Audit Assurance 12 Report on Audit Assurance and Compliance

This report provides a comprehensive analysis of audit assurance and compliance, focusing on Double Ink Printers Ltd (DIPL). It begins by applying analytical procedures to DIPL's financial reports over three years, explaining how the results influence audit planning decisions. The report then identifies inherent risk factors arising from DIPL's business operations, such as copyright challenges and author grants, and explains their potential impact on material misstatements. Finally, it examines fraud risk factors, including incentives and opportunities, and discusses how these factors affect the conduct of the audit. The report covers various financial ratios, copyright issues, privacy concerns, and the effects of market competition on audit procedures, offering insights into the complexities of financial auditing within the publishing industry.

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Report on Audit Assurance and Compliance Risk

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Table of Contents
Introduction:...............................................................................................................................4
Question 1:.................................................................................................................................5
Apply analytical procedures to the financial report information of DIPL for the last three
years. Explain how your results influence your planning decisions for the audit for the year
ending 30 June 2015...................................................................................................................5
Question 2..................................................................................................................................7
Identify two inherent risk factors that arise from the nature of DIPL’s business operations.
Explain why it is a risk and how it may affect the risk of material misstatement in the
financial report...........................................................................................................................7
Question 3: As part of your audit of DIPL for the year ended 30 June 2015, you are
considering the risk that fraud may have occurred..................................................................10
(a) Based on the background information for DIPL contained in the case, identify and
explain two key fraud risk factors relating to misstatements arising from fraudulent
financial reporting to which DIPL may be susceptible........................................................10
(b) Explain how the risk factors identified in (a) above would affect the conduct of the (a)
audit......................................................................................................................................11
Conclusion:..............................................................................................................................13
References................................................................................................................................14

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Introduction:
The basic propose lying behind the preparation of this report is to develop the understanding
on the audit assurance and compliance. This case problem is based on the organization of
Double Ink Printers Ltd (DIPL). This report will focus on analysis of DIPL financial reports
for the three years. At the same time, report also has a focus on the study of decision related
to planning of the audit in organization. On the other hand, this report also focuses on the
inherent risk factors in auditing. In this report, there is also a discussion on how inherent risk
factors affect the risk of misstatement in the financial reports. Finally, this case study focuses
on analysis of different fraud risk factors, which are related to the misstatements arising
through the fraudulent financial reports.

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Question 1: Apply analytical procedures to the financial report information of DIPL for
the last three years. Explain how your results influence your planning decisions for the
audit for the year ending 30 June 2015
Basically, the Double Ink Printers Limited is engaged in the business of printing of books and
magazines, advertising materials for different articles, trading in different books on the basis
of demand. The company use to print the exact number of books that it has received in its
orders from different customers. Company provides a fee of 5% of its revenue to the
publishers for publish its books. Short term turnover policy has followed by the organisation.
Apart from this, the company is also going to start its online portal in order to publish its
books and magazines (Collis and Hussey, 2013).
Analytical procedure can be defined as a set of methods and procedures that is used for the
purpose of analysing the approximate relationships between the financial and non-financial
aspect of data on order to evaluate the financial facts and findings of the company. They are
also done to find out deviations that are occurring due to other related information. Expecting
the existence of approximate relationship between various data provides the basic premise for
the application of analytical procedure (Lobo and Zhao, 2013).
There are four stages comprising the analytical procedures:
Developing an independent expectation’: This is the initial stage of analytical procedure.
Developing an expectation for recorded amount or data comprises this step. Every auditor is
required to develop an independent expectation about the data. Identification of relationships
between the financial and non-financial aspect of data can help the auditor in developing this.
Defining a significant variation’: Before proceeding the analytical procedure, the auditors
are required to develop a reasonable difference between expected data and the data provided

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by the company. This is necessary in appropriate application of the procedure and to remove
biasness from data.
Calculation of variances: This step is dedicated towards the calculating the differences
between the expected data and actual data. This should only do after applying the significant
amount of expected data. This should not be calculated without this application.
Analysing variations and interfering conclusions: This is the last step of the procedure.
This step is dedicated towards the analysing the variances that are computed in the previous
step and then drawing conclusions on the basis of them.
On the basis of the financial information given in this report, it can be said that the liquid
assets of the company has fallen this year as compared to previous two years. The value of its
long term assets increases two times that shows a good sign for the company. Along with
this, the liabilities of company also increases that shows a pressure on the assets of the
company. Current ratio of the company increases from 1.425 to 1.501. Quick ratio of the
company also increases from 0.828 to 0.847 which shows the better functioning of the
company. Operating profit of the company declines from 9.851 to 7.039 over the time which
shows the deficiency in the functioning of organisation. Net profit margin ration does not
vary and remains almost same at 0.84. Gross profit ratio of the company also goes on
declining which shows decline in operational efficiency. Capital employed ratio has
decreased from 3.739 to 2.200 which show leverage to capital. Trade receivables ratio has
also increased from 32.123 to 50.244 which show the increased debtor period. Debt equity
ratio has also increased from 0.413 to 1.134 (Saaty and Kearns, 2014).

