Auditing Theory and Practice : Assignment

Added on - 23 Feb 2020

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Running head: AUDITING THEORY AND PRACTICEAuditing theory and practiceName of the UniversityName of the studentAuthors note
1AUDITING THEORY AND PRACTICEAnswer to Question 1:Auditors are able to plan their audit by conducting preliminary analysis usinganalytical procedures. Such plan helps in cutting unreasonable cost associated with audit andclarifies any facts for accomplishing the verification of financial declaration of DIPL. Thereare many analytical procedures available to auditor for carrying out analysis and this involvescommon size analysis, benchmarking and ratio analysis. Application of ratio analysis toolwould help auditor in providing information about trend of financial performance oforganization (Booneet al.2017).Application of analytical procedures to the financial declaration of DIPL:For the analysis of financial performance, auditor uses ratio analysis tool. Analysis isdone by calculation profitability, liquidity, solvency and efficiency position of company.Profitability analysis:Table 4: Profitability RatiosRatio201320142015Gross Profit Ratio17.55%16.13%15.20%Net Profit Ratio6.90%6.08%6.84%Operating Profit Ratio19.82%19.18%19.12%Return on Assets18.25%14.41%11.37%Return on Equity25.78%21.25%24.26%The above table depicts profitability position of DIPL over the period of three years.It involves calculation of gross profit, net profit ratio, return on assets, return on equity andoperating profit margin. Gross profit ratio has decreased since year 2013. Ratio stood at17.55% in financial year 2013 as compared to 16.13% and 15.2% in year 2014 and 2015respectively. Net profit ratio stood at 6.9% and 6.08% in year 2013 and 2014 as against
2AUDITING THEORY AND PRACTICE6.84% in year 2015. There was significant decline in return on assets from 18.25% in year2013 compared to 11.37% in year 2015. Return on equity declined from 25.78% in year 2013to 24.26% in year 2015.Liquidity analysis:Table 1: Liquidity ratiosRatio201320142015Current Ratio1.421.471.50Quick Ratio0.830.940.85Liquidity analysis is evaluated by calculating current ratio and quick ratio. Liquidityposition of DIPL has marginally improved since year 2013. Current ratio of DIPL stood at1.42 in financial year 2013, 1.47 in year 2014 and 1.5 in year 2015 respectively. On otherhand, quick ratio has initially increased and subsequently decreased in year 2015. Ratio stoodat 0.83 in year 2013 as compared to 0.94 and 0.95 in year 2014 and 2015 respectively.Solvency analysis:Table 2: Solvency RatiosRatio201320142015Debt Equity Ratio0.410.471.13Debt to Total Assets0.290.320.53Interest Coverage Ratio28.9628.394.68Solvency position of DIPL is analysed by calculating by interest coverage ratio, debtto equity ratio and debt to total assets. Debt to total assets of DIPL stood at 0.29, 0.32 and0.53 in year 2013, 2014 and 2015 respectively. Figures represents that there has been declinein ratio since year 2013. There has been increase in debt to equity ratio to 1.13% in year 2015compared to 0.41% and 0.47% in year 2014 and 2015 respectively. Interest coverage ratio
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