Audit, Assurance, Compliance Report: DIPL Financial Analysis and Risks

This report provides a comprehensive analysis of an audit, assurance, and compliance case study focusing on the financial performance and risk assessment of DIPL. It begins by exploring the application of analytical methods, such as common sizing, benchmarking, and ratio analysis, to evaluate DIPL's financial statements and develop an effective audit plan. The report then delves into the identification of inherent risks, including those related to employee experience, environmental factors, and CEO succession, and their potential impact on the accuracy of financial reporting. Furthermore, it examines fraud risks associated with employee dissatisfaction and pressures to meet financial targets, highlighting potential misstatements and fraudulent activities. The analysis includes a detailed examination of financial ratios, such as solvency and current ratios, to assess DIPL's financial position. The report concludes with an assessment of the valuation of inventory and the implementation of a new IT system, providing insights into the complexities of financial auditing and risk management.

Running head: AUDIT, ASSURANCE AND COMPLIANCE
Audit, Assurance and Compliance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Answer to Question 1:.....................................................................................................................2
Answer to Question 2:.....................................................................................................................4
Answer to Question 3:.....................................................................................................................7
Answer to Part A:........................................................................................................................7
Answer to Part B:.......................................................................................................................10
References:....................................................................................................................................11

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Answer to Question 1:
The analytical method pertaining to the financial information of DIPL could enable in
preparing the audit plan. Such plan could be adjudged as a specific guideline, which is required
to be followed during the undertaking of audit. Specifically, this enables the assessor to maintain
the overall cost of audit at an effective level, which helps in minimising understanding with the
clients (Zureigat 2015). The analytical approach to the financial announcements of DIPL
indicates the procedure of information dissemination from the same. Such evaluation method
could be conducted by using a group of mechanisms. However, with the help of analytical
method of evaluating financial announcements, various financial analysts as well as accountants
could decipher information for enabling in arriving at crucial business decisions (Barr-Pulliam et
al. 2017).
The common sizing analytical method enables in assessing the financial announcements
to a common point of reference. As a result, the financial statements could be contrasted in
relation to various timeframe or in relation to various entities. The assessors could consider the
various item lines depicted in the financial report along with their method of reporting. For
instance, the method of registering items like assets, liabilities and owner’s equity in the financial
reporting of the organisation along with investigating digression from usual scenario (Bayer and
Cowell 2016). Benchmarking is considered as an analytical process and it could be used further
for the assessment of audit plan. The variance of the real financial declaration from the yardstick
enables in recognising the deviation and it assists in evaluating the reason of the identified
variance. Along with this, ratio analysis could be adjudged as an effective analytical method,

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which could be used for contrasting financial declarations coupled with the assessment of audit
plan (Bepari and Mollik 2015).
Explanation:
The outcomes of the planning decisions related to audit planning is influenced primarily
through the outcomes of analytical method to disseminate information from the financial reports.
The following ratios have been taken into consideration:
Particulars 2013 2014 2015
Solvency ratio 0.62 0.44 0.21
Profit margin 0.068 0.60 0.06
Current ratio 1.42 1.46 1.50
The above table signifies that the current ratio of DIPL has increased over the years. On
the other hand, the profit margin has been observed as fluctuating over the years. With the help
of this ratio, the net profit of an organisation could be compared with the overall revenues
generated (Bryce, Ali and Mather 2015). However, this could carry immense value to the
assessor in obtaining an overview of whether the expenditures are greater or lower and whether
the management of the organisation has the need to reduce budget and overall expenses of the
same. Any favourable or unfavourable change in the ratio could be utilised as a referential factor
to assess the soundness of financial condition of DIPL. For example, the solvency ratio
computed in the above table helps in depicting the favourable as well as unfavourable trends in
the overall financial position of the firm. In a similar fashion, the contrast of ratios over the years
would provide an insight of clearing both short-term and long-term obligations of the business.

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Hence, the auditors could gain an insight of the relative position of DIPL over the years along
with evaluating the factors leading to undesirable position of the organisation (Cason, Friesen
and Gangadharan 2016).
Answer to Question 2:
Various significant factors are inherent in auditing constituting of incidence of material
misstatements in the financial declarations of a particular entity. However, it is inherent that
there are various kinds of both systematic and unsystematic risks depicting the way towards
financial misstatements in the financial announcements of the organisations. In addition, the
identified risks might be because of financial and non-financial factors, which could
subsequently avert a particular entity in reflecting a fair view of the financial announcements.
According to Devos and Zackrisson (2015), the detected risks might be associated with various
risks of omission coupled with risks of various unthinkable errors for a particular bookkeeper.
Thus, it could be adjudged as the inherent risk arising from the business operations of DIPL.
Besides, the employees of DIPL are inexperienced and lack in proficiency, which have
escalated the overall inherent risk of the organisation. In addition, such lack of experience might
result in committing mistakes; thus, increasing the inherent risk. This is because the employees
form a significant part of the organisation and it is not possible for the firm to ensure its business
success and growth in future without effective employee contributions. The other important
factors contributing towards inherent risk could be classified into various sections like
environmental and external facets, material misstatements in past periods and false exercises
(Gani, Wijeweera and Eddie 2017). The environmental facets directing the way towards inherent
risk constitutes of rapid alterations where issues would arise associated with inventory valuation,

