Audit, Assurance and Compliance Case Study: DIPL (Semester 1, 2023)

This assignment presents a comprehensive audit case study on Double Ink Printers Ltd. (DIPL), focusing on the application of audit policies and compliances. It begins with an introduction to analytical procedures and their purpose in auditing, followed by the application of these procedures to DIPL's financial data for the year ending June 2015. The study includes a detailed risk assessment of DIPL's business operations, identifying inherent risks such as inventory and financial risks. Furthermore, it explores potential fraud risks related to revenue recognition and CEO incentives, and their impact on audit procedures. The assignment concludes with an analysis of financial ratios and a discussion of how audit strategies should be adapted to address the identified risks and potential misstatements within DIPL's financial statements.

Audit, Assurance and Compliance 1
Audit, Assurance and Compliance
(A case study on Double Ink Printers Ltd)

Audit, Assurance and Compliance 2
Table of Contents
Introduction......................................................................................................................................3
Question 1 Applying preliminary analytical procedure for conducting audit.................................4
Question 2: Risk assessment of business operations of DIPL.........................................................9
Question 3:.....................................................................................................................................11
(a) On the basis of background information of DIPL there are two possible risk factors to
generate fraud related to misstatements.....................................................................................11
(b)Direct impact on the audit procedure of company due to risk factors determined in DIPL. 11
Conclusion.....................................................................................................................................13
References:....................................................................................................................................14

Audit, Assurance and Compliance 3
Introduction
This assignment is undertaken for the purpose of understanding the requirement and compliance
of audit policies for an organization. This whole study is concerned about the audit of Double
Ink Printers Ltd based on the information given in the case study. On the basis of financial
information given in the case study about DIPL an analytical procedure will be applied for
conducting audit. From the results of analytical procedures risk assessment will be completed
and planning will be done for conducting audit for the year ending June 2015 of DIPL. With the
help of audit policies and compliances major risk factors that may causes fraud will be identified.

Audit, Assurance and Compliance 4
Question 1 Applying preliminary analytical procedure for conducting audit
On the basis of background information and financial report given in the scenario an analytical
procedure is applied for the audit of Double Ink Printers Ltd. DIPL is a printing manufacturing
company which prints advertising materials, books and magazines or journals on the demand of
advertising, publishing and educational institutions. Its whole operation is based on the demand
of customers that how much to produce and how much to supply not on forecasting basis. DIPL
also provide online facility to its readers with the help of DIPL’s website for the purpose of
increasing income.
Definition and purpose of analytical procedures:
Auditing Standard ASA 520 issued by the AUASB (Auditing and Assurance Standards Board)
for Analytical Procedures in perspective of the audit compliance and the strategic planning done
by the auditor. Analytical procedure can be defined as the process of analysis of financial
information and evaluation of historical information based on the financial and non financial
records of a company (Khansalar, et al., 2015). Analytical procedures help the auditor in
assessment of risk and evaluation of financial statement and draw the conclusions at the last
stage of the audit procedure.
The main purpose behind the use of analytical procedures is that data should be interrelated to
each other and relationship between information of two years should exist in future irrespective
of the contrary situation (Knechel and Salterio, 2016). Along with this there are three main
purposes behind the use of analytical procedures are as follows:
1. Analytical review at preliminary level: In this stage analytical reviews are executed to
get an understanding of the environment and operation of DIPL. With the help of this review risk

Audit, Assurance and Compliance 5
assessment will be done by auditor in order to find out the timing, process of audit and strategy
for future audit.
2. Analytical procedure at substantial level:
This procedure is useful for the further assessment when audit is conducted at more effective
level in DIPL. This method is useful to reduce the error in financial statement and risk level.
3. Analytical review at final level:
Overall analysis of financial statement is conducted at the closing stage of the audit process to
evaluate whether the information is reliable with the nature and operation of DIPL (Plumlee, et
al., 2014). This process is applied when any indiscretions or dissimilarities are found in the
financial statement.
Planning and strategy for audit for the year ending June 2015 on the basis of analytical
procedures
The main objective behind the application of analytical procedures is to develop the strategy and
planning process for audit. It helps in find out the time for audit and facts, figures required for
risk assessment. To avoid the misappropriation in results of the given financial information
various step are required for effective audit.
Know about the client and identify audit planning at initial level: On the basis of given
information audit is conducted for the Double Ink Printers Ltd. All the information should be
disclosed in front of auditor about the business (Jans, et al., 2014). An engagement will be signed
from the client to develop the understanding between both. The main reason of conducting audit
is new CEO is appointed in the DIPL and set up a new department for internal audit and external
audit.

