Fraud Risk Factors in System Replacement
Added on 2020-03-02
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AUDITING AND ASSURANCE
Answer to Question 1 :While performing the task of audit, an auditor's job is to determine the quality of the financialstatements prepared by the management of the client. The auditor is to determine the auditprocedures on the basis of his understanding of the entity, nature & business operations of theentity, timing & extent of procedures adopted, etc. Every procedure must be justified with whatassertion is being tested and the reason for adopting this procedure. Auditor's job is to obtainsufficient appropriate audit evidence on the basis of audit procedures. Such procedures includeInspection, observation, confirmation, reperformance, recalculation, and analytical procedureswhich are often applied in some combination (Basu, 2009). Analytical procedures are an important part of audit process as it helps an auditor to understandthe nature & operations of the business and to observe the key changes in the business. It helpsan auditor to identify the potential areas of risk where the auditor can further proceed with otheraudit procedures. As per the given case study of DIPL, various key ratios have been calculated to identify thechanges in the business and to analyze its financial position(Blank, 2014). The study of ratiosmakes the financial statements comparable with that of its prior results, budgeted results as wellas other company’s financial statements in the industry. The following observations are seenwhile calculating ratios of previous three years of DIPL:The company is under an obligation that it is to maintain at least 1.50 as current ratio and lessthan 1 as debt-equity ratio otherwise the loan given to it will be recalled. The company is doabiding by it but it can be the case that to maintain this conditions, it has shown its shareholdersequity amount high which is because of drastic change in the retained earnings inspire ofincurring heavy expenditure in 2015, for example, new adoption of IT system, takeover of a newcompany, heavy purchase of plant and equipment, etc. Also, it shows a tax amount of Rs. 87116on the profit of Rs. 3059299, which goes against the tax slab calculations (Boynton & Johnson,2006). Thus, the company might have manipulated its profits to show required ratios.
The cash ratio is being calculated instead of quick ratio as quick ratio excludes only inventorywhile cash ratio also excludes depreciation which is actually a non-cash expense thus,determining the ready cash available within the company. DIPL's cash ratio was 0.89 in 2013 butit showed an improvement in 2014 by having 1.00 which means that the company had enoughcash available to pay its short term obligations (Cahill & Kane, 2011). However, in the currentyear, the cash ratio reduced by almost 8% showing that the company's cash in hand reducedinstantly and that the short term obligations cannot be paid so frequently if in case it has to bepaid.The return on assets ratio measures how efficiently a company is using its assets to convert itinto profits and revenues. It is important for both the management & investors to know thereturn the company is earning as the major investments of a company are in its assets. However,in this case, the return on assets is decreasing every year,that is, from 18.25% & 14.41% to
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