Auditing Risks and Accounting Practices

The assignment delves into the complexities of auditing risks within accounting systems, particularly focusing on the use of information technology (IT) in bookkeeping. It highlights the potential for fraudulent activities when utilizing IT for financial record-keeping and emphasizes the importance of proper internal controls. The discussion specifically addresses the issue of inventory valuation using average cost methods, noting potential inaccuracies when raw material costs significantly deviate from the average. It also touches on the role of auditors in assessing financial statements and implementing control mechanisms to mitigate risks.

Running head: AUDIT ASSURANCE AND COMPLIANCE
Audit Assurance and Compliance
University Name
Student Name
Authors’ Note

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Table of Contents
Solution to Question 1:...............................................................................................................2
Solution to Question 2:...............................................................................................................4
Solution to Question 3:...............................................................................................................7

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Solution to Question 1:
Implementation of analytical procedures to monetary assertions of firm DIPL
Proper implementation of analytical procedures to different pecuniary assertions of the firm
DIPL can support the process of improvement of the audit design. Fundamentally, audit plan
can reflect specific directive that need to be tracked during a specific time of executing the
audit practise. Fundamentally, stratagem of assessment also aids auditors in backing up audit
expenses at sensible stage and aids in illustrating misapprehension together with
miscommunication with diverse customers of specific firm.
Inspective tactic of common sizing backs evaluation of financial assertions in a specific
manner. This way of analytical procedure also aids management of firms to work on carrying
out comparative evaluation of economic assertions of firms from the perspective of different
periods (different phases of time) or else from the perspective of different business concerns.
Appraisers can also tell about different categories otherwise classes of elements recognized in
the financial statements and help in examining the manner of disclosing diverse economic
pronouncements (Chou 2015). As such, the mechanism of considering diverse elements of
economic statements for example, net assets as well as liabilities together with shareholders’
equity (Simnett et al. 2016). Nonetheless, modification in the financial statements considered
from a specific point of view backs the development of the system of identifying the
aberration, thus, this aids the process of analysis of the reason behind the deviation for
gaining a deep understanding as regards the main intent (William Jr et al. 2016). In essence,
this is mainly because this technique can be appositely executed for analysing financial
reports and all at the same time analysing comprehensive idea of financial analysis.
Detailed discussion of the way economic fallouts can affect audit process

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Specific outcomes of planning for preparation as well as presentation of audit can be
exclusively effected by the exploratory tactic undertaken for the purpose of translation as
well as making out information from different reports published by the firm (William Jr et al.
2016). For instance, results of the analysis of key financial ratio enumerated based on
pecuniary reports is hereby tabulated below:
Particulars 2013 2014 2015
Profit margin 0.068 0.60 0.06
Solvency ratio 0.62 0.44 0.21
Current ratio 1.42 1.46 1.50
Critical evaluation of the financial reports of the firm DIPL helps in understanding the
financial health as well as financial condition of the firm. The above table reflects the
profitability condition of the firm suing the profit margin ratio. Profit margin ratio is
documented to be 0.068 during FY 2013, while this ratio increased to around 0.60 in the FY
2014 and further escalated to o.06 during the subsequent year. This reflects an improvement
in the financial condition from the perspective of profitability. Again, the solvency ratio
documented to be 0.62 during the FY 2013 declined to around 0.44 in 2014. Furthermore,
this ratio also decreased to about 0.21 in FY 2015. Current ratio recorded to be 1.42 in 2013,
1.46 in FY 2014 and 1.50 in FY 2015. Thus, significant financial ratio assessment aids in
comprehending whether disbursement of the entire business are properly effective and
whether all-inclusive costs of the firm is remarkably high. In accordance with the present
business case, it can thus be stated that audit of financial reports of the firm can hereby help
in examining the assets, reserves as well as possessions of the firm. This also helps in
recognizing the pattern in which the firm can carry out necessary actions to limit any type of
adverse happenings (Simnett et al. 2016).

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Solution to Question 2:
There are different categories of risk recognized in the process of audit and can be related to
material misstatements in financial reports. Even so, it can be mentioned here that there
remains different categories of unsystematic risk that can pull the attention to different types
of risks recognized from financial proclamation of business concerns. Besides this, there also
exists miscellaneous categories of risks that can also affect the business operations and thus
needs to be avoided by firms (Messier et al. 2014). Fundamentally, this can assist in
indicating both true and fair view of different classes of economic announcements. Inherent
risks might occur in this case. This inherent risk is the risk that essentially occur owing to
error or else omission in a pecuniary reports because of a feature excluding control failure.
However, in a monetary assessment, inherent risk is utmost probable to happen when
dealings are intricate, or in circumstances that need a high magnitude of judgment as regards
financial approximations. The auditor might plausibly find it very hard to detect the certain
risks. There also exists certain risks that occur because of exclusion of certain factors together
with certain faults or mistakes that are unlikely to be committed to be committed by different
expert accountants (Louwers et al. 2015).
The table below presents different types of inherent risks that might be faced by the business
concern DIPL along with detailed illustration of the same.
Risk Explanatory
Inherent Risk -Detailed evaluation of the business case on the operations of DIPL
reveals the fact that risks might stem owing to exclusion of different
business transactions by proficient as well as certified accountants.
Examination of financial declarations helps in identifying the fact that the
corporation has inevitably failed to attain a preferred amount of profit and
attain revenue targets from the sales (Simnett et al. 2016). However, this

