Audit Assurance and Compliance Report: Financial Analysis of DIPL

This report provides an in-depth analysis of audit assurance and compliance for Double Ink Printers Ltd. (DIPL). It begins with an introduction to analytical procedures and their impact on audit planning decisions, using DIPL's financial data from 2013 to 2015 to illustrate trends in assets, liabilities, equity, and profitability. The report identifies inherent risk factors stemming from DIPL's business operations, including financial and audit risks, and assesses how these factors could lead to material misstatements. Furthermore, it explores two potential fraud activities, including those related to the CEO's performance bonus and management's manipulation of financial ratios to secure a loan. The report concludes with a summary of findings and their implications for audit planning, emphasizing the importance of understanding financial risks and fraud vulnerabilities in the audit process. The report uses information from the provided assignment solution.

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Table of Contents
Introduction:................................................................................................................................................3
Question 1...................................................................................................................................................4
Question 2...................................................................................................................................................6
Question 3...................................................................................................................................................8
A) Two Possible Fraud Activities:....................................................................................................8
B) Cause of fraud identified:...................................................................................................................8
Conclusion:...............................................................................................................................................10
References:................................................................................................................................................11

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Introduction:
The main purpose of this report is to develop the understanding and knowledge about the
analytical procedure for evaluating the impact of financial reports on the audit planning decision.
This report will provide preliminary analytical procedure of DIPL and it will provide information
about how the results will affect the planning decision of audit for the year ending. This report
will also provide details about the inherent risk factors that arise from the nature of DIPL’s
business operations and how that will affect the risk of material misstatement in the financial
report. At the same time, it will also discuss the two different fraud risks that may occur from the
business operation relating to misstatements from the financial reporting activities. It will also
represent the cause of the fraud in the financial reporting transactions in relation to business
operations of DIPL. It will also provide information about how the fraud will affect the planning
of audit.

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Question 1
DIPL (Double Ink Printers Ltd.):
Double Ink Printers Ltd. Print books, magazines and advertising material on a print demand basis
for publishing, educational and educational industries. Printing on demand means that publisher
can print the exact quantity ordered by retail outlets, rather than estimating in advance how many
books are required and often printing too many or too few. The average printing turnaround time
for DIPL is two business days for small order and for large order five to ten business days.
Analytical procedure:
This method enhances the efficiency of auditor in relation to audit of company financial
statements. Preliminary Analytical procedures involve the evaluations of the company financial
statements or information through measuring relationship between both financial and non-
financial data (Galuszka, et al., 2012). This procedure supports in planning, collecting the
evidence and final review of the audit work.
According to DIPL’s financial position statement, its total assets of 2013 was 12930000 that
increased in 2014 and in 2014 its total assets was 15903900 and in 2015 total assets was
26147991, it means its total assets are increasing continuously. Similarly its total liabilities are
also increasing, in 2013 its total liability was 3780000 which increased in 2014 and become
5120250 and in 2015 it was 13897500. It means the net assets of DIPL’s is also increasing in
2015 as compare to 2013 and 2014, the net assets of 2013 was 9150000, net assets of 2014 was
10783650 and in 2015 it was 12250491. Total equity of DIPL is also increased in 2015, where it
was 9150000 in 2013 and 10783650 in 2014 but in 2015 it was 12250491, this clearly shows the
increment in equity. According to income statement of DIPL, after deducting expenses from
revenues the profit before tax of 2013 was 3370271, 2014’s was 3273374 and the profit before

