Case Study: Audit of Double Ink Printers Ltd (DIPL) - HI6026

This case study analyzes the audit of Double Ink Printers Ltd (DIPL), focusing on the audit planning process, risk assessment, and fraud risk factors. The assignment begins with an overview of preliminary audit procedures, emphasizing their importance in understanding a company's financial and non-financial aspects. It then delves into the specific context of DIPL, a print-on-demand company, highlighting key areas for audit scrutiny such as inventory valuation, cash and accounts receivable balances, fixed assets, liabilities, revenue recognition, and expenses. The case study further explores risk assessment, particularly inherent risks related to e-book revenue, fixed assets, changes in key personnel and IT systems, and cash receipts. Finally, it addresses fraud risk factors, identifying potential vulnerabilities in cash receipts, inventory management, and the implementation of a new IT system. The student emphasizes the need for auditors to develop comprehensive audit plans to address these risks and ensure the accuracy of financial reporting.

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Word Count: 1958
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Date: 16 August 2017 Reference Style: HARVARD
Case Study on Double Ink Printers Ltd (DIPL)

Assessment Item 1: Case Study on Double Ink Printers Ltd (DIPL) Student Name
Table of Contents
Question 1……………………….….…………………………………………………………....6
Question 2….………………….……………………………………………………….….…….8
Question 3……………………………………...…………………………………….….…...…15
References.……………………………………………………………………………….....…...21
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Assessment Item 1: Case Study on Double Ink Printers Ltd (DIPL) Student Name
Question 1:
For conducting an audit of the company in efficient and appropriate manner an auditor must
prepare a proper audit plan for understanding nature, timing and extent of every transaction
while conducting audit procedure of the company. Preliminary audit procedure is the most
important tool of auditing which guides an auditor to understand not only financial aspects but
also all the non-financial aspects related to the company while executing audit plan. Preliminary
audit procedures majorly guide an auditor regarding understanding all the transactions occurring
on day-to-day basis in the company and errors in those transactions affecting the financials of the
company. Hence we can conclude that preliminary analytical procedures are the evaluations of
the information consisting of both financial and non-financial transactions along with
understanding all the errors or imbalance of financials caused due to difference of values from
the budgeted figures or figures from previous years. These analytical procedures are used by an
auditor at each and every stage while conducting an audit of the company. It helps an auditor in
conducting substantive and compliance test to obtain evidences relating to financials of the
company and reviewing all the financial information. In the given case of Double Ink Printers
Ltd (DIPL) the assesse is involved into the business of printing books, magazines and advertising
materials for publishing, educational and advertising industries on a print on demand basis.
While planning decisions for the audit plan auditor must take note of all the purchase invoices
and actual transfer of inventory into warehouse along with its value. As compared to last two
years there is huge difference in the value of inventory in 2015. An auditor must plan its analysis
for cash and accounts receivable balance as cash balance shows a decreasing trend in 2015 as
compared to 2013 and 2014 whereas there is heavy increasing trend in accounts receivable
balance in 2015 as compared to 2013 and 2014. Proper records for inventory must be checked
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Assessment Item 1: Case Study on Double Ink Printers Ltd (DIPL) Student Name
whether excessive inventories are purchased or inventory with huge cost are purchased due to
which inventory ledger shows huge balance in 2015 which may be not needed. Auditor must take
precise care while auditing fixed assets of the company as the company has incurred cost for
installation of new software and IT systems and new tangible assets are also purchased. Auditor
must verify all the related documents carefully and depreciation effects of same. An auditor must
carefully vouch and verify all the liabilities of the company it is found that the company is
showing normal fluctuations in terms of liabilities with only major change in long term interest
bearing liabilities which has incurred because of loan taken by DIPL, an auditor must plan
properly regarding checking of loan facilities, its repayment criteria, interest rates etc. DIPL
shows good increment in revenue from operations in relation to previous years along with
increase in cost of sales, hence auditor must plan to take verify whether the revenue so generated
is correct or not majorly the e-revenue generated. Also an auditor must be careful while assessing
all the expenses relating to the organization like depreciation, bad-debts, advertisement, salaries,
interest expense, legal fees, discounts, etc. An auditor must understand whether all the expenses
are genuine and are related to current year only. Whether due to installation of new IT system
new staff is appointed or increment is being given to existing staff by checking salary register so