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might occur on account of sheer failure of the management and the board
to perceive certain necessities, evaluate different macro and micro issues
involved in the environment of the business. This essentially includes the
socio- economic along with political factors present in the business
environ of the company DIPL (William Jr et al. 2016). Thus, this can be
witnessed from lower amount of sales and leads to events of risks.
-The workforces also augmented the inherent risks. Critical analysis of
the business case also helps in understanding the fact that lack of
efficiency and experience of the employees also leads to incidence of
inherent risks. The non-proficient employees can also escalate the overall
inherent risks by committing different slips and errors (Simnett et al.
2016). For instance, imprecision might owing to exclusion and this can
eventually lead to falsified presentations in the financial statements.
There are different environmental facets that too become the root cause
of inherent risks. This primarily takes place due to rapid transformations
in business environs, stiff competition as well as inadequacy of capital
(Simnett et al. 2016).
Inherent Risk Detailed analysis of the business case on DIPL aids in gaining deep
understanding regarding the fact that possibility of occurrence of inherent
risks exists in the process of undertaking CEO succession (Messier et al.
2014). Therefore, a proper exercise of assessing ease of change also
covers inherent risk involved in different operations. Therefore, initiation
of exercise without adhering to specific strategies, commencement of
certain operations late, incorrect connection with the chief executive
officer and nomination of CEO also may lead to incidence of inherent

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risk (Louwers et al. 2015).
Also, registering cash proceeds of the firm by different finance
professional of DIPL too can lead to incidence of risk (Knechel 2016).
Carrying out detailed cataloguing of acquired sales proceeds from
definite e-book, considering reissuance of texts or else guidebook in the
upcoming period can add to the possibility of occurrence of inherent risks
as a upshot of the complexity involved in the technique (Knechel and
Salterio 2016).
Possible reasons behind occurrence of inherent risks related to material misstatements in the
financial pronouncements of the firm include:-
- Too much work related stress and overload of work on employees along with the
management of the firm
- Risk of carrying out tasks by professional accountants in a faulty or erroneous manner
that might lead to misrepresentation in the financial statements (Elder et al. 2011)
- Trustworthiness of the complete management and board (Glover et al. 2016)
- Strain on the entire management of the firm
- Features and nature of functionality of operations of the business concern (Edgley et
al. 2015)
Solution to Question 3:
Fraud risks can essentially lead to loss of assets and reserves of the corporation DIPL. In
essence, discontentment of employees owing to excessive stress of work can direct
employees to contain different fraudulent arrangement (Arens et al. 2016). In addition to this,
expectancies of administration of corporation as regards financial results and to achieve a

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certain level of performance can also lead to occurrence of different incidence of fraud (Chou
2015). Added to this, there too occurs the necessity to communicate financial result that in
line can help in evading risks reflecting made-up affirmations (Baylis et al. 2017).
Recognition of
Risk
Illustration
Fraud Risk Analysis of the business case on DIPL helps in understanding the fact
that risks in business might crop up owing to involvement of
discontented workers in diverse deceitful tasks. Assessment of
functionalities of the business firms helps in laying stress on the fact
that there exists excessive strain on workers to adopt the task of
implementing advanced and progressive IT prompted accounting
system (Chou 2015). However, this can lead to fraudulent actions and
manage the clearance tasks in an appropriate manner. Thus, this can
help in carrying out misstatement in financial statements (Arens et al.
2016). Analysis of the case also helps in understanding the
inappropriate way of managing the entire course of executing the action
of establishing innovative accounting plan and give way to unfitting
suppositions regarding explicit corporate dealings during the end of the
year (Arens et al. 2016). Yet again, this also reveals the manner towards
incurring loss on account of material misstatement along with fraud
risk.
Fraud Risk Analytical evaluation of business case on DIPL discloses the fact that a
totally different event of risk might perhaps take place on account of
different fraudulent actions (Baylis et al. 2017). This mainly occurs
owing to events involved in the process of arrangement together with

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presentation of different financial pronouncements. Mainly, once there
exists huge anticipation from large number of outside sponsors
regarding publicizing precise financial suggestions and realizing pre-
determined performance goals (Baylis et al. 2017). This too leads
towards risks of committing material misstatement in the financial
assertions of the corporation. Furthermore, the attainment of the pre-
determined goals to achieve the necessities to get credit and gather debt
also involves high level of risk of incorrect financial statement
(Christensen et al. 2016).
Even so, financial assertions as regards specific financial state of affairs
of the concern also suggests about profit of the business concern
(Christensen et al. 2016). This too helps in identifying the fact that the
business concern has increased the entire proceeds of the corporation
during a specific period of time that is necessarily between financial
year 2013 and 2015. Besides this, the calculated sales revenue (gross)
along with the sales revenue (net) can also be observed to have
increased. Nonetheless, this current business case replicates that DIPL
has secured loans amounting to 7.5 million from BDO Finance. This
loan agreement also has certain contract terms that calls for the need of
satisfying a certain level of current ratio of nearly 1.5 plus debt equity
ratio of lower than almost 1. Thus, it can be hereby inferred that these
identified facets require the corporation to maintain a certain financial
ration that can help in acquiring credit (Duncan and Whittington 2014).
This too can lead towards diverse fraudulent actions and give way to
inappropriate replication of financial condition.

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Consistent with the given business case, it can be hereby mentioned that exercise of
approximation of inventory of specifically raw material at precise average cost was not
proper as the charge of paper was substantially beyond the average cost (Edgley et al. 2015).
In addition to this, risk of recognizing fraudulent deeds involved in executing accounting
arrangement using IT in tasks of book keeping can be presumed by observing diverse
arrangements at different phases (Duncan and Whittington 2014). At the inception, the risk
associated to the registering economic assertions can be recognized by undertaking inquiry of
financial assertions by assessors, outlining schemes of control directly.