................................................6
Question 3:..............................................................................................................................6
A) Two possible fraud activities:........................................................................................6
B) Cause of fraud identified:..............................................................................................7
Conclusion:................................................................................................................................8
References:.................................................................................................................................9

Audit 3
Introduction:
The main purpose of this report is to develop the understanding and knowledge about the
analytical procedure for evaluating the impact o0f financial reports on the audit planning
decision. It discusses the important ratio in relation to DIPL that are important for the
building the audit planning decision. Along with this, report discusses about the two inherent
risks that may arise from the nature of DIPL business operations and impact of risks on the
financial reports or statements. At the same time, it also discusses about the two different
fraud risks that may occurred from the business operations relating to misstatements from the
financial reporting activities. Furthermore, it also represents the cause of the fraud in the
financial reporting transactions in relation to business operations of DIPL. It also describes
the impact of the fraud activities on the audit planning and audit work.

Audit 4
Case Analysis:
Question 1:
Preliminary Analytical procedures:
This method enhances the efficiency of auditor in relation to audit of company financial
statements. Preliminary Analytical procedures involve the evaluations of the company
financial statements or information through measuring relationship between both financial
and non-financial data. This procedure supports in planning, collecting the evidence and final
review of the audit work. Along with this, analytical procedure helps the auditors in
determining the timing, nature, and scope of their auditing procedure (Humpherys et al,
2011). The main purpose of this procedure is to develop the understanding of the auditors
about the client and measuring audit risks through using the unexpected or expected data or
balances.
Along with this, procedure involves the different tools such as account balance comparison,
calculation of significant ratios, regression analysis, and ratio calculation through using the
financial and non-financial information (Brazel et al, 2013). These different tools support the
auditors in audit planning. The main purpose of this procedure is to find out the potential
account errors and understand business and its transactions.
The analysis of ratio in analytical procedures for the DIPL financial report information for the
year 2013, 2014, and 2015 is as below:
Double Ink Printers Ltd
Name of ratio 2013 2014 2015
liquidity ratio:

Audit 5
current ratio = Current assets / current liabilities 1.425 1.467 1.501
Current Assets 53,85,938 75,09,150 96,00,929
Current Liabilities 37,80,000 5120250 6397500
Quick ratio = current assets - inventories/ current
liabilities
0.828 0.945 0.847
Current Assets 53,85,938 75,09,150 96,00,929
Current Liabilities 37,80,000 5120250 6397500
Inventory 22,56,188 26,71,362 41,80,500
Profitability ratio:
Gross profit margin = gross profit/ revenue * 100 17.551 16.126 15.197
Gross profit 60,04,500 60,79,500 66,04,500
revenue 3,42,12,00
0
3,76,99,50
0
4,34,59,50
0
Net profit margin= net profit / revenue * 100 6.896 6.078 6.839
Net profit 23,59,190 22,91,362 29,72,183
revenue 3,42,12,00
0
3,76,99,50
0
4,34,59,50
0
Operating profit margin ratio = Operating profit /
revenue * 100
9.851 8.683 7.039
Operating profit 33,70,271 32,73,374 30,59,299
revenue 3,42,12,00
0
3,76,99,50
0
4,34,59,50
0
Efficiency Ratio:

Audit 6
trade receivable turnover ratio=average trade
receivable/ revenue *365
32.123 49.867 50.244
average trade rec. 24,82,500 43,20,000 50,73,309
cost of sale 2,82,07,50
0
3,16,20,00
0
3,68,55,00
0
Sale revenue to capital employed = sales revenue /
capital employed
3.739 3.496 2.200
sales revenue 3,42,12,00
0
3,76,99,50
0
4,34,59,50
0
capital employed 9150000 10783650 19750491
Capital structure ratio:
Debt to equity ratio = total liabilities / total equity 0.413 0.475 1.134
Total liabilities 37,80,000 51,20,250 1,38,97,50
0
Total equity 91,50,000 1,07,83,65
0
1,22,50,49
1
Based on above calculation, it can be analysed that current ratio of Double Ink Printers Ltd in
year 2013, 2014, and 2015 is 1.42, 1.46, and 1.50 respectively. It means liquidity position of
company increased in 2015 as compared to previous years and it reached at targeted rate 1.5.
It indicates that liquidity position of company is good to meet its short term liabilities. Along
with this, quick ratio of company is 0.82, 0.94, and 0.84 in year 2013, 2014, and 2015 that
represents effective liquidity position of company. At the same time, the gross profit margin
ratio of company is 17.55, 16.12, and 15.19 in same years (Collier, 2015). The net profit
margin ratio is 6.89, 6.07, and 6.83 but at the same time, operating profit margin ratio of
company is 9.85, 8.68, and 7.03 in year 2013, 2014, and 2015. These ratios indicate that net

