Audit Risks and Challenges

This assignment analyzes potential risks and challenges faced during an audit process. It highlights how fraudulent activities within an organization, such as manipulating debt restrictions and misrepresenting the cost of goods sold, can compromise audit procedures and the reliability of financial reports. The analysis emphasizes the importance of addressing these risks to ensure accurate and trustworthy audit evaluations.

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

AUDIT, ASSURANCE AND COMPLIANCE
1
Executive Summary:
The overall assignment mainly focuses in relevant audit approach, which could be used in
analysing the overall performance of DIPL. In addition, the overall financial report analysis is
mainly been conducted in the assignment, where relevant ratios is been used in analysing the
performance of DIPL. This mainly raises the concern for the analyst, where relevant audit
procedure could directly help in evaluating the financial condition of DIPL. Therefore, the
needs of audit procedure are directly influenced by the financial report that is portrayed by
the company. This could directly lead to manipulations in the overall financial report, which
increase the inheritance risk and reduce viability of the audit procedure.

AUDIT, ASSURANCE AND COMPLIANCE
2
Table of Contents
Question 1: Results influence audit procedures.........................................................................3
Question 2: Inheritance risk leading to Material misstatement risk of the company.................6
Question 3a: Risk factors of the company.................................................................................8
Question 3b: Identified fraud risk from the scenario.................................................................9
Reference:................................................................................................................................10

AUDIT, ASSURANCE AND COMPLIANCE
3
Question 1: Results influence audit procedures
From the valuation of DIPL case study relevant need of analytical procedure could be
identified, which could directly indicate the need of audit procedures. The overall
identification of analytical measures such as benchmarking and ratios is mainly identified as
the overall measure, which could help in evaluating the results provided by an organisation.
With the help of benchmarking analyst are mainly able to identify relevant measures such as
profitability and expenditure that is conducted by an organisation. Benchmarking allows the
analyst to evaluate the company's performance with the current trend and identify the
loopholes that is hampering its progress (Cope et al. 2017). However, the use of ratios mainly
allows the analyst to evaluate the increments in financial position of an organisation
comparing it previous financial results. Hence, financial ratio evaluation is mainly used in
analysing the financial statement of DIPL.
Particulars 2013 2014 2015
Current ratio 1.42 1.47 1.50
Quick assets 0.83 0.94 0.85
receivables turnover 13.78 8.73 8.57
Days in receivables 26.49 41.83 42.61
Inventory turn over 12.50 11.84 8.82
Return on total asset 18.25% 14.41% 11.37%
ROE 25.78% 21.25% 24.26%
Debt to equity 41.31% 47.48% 113.44%
Debt to capital 7.25% 5.42% 31.69%
Interest coverage 41 40 5
gross profit 17.55% 16.13% 15.20%

AUDIT, ASSURANCE AND COMPLIANCE
4
net profit 6.90% 6.08% 6.84%
Ratios Explanations Audit impact
Liquidity
ratio
Relevant upward
trend in the
financial current
ratio is seen from
2013 to 2015
The evaluation of the overall financial performance of
DIPL can be conducted from the above table, which
directly portrays the overall financial improvements that
is achieved by the company in three fiscal years. Starting
from the evaluation of current and quick ratio it
gradually increased over the period of 3 fiscal
years. However, the relevant gap between the increments
is relatively higher, which only indicates that the
company’s performance needs to be evaluated (Earley et
al. 2016). Therefore, the overall liquidity ratio of the
company mainly increased over time, which could in
turn indicate the use of audit report for evaluating
performance of the company.
Efficiency
ratios
The overall
Efficiency ratio of
DIPL has
relevantly
improved from
2013 to 2015
Moreover, the overall financial ratios such as efficiency
ratios of the company could also be evaluated, which
could in turn detect the overall financial stability of
DIPL. The overall receivables turnover ratio, days in
receivables and inventory turnover ratio of DIPL has
relevantly improved over the three fiscal years. This
mainly indicates that the company’s financial stability
and efficiency has relevantly improved over time. This

