Financial Reporting Risk Assessment

This assignment focuses on analyzing the risks inherent in the financial reporting process. It delves into identifying potential issues through examination of financial statements and reports, emphasizing the role of financial analysts and accountants in utilizing analytical and control procedures to minimize these risks. The timely review and monitoring of financial information are crucial for effective decision-making.

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
Answer to Question 1:................................................................................................................2
Answer to Question 2:................................................................................................................4
Answer to Question 3:................................................................................................................5
Answer to Part A:...................................................................................................................5
Answer to Part B:...................................................................................................................8
References:.................................................................................................................................9

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Answer to Question 1:
While developing the plan of audit relating to Double Ink Printers Limited (DIPL),
the analytical procedure related to financial information offers great benefits. On the other
hand, the plan of audit offers the needed guidelines and directions to the auditors during the
operations of audit. In other words, the plan of audit helps the auditors to maintain the audit
cost in a certain limit to curb confusion with the audit clients (Carson, Redmayne and Liao
2014). The procedure of evaluating the financial performance of the organisation could be
formed with the help of various mechanisms.
It has become possible for the financial analysts and accountants to utilise the
financial information in order to make various business decisions through the analytical
method. The common size analytical method helps in the process of evaluating the financial
declaration of the organisation from the prevalent referential points. The fundamental merit is
that it lends support to compare the financial statement from different financial timelines.
The financial analysts and accountants could make use of various lines of items from
the financial statements and accordingly, the base of preparation could be made for the firms.
For example, the process of registration of various accounting and financial items in the
financial statements like owner’s equity, overall liabilities and assets could be taken into
account along with the dissection of digression from the normal position (Carson et al. 2014).
One of the primary analytical processes related to financial information is benchmarking,
which could be used to evaluate the plan of audit. In addition, ratio analysis is a fundamental
analytical procedure associated with the financial information of a firm, as it could be used to
compare the performance of the firm with its competitors to develop the audit plan (Cohen
and Simnett 2014).

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Explanation:
The analytical methods of the organisations to dissect the financial information has
considerable impact on the process development associated with audit planning and this is
vital for flowing financial information amongst the certain departments of the organisations.
Certain ratios in the context of DIPL have been taken into account for this purpose:
Particulars 2013 2014 2015
Profit margin 0.068 0.60 0.06
Current ratio 1.42 1.46 1.50
Solvency ratio 0.62 0.44 0.21
Based on the above table, it could be stated that the organisation has experienced an
improvement in liquidity position with the increase in current ratio over the years. However,
the fluctuating profit margin has helped in disclosing the net income gained compared to
overall revenues generated (Fernandez-Feijoo, Romero and Ruiz 2016). Along with this, such
profitability evaluation provides the accountants and financial analysts with an insight of
ascertaining the expenses of the firm. Furthermore, an insight about the efficacy of the
company budget has been obtained, which would serve the need for business expansion.
The favourable as well as unfavourable modifications in the financial performance
and ratios of the organisation help the auditors in developing an overview of the present
financial condition of the organisations. In this regard, the consideration of solvency ratio has
been made that has declined over the years. Such assessment is crucial to ascertain the
desirable or undesirable movement of the firm performance over consecutive years.

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In other words, it could be stated that the evaluation and comparison of ratios and
financial performance help the accountants and financial analysts to determine the relative
financial condition of the organisation over the years. It helps to determine whether the
current financial condition of the firm is feasible or not. If the condition is not feasible, the
management needs to implement corrective measures to improve its financial performance.
Hence, the analytical process associated with financial information has immense value (Gu,
Simunic and Stein 2017).
Answer to Question 2:
Based on the provided case, the management has failed to record certain business
transactions. Such method has direct association with the inconsistencies associated with the
planning of various sales and marketing activities of the organisation (Hardy 2014). The
financial evaluation of DIPL implies that the profit level is inadequate when compared with
the overall revenues generated. The fundamental cause is the inefficiency and ineffectiveness
of the management in handling its business operations. In addition, the organisation has not
been able in measuring the influence of various macro and micro-economic factors on the
business functioning of DIPL. Thus, these factors have lead to lead inherent risk for the
organisation (Jones 2016).
In addition, the employees of DIPL have grown rapidly resulting in increased inherent
risk. The lack of experience and professionalism of the staffs of the organisation has
increased the level of inherent risk, as they could conduct serious mistakes. According to the
provided case study, the problems could be identified in the CEO succession procedure of the
organisation. Due to this, such procedure has lead to increase in inherent risk of the
organisation. However, this procedure has not been effective in DIPL.

