Audit, Assurance and Compliance Report

This report presents a detailed audit analysis of DIPL, focusing on financial statements, ratio analysis, and inherent risks. It identifies key fraud risk factors and their implications on financial planning and audit processes. The findings suggest a decline in operational efficiency and highlight the need for improved corporate governance to mitigate identified risks.

Audit, Assurance and Compliance

Table of Contents
Introduction:....................................................................................................................................3
Extraction of crucial financial information-Ratio Analysis.............................................................3
Impact of crucial financial information over financial planning:....................................................5
Inherent risk factors associated with the business operation of DIPL:............................................6
Identification of the two key fraud risk factors:..............................................................................8
Impact of the risk factor over Audit:.............................................................................................10
Conclusion:....................................................................................................................................10
Reference:......................................................................................................................................11

Introduction:
This assignment represents how an auditor digs in to the financial statements of the company to
extract crucial information regarding the operational efficiency of the company and also the
possible anomalies that are taking place in to the activities of the company(Christensen et
al.,2012). In this assignment an audit report has been prepared to identify the accounting
accuracy with respect to the major items of the financial statements in order understand the
financial health of the company and also to identify the areas where possible fraud can happen.
Extraction of crucial financial information-Ratio Analysis
DIPL-Ratio analysis
year 2013 2014 2015
Printing
Industr
y bench
mark
ratios
(Gleeson,
2017) Comments
Items
Current Assets 5385938 7509150 9600929
Current Liability 3780000 5120250 6397500
Gross Profit 6004500 6079500 6604500
Net sales
3421200
0
3769950
0
4345950
0
Income from operating
activities 6780000 7230000 8308088
Net income before interest and
tax
3454650 3357037 3867337
Net Assets
9150000 1078365
0
1225049
1
Debt 7500000
Equity
9150000 1078365
0
1225049
1
Interest expense 84379 83663 808038

Ratios
liquidity ratio
current ratio[current asset
/current liability]
1.424851 1.466559 1.500731 1.53-1
On an average the DIPL
has 1.4 units of current
assets for paying 1 unit of
current liability, but the
industry standard
requires that a business
in printing industry
should have 1.53 units of
current assets for each
units of current
liability(Higgins, 2012)
Profitability ratio
Gross Profit Margin[gross
profit/net sales] 18% 16% 15%
Gross profit earned out of
every dollar of revenue is
declining over time
Operating Profit
Margin[operating profit/net
sales] 20% 19% 19% 15.63%
Though the operating
profit earning out of
every dollar declining
over time, but still it is
above the industry
standard
Return on Asset[Net income
/total asset] 38% 31% 32%
percentage of income
generated out of total
asset declining over time
Capital structure ratio
Debt/Equity 0 0 0.61222 2.4-1
There was no presence of
the interest bearing
liabilities in 2013,2014,In
2015 some amount of
interest bearing liabilities
has been generated
Debt /Asset ratio 0 0 0.61222
The interest bearing
liabilities are not
recognized as
debt ,Therefore DIPL
appears as a company
that only runs on equity
capital
Debt servicing ratios
Interest coverage
ratio[EBIT/Interest expenses]
40.94206 40.12571 4.786083 ratio declined drastically
in 2015,implies sudden
huge increase in the debt
burden of the company

has increased suddenly
Table-1: DIPL-Ratio analysis
The key findings that are extracted from the above ratio analysis are as follows:
 The current ratio of the company has increased from 1.4 to 1.5 during the period 2013-
2015.But the current ratio of the company is still below the benchmark ratio of the global
printing industry.
 The gross profit margin ratio of the company has declined from 18% to 15% during the
period 2013-2015.This indicates that the gross profit generation capacity out of the sales
revenue earned is declining over period for the business. This indicates that the cost of
goods sold by the company is increasing over time
 The operating profit margin ratio of the business has declined from 20% in 2013 to 19%
in 2015.This indicates a deteoriation in the operational efficiency of the company.
However the ratio of the business is still better with respect to the bench mark ratio of the
global printing industry (15.63%).
 The Return on Asset Ratio has declined from 38 %( 2013) to 32 %( 2015); this describes
that the income generation capacity out of the total asset has declined steadily for the
company over years(Costello, 2011)
 The debt-equity ratio and the debt-asset ratio of the company describes that up to 2014
DIPL was a solely equity based company. In 2015 the company has acquired huge
amount of interest bearing loan probably due to reduced capacity of generating profit
&income from assets in possession and sales revenue earned by the company(McCue and
Nayar, 2009).
 The interest coverage ratio describes that it has reduced drastically from 40.94(2013) to
4.8(2015) as the company borrowed huge amount of loan in 2015.This indicates the weak
strength of the current operating income of the company for servicing the interest bearing
liabilities of the company.