AUDIT, ASSURANCE AND COMPLIANCE
5
mainly helps in identifying the relevant financial
stability of the organisation for generating higher
revenue from investment. Henczel and Robertson (2016)
argued that the overall efficiency ratio of the company
could mainly help in identifying the relevant efficiency
of the management to conduct relevant activities to
improve performance of the organisation.
Profitability
ratio
The overall
profitability ratio
of DIPL is
relevantly
declined over the
period of 3 fiscal
years
The overall profitability ratio of the company is mainly
identified from net profit margin, gross profit margin,
return on total assets, and return on equity that is
provided by DIPL. In addition, the company’s overall
probability ratio has gradually declined over the period
of three fiscal years, which indicates that the company’s
revenue generation capacity has declined. This mainly
states the overall expenditure of the company has
gradually increased over the period of three fiscal years.
The overall debt to capital, debt to equity and interest
coverage ratio of ratio of the company has mainly
declined over the period of three fiscal years. This only
indicates that financial stability of the company has
declined, which directly contradicts with the financial
stability portrayed in liquidity ratio (Hussein et al.
2017).

AUDIT, ASSURANCE AND COMPLIANCE
6
There are several risks that might be identified from the evaluation of risk, which
could directly result in conducting the audit approach for DIPL. Furthermore, the declining
revenues need to be evaluated by the audit procedure, which could mainly help in identifying
the overall financial capability of the company. However, the overall current ratio of the
company has directly increased, while other financial ratio has declined, which only indicate
the company could have manipulated the financial report. This mainly raises the concern for
the analyst, where relevant audit procedure could directly help in evaluating the financial
condition of DIPL. Therefore, the needs of audit procedure are directly influenced by the
financial report that is portrayed by the company (Ismanto and Hassan 2017).
Question 2: Inheritance risk leading to Material misstatement risk of the company
There are relevant two different types of inheritance risk, which could be identified
from the evaluation of DIPL case study. The overall financial stability of the company could
be identified from using relevant inheritance risk.
Inheritance risk Material misstatement
Risk from information
technology
The overall financial information risk is mainly identified from
the implementation of new technology, which is used by DIPL. In
addition, the overall implementation of the new technology was
mainly conducted quickly, which directly increased pressure on
the employee transferring the transaction into the new accounting
software. The overall time allocated by the management in
converting the new accounting software was minimal, which
directly increased the chances of material misstatement that could
directly lead to inheritance risk. Furthermore, minimal employees
also conducted the transfer of the accounting software, where

AUDIT, ASSURANCE AND COMPLIANCE
7
adequate workface was not provided to the accounting
department. This could directly result in increased material
misstatement conducted by the employees, which could directly
affect h inheritance risk of DIPL.
Therefore, the overall misrepresentation of the transitional data in
the overall accounting software could directly increase the chance
of manipulation in the financial report. This could directly
increase the material misstatement conducted in the financial
report and reduce value of the announced financial report. Lowell
(2016) mentioned that overall increment in the material
misstatement of the financial report could directly reduce the
friction of ratios, which are used by analyst to understand
financial condition of the company.
Risk from financial
reporting
The second inheritance risk from the evaluation of DIPL case
study is mainly identified as the risk from the financial reporting,
which is prepared by the management. There is relevant
possibility, where the management to comply with the loan
requirements of BD Finance directly manipulates the overall
financial report of DIPL. This move conducted by the
management to DIPL for supporting the loan requirements could
directly increase the inheritance risk of the organisation. The
current ratio needs to be maintained at 1.5 levels, while the overall
debt to equity ratio needs to below 1. Therefore, it could be
assumed that the management could directly use the overall
financial stability of the organisation to support its loan

AUDIT, ASSURANCE AND COMPLIANCE
8
requirements. This could direct lead to manipulation that is
conducted by the management to its financial report and raise the
inheritance risk. Seago (2016) mentioned that overall financial
report manipulation that is conducted by the management could
directly increase inheritance risks and hamper viability of the
declared financial report.
Question 3a: Risk factors of the company
There are relevantly two different types of risk, which could be understood from the
evaluation for DIPL case study. In addition, the overall financial stability of the company
could be used in identifying the relevant risk factors that could raise the overall material
misstatement. The relevant risk factors could be identified from the valuation of DIPL case
study is mainly depicted as follows.
Fraud risks Audit Impact of fraud risk
Increased Control
environments used
by DIPL
A relevant control environment is used by DIPL in changing the
overall financial accounting software. The changing process of the
accounting software was mainly conducted on an urgent basis, which
directly increased the chance of manipulation conducted by the
employees in recoding the transactions. These manipulations directly
increased the chance of wrong transactional record and increase the
material misstatement in the financial report. The pressure conducted
on the employees could directly increase the chance of manipulations
(Sobel 2016).
Debt obligations of The overall manipulations could directly be raised from the overall