Inherent Risks in DIPL Ltd: A Critical Analysis

The analysis of DIPL Ltd's financial records revealed two inherent risks: the discontinuation of its old IT system and the appointment of an internal audit team by a person with a financial interest in the company. The new CEO, who has a 10% share in profits and bonuses, may manipulate financial statements to show dummy profits, posing a significant risk. Additionally, there is a possibility that the new IT system may not be able to record all transactions, allowing accountants to hide illegal transactions and create a cash crisis. Furthermore, inventory statements could have been used to fabricate massive dummy profits. It is recommended that auditors use their skills and knowledge to verify company records rather than relying solely on data provided by management.

AUDITING

Auditing
Answer 1
Being an auditor, and going through the presented records of the DIPL Ltd, it is advised to the
company to follow certain measures that will help the company to thrive in the future and will be
useful in making certain financial and non-financial decisions. All the advised functions if followed
can depict a clear picture of the position of the company in the market, Auditor Liability: Liability
Limitation, Wood 11
It is seen that the advised procedures, if followed by the auditor, can help in making crucial decisions
in relation to the finances of the company. There are many such procedures available and ready to be
used, but it depends upon the auditor to them as per the demand of the present situations. It is also
important to take into account the mode f measure before following any process of analysis (Wood,
2011).
Taking into account the current circumstances, some of the analysis methods that can be followed are
listed below:
It would be appropriate if the financial position of the company is compared with the records of the
previous years or with any estimates made for it to be achieved in the future. The current position can
also be compared with any opposition company in the same field which will give the management an
idea of the well-being of the company and its achievements in the past (Elder et. aprall energyal,
2016).
While following this type of procedure it is seen that the information represented in the financial
statements are compared with the ones estimated for the future achievements which will give them an
idea of the scale which the company’s finances have been following and the explanation to those
happenings. For instance, the alteration in the company’s turnover can be compared to the future
estimates and also to the previous records for knowing the achievement (Geoffrey s, 2012). It is
obvious that if the turnover shows a positive deflection then it is better for the company but it should
also be kept in mind that seek a perfect explanation of such alteration because it can also happen that
the return from debtors are or discount from the creditors is shown s false sales. This will help in
depicting the true picture of the company (Geoffrey et. al, 2017)
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Auditing
The conformation of transactions in association with the debtors and creditors is necessary. It is also
crucial to check the balances randomly to see if there exists some written off balances which are
settled outside the managerial boundaries without the company having any knowledge about it.
Similarly, all this can be shown as company’s capital which should be eliminated by the auditor by
analyzing the confirmation statements.
Evaluation of ratios is useful in depicting the bonding between stocks of items with the other. For
instance, Gross Profit to Sales, Net Profit to Sales, and Inventory to Sales, Current Ratio, Quick Ratio,
and Liquidity Ratio. All these ratio terms are useful in explaining the alteration in the sales.
If the ratio for the previous three years is evaluated than a consistent trend is seen in them, like:
Net Profit Ratio= Net Profit after Tax / Sales *100
2013= 23, 59,190/ 3, 42, 12,000 *100 = 6.90
2014= 22, 91,362/ 3, 76, 99,500 *100 = 6.08
2015= 29, 72,183/ 4, 34, 59,500 * 100 = 6.84
Gross Profit Ratio = Gross Profit / Sales *100
2013 = 17.55%
2014 = 16.14%
2015 = 15.199%
The remaining unmentioned ratios like liquidity and solvency are also equally important. It should
also be kept into attention whether the average rate of the ratios is maintained if not followed can lead
to distress in the company. Ratios performing and maintaining a fixed defined rate shall be checked
regularly by the auditor to detect any flaw put up by the managerial section for fooling the people.
This leads to a show that the company is successful in attaining massive profit which is actually not
the case. Thus, it is crucial that the auditor uses his knowledge and the skills to determine the financial
position of the company.
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Auditing
Answer-2
Common business policies and methods followed are generally attacked by a group of risks known as
the inherent risks.
Inherent risks were seen prevailing in the case of DIPL Ltd. This was evident when the records of the