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Along with this, it could be seen that DIPL does not have adequate employees in
handling its business operations, which has again lead to increased inherent risk in the entire
business operations of the organisation. Therefore, from the above assessment, it has been
found that these are the fundamental reasons of increase in inherent risks in the business
functioning of DIPL (Junior, Best and Cotter 2014).
Explanation:
As observed from the case study, the amount of work pressure on the employees of
DIPL is extremely high. The rising workload leads to inaccurate bookkeeping of the firm and
this issue further leads to various cash flow problems, ineffective solvency and liquidity
positions along with unsuitable operating results for the organisation. Along with this, the
error risk could be represented in the financial reports because of inappropriate interpretation.
In this regard, the management of the organisation has a significant role to play. However,
there is lack of integrity and accountability in the management of DIPL and because of this
reason; they are facing the concern of reputation loss in the business community. The higher
structure of incentive associated with management develops extra pressure on the
management due to which there has been material misstatement in the financial reports
(Kend, Houghton and Jubb 2014).
Answer to Question 3:
Answer to Part A:
In the present day business organisations, fraudulent risk is considered as the primary
risk in the context of the same. Because of the occurrence of such risk, the business firm
often face huge losses in its business assets (Rahim and Idowu 2015). In most of the
situations, the basic dissatisfaction could be seen among the workforce and such

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dissatisfaction often force them to involve in different kinds of frauds in firms. Another cause
of fraud is to meet the needs of the investors associated with an organisation. This is because
it often promises to accomplish a specific financial position; thereby, leading to higher level
of fraud (Shah and Nair 2013).
Types of risk Identification
Fraudulent risk In the context of the business functioning of
DIPL, the major risk that could happen from
the business operations is the engagement of
the staffs in different types of fraud activities.
This mainly arises with the fall in satisfaction
level of the staffs. According to the case
study of DIPL, it could be stated that the
board of the organisation has exerted
excessive pressure in adopting a new
accounting system. The adoption of such
system creates a huge pressure on the
workforce of the organisation and this
pressure has lead to fraud. Hence, it is
evident that for dealing with such pressure of
reconciliation, the staffs might adopt
unscrupulous behaviour leading to wrong
handling of the overall process, which further
results in material misstatement (Singh et al.
2014).

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Based on the case study, it could be seen that
the process of ineffective handling in
implementing the new information
technology leads to inaccurate treatment of
accounting transactions at the year end. Such
procedure might lead to loss of financial
information and material misstatements.
Procedure of financial reporting One of the primary audit risks is related to
the process of financial reporting. The
additional risk of incorrect financial
announcements could be observed, if extra
expectations could be seen from various
stakeholders for the financial announcements.
This holds good in case of management
announcements for accomplishing a specific
target of the goals for acquisition of debt.
Depending on the financial statements of
DIPL, it could be viewed that there is
increase in revenue from 2013 to 2015.
Along with this, the gross income and net
income of the organisation have increased in
tandem. The information collected from the
case study states that DIPL has obtained a
loan amount of 7.5 million from BDO
Finance in 2015.

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The case study further reveals that the DIPL
needs to maintain a current ratio of 1.5 and
debt-to-equity ratio of below 1. The need of
this specific arrangement might be to exert
pressure on the firm to repay the loan
according to the agreed timeline. These
requirements could lead to fraudulent
activities, as DIPL could manipulate its
financial statements to win the trust and
confidence of its investors. In case, it is
unable in maintaining the desired benchmark,
BDO Finance might not grant any further
loan to the organisation (Stewart, Kent and
Routledge 2015).
Answer to Part B:
According to the provided case, it has been assessed that the procedure of valuation
associated with the raw materials of the organisation depending on average cost is not
appropriate, since the current cost of paper exceeds the average cost. The primary risk in the
identification of fraudulent activities of its staffs to implement new system of information
technology could be detected through continual monitoring of the same in different job
phrases. Alongside this risk, the risk pertaining to the procedure of financial reporting could
be identified through assessment of the various financial statements and reports of the
organisations and the responsibility lies on the financial analysts and accountants with the
help of various analytical and control procedures. This process of reviewing as well as

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monitoring is needed to be carried out in a timely fashion (Sutherland 2017). Thus, it has
become possible for the financial analysts and accountants to utilise the financial information
in order to make various business decisions through the analytical method.
References:
Carson, E., Redmayne, N.B. and Liao, L., 2014. Audit market structure and competition in
Australia. Australian Accounting Review, 24(4), pp.298-312.
Carson, E., Simnett, R., Trompeter, G. and Vanstraelen, A., 2014. The Impact of Group Audit
Arrangements on Audit Quality and Pricing.
Cohen, J.R. and Simnett, R., 2014. CSR and assurance services: A research agenda. Auditing:
A Journal of Practice & Theory, 34(1), pp.59-74.
Fernandez-Feijoo, B., Romero, S. and Ruiz, S., 2016. The assurance market of sustainability
reports: What do accounting firms do?. Journal of Cleaner Production, 139, pp.1128-1137.
Gu, T., Simunic, D.A. and Stein, M.T., 2017. Fixed Costs, Audit Production, and Audit
Markets: Theory and Evidence.
Hardy, C.A., 2014. The messy matters of continuous assurance: Findings from exploratory
research in Australia. Journal of Information Systems, 28(2), pp.357-377.
Jones, P., 2016. Internal audit: An integrated approach. Company Director, 32(5), p.50.
Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A
historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.
Kend, M., Houghton, K.A. and Jubb, C., 2014. Competition issues in the market for audit and
assurance services: are the concerns justified?. Australian Accounting Review, 24(4), pp.313-
320.