Audit, Assurance and Compliance - Question Answers
Added on 2020-03-04
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AUDITING
Answer-1 :Analytical procedures are the procedures performed by the auditor at the year end so as to assistthe auditor to form an overall opinion about the financial statements in his report. It is carried outso as to determine the fact whether the financial statements are in consistent with the auditor'sunderstanding of the firm. It helps to compare the financial information with previous years bydetermining the possible relationships between both financial and non-financial data. If anyinconsistency or any material changes are being observed, the auditor then either make enquirieswith the management or those charged with governance or the auditor carries out further auditprocedures so as to make a detailed study of his observations indicating towards inconsistency.As per the given case study of DIPL (Auditing & Assurance Services + Connect 2s Access Card,2016), the main key ratios are being calculated to perform analytical procedures so as to accordinglyformulate the planning process based on these results :1. CURRENT RATIOPARTICULARS201320142015CURRENT ASSETS 538593875091509600929CURRENT LIABILITIES378000051202506397500CURRENT RATIO( CURRENTASSETS/CURRENTLIABILITIES)1.421.471.50The current ratio of current year is 1.50 while of previous years, it is 1.42 (2013) and 1.47 (2014)which indicates a favourable condition as current ratio is an indication of liquidity of thecompany (Blank, 2014). However, the true indication of the liquidity of the company is QuickRatio as the current assets excludes the inventories amount so as to determine the readily cashavailable in hand as inventories cannot be converted into cash instantly. However, the quick ratioof the current year is 0.85 which is lower than the previous year of 2014 that is, 0.94 meaningthat the actual cash is not much available in the hand if in case, the company is required to payits short term obligations 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 towards unusualtransactions or expenses the company may hand indulged into this year.2.RETURN ON EQUITYPARTICULARS201320142015NET INCOME235919022913622972183SHAREHOLDER'S EQUITY91500001078365012250491
RETURN ON EQUITY (NETINCOME/TOTALEQUITY)*10025.78%21.25%24.26%Coming to Return On Equity % and EPS calculation, the profit before tax in 2015 is Rs. 3059299but the income tax shows an amount of Rs. 87116, which is just not possible, without anymanipulations. It may be so as to show high net earnings as the EPS for 2013 is Rs. 104.85,for2014 is Rs. 101.84 but the current year's EPS is Rs. 132 approximately. Such calculation of PAT(Profit After Tax) needs a justification as the calculation of income tax is too low according tothe operations which may be to show high EPS so as to win the confidence of the investors in thecompany. Also, such calculation of net earnings may also be done so as to lift up its return onequity % from previous years as it reveals the % of return the investors are receiving on theirinvestment (Boynton & Johnson, 2006). 3. DEBT TO EQUITY RATIOPARTICULARS201320142015INTEREST-BEARING DEBTS007500000SHAREHOLDER'S EQUITY91500001078365012250491DEBT TO EQUITY RATIO(TOTALDEBT/SHAREHOLDER'SEQUITY)0.000.000.61The debt equity ratio is calculated only for this year, that is, 0.61. The company has an obligationthat it is to maintain a current ratio of at least 1.5 and debt equity should be below 1 otherwisethe loan giver would recall the loan amount. Being under pressure, it can be the case that to showa high shareholder's equity balance, the company manipulated the books that the income taxliability came to Rs. 87116 on a profit of Rs. 3059299. Also in comparison to previous yearretained earning balances, there in an unusual increase in the value of the retained earningsinspite of facing heavy 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 amount etc. Thus,such a case requires detailed examination of books (Boynton & Johnson, 2006). 4. INTEREST COVERAGE RATIOPARTICULARS201320142015NET EARNINGS 235919022913622972183INCOME TAX EXPENSE101108198201287116INTEREST EXPENSE8437983663808038
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