maintained. An auditor must efficiently calculate all the discounts and interest costs incurred by
the company. Whether the discount and interest incurred are apportioned based on the no. of
copies or the time period involved respectively. Also auditor must be accurate at the time of
calculating taxes of the company as it can be seen from the financials prepared the in the year
2015 income taxed are of very nominal value in context to years 2013 and 2014. An auditor must
try to find out whether there is any difference in tax rates as compared to previous years or the
officers have not calculated the taxes properly. An auditor must analyze all the aspects of the
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Assessment Item 1: Case Study on Double Ink Printers Ltd (DIPL) Student Name
financial information so provided both in terms of financial and non-financial nature using his
knowledge, judgments, observation and auditing sense. An auditor must have an adequate plan
while doing analytical procedures as any error in planning at that stage may cause entire audit
plan to fail. An auditor must understand the entire business process, all the risk involved in the
process along with its materiality and its acceptance level, understanding and assessing all the
controls used by the organization, collect all the available information in context of fraud risks of
material misstatements before developing the entire audit plan for conducting an audit of the
financial information of the company. Also an auditor must try to compare its clients’ financials
with industry standards or with prior financial years or with budgeted figures so estimated by the
analyst or with the non-financial factors or analyzing data by doing ratio analysis, etc. to
understand how well is the organization performing as compared to others. Analytical
procedures must be conducted at all the phases of an audit i.e. the planning phase, the testing
phase and the complete execution of audit at the completion phase.
Question 2:
Risk assessment is a valuable process while conducting an audit of the company. It is a process
where all the major risks covered under the transaction or process are evaluated carefully to
avoid damage caused by risk factor involved. Inherent risk is profoundly used by an auditor
while conducting audit to value the risk involved in the financials of the company based upon
suspicion of materials misstatements. Entire financials are measured in terms of high, medium
and low risk when an audit is performed. Inherent risk is valued based upon the auditor’s
assumptions, knowledge and observations. In the given case of DIPL, the two inherent risk
factors that arise from the nature of DIPL’s business operations are in the process of “E-book
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Assessment Item 1: Case Study on Double Ink Printers Ltd (DIPL) Student Name
Revenue”, “Fixed Assets”, “changes in key personnel and IT Systems” and “Cash receipts”. In
the given case DIPL receives its payments of accounts receivable through cheque as forwarded
by the clients in the mail and few by cashier. There is no proper system for accounting payments
received. Cashier may embezzle cash receipts gradually as no proper documents are available
and if cheques received through mail are skipped by the responsible person so authorized then it
would be difficult to account for that skipped cheque. It will major source where inherent risk
will be high as these cheques are accounted into register only when mail is opened but in case if
authorized person forgets to open the mail then there can cause difference in accounts receivable
ledger which can affect the financials of the company. Also during 2015 DIPL decided to
incorporate a new IT System which would be fully computerized and integrate all the accounting
processes across entire organization into general ledger system. New CEO is also appointed in
2015 along with major change of incorporating internal audit department. By these major
changes old staff may not be comfortable with new CEO, its policy and new IT system and may
tend to involve in committing fraud and errors. Also before DIPL was working under different
system so the sudden change of incorporating fully computerized system all of sudden may cause
difficulty for staff to get use to the same which may directly affect the financials of the company
because of high amount of inherent risk involved because of sudden changes in key personnel
and new IT system. It can also be found that IT manager Andy Rogers that there was excess
pressure on the staff to install the system as soon as possible and there was not enough time for
the staff to reconcile and test the new IT system before it went live. During preliminary
examination it was found that few transactions conducted during year around were not been
properly allocated the reason behind this problem was interface between new IT system and old
IT system hence it caused material effect on financials. Also to overcome such risk the company
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Assessment Item 1: Case Study on Double Ink Printers Ltd (DIPL) Student Name
need to another software written named “patch” to fix it hence incurring unexpected and
unnecessary cost. The effect of these risk factors can also be seen in the financials of the
company by comparing last three years’ records.