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Question 2: Identify two inherent risk factors that arise from the nature of DIPL’s
business operations. Explain why it is a risk and how it may affect the risk of material
misstatement in the financial report.
Inherent Risk: Inherent risk is the term, which is pretended through mistake and exclusion
within a financial statement (Merna and Al-Thani, 2011). This is because of a factor, which is
not a failure of control. The situations, in which inherent risk is frequent to occur in financial
audit, are as below:
- when relations are complex
- In those situations that need high degree of decision making, keeping the financial
estimations in mind.
Inherent risk is a form of risk that represents the worst-case situation, when all controls are
botched. Auditors and predictors should look for inherent risk before studying the financial
statements. This should be done along with detection risk or control risk (Loughran 2017).
There are several types of risks associated with publishing companies like:
Copyright challenges: The copyright context is the most valuable assets of the book
publishers in the books. It is a copyright tool in the hands of companies. Besides this, it is
provided in the framework, which enables the publishers to control content. This term
permits them to earn money with selling books or licensing subsidiary right like book club,
serial, adaptation, merchandising or foreign translation (Song, 2011). Therefore, a type of
legal challenge with the context of patent context is challenge in order to learn that how to
understand, avoid or exploit infringement of copyrights. There are different types of
copyrights such as author grants, copyright licenses, copyright procedures, protecting against
infringement, internet and electronic uses. The expiry of patents of companies can also affect
the audit operations.

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Author Grants: The first step that lies with the publishing process is to order accurately to
acquire rights through the author. This could be done in the two ways. The mainly operator
publishers become exclusive licensees of every copyrights generated with their writers. On
the other hand, most scholastic or expert publishers, rather to be assignees of these
copyrights, thus obtaining a complete ownership concern. Although, from these variations,
almost every publisher is knowing the writers right in order to improve their copyrights when
their books withdraw of print or the publisher stop in order to utilize these rights (McElrath,
2013). Along with this, lot of publishers are required to allow the writers for the purpose of
retention of certain subsidiary rights like theatrical, television or movie and electronic rights.
Protection against Infringement: This is the one of the copyright forms, which assesses the
applying measures or guides individuals to encourage the proper use or non- infringement of
the rights of others. During the frequent writings, writers start having warrant, which their
works do not infringe third-party rights as well as at being required to indemnify publishers
for breach, publisher want like “tough love” provisions in order to force writers to take these
problems seriously. Normally, former writers take legal actions, which they hold someone
responsible for infringements as well as privacy violations, defamation or similar issues (Wei,
2012). Writers have to cooperate with publishers in identifying potential problems or helping
to resolve them in proceeds.
Privacy and Public issues: Writers put off the challenges in front of publishers to approach
through the sifting limits of the laws of publicity, privacy or libel.
Privacy Rights: The privacy right can be defined as the right of an individual to protect
his/her personal identity from unauthentic persons. Privacy is in the company that publishes
the magazines or newspapers can be related to identity of personal details of writers (Bridges,

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2017). In this, up-to- the- minute reporting may propel the disclosure of facts which should
be made public, including medical, financial and other highly personal information.
Publicity rights: It is directly associated with the right of publicity. Usually, the rights of
publicity prevent the commercial exploitation of the value of a personal name or likeness.
The publicity rights not only protect the celebrities or others, whose names or appearances
are real commercial, or value (Dreyfuss and Ginsburg, 2014). It also avoids the usage of
another name and likeness within advertising and trade without their permission.

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Question 3: As part of your audit of DIPL for the year ended 30 June 2015, you are
considering the risk that fraud may have occurred
(a) Based on the background information for DIPL contained in the case, identify and
explain two key fraud risk factors relating to misstatements arising from fraudulent
financial reporting to which DIPL may be susceptible.
There are two major types of fraud risk factors relating to misstatements arising from
fraudulent financial reporting.
Incentives related factor
 Prevailing of high degree of competition in the market results in falling down of the
profit margins
 Rapid changes in technology negatively hamper the functioning of an organisation
 Severe situations like insolvency, foreclosure may be created due to losses occurs in
operation of business
 Continuous occurrence of negative balances reveals the disability of business in
generating the revenues (Knechel and et al., 2016)
 Continuous falling in the level of demand may results in shut down of business units
in the economy
 Continuous amendments in statutory requirements often creates hurdles in the path of
effective business operations
 Companies may often requires the additional debt and equity
Opportunities Factor
 Ordinary course of business sometimes do not includes transactions specified to a
business