DIPL Ltd were clearly analyzed and the flaws in the financial position were detected to be attacked by
two inherent risks which are:
The discontinuous of the old IT system
The old It system has been abandoned by the whole market and a new system has been adopted by the
companies. But it should also be seen that the employees must have a thorough knowledge to use the
system and the system should only be accessible only to a closed group and not to the outside people
(Gay & Simnet, 2015).
Appointment of Internal Audit team by a person having a financial interest in the company.
The new CEO which has been appointed has been granted a 10% share in all the profit and
bonus earned.
For this the CEO can also adopt to showing dummy profits in the statements which will
fetch him much more wealth and thus, fooling the shareholders. This can be regarded as a
serious inherent risk. This can be prevented if the board themselves appoint an internal
auditor and not only the CEO (Church et. al 2008i).
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Auditing
Answer-3(a)
The following two frauds are susceptible:
It is very much possible that the new system is not able to record all the transactions which were made
at the end of the year. This could rather be used by the accountants in a clever way to produce a
distress in the company for their own benefits by hiding the illegal transactions so as to produce a
decrease in the cash availability in the company. All this explanation can be perfect to sit fit into the
matter of cash decline in the company .
Inventory statements could also have been used to fool others. It is evident that the inventory has
shown a marked increase in the third year as there is also an increase in the company’s sales. All this
clearly depicts inflation in the inventory which could have been cleverly planned to shown massive
dummy profits earned by the company. (Heeler, 2010)
Answer-3(b)
1. All the flaws if not found out timely then it can have an impact on the mindset and the decision
made by the auditor in the part of the company. If the matter about the first fraud is taken into
account then it can be said that this matter can include a massive amount of money in it as the
transaction are hidden on a large basis. All these flaws if detected by the auditor can be said that
the managerial committee and the top level executives are highly involved in it. If these flaws are
not detected timely then it can cause a huge loss to the company’s financial position.
2. If the inventory matter is paid attention then due to the inflation of the inventory, it will be visible
to the others that the company is able to earn huge profits which are not the case and these are only
dummy profits (Carcello, 2012). Thus, if the flaws not rectified at a time can arise question to the
auditor and can be said that the auditing is not at all pure. Thus it is recommended to the auditor he
should use his own skills and finding of the company’s record to get to a decision and not only
rely on the data provided by the managing committee of the company. If this does not happen then
the auditor in unable to fully dispatch his duties and this may affect the financial statements of the
company which may easily fool the investors of the company (Guerard orient)
3. .
4.
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Auditing
References
Carcello, J 2012, ‘What do investors want from the standard audit report?’, CPA Journal
vol.82, no. 1, pp. 7-12
Church, B, Davis, S & McCracken, S 2008, ‘The auditor’s reporting model: A literature
overview and research synthesis’, Accounting Horizons vol. 22, no. 1, pp. 69-90.
Elder, J. R, Beasley S. M.& Arens A. A 2010, Auditing and Assurance Services, Person
Education, New Jersey: USA
Gay, G & Simnet, R 2015, Auditing and Assurance Services, McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S & David A. W 2016, ‘Attracting Applicants for In-
House and Outsourced Internal Audit Positions: Views from External Auditors’, Accounting
Horizons, vol. 30, no. 1, pp. 143-156.
Gilbert, W. Joseph J & Terry J. E., 2005. The Use of Control Self-Assessment by
Independent Auditors. The CPA Journal, 3, pp. 66-92
Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York,
NY: Springer, pp. 78-81
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting. Pearson Press
Matthew S. E 2015, ‘ Does Internal Audit Function Quality Deter Management
Misconduct?’, The Accounting Review, vol. 90, no. 2, pp. 495-527
Northington, S 2011, Finance, New York, NY: Ferguson's, pp. 52-55
Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.
Vause, B 2009, Guide to Analysing Companies, Bloomberg Press
Wood, D A 2011, ‘The Effect of Using the Internal Audit Function as a Management
Training Ground on the External Auditor's Reliance Decision,’ The Accounting Review, vol.
86. No. 6
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Auditing
Appendix
Ratio Formula 2013 2014 2015
Current Ratio Current Assets/
Current
Liabilities
1.42 1.47 1.50
Gross Profit
Ratio
Gross Profit/
Sales
17.55 16.13 15.20
Net Profit Ratio Net Profit after
tax/ Sales
6.89 6.07 6.84
Debt Equity
Ratio
Debt / Equity _ _ 0.61
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