Fraud Risk Factors and Audit Response

This assignment delves into the identification of fraud risk factors within financial data, particularly concerning inventory obsolescence and accounts payable manipulation. The report highlights how these factors might arise due to pressure or misutilization of authority by employees. It further explains the audit procedures that are implemented in response to such identified risks, emphasizing the auditor's role in mitigating the potential for fraudulent activity.

Table of Contents
Contents
Table of Contents.............................................................................................................................2
Analytical procedures......................................................................................................................3
Risk assessment and inherent risk identification.............................................................................5
Fraud risk factor identification........................................................................................................5
References........................................................................................................................................7

Analytical procedures
Analytical procedures mean any procedures done by the auditor to make analysis regarding the
financial statements of the organization. Analytical procedures are of two types one is
preliminary analytical procedures and other is substantive analytical procedures. Preliminary
analytical procedures are performed for planning nature, time and extant of substantive
procedures required in the performance of the audit. On the other hand, substantive procedures
are extensive procedures which include ratio analysis, trend analysis and comparative analysis of
financial statements. Results of substantive procedures help the auditor in planning audit
(Auditing and Assurance Standards Board, 2009).
In the present case company under consideration, Double ink printers limited is a company
works in printing industry providing serives of printing on demand as well as e-books with
publishers titles, to its clients. The background information of Double ink printers limited
indicate various factors which required to take into consideration by the auditor during the
planning of audit. Some activities which required special consideration are,
a. Recording of inventory value as well as accounts payble by the same person
b. Indicating factor for impairment of assets purchased from Nuclear Publishing limited in
last year
c. Entrance in new loan with two specific conditions
d. Change of chief executive officer and establishment of new internal audit depatment
e. Change of external auditor
f. Implementation of new IT system with insufficient staff
g. No allowance for inventory obsolescence
h. Allowance for inventory obsolescence made in previous years, written back
i. Change in method of inventory valuation from average cost inventory valuation to first in
first out based inventory valuation
j. Change in estimated regarding the depreciable life of printing press by incereasing
depreciable life, due to this depreciation expenses per year will decline
k. E-book revenue recognization without completion of revenue genration process

Results from ratio analysis and comperative analysis
Trend analysis of balalnce sheet of Double ink printers limited
2013 2014 2015
Total Current Assets 41.65% 47.22% 36.72%
Total Non-Current Assets 58.35% 52.78% 63.28%
Total Assets 100.00% 100.00% 100.00%
Total Current Liabilities 29.23% 32.19% 24.47%
Total Non-current Liabilities 28.68%
Total Liabilities 29.23% 32.19% 53.15%
Net Assets 70.77% 67.81% 46.85%
Total Equity 70.77% 67.81% 46.85%
Trend analysis of income statement of Double ink printers limited
2013 2014 2015
Revenue 100.00% 100.00% 100.00%
Cost of Sales 82.45% 83.87% 84.80%
Gross Profit 17.55% 16.13% 15.20%
Profit before tax 9.85% 8.68% 7.04%
Profit after tax 6.90% 6.08% 6.84%
Ratio relevent for loan conditions
2015
Current ratio 1.50
Debt equity ratio 1.13

Information which collected during the analytical procedures will affect the audit. All above
mentioned financial and non financial factors auditor will effect planning for audit. Auditor will
plan extensive procedures for reaching an appropriate opinion regarding these assertions (Putra,
2010).
Risk assessment and inherent risk identification
Risk assessment procedures are procedures which followed by the auditor to measure risks
related to financial information (Auditing and Assurance Standards Board, 2011). Audit risks are
mainly of three types. Inherent risk arises because of nature of the transaction, control risk arises
due to non availability of appropriate control and detection risk arises because of non detection
of material misstatement due to lack of procedures followed by the auditor (Auditing and
Assurance Standards Board, 2009). In the present case, inherent risk factors are,
1. Change in method of inventory valuation from average cost inventory valuation to first in
first out based inventory valuation
2. Change in estimated regarding the depreciable life of printing press by incereasing
depreciable life, due to this depreciation expenses per year will decline
These changes are considered as an inherent risk factor because application of both changes will
result in higher net income and in turn better financial position. Suggested change in method of
inventory valuation will increase the value of closing stock and in turn, will increase net income.
Suggested change in the life of the non-current asset will decline depreciation expenses and in
turn, will increase net income. Due to nature of these two changes, these assertions involves
inherent risk and this can be reduced up to an acceptable level by making appropriate audit
procedures.
Fraud risk factor identification
Fraud risk is the risk that financial reports of the organization are manipulated by a fraudster in
such a way so that it becomes material for the users of financial reports. Fraud risk factors are the
factors present in the reports of financial data which increase the suspicion of fraud (Auditing
and Assurance Standards Board, 2013). Fraud can be initiated by any level of management of
the organization. Fraud is performed by fraudster either because of pressure or because of

misutilization of extensive rights provided to a person or group of persons. Fraud risk factors and
effects of identification of these factors are,
1. Non-allowance for inventory obsolescence, writing back the allowance for inventory
obsolescence made in previous years and change in inventory valuation method indicates
that there may be fraud risk factor due to pressure. The company needs to make current
ratio at least 1.5 for the fulfillment of one condition out of two conditions of a loan from
BDO finance. Current ratio can be increased by increasing current assets. Inventory is a
current asset and non-creation of inventory allowances, wrtiing back the allowance for
inventory obsolescence and change in inventory valuation method will enhance net
inventory value. Due to the identification of this factor auditor will increase the extant of
procedures for assessment of need of allowance for inventory obsolescence and inventory
value.
2. Recording of inventory value, as well as accounts payble by the same person, indicates
that there may be fraud risk factor due to misutilization of extensive rights to accounts
payable clerk. This employee may make a change in both values i.e. inventory and
accounts payable for taking unjustified advantages. Due to the identification of this factor
auditor will increase the extant of procedures for assessment of accounts receivable
value, for this auditor may send confirmation requests to all accounts payables for
confirming their due balances.

References
Auditing and Assurance Standards Board, 2009. ASA 520 Analytical Procedures. [Online]
Available at: http://www.auasb.gov.au/admin/file/content102/c3/ASA_520_28-04-06.pdf
[Accessed August 20 2017].
Auditing and Assurance Standards Board, 2009. Auditing Standard ASA 200 Overall Objectives
of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing
Standards. [Online] Available at:
http://www.auasb.gov.au/admin/file/content102/c3/ASA_200_27-10-09.pdf [Accessed 20 august
2017].
Auditing and Assurance Standards Board, 2011. Auditing Standard ASA 315 Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity and Its
Environment. [Online] Available at: file:///F:/GS%20Solution%20(60%20paise)/Aug/16/risk
%20assement%20procedure.pdf [Accessed 20 august 2017].
Auditing and Assurance Standards Board, 2013. Auditing Standard ASA 240 The Auditor's
Responsibilities Relating to Fraud in an Audit of a Financial Report. [Online] Available at:
http://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_
240.pdf [Accessed 2017 August 20].
Putra, L.D., 2010. http://accounting-financial-tax.com. [Online] Available at: http://accounting-
financial-tax.com/2010/04/the-use-of-analytical-procedures-in-auditing/ [Accessed 20 August
2017].