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 A firm holding strong position in terms of financial status or having the potential to
influence the other company’s decisions may involve in doing extra length
transactions.
 Judgements or uncertainties based on the forecast of revenues, expenses, assets and
liabilities are difficult to confirmations
 Differences in business culture and environment often creates problems in effective
operations when business is carried beyond the geographical boundaries of a country
 Having branches of a business on different countries generally faces the problems of
compiling with the tax norms of the country in which business is running
 Ineffective group of board of directors and committee of auditing may results in
development of misunderstanding about financial reports (Sadgrove, 2016).
(b) Explain how the risk factors identified in (a) above would affect the conduct of the
(a) audit.
When high degree of competition prevails in the market, then the whole segments of market
entirely depends on the side of customer. Customer is treated as king of the market in that
scenario. The companies are required to keep prices for their products below the level of
price designed by their competitive in order to increase their sales and capture a good portion
of market. If a company is continuously suffering from operational losses, then it may
become impossible for the company to survive in long run. This loss may occur due to fall in
demand, increase in cost of production. If company does not control its operational losses,
then, it might happen that the company can survive with the severe situations like shut down
of business (Bentley, et al., 2013). It also reveals the poor functioning and mismanagement
among the organisation.
Along with it, if taxation policies continuously amended by the government often creates
problem for companies in compiling with them. It is compulsory for a company by law to

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comply with the legal obligations of tax and audit. But continuous amendments may divert
the focus of the company from its main objective to the meeting with different revised rules
and regulations (Abdullatif, 2013). Taking finance from market and other sources may
increase the pressure of interest and repayments. Firms having potential to influence the
decisions of others may create problems for minor scale firms. Decisions taken on the basis
of past facts and findings without developing the premises for future sometimes may fails in
business case.

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Conclusion:
From the above discussion, it can be concluded that the inherent risk is the idiom that is the
pretended from mistake or exclusion within the financial statements. In this report, it is also
evaluated there are various types of inherent risk such as copyrights challenges and public or
private issues. On the other hand, it is also analyzed that various risks associated with
misstatement of frauds and the ways that are used to tackle them.

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References
Abdullatif, M., (2013) Fraud risk factors and audit programme modifications: Evidence from
Jordan. Australasian Accounting Business & Finance Journal, 7(1), p.59.
Bentley, K.A., Omer, T.C. and Sharp, N.Y., (2013) Business strategy, financial reporting
irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.
Bridges, K. (2017) The Poverty of Privacy Rights. US: Stanford University Press.
Collis, J. and Hussey, R., (2013) Business research: A practical guide for undergraduate and
postgraduate students, UK: Palgrave Macmillan.
Dreyfuss, R., and Ginsburg, J. (2014) Intellectual Property at the Edge: The Contested
Contours of IP Volume 22 of Cambridge Intellectual Property and Information Law. UK:
Cambridge University Press.
Knechel, W.R. and Salterio, S.E., (2016) Auditing: Assurance and risk, UK: Taylor &
Francis.
Lobo, G.J. and Zhao, Y., (2013) Relation between audit effort and financial report
misstatements: Evidence from quarterly and annual restatements. The Accounting
Review, 88(4), pp.1385-1412.
Loughran, M. (2017) How to assess inherent risk in an audit [Online]. Available at:
http://www.dummies.com/business/accounting/auditing/how-to-assess-inherent-risk-in-an-
audit/ (Accessed 16August 2017)
McElrath, T. (2013) Winning Grants Step by Step: The Complete Workbook for Planning,
Developing and Writing Successful Proposals The Jossey-Bass Nonprofits Guidebook Series.
US: John Wiley & Sons.

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Merna, T., and Al-Thani, F. (2011) Corporate Risk Management. UK: John Wiley & Sons.
Saaty, T.L. and Kearns, K.P., (2014). Analytical planning: The organization of system (Vol.
7), Netherlands: Elsevier.
Sadgrove, K., (2016) The complete guide to business risk management, UK: Routledge.
Song, S. (2011) New Challenges of Chinese Copyright Law in the Digital Age: A
Comparative Copyright Analysis of ISP Liability: Fair Use and Sports Telecasts. Netherland:
Kluwer Law International.
Wei, G. (2012) Industrial Design Law in Singapore Monograph Series. Singapore: Academy
Publishing.