Audit, Assurance and Compliance 6
Understand and analyze the business and operation of client: DIPL is a printing company
prints magazines, books and journals for the different education institutions and advertising
agencies. 50% of procurement of ink and paper material is from Australia and 50% of the
materials from Asian sources. Various new processes are adopted by DIPL such as New IT
system and appoint of new CEO and acquisition of NPL (Nuclear Publishing Ltd).
Assessment of business risk: There is different type of risks associated with the DIPL are
finance risk, political risk, economic risk, internal control risk and risk of misstatement of
materials (Coetzee and Lubbe, 2014).
Conducting preliminary analytical procedures: This step is useful for conducting the
analytical procedure for initiating the audit planning. All the financial statement, cash statement
will be checked by auditor to know the overall position of DIPL. On the basis of given statement
Cash position in the year 2013, 2014 and 2015 is 64647250, 517788 and 347120 respectively. It
shows that cash position of DIPL is decreasing in year 2015. Total assets of DIPL are 12930000,
15903900, 26147991 and total liabilities of DIPL are 3780000, 5120250, 13897500 in year 2013,
2014, 2015 respectively. From the above information it can be analyzed that assets are increased
with double rate in 2015 and liabilities are also increased with double rate in 2015 which is not
good for DIPL.
Determine the purpose and timing of analytical procedures: Analytical procedures are
completed in three parts as initially in the development and planning stage and then in the
substantial stage and finally in the last stage of audit process (Leung, et al., 2012). Appropriate
method for the business of DIPL is comparison of data with the previous year’s data.
Evaluate the financial ratios and analysis of financial statement: In this last stage of audit
planning process financial ratios of DIPL will be calculated. With the help of this, measurement

Audit, Assurance and Compliance 7
and analysis of DIPL performance will be done. Evaluation of financial ratios from the given
financial statement is as follows:
Ratios which show ability of paying short term debt:
Current Ratio= Total Current Assets
Total Current Liabilities
Quick ratio=Total current assets – stock− prepaid expenses
Total current liabilities
2013 2014 2015
CR= 53,85,938
37,80,000 CR= 75,09,150
51,20,250 CR= 96,00,929
63,97,500
=1.425 =1.466 =1.5
QR= 53,85,938−22,56,188
37,80,000 QR= 75,09,150−26,71,362
51,20,250 QR= 96,00,929−4180500
63,97,500
=0.828 =0.945 =0.847
From the above table it can be said that current ratio increased in 2015 that is 1.5 which is an
ideal ratio. Quick ratio remains increasing and decreasing throughout the years. It shows that
ability of DIPL to pay its short term debt is good and having efficient liquidity position (Babalola
and Abiola, 2013).
Ratio which show ability of paying long term debt:
Debt ¿ Equity Ratio= Total Liabilitie s
Total Equity
2013 2014 2015
¿ 37,80,000
91,50,000 ¿ 51,20,250
1,07,83,650 ¿ 1,38,97,500
1,22,50,491
=0.41 =0.47 =1.13

Audit, Assurance and Compliance 8
From the above table it can be said that debt to equity ratio is increased in 2015 which is 1.13. It
shows that liabilities are increasing with double rate and equity is not increasing with that pace.
So, it means company is not in good position to pay its long term debt.
Ratios which show profitability of DIPL:
Percentage of Gross profit = Gross profit
Tot al revenue∗100
Net profit Margin Ratio= Net profit
Total Revenue ∗100
2013 2014 2015
GP= 6004500
34212000 GP= 6079500
37699500 GP= 6604500
43459500
=17.55 =16.12 =15.19
NP= 23,59,190
34212000 NP= 22,91,362
37699500 NP= 29,72,183
43459500
=6.89 =6.07 =6.83
From the above table it can be concluded that percentage of gross profit is decreased in the year
2015 which is 15.19, is an unadjustable situation for the company. Net profit of the DIPL is
increased in the year 2015 that is 6.83 which is good for the company. This will create a situation
which forces an auditor to do comprehensive planning (Vogel, 2014).

Audit, Assurance and Compliance 9
Question 2: Risk assessment of business operations of DIPL
Inherent risk: Inherent risk can be defined as the chances of wrong or deceptive information in
financial statements due to the lack of internal control of management and can be due to various
external factors (Hopkin, 2017). Some examples of inherent risk are such as use of large data
approximation and use of those financial instruments which cannot generate clear picture of
business. Inherent risk is the important part of audit risk which cannot be simply avoided from
the financial statement.
In the DIPL there are two type of inherent risk exist such as inventory risk or financial risk.
Financial risk is the risk because it covers all type risk such as interest rate risk, debt risk etc. In
the financial report it can generate the occurrence of material misstatement as to show the better
finance position of the company (PCAOB, 2017). While calculating the liquidity ratios of the
company it can analyzed that current ratio is 1.5 which shows company have enough fund to pay
its short term debt. But company does not have enough funds to pay its long term debt because
its liabilities are increasing with double rate and equity is not increasing with that pace. So,
company cannot generate enough funds to pay its long term debt and it may show false
information related to equity balance or can manipulate the management to create high liquidity
position in the market and to show the debt to equity ratio of less than 1.
One more risk is arising from the nature of DIPL’s business operations is the inventory risk.
Inventory risk is the major inherent risk for a business operation if its inventory becomes
outdated (PCAOB, 2017). DIPL generally does 50% of procurement of ink and paper material is
from Australia and 50% of the materials from Asian sources. From the given information it can
be analyzed that DIPL valued its raw material at average cost and to cover from the loss of
reduction in value of old inventory an allowance for outdated stock shown in last year account.