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tax of 2015 was 3059299. After deduction of tax the profit of 2013 was 2359190, 2014’s profit
was 2291362 and the profit of 2015 was 2972183, it means the profit of 2014 was low than 2013
but in 2015 its profit increased and the amount of profit was 2972183, this shows the growth of
DIPL. The profit of DIPL in 2015 is increases as compare to 2013 and 2015. In September
2014, DIPL acquired Nuclear Publishing Ltd. (NPL). DIPL acquired the business operations not
the shares of NPL and DIPL paying net assets of NPL. According to an article published in June
2015, NPL’s medical textbooks will become obsolete. If this article is right, then textbooks are
unlikely to be reprinted or used as textbooks at universities in the future, effectively making them
unviable as e-books. Each book of NPL had a high profit margin and had been used across the
world but it is converting into e-book that means DIPL will not earn high profit from the sale of
these books. During 2015, DIPL has entered into a 7.5 million loan from BDO Finance Ltd. The
loan has debt covenant’s requiring DIPL to maintain a current ratio of at least 1.5 and a debt to
equity ratio of less than 1. So this is also a challenge for DIPL and it is increasing its expenses.
During 2015, DIPL decided to invest in a new IT system that would fully computerized and
integrate all the current accounting processes across the organization, including integration into
the general ledger system. This IT system will help DIPL to control the operation and manage
the financial transactions of DIPL. According to William, the valuation of raw materials
inventories at average cost was no longer appropriate as the current cost of paper was
substantially above the average cost. It shows that the actual cost is higher than the average or
estimated cost. William also stated that DIPL’s printing presses had a potential maximum life of
30 years, it clearly shows that the operation of DIPL with existing machines will be continued.
So it can be said that the fluctuation in the performance effects the planning decision for the
auditing. The profitability of the company in year 2014 is decreased as compare to 2013 but in

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2015 it is increased this fluctuation effect the planning decision for the auditing in the
organization. Total equity of DIPL is also increasing continuously this shows the growth of
DIPL over the years. Every company wants to earn profit and want to report to the public and
shareholders and the profit of DIPL is increased in 2015 and has good growth which will effect
the auditing team. In 2014 profit was decreased this shows that the revision of previous audit is
needed. This kind of profit will make an auditor to mostly focus on debt, profitability and
efficiency.
Question 2
Identification of hazards and risk factors that could harm the business operations is called risk
assessment. It includes evaluation of risks associated with that hazard and determining
appropriate ways to eliminate the hazard or control the risk (Li, et al., 2014). These risk factors
may negatively affect the operations or the growth of the company. Risk assessment also helps in
planning of the audit. A risk assessment is a process of look at the workplace to identify those
things, situations, processes etc. that may harm. Two inherent risk factors that arise from the
nature of DIPL’s business operations are financial risk and audit risk.
Financial risk is that type of risk that has negative impact on the reliability of financial statement
and growth of DIPL. Credit risk, operating risk and foreign exchange risk are the part of
financial risk which may affect the risk of material misstatement of DIPL financial statement
(Brown, 2015). During 2015, DIPL has entered into a 7.5 million loan from BDO Finance Ltd. It
means DIPL needs finance that’s why it took a loan of 7.5 million. So the expenses of DIPL are
also increased because DIPL has to pay the interest on that loan. Development of new IT system
also increases the expenses of DIPL. There were not enough trained staff who can work on new
technology so this directly increasing the financial risk of DIPL. Along with this, operating risk

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also may arise as company not have inventory to fulfill the client order because company
provides the on demand services and the company purchases inventory (i.e. paper, ink and
binding materials etc.) from the Asian and Australia. It is a risk that company can record the
higher inventory into financial statement that may increase the operational costs of the company.
Along with this, credit risk can also increase the financial risk because debtor receivable turnover
time is increasing in every year this shows that the company is unable to collect the payment of
creditors. To show the company’s worth higher company can show less creditors than actual in
the financial statement of DIPL.
Apart from this, according to the provided information audit risk may be raised. Audit risk can
be raised because in January 2015, William Jackson was appointed as a new chief executive
officer (CEO) of DIPL. William has a great experience in printing business. Board of DIPL has
decided to provide remuneration package to William as performance bonus (Vona, 2011). But
this was decided that the company will provide bonus to William when the total revenue will
increased by 10% as well as net profit after tax of company should also increased by 10%.
Therefore, William can meet with the internal accounts and auditors and can convince them to
show the company’s growth and to increase the company’s revenue with 10%. In this way, CEO
and accountants can make the fraud in company’s accounts to get the financial benefits. It is also
possible that the internal auditing would not be effective to detect the material misstatement in
company accounts because auditor is working for four big audit firms and for two charted
accountants. So the reason behind the audit risk is the work pressure of auditor because the
auditor have so many work to do and handling four firms.