Impact of crucial financial information over financial planning:
On the basis of the above findings the following measures will be taken while making the future
financial plans:
 The holding of liquid asset of the company should be enhanced and new investments will
be done in such a way so that the business is left with sufficient liquid assets that can be
readily converted in to cash for repaying the shorter liabilities that are to be paid within
one year from 30th June,2015
 The business should work on enhancing the operational efficiency of the company as
well as the work force before going in to any new venture.
 Any new investment decisions should be taken while considering the fact that business
has bear the burden of a loan of 7.5 million for which they have to maintain a strong
current ratio of 1.5
 The company should strengthen their debt collection mechanism so that the provision of
doubtful debt can be reduced to a great extent and the revenue earning mechanism of the
company can be enhanced substantially.
 In order to bring transparency inventory should be valued on FIFO basis as it is revealed
in the auditors note that there is much volatility in the current method of inventory
valuation.
 To avoid any kind of fraudulent activity and to ensure compliance with the applicable
accounting standard revenue earned from sale of E-book will be recognized as per the
stage of completion
Inherent risk factors associated with the business operation of DIPL:
Risk-1
Completion of ordered publishing job within the quick turnaround time:

DIPL is generally involved in printing of books, magazines and advertising materials that are
ordered by the clients who are mainly from the publishing, educational and advertising
industries. Once the order is placed and confirmed by the client, then the accounts department of
DIPL check the credit record of the client and if there is no problem then the business has to
deliver the job within the predefined time limit given by the client. The time with in which the
publishing job has to be completed often appears to be quiet short and any failure in delivering
the job on time or a delivery of an erroneous job will be considered as a breach of trust or fraud
on behalf of the ordering client for which DIPL may lose the business reputation or may end up
paying heavy financial penalty(Bushman and Williams, 2012). Thus there appears a high risk
of failure if DIPL accepts a publishing order without making the proper calculation regarding
whether the available resources are sufficient for completing the ordered job in time or not.
The impact of this risk is that if an order is cancelled then the business will not only lose their
reputation but there is a huge scope of material misstatement. Because when a certain amount
of resources are sanctioned for an order, on cancellation of the order those partially unutilized
resources may wrongfully will not be accounted with respect to the inventory and this will lead
to erroneous valuation of inventory as well as mis-statement of asset in the balance sheet.
More over if the cancellation of order is not recorded properly then there lies a possibility that
the cancelled order may worn fully be included under credit sales which may inflate the revenue
earning of the company
Risk-2
Valuation of raw materials inventories at an average cost is another risk factor inherent to the
nature of operation of DIPL.DIPL is involved in a business where it is essential that predefined
jobs are to be completed with a in the limited time. Therefore in order to maintain an undisturbed
production process it is essential that the business should keep up-to-date their required stock of
inventories and should also keep a tap on the required cost of purchasing the inventories that
accounts the maximum share of the total expense made by the business. But if the inventories are
valued at average cost when the actual cost of inventories are much below the average cost then
such valuation will lead to wrong estimation regarding the expenditure that has actually been
incurred for acquiring the inventories(Leung and Sircar, 2009). Thus miscalculation of inventory