Question 3:
Any organization can lose tremendous amount of its net worth because of frauds. If there is
extremely high level of fraud risk involved in the organization, then a phase may occur where the
organization may need to shut down all its processes hence organization must keep a watch on
the fraud risks involved and its effects on the organization. There are various factors which may
cause fraud risks in the environment of the organization i.e based upon nature of items involved,
nature of controls executed on financials and working of the organization and pressures
incorporated at various phases. Based on the background information for DIPL contained in the
case, the key fraud risk factors relating to misstatements arising from fraudulent financial
reporting to which DIPL may be susceptible are cash receipts, purchase and storage of inventory
and sudden pressure on staff for incorporating new IT system. There is no proper accounting of
cash receipts both received through online cheques and cash which may create fair chances of
very high risk of frauds. DIPL purchases its all inventory like paper, ink, binding materials etc.
from Australian and Asian countries and are accounted when these inventories are moved to
warehouse. There may be chances that inventories stored in warehouse may get stolen containing
huge costs while these inventories are being transferred to the warehouse. Also fraud risk can be
assessed when there is sudden change in IT system of the organization with extreme pressure on
the staff for its installation. And in the situation of extreme pressure staff members can easily get
level of dissatisfaction due to which there may occur very high fraud risks in the organization.
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Assessment Item 1: Case Study on Double Ink Printers Ltd (DIPL) Student Name
While conducting audit auditor must plan its audit plan in such a manner that it covers all the
major frauds and errors involved in the material misstatements of the organization. Fraud risks of
material misstatements directly affect the entire audit conducted by an auditor and does not give
true value of financials of the organization. An auditor need to prepare a separate audit plan for
assessing the fraud risks involved because of changes in IT system as these fraud risks can’t be
so easily be found. These frauds may affect the financials adversely but these frauds can’t be
measured upfront in normal course of an audit. An auditor must put extra efforts to analyze all
such frauds involved and its effects on the financials. Also if any inventory is stolen in between
transferring to warehouse than such loss may not be accounted as the organization record the
inventory once it reaches the warehouse. An auditor won’t be able to find the audit trail of
inventories purchased and inventories actually transferred to warehouse hence an auditor needs
to put extra efforts to know the fraud risks involved in purchase of inventory and its storage.
Hence these fraud risk relating to misstatements may cause serious harm to the financials of the
organization so auditor must put extra efforts to assess these fraud risk or else it would cause
incorrect impact on the financials.
References
Anon., n.d. [Online]
Available at: https://www.researchgate.net/publication/229543967-
Fraud_Risk_and_Audit_Planning/amp
[Accessed 15 August 2017].
Anon., n.d. [Online]
Available at: http://facweb.northseattle.edu/pbouler/instructor/ACC275_Folder/Lesson%208--
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Assessment Item 1: Case Study on Double Ink Printers Ltd (DIPL) Student Name
Audit%20Planing%20and%20Analytical%20Procedures.htm
[Accessed 15 August 2017].
Anon., n.d. [Online]
Available at: https://www.ccohs.ca/oshanswers/hsprograms/risk_assessment.html
[Accessed 15 August 2017].
Anon., n.d. [Online]
Available at: https://www.accountingtools.com/articles/what-are-common-fraud-risk-
factors.html
[Accessed 15 August 2017].
Anon., n.d. [Online]
Available at:
https://www.researchgate.net/publication/229543967_Fraud_Risk_and_Audit_Planing/amp
[Accessed 15 August 2017].
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