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Question 3
A) Two Possible Fraud Activities:
According to the given information about DIPL business operations, two possible frauds identified is that
fraud of CEO and the second fraud can be by the accounts management. Board of DIPL has decided to
provide bonus to CEO when both the total revenue and net income of company would increase by 10%.
So it is possible that CEO of company can do fraud with company by misrepresenting the company
expenses and revenues to get bonus. CEO can do fraud with the help of accounts managements also
(Cumming, et al., 2012). The second possible fraud can be conducted by DIPL’s management and
accounts to maintain the current ratio at least 1.5% to borrow the loan of 7.5 million from BDO Finance
Ltd.
B) Cause of fraud identified:
The new CEO of DIPL William Jackson can make the fraud because the board has decided to
provide bonus to the CEO when the total revenue and net profit after tax of company increased
by 10% and to get this performance bonus CEO can make fraud with the company. On the basis
of the provided information about the business operations of DIPL, the revenue of DIPL
increased in 2014 by 3,487,500 but in 2015 the revenue increased by 5,760,000. So this is clearly
shown that the increased rate of revenue is very high in 2015 as compare to 2015, this rate may
increased because of the fraud of CEO to get the performance bonus. Along with this, net profit
after tax in 2013 was 2,359,190 which was decreased in 2014 and 67828 and the net profit after
tax was 2,291,362 but net profit of DIPL increased in 2015 by 680,821 and the net profit in 2015
was 2,972,183. Based on this information, it is analyzed that the CEO of company make the
fraud with the company by showing the less expenses in accounts to show the growth in
company’s net profit so he can get the performance bonus. According to the financial statement
of company it is possible that company conduct fraud to get the loan of 1.5 million. It is because

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bank decided that if the current ratio of company would be at least 1.5 and debt to equity ratio
would be less than 1 than it will provide loan to company. Along with this the current ratio of
2013 was 1.42 and in 2014 it was 1.46 but in 2015 it would become 1.50 that is required for the
company to take loan from the bank. Therefore, company can conduct fraud in financial
statement through showing the higher current assets.

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Conclusion:
From the above analysis, it can be concluded that the analytical procedure described the
comparison between the data of year 2013, 2014 and 2015. From this report it is also concluded
that how the result of analytical procedure affected the audit plan. In addition to this, DIPL can
face the financial risk and audit risks based on the provided information that may affect the
reliability and accuracy of DIPL financial statements negatively. Along with this, the CEO of
company and management or accountant can make the fraud to get the benefit of performance
bonus and to borrow funds from the bank.

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References:
Brown, A. (2015) Financial Risk Management For Dummies. USA: John Wiley and Sons.
Cumming, D., Hou, W. and Lee, E. (2012) Impact of split share structure reform in China on
CEO accountability to corporate fraud. Unpublished Working Paper, University of York.
Gałuszka, A., Migaszewski, Z.M., Konieczka, P. and Namieśnik, J. (2012) Analytical Eco-Scale
for assessing the greenness of analytical procedures. TrAC Trends in Analytical Chemistry, 37,
pp.61-72.
Li, Z., Ma, Z., van der Kuijp, T.J., Yuan, Z. and Huang, L. (2014) A review of soil heavy metal
pollution from mines in China: pollution and health risk assessment. Science of the Total
Environment, 468, pp.843-853.
Vona, L. W. (2011) The Fraud Audit: Responding to the Risk of Fraud in Core Business
Systems. USA: John Wiley and Sons.