Audit Risk and Financial Reporting

This assignment examines the inherent audit risks faced by DIPL, a company transitioning to new software and facing loan requirements. It delves into two key areas: (1) The risk of material misstatement arising from new software implementation and (2) Management's potential for manipulating financial records to meet loan conditions. The assignment requires students to identify specific fraud risks, analyze their impact on the audit, and propose audit procedures to mitigate these risks.

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

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Table of Contents
Question 1: Impact of results on audit procedures.....................................................................2
Question 2: Mentioning about inheritance risk, which is leading to material misstatement risk
....................................................................................................................................................4
Question 3a: Identifying the risk factors....................................................................................5
Question 3b: Mentioning about the fraud risk...........................................................................5
Reference:..................................................................................................................................7

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Question 1: Impact of results on audit procedures
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%
net profit 6.90% 6.08% 6.84%
RATIOS EXPLANATIONS AUDIT IMPACT
Current
Ratio
Upward trend can be seen
in the current ratio, where
value of current assets
have risen from 2013 to
2015
The current ratio of the company adequately
increased from 2013 to 2015. This mainly
raises the overall financial stability of the
organization. However, there is also a
requirement that needs to be fulfilled by DIPL,
which directly indicates that the overall
financial statement could be manipulated. The

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evaluation of profitability ratios depicts a
decline in profits, while current assets rose.
Therefore, use of Audit procedures could
eventually help in identifying any kind of
misstatement.
Quick
Ratio
The quick ration also rose
by two basis points from
0.83 to 0.85 in 2015.
The overall currents assets have been increased
by increasing the inventory storage, which
could be seen from quick ratio. Therefore, it is
mainly a confirmation, where the management
of DIPL has relevantly used manipulative
measures for supporting the loan requirements.
ROE The ROE has also
declined from 2013 in
2015, as the overall equity
of the organization has
increased rapidly.
The ROE of the company has increased, where
relevant equity supply has also escalated. This
mainly states that the company is forcing its
financial records to become more attractive for
the loan providers.
Profitabilit
y
The profitability ratios
such as gross profit margin
and interest coverage
ratios have directly
decreased over.
The profitability of the organization has
declined over the period, which states that, the
company’s revenue expenses have increased
exponentially. This mainly indicates that the
company could have manipulated its balance
sheet to support the loan requirements (Simons,
Bester and Moll 2017).
Net profit
Margin
The net profit margin has
fallen minutely even an
The decline in DIPL net profit margin
condition mainly portrays the relevant

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increment in profits was
witnessed during 2015 as
compared to 2013
expenses, which is been conducted by the
organization. Therefore, it could be seen that
eve with high expenses the compny was able I
incrase ts current assets, which indicates that
some manipulative measures have been used
by the organization.
Question 2: Mentioning about inheritance risk, which is leading to material
misstatement risk
Risk Reason of inherent risk Material misstatement risk
Risk from
recording in
the accounting
system
The first risk that could be found from
the evaluation is the valuation of the
inventory risk. The relevant inherent
risk is mainly due to the
misrepresentation of the records
conducted by accountants of DIPL.
This mainly increases the change of
inheritance risk (Hut-Mossel et al.
2017).
The wrongful interpretation of
transactions on the new software
could directly increase the
chance of material misstatement,
which in turn affect its financial
report.
Financial
record
evaluation
The second inheritance risk is mainly
portrayed from the management,
where compliance with the loan
requirements is essential. Therefore,
The material misstatement could
occur if the management uses
inflated values in preparing the
annual report so that it could

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the organization could use
manipulative measures for inflating
its annual report.
comply with the loan
requirements of 1.5 current
assets and less than one debt to
equity ratio.
Question 3a: Identifying the risk factors
Fraud risks Identification of fraud risk Audit impact of fraud
risk
1. The first risk that
could be recognized is
from the
misappropriation of
resources
2. The second risk is
mainly recognised
from
misrepresentation of
financial records that
is been conducted by
the management.
 There is relevant
indication where the
manipulation in the
overall financial report
could be identified, which
is been conducted by
employees (Baylis et al.
2017).
 The misreporting system
could also be used by the
management for
manipulating the financial
report, which could help
in attaining the loan
requirements.
 Checking of all the
records needs to be
conducted by the
auditors.
 The relevant sales data
and annual report data
also needs to be
evaluated to understand
the manipulations
conducted by the
organisation.
 Identifying the
uncertainty is called for