Audit 7
profit of company is continuously increasing but operating efficiency of the company is
decreased.
Furthermore, trade receivable turnover ratio of company is 32.12, 49.86, and 50.24
respectively. The ratio of company is continuously increasing that means company is
inefficient in collecting the payment from the debtors that may increase the debt of company.
at the same time, the sales to capital employed ratio of company is 3.73, 3.49, and 2.20 in
year 2013,2014, and 2015. It represents that ratio of company is continuously decreasing that
means company is not effective in generating sales through utilizing its assets. The trade
receivable turnover and sales revenue to capital employed ratio of company is indicating that
efficiency of company decreased (Brigham and Houston, 2012). Apart from this, debt to
equity ratio of company in year 2013, 2014, and 2015 is 0.414, 0.47, and 1.13 respectively
but company wants to maintain ratio less than 1. It means ratio of debt of company increased
but equity of company is decreased in current year.
The fluctuation in the performance affects the planning decision for the auditing for the year.
The profitability of the company over the years is decreasing. The gross profit and operating
profit in 2014 and 2015 has been decreased while the liquidity condition is improving. This
affects the planning decision for the auditing in the organization. This kind of situation can
force for auditing in these financial aspects as well. This will lead the auditing of the
operating expenses and short term financial obligation of the DIPL (Hammersley, 2011). The
reduced financial performance affects dept financial planning that lead the auditing in the
company.
Every company wants to earn profit and want to report to the public and shareholders but the
performance of the company has been decreased and the long term liability has been
increased. Apart from this, this will cause the revision of the earlier audit plan for DIPL.

Audit 8
Auditors uses analytical procedure to plan nature, timing and extent of the auditing. This
result will make the auditor mostly focus on the debt, profitability and efficiency (Bagshaw,
2013). It will make the researcher to be focused on the high material risk areas. In the
previous audit plan, it was expected that 10% increment in the profitability in 2015, but it did
not happen so. This can lead the revision in the previous audit plan.
Question 2:
Risk assessment supports in measuring or analyzing the business operations risks and risks
may affect the business operations or growth of company negatively. Along with this, risk
assessment also significant in planning for the audit. In the provided information about the
DIPL, there is two various inherent risks are available such as financial risk and audit risks
(Knechel and Salterio, 2016). The financial risk arises from the decrease in the liquidity
position of the company, operating risks from managing the inventory and foreign exchange
risks from the foreign transactions.
The financial risk is an risk type that has negative impact on the reliability of financial
statements and growth of DIPL. It involves the operating risk, credit risk, foreign exchange
risk, which may affect the risk of material misstatement in the DIPL financial statements. The
quick ratio of company decreased in year 2015 that means liquidity position of company is
ineffective to meet the short term liabilities (Arens et al, 2012). Along with this, operating
risk also may arise as company not have inventory to fulfill the client order because company
provides the on demand services. The company purchases inventory such as paper, ink and
binding materials from the Asian and Australia.
In this way, it is risk that to show the operating efficiency, company can record the higher
inventory into financial statements that may increase the operational efficiency of company.
Along with this, credit risk also may arise as debtor receivable turnover time of company is

Audit 9
also increasing in every year that means company is ineffective in colleting the payment from
the creditors (Griffiths, 2012). Due to credit risk also may arise that affect the business
operations and company also can decrease the creditors in its financial statement to show the
company worth higher.
Apart from this, based on the provided information, audit risk also may be raised. It is
because DIPL has appointed a new chief executive and board decided to provide the
remuneration package as company will provide bonus to CEO when the total revenue and net
profit after tax of company will increased by 10%. Therefore, CEO can meet with the internal
accounts and auditors to show the company growth and increase the company revenue by
10% with their mutual concern. In this way, accountants or CEO can make the fraud in the
company accounts to get the financial benefits (Leung et al, 2012). Along with this, it is
possibility that internal auditor of company would not be effective to detect the material
misstatement in company accounts as he is working for four big audit firm and two chartered
accountants. Due to the work pressure of auditor the audit risk may arise in DIPL.
Question 3:
A) Two possible fraud activities:
As per the given information about the DIPL business operations, two possible fraud risk
identified is that fraud of CEO to get the performance bonus as board decided to provide the
bonus when the total revenue and net income of company would increased by 10%.
Therefore, its possibility that CEO can conduct the fraud in misrepresenting the company
expenses to get bonus (Prawitt et al, 2012). The second possible fraud can be conducted by
the company management and accounts to maintain the current ratio at least 1.5 to borrow
fund of 7.5 million from BDO Finance Ltd.

