Auditing and Assurance: Analytical Procedures, Risk and Fraud at DIPL

This assignment solution provides a comprehensive analysis of the DIPL case study, focusing on auditing and assurance principles. The solution examines analytical procedures, including the calculation and interpretation of key financial ratios such as interest coverage, gross profit margin, debt-equity ratio, current ratio, quick ratio, return on equity, and EPS. It identifies and assesses inherent risks related to inventory control and the appointment of new management. Furthermore, the assignment explores fraud risk factors associated with plant and equipment valuation and the adoption of a new IT system, highlighting potential areas for fraudulent activities and the pressures that may lead to such actions. The analysis includes a discussion of how these factors can be exploited and how the implementation of an internal audit team might influence the detection and prevention of fraud. The assignment offers valuable insights into financial statement analysis, risk management, and fraud detection within the context of the DIPL case study.

AUDITING AND ASSURANCE

Answer-1:-
The procedures performed by the auditor at the end of the year to abet the auditor to form an
overall opinion about the financial statements in his report are called Analytical Procedures. It is
so worked out to ascertain the fact whether the financial statements are consistent with the
auditor’s understanding of the firm. If any inconsistency or any significant changes are being
observed, then the auditor will either make enquiries with the management or those charged with
governance or the auditor carries out further audit procedures so as to make in depth analysis of
his observations indicating towards inconsistency. It helps to compare the financial information
with previous years by determining the possible relationships between both non financial and
financial data. As per the given case study of DIPL, the main key ratios are being calculated to
perform analytical procedures so as to accordingly formulate the planning process based on these
results :
 In interest coverage ratio, we observe a drastic decrease in the paying capability of
interest by the company that is, from almost 41% to 5% approximately due to heavy
interest expenses on the company.
 The gross profit margin shows a decrement of 1% almost in the three years which is
not of susceptible nature as such. However, due to presence of allot of susceptible
factors, gross profit margin also comes under the suspicion (Basu, 2009).
 The debt equity ratio is calculated only for this year, that is, 0.61. The company has
an obligation that it is to maintain a current ratio of at least 1.5 and debt equity should
be below 1 otherwise the loan giver would recall the loan amount. Being under
pressure, it can be the case that to show a high shareholder's equity balance, the
company manipulated the books that the income tax liability came to Rs. 87116 on a
profit of Rs. 3059299. Also in comparison to previous year retained earning balances,
there in an unusual increase in the value of the retained earnings inspire of facing
heavy expenditure in this current year such as new It System, takeover of a new
company named as Nuclear Publishing Ltd., purchase of fixed assets in large amount
etc. Thus, such a case requires detailed examination of books.
 The current ratio of current year is 1.50 while of previous years, it is 1.42 (2013) and
1.47 (2014) which indicates a favorable condition as current ratio is an indication of
liquidity of the company. However, the true indication of the liquidity of the company
is Quick Ratio as the current assets excludes the inventories amount so as to
determine the readily cash available in hand as inventories cannot be converted into
cash instantly. However, the quick ratio of the current year is 0.85 which is lower
than the previous year of 2014 that is, 0.94 meaning that the actual cash is not much
available in the hand if in case, the company is required to pay its short term
obligations instantly. This is not a good sign as the % of fall in cash in hand has
reduced drastically this year in comparison to previous years indicating towards
unusual transactions or expenses the company may hand indulged into this year.

 Coming to Return On Equity % and EPS calculation, the profit before tax in 2015 is
Rs. 3059299 but the income tax shows an amount of Rs. 87116, which is just not
possible, without any manipulations. It may be so as to show high net earnings as the
EPS for 2013 is Rs. 104.85, for 2014 is Rs. 101.84 but the current year's EPS is Rs.
132 approximately. Such calculation of PAT (Profit after Tax) needs a justification as
the calculation of income tax is too low according to the operations which may be to
show high EPS so as to win the confidence of the investors in the company. Also,
such calculation of net earnings may also be done so as to lift up its return on equity
% from previous years as it reveals the % of return the investors are receiving on their
investment(Blank, 2014).
Answer-2:-