Audit, Assurance and Compliance 10
Inventory of DIPL is increased with twice rate and allowance for obsolete inventory is also
increased but written back. So, company can record higher amount of stock to show better
position in the market and can increase the amount of allowance for outdated inventory can be a
part of material misstatement.

Audit, Assurance and Compliance 11
Question 3:
(a) On the basis of background information of DIPL there are two possible risk factors to
generate fraud related to misstatements
On the basis of information given in the case study it is identified that for the purpose of
uploading the e-book on the website of DIPL an annual fee is charged by DIPL from its
publishers as a storage fee. This fee payable by the publishers in advance for 12 months but
revenue is recognized and recorded in the books on the date of first book download when fees
are invoiced. Another risk factor identified is that new CEO (chief executive officer) has been
appointed from January 2015. It is remuneration policy of DIPL is that CEO will get
performance bonus on the basis of achieving 10% growth in revenue and net profit after tax.
CEO also recommended for appointing new audit team for DIPL business which directly shows
that any fraudulent or misstatements can occur to get higher bonus
(b)Direct impact on the audit procedure of company due to risk factors determined in
DIPL
Both the fraudulent activities and risk factors identified above will have direct impact on the
audit procedure for business operation of DIPL. To avoid the misappropriation in the results of
given financial information various strategy have to be followed by auditor (Ruhnke and
Schmidt, 2014). Evaluation of financial ratios and analysis of financial statement is required and
proper facts and figures will be analyzed. From the given financial information it can be
analyzed that revenue in 2015 that is 4,34,59,500 increased with double rate as compared to the
increased in 2014. Net profit after deducting taxes also increased with higher rate in 2015 while
it is decreased in 2014. This all facts show that any wrongful information or misstatements
occurred in DIPL business activities to get higher amount of bonus by the CEO. Recording of E-

Audit, Assurance and Compliance 12
book storage fees in the month of fees are invoiced not at the time when fees are taken by DIPL
in advance for 12 months. This recording of storage fees also increased with higher rate in 2015.
This all wrongful information required to do proper planning for audit of business activities of
DIPL (Cohen, et al., 2017).

Audit, Assurance and Compliance 13
Conclusion
On the basis of overall discussion about the case study and audit compliances it can be
determined that an organization should have proper internal audit department. Efficient manager
and effective audit department is helpful in finding out the risk factors which is harmful for a
business. To generate the better position in the market an organization should not be record any
false information in the books. Material misstatements and activities causing fraud will create the
loss of goodwill in future.

Audit, Assurance and Compliance 14
References:
Babalola, Y.A. and Abiola, F.R., (2013) Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), pp. 132-137.
Coetzee, P. and Lubbe, D., (2014) Improving the Efficiency and Effectiveness of Risk‐Based
Internal Audit Engagements. International Journal of Auditing, 18(2), pp. 115-125.
Cohen, J., Krishnamoorthy, G. and Wright, A., (2017) Enterprise risk management and the
financial reporting process: The experiences of audit committee members, CFOs, and external
auditors. Contemporary Accounting Research, 34(2), pp. 1178-1209.
Hopkin, P., (2017) Fundamentals of risk management: understanding, evaluating and
implementing effective risk management. UK: Kogan Page Publishers.
Jans, M., Alles, M.G. and Vasarhelyi, M.A.,(2014) A field study on the use of process mining of
event logs as an analytical procedure in auditing. The Accounting Review, 89(5), pp. 1751-1773.
Khansalar, E., Dasht-Bayaz, M.L. and Zarei, J., (2015) Influential factors on analytical methods
in external audit. International Journal of Economics and Finance, 7(11), pp. 76-83.
Knechel, W.R. and Salterio, S.E., (2016) Auditing: Assurance and risk. UK: Taylor & Francis.
Leung, P., Coram, P. and Cooper, B. (2012) Modern Auditing and Assurance Services. AU: John
Wiley & Sons.
PCAOB (2017) DISCUSSION AMONG ENGAGEMENT PERSONNEL REGARDING THE
RISKS OF MATERIAL MISSTATEMENT DUE TO FRAUD. [Online]. Available at:
https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_12.aspx (Accessed: 17 August
2017).

Audit, Assurance and Compliance 15
PCAOB (2017) Identifying and Assessing Risks of Material Misstatement. [Online]. Available at:
https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_12.aspx (Accessed: 17 August
2017).
Plumlee, R.D., Rixom, B.A. and Rosman, A.J., (2014) Training auditors to perform analytical
procedures using metacognitive skills. The Accounting Review, 90(1), pp. 351-369.
Ruhnke, K. and Schmidt, M., (2014) Misstatements in financial statements: The relationship
between inherent and control risk factors and audit adjustments. Auditing: A Journal of Practice
& Theory, 33(4), pp. 247-269.
Vogel, H.L., (2014) Entertainment industry economics: A guide for financial analysis. UK:
Cambridge University Press.