Audit 10
B) Cause of fraud identified:
The newly appointed CEO of company William Jackson also can make the fraud in the
company to get the performance bonus. It is because management decided to provide the
performance bonus to CEO when the total revenue and net profit after tax of company
increased by 10%. In this way, based on the information about the business operations of
DIPL, the revenue of company increases in year 2014 increased by 3,487,500 but in year
2015 it increased by 5,760,000. This increase rate of revenue is very higher as compare to
previous year’s rates; the result may arise due to fraud of CEO to get the performance bonus.
Along with this, net profit after tax of DIPL in year 2013 was 2359190 that was decrease in
year 2014 by 67828 but profit of company increased in year 2015 with a higher rate as
680,821. Based on this, it is analyzed that CEO make the fraud in accounts through showing
the decreasing the company expenses to represent the growth in company net profit. Apart
from this, based on the provided information in the financial statements it is possibility that
company conduct fraud in relation to get the loan of 1.5 million. It is because bank decided
that if the current ratio of company would be at least 1.5 and debt to equity ratio would be
less than 1 to get the loan. In this way, the current ratio of DIPL was 1.42 and 1.46 in year
2013 and 2014 but in year 2015 it would become 1.50 that is required by the bank to provide
the loan of 1.5 million worth. The company can conduct fraud in the financial statements in
relation to company current assets through showing the higher value of company assets.

Audit 11
Conclusion:
From the analysis of above report, it can be concluded that Analytical procedures involves
the different tools such as account balance comparison, calculation of ratios, regression
analysis, which can be used in audit planning for the analysis of financial statements. Along
with this, DIPL can face the financial risk and audit risks based on the provided information
that may affect the reliability and accuracy of DIPL financial statements negatively.
Furthermore, in the case of DIPL the CEO of company and management or accountant can
make the fraud to get the benefit of performance bonus and to borrow funds from the bank.

Audit 12
References:
Arens, A.A., Elder, R.J. and Mark, B., (2012) Auditing and assurance services: an integrated
approach. USA: Boston: Prentice Hall.
Bagshaw, K., (2013) Audit and Assurance Essentials: For Professional Accountancy Exams.
USA: John Wiley & Sons.
Brazel, J.F., Jones, K.L. and Prawitt, D.F., (2013) Auditors' reactions to inconsistencies
between financial and nonfinancial measures: The interactive effects of fraud risk assessment
and a decision prompt. Behavioral Research in Accounting, 26(1), pp. 131-156.
Brigham, E.F. and Houston, J.F., (2012) Fundamentals of financial management. USA:
Cengage Learning.
Collier, P.M., (2015) Accounting for managers: Interpreting accounting information for
decision making. UK: John Wiley & Sons.
Griffiths, M.P., (2012) Risk-based auditing. UK: Gower Publishing, Ltd.
Hammersley, J.S., (2011) A review and model of auditor judgments in fraud-related planning
tasks. Auditing: A Journal of Practice & Theory, 30(4), pp.101-128.
Humpherys, S.L., Moffitt, K.C., Burns, M.B., Burgoon, J.K. and Felix, W.F., (2011)
Identification of fraudulent financial statements using linguistic credibility analysis. Decision
Support Systems, 50(3), pp. 585-594.
Knechel, W.R. and Salterio, S.E., (2016) Auditing: Assurance and risk. UK: Taylor &
Francis.
Leung, P., Coram, P. and Cooper, B. (2012) Modern Auditing and Assurance Services. AU:
John Wiley & Sons.

Audit 13
Prawitt, D. F., Sharp, N. Y., & Wood, D. A. (2012) Internal Audit Outsourcing and the Risk
of Misleading or Fraudulent Financial Reporting: Did Sarbanes‐Oxley Get It
Wrong?. Contemporary Accounting Research, 29(4), pp.1109-1136.