logo

HI6026 - Audit, Assurance | Questions & Answers

   

Added on  2020-03-13

8 Pages2587 Words48 Views
AUDITING AND ASSURANCE

Answer-1:-The procedures performed by the auditor at the end of the year to abet the auditor to form anoverall opinion about the financial statements in his report are called Analytical Procedures. It isso worked out to ascertain the fact whether the financial statements are consistent with theauditor’s understanding of the firm. If any inconsistency or any significant changes are beingobserved, then the auditor will either make enquiries with the management or those charged withgovernance or the auditor carries out further audit procedures so as to make in depth analysis ofhis observations indicating towards inconsistency. It helps to compare the financial informationwith previous years by determining the possible relationships between both non financial andfinancial data. As per the given case study of DIPL, the main key ratios are being calculated toperform analytical procedures so as to accordingly formulate the planning process based on theseresults :In interest coverage ratio, we observe a drastic decrease in the paying capability ofinterest by the company that is, from almost 41% to 5% approximately due to heavyinterest expenses on the company. The gross profit margin shows a decrement of 1% almost in the three years which isnot of susceptible nature as such. However, due to presence of allot of susceptiblefactors, gross profit margin also comes under the suspicion (Basu, 2009). The debt equity ratio is calculated only for this year, that is, 0.61. The company hasan obligation that it is to maintain a current ratio of at least 1.5 and debt equity shouldbe below 1 otherwise the loan giver would recall the loan amount. Being underpressure, it can be the case that to show a high shareholder's equity balance, thecompany manipulated the books that the income tax liability came to Rs. 87116 on aprofit of Rs. 3059299. Also in comparison to previous year retained earning balances,there in an unusual increase in the value of the retained earnings inspire of facingheavy expenditure in this current year such as new It System, takeover of a newcompany named as Nuclear Publishing Ltd., purchase of fixed assets in large amountetc. Thus, such a case requires detailed examination of books. The current ratio of current year is 1.50 while of previous years, it is 1.42 (2013) and1.47 (2014) which indicates a favorable condition as current ratio is an indication ofliquidity of the company. However, the true indication of the liquidity of the companyis Quick Ratio as the current assets excludes the inventories amount so as todetermine the readily cash available in hand as inventories cannot be converted intocash instantly. However, the quick ratio of the current year is 0.85 which is lowerthan the previous year of 2014 that is, 0.94 meaning that the actual cash is not muchavailable in the hand if in case, the company is required to pay its short termobligations instantly. This is not a good sign as the % of fall in cash in hand hasreduced drastically this year in comparison to previous years indicating towardsunusual transactions or expenses the company may hand indulged into this year.

Coming to Return On Equity % and EPS calculation, the profit before tax in 2015 isRs. 3059299 but the income tax shows an amount of Rs. 87116, which is just notpossible, without any manipulations. It may be so as to show high net earnings as theEPS for 2013 is Rs. 104.85, for 2014 is Rs. 101.84 but the current year's EPS is Rs.132 approximately. Such calculation of PAT (Profit after Tax) needs a justification asthe calculation of income tax is too low according to the operations which may be toshow high EPS so as to win the confidence of the investors in the company. Also,such calculation of net earnings may also be done so as to lift up its return on equity% from previous years as it reveals the % of return the investors are receiving on theirinvestment(Blank, 2014). Answer-2:-

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Audit, Assurance and Compliance - Question Answers
|9
|2763
|51

ITECH1103 - Analytical Procedures By Auditor
|10
|2560
|137

ACC300 - Auditing and Assurance : Case Study of DIPL
|10
|2643
|113

Audit And Asssurance Answer 1
|8
|1999
|478

HI6026 Audit, Assurance and Compliance- Report
|8
|2103
|37

Assignment | Audit, Assurance and Compliance (HI6026)
|10
|2449
|39