While carrying out the auditing process, to identify the risk where the material misstatements
exist or not Risk assessment procedures are being used. It is an important step as to find out
whether the books are free of misstatements or not is the whole aim of auditing the financial
statements (Boynton & Johnson, 2006).
One of the major types of audit risk is Inherent risk which means the risk arising out of
manipulating information or omission in financial statements due to certain reasons but not due
to failure of controls. The reason behind the occurrence of Inherent risk is due to heavy use of
sampling, large number of similar transactions, disclosure to the misstatements that can be
material, human intuitions, or a number of small misstatements contributing to a material
misstatement together. The auditor assesses this kind of risk on the basis of his intuitions &
judgment and his understanding of the firm’s nature and operations (Cahill & Kane, 2011).
Taking into account, the present case of Double Ink Printers Ltd. (DIPL), where the books are
being closed on 30th June, following are the two inherent risk factors that arises out of the
company's nature & operations (GUPTA., 2016):
 Control over Inventory: The inventory of this company basically consists of paper, ink &
binding materials, which are to be specified as materials not of high value. The inventory
when received is kept at the warehouse and the entry is being made by the accounts
payable clerk on the arrival of it specifying the value & quantity in the books. The risk
observed in this case :
A) It is nowhere mentioned that when the inventory is being received, there is a physical
check of inventory. Only one in-charge is being appointed who passes the entry on the
arrival. However, it is a susceptible point because it may happen the person responsible
may record the entry of less inventory in his books rather than what is being actually
received and the balance he sells it personally to the outside parties and enjoys the entire
earning without actually paying for any cost of production (Horngren, 2017).
B) The warehouse closes only at the year end for the last two days which can be susceptible
as inventories are something that can be stolen. The employees can use the raw materials
for their own personal use. A periodic stock counting should take place rather than
conducting it only at the year end as stock taking only at the year end won't reveal the
regularity or irregularity of stock at the month end. Theft is a very common risk in this
case as the items missing can either be ignored or can be claimed as discrepancies and
therefore, the employees remains on the safe side.
 Appointment of New CEO & a new internal audit firm in January, 2015: The Company
appointed a new CEO in almost in the mid of the financial year without mentioning much
reasons and explanations (Griffin, 2009). The previous CEO was semi-retired but wasn't
on the verge of being replaced. Enquiries are to be made so as to analyze the true reasons
of such a step either by having a word with previous CEO or the other members of the
company. Also, the board now formed an internal audit department that indicates that

previously it had no such internal audit procedures. This is susceptible in a way as it
indicates a pressure over the company or maybe some problems in the operations of the
company or maybe the level of misappropriations are increasing which the company is
not being able to identify but is only facing the consequences. All these can together
create a pressure on the firm that made it to form an entire separate audit department so
as to rectify the areas prone to errors or frauds (Hooks, 2011).
Answer-3:-

Fraud is an act which is performed by one or more individuals, intentionally, among the
management itself be it the third parties or employees or the top level management, so as to
enjoy an illegal advantage (Knechel, Salterio & Ballou, 2017). The factors that gives rise to a
pressure or an incentive that can result in committing fraud is called Fraud Risk Factors. It
can be generally classified into three conditions that usually exist when a fraud occurs –
opportunities, Attitude/Rationalization and incentives.
Based on the given case study, DIPL is susceptible to the two key fraud risk factors which is
hereunder:-
 Plant and Equipment Asset Valuation : There is an increment of Rs. 5,25,000 in the value
of plant and equipment from 2013 to 2014 while the accounts shows a purchase of Rs.
76,50,000 of plant & equipment in 2015. However, the loan obtained from BDO Finance
Ltd. is Rs. 75, 00,000. Also, the company made an unusual hasty decision of adopting a
computerized accounting system in June, 2015 itself (Khan and Jain, 2013). Thus, the
purpose of loan is not being clearly understood. Also, it is susceptible that under what
conditions, the company directly took the decision of taking such a big amount as loan as
well as on the other hand, it is suddenly showing a high value of asset in its books.
Therefore, the following points are to be considered :
(i). In the board year meeting, the estimated life of the printing presses was changed to 30
years instead of 20 years which is commonly adopted in the industry for the depreciation
purpose. Changing the estimated life from 20 years to 30 years would definitely be showing
less depreciation but it may also happen that it is to compensate for the overall heavy
depreciation amount in comparison to previous two years(Whittington & Pany, 2016).
(ii). Also, such a decision is being taken only on the basis of the CEO's experience which
actually goes against the policy being adopted in the printing industry(Pitt, 2014).
(iii). It may happen that by showing a high value of assets in its books, the company wants to
show its financial position strong to the stakeholders so as to enjoy smooth public funding in
future.
 Adoption of New IT System : The board under extreme pressure invested in the new IT
system so as to automate the entire accounting processes (Ramaswamy, 2015). It created
a heavy pressure on the IT department to install the system in the June, 2015 itself when
the company is supposed to close its books. The IT manager claimed that sudden change
of the entire system of recording accounting transactions is messing up the entire scenario
as neither the staffs are presently being properly trained nor proper testing or handling of
the installations is being created (Messier, 2016).
Such an action is an opportunity to conduct fraud as it can clearly be stated at the end that during
the transfer of accounting information into computerized system, the transactions were missed or

lost due to the inefficiency or less knowledge about the system by the staff. Also, in this way, the
person intending to commit fraud can misappropriate the cash balance or can make the
management overlook the fraudulent transactions that has been conducted in the respective
financial year. For example, a director conducted some transactions with the third party on the
name of the company and sold the goods & enjoyed the earnings on his personal account. Taking
advantage of his position, he painted the scenario in such a way that the goods sold were actually
considered as goods lost in the eyes of the management (PAVAN, 2014). Now suddenly, a new
internal audit team in January, 2015 was formed which would clearly rectify such a fraudulent
activity. Therefore, under immense pressure, it may happen that the new IT system was formed
in June, 2015 itself so as to get such fraudulent activities ignored and at the end, the accounting
department's inefficiency could be blamed.
It is credulous in a manner that such valuation can be for the purpose of winning the stakeholders
trust to as to enjoy the funding in the future and use such funding for fraudulent purposes. Thus,
Such unusual transactions & unjustified decisions serve as indication of Fraud risk factors.

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