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intense competition in the market and lack of capital. Moreover, there is possibility of material
misstatements, which would direct DIPL towards inherent risk in the upcoming years.
The analysis of the present case of DIPL depicts the fact that the issues and complexities
related to CEO succession comprise of inherent risk as well. In essence, the CEO succession
could be adjudged as different, as the candidates are individuals (Graham 2015). Hence, the
commencement of the process without compliance with the strategy, late initiation of the
process, ineffective association of CEO and attrition of the staffs might result in inherent risk.
The assessment of the provided case implies that the implementation process of the IT
system has lead to certain issues. DIPL has employee shortage for managing the execution
process and installation along with conducting the reconciliation and testing primarily before
new arrangement at the end of the period. In addition, the initial assessment disclosed that
several transactions carried out were not recorded in an appropriate manner. Hence, this results
in material misstatement due to inherent factors, which is an error of omission in a particular
financial announcement (Gray et al. 2016).
The staff members of DIPL are needed to follow an appropriate sequence for registering
accounts receivable and ledgers associated with accounts receivable. Along with this, the bank
reconciliation is needed to be recorded appropriately as well (Milonas et al. 2016). Furthermore,
the registration of revenue obtained from e-book and considering the reprint of textbooks in
future could result in various inherent risks because of complexity associated with the process.
Thus, the valuation of inventory pertaining to raw materials at average cost is not appropriate, as
the average cost is well below the existing cost of paper.

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The detected inherent risks could be adjudged as the susceptibility of a specific assertion
in relation to the material misstatements and they are depicted briefly as follows:
Increasing burden on employees and management:
Due to the rising burden of work on the staffs of DIPL, it has resulted in inaccurate
bookkeeping. As a result, various attributes have happened that include the propensity in
encountering cash flows, poor liquidity and operating results (Mumford et al. 2014).
Error risk or wrong representation:
Reliability and intricacy are inherent due to risk associated with errors and
misrepresentation in a simultaneous fashion.
Integrity of the overall management:
As per the case study, the management of DIPL has lack of integrity and it is expected to
be ready for any loss of reputation in the business community.
Unusual pressure on management:
Often, it occurs that there is existence of incentives for the management. As a result, it
leads to misstatement in the financial announcements (Nalewaik and Mills 2016).
Nature of the business entity:
DIPL contributes to growth to major economic and competitive circumstances. In
addition, these facets might have influence on the inherent risk of the business entity for the
assessment of audit planning structure in an appropriate fashion.

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Answer to Question 3:
Answer to Part A:
In the words of Saad (2014), the fraud risk could result in severe losses of assets due to
fraudulent activities. The lack of motivation of the workforce due to additional work pressure of
the staffs could induce them to engage in various kinds of fraudulent activities. Along with this,
the expectations from the various groups of investors in reporting particular financial results or
specifically on the part of the management in achieving particular targets of performance could
result in increased fraud risk. Furthermore, strong pressure is exerted on the management of
DIPL to announce particular financial results in a bid for averting generating the guarantees.
The major types of risks that are identified in the context of the business operations of
DIPL are briefly classified as follows:
Types of risk Identification
Engagement of workforce in fraudulent
activities
The primary fraud risk that might take place
due to the business operations of DIPL is the
engagement of the workforce in fraudulent
activities because of greater level of employee
dissatisfaction. The provided case study
pertaining to the operations of DOPL states
that the board has exerted heavy pressure on
the organisation in acquiring a novel system of
accounting. Such additional pressure on the
staffs in conducting the installation process of

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the new information technology system for
accounting might result in fraud.
This signifies that the staffs might involve in
fraudulent behaviours and activities for
managing the process of reconciliation in an
ineffective fashion and accordingly, material
misstatements. The provided case depicts that
the ineffective management of the execution
process related to implementation of
information technology for the system of
accounting results in incorrect apportionment
of various transactions at the end of the period.
As a result, this might lead to severe loss
because of material misstatement and
fraudulent risk (DeFond and Zhang 2014).
Method pertaining to financial reporting Another fraud risk that might confront the
business operations of DIPL takes into account
the risk related to financial reporting fraud.
During certain situations, it has been observed
that there is additional expectation from the
external financiers or from the management.
Such expectation is to achieve the particular
targets of performance or other goals in order

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to qualify to obtain debt. As a result, there is
enhanced risk of incorrect financial
declarations. According to the balance sheet
statement of DIPL provided in the case study,
the net revenue of the organisation has
increased from the year 2103 to the year 2015.
Along with this, both the gross income and net
income of the organisation have increased in
tandem as well.
Furthermore, the current assets and overall
assets of the organisation DIPL have escalated
as well. However, the provided case signifies
that during the year 2015, DIPL has made a
loan acquisition of $7.5 million, the major part
of which has been obtained from BDO
Finance. Apart from this, the provided case
depicts that the loan obtained has a particular
agreement of loan requiring DIPL in
maintaining a current ratio of nearly 1.5 along
with debt-equity of below 1. This depicts that
such need might compel the organisation in
maintaining the financial ratio for acquiring the
credit terms. Hence, this might result in

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fraudulent activities, which could to lead
inaccurate depiction of the financial position.
As a result, the failure of the organisation in
maintaining the standard yardsticks could
make the organisation ineligible in acquiring
funds from BDO Finance.
Answer to Part B:
Based on the provided case study, it could be remarked that the method of valuation
associated with valuation of inventory of various raw materials at specifically average cost has
not been appropriate. This is because of the fact that the average cost has been considerably
lower in contrast to the existing paper cost. The risk of detecting fraudulent actions associated
with implementing the new system pertaining to information technology could be conducted by
monitoring various activities at various phases. The risk associated with financial reporting could
be identified by conducting dissection of the financial statements on the part of the assessors
along with reviewing the mechanisms of control over time (Stephenson et al. 2015).
Benchmarking is considered as an analytical process and it could be used further for the
assessment of audit plan. The variance of the real financial declaration from the yardstick
enables in recognising the deviation and it assists in evaluating the reason of the identified
variance.

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