acquiring cost is a huge risk in itself as it can lead the business to operate out of budget at any
point of time especially when huge orders are placed to the business.
The impact of this risk is that there is a possibility of erroneous recording of expenditure amount
under the head of “inventory purchase” in the profit and loss statement and possible error may
also take place in case of recording the amount with respect to the “cost of goods sold” in the
balance sheet. Thus this risk may lead to the above mentioned material misstatements in the
financial statements as well as financial reports.
Identification of the two key fraud risk factors:
Fraud Risk Factor-1
Year 2013 2014 2015
Accounts
Receivable
s
248250
0
4320000 507330
9
Account
Receivabl
e (As
stated by
auditor)
264750
0
453000 531330
9
Gap 165000 -3867000 240000
Inventorie
s
225618
8
2671362 418050
0
Inventory
(As stated
by
auditor)
236250
0
2797238 418050
0
Gap 106312 125876 0
Table-2: Fraud Risk Factor-1
The above table-2, describes that there is a substantial difference between the numerical values
that has been stated in the financial statements & the statements made by the auditor after
making the financial audits(Jans et al.,2010).
In 2013 the balance sheet of the business reported the amount of “accounts receivable” by
165000 units less compared to what stated by the auditor. In 2014 the balance sheet reported the
amounts of accounts receivable by an amount which is higher than the respective statement of

the auditor by an amount of 38, 67,000.Again in 2015 the balance sheet accounts statement with
respect to the accounts receivable is lesser by an amount of 2, 40,000 with respect to what has
been stated by the auditor. Thus it can be seen that in each year from 2013-2015 there is an
anomaly with respect to the amount that has been reported against the head accounts receivable
as per balance sheet and as per the audited amount as presented by the auditor. Therefore it
should be suspected that DIPL is susceptible to the fraudulent accounting as risk identified by
the differences in the report of balance sheet and the report of the auditor with respect to
“Accounts receivable”.
Again discrepancy can be observed with respect to the amount reported against “inventory” in
the balance sheet and the amount reported by the auditor. In 2013 the balance sheet amount of
“inventory” is less by an amount of 1, 06,312 compared to what stated by the auditor, in 2014 the
balance sheet amount of inventors is less by an amount of 125876 compared to that of auditor.
However in 2015 both the reported amounts with respect to the auditor as well as balance sheet
match for inventory(Norman et al.,2010).
Therefore it should be suspected that DIPL is susceptible to the fraudulent accounting risk as
identified by the differences in the report of balance sheet and the report of the auditor with
respect to “Accounts receivable” and inventory. The above inspection reveals a crucial fact that
the accounting discrepancy or inaccurate accounting has taken place almost each year under
consideration [2013-2014] with respect to the two most important items of the balance sheet
namely “Accounts receivable” and “inventory”. When an accounting error with respect a
particular item is repeated each year then it should be considered as an act of deliberate error or
fraud and therefore it can be said that DIPL is exposed to accounting fraud risk and the
management of the business should take some preventive measures for protecting the company
from such risk.
Fraud Risk Factor-2
Another major misstatement can be observed in the balance sheet with respect to the description
of the capital structure i the year 2015.As per the finance information of the business in 2015
DIPL take an interest bearing loan of 7.5million from BDO Finance Ltd but still the balance
sheet of the company represented the entire asset of the company in the form of equity. This can

be considered as deliberate act of omission or fraud which has been done to show that IDPL is a
financially healthy company and can efficiently run without taking any interest bearing
loan(Brazel et al.,2009). This risk has been identified while ratio analysis has been done and both
values of debt-equity ratio and debt-asset ratio appear to be same [0.61] for the year 2015.Thus it
can be seen that DIPL is exposed to fraud risk of misrepresentation of capital structure which
is often done to attract the investors by concealing the real financial condition of the business.
Impact of the risk factor over Audit:
Identification of these possible fraud risk factors will make the audit process more detailed and
stringent. As presence of any fraud will do long term harm to the business.Thus now it is
recommended that a further deep audit should be conducted for identifying the other operational
malfunctions that may have taken place in the business and thus hampering the financial
performance of the business(Soh et al.,2011).
Conclusion:
The above assignment describes a deeper analysis of the financial statements as made by the
auditor can catch every progress or deteoriation in the financial health of the company as
described above. The ratio analysis reveals that the declining gross profit as well as operating
profit generating efficiency of the business out of the sales revenue earned when the company is
moving from 2013 to 2015(Hodgdon et al., 2009).The ratio analysis also reveals that the
business is exposed to the risk of misrepresentation of capital structure in terms of the financial
statements so that investors consider this company as an attracting one for investment. In the
context of the above revelation it can be recommended that rigorous corporate governance
should be practiced by DIPL for protecting the business from the risk of the identified frauds and
the same time new strategies will be formed for enhancing the operational efficiency of the
company.

Reference:
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