Comprehensive Auditing and Assurance Report on DIPL Case Study

This report presents an analysis of an auditing and assurance assignment, focusing on the DIPL case study. The report begins by outlining the analytical procedures employed by auditors to form an overall opinion on financial statements, emphasizing the importance of distinguishing between financial and non-financial information, and highlighting the use of ratios like current ratio, quick ratio, return on equity, and debt-to-equity ratio. The analysis reveals potential issues, such as inconsistencies in income tax calculations and unusual changes in interest coverage ratios. The report then delves into the dangers of material misstatement at both financial statement and assertion levels, discussing the valuation of inventory and the impact of pressure within the entity. The final section addresses the auditor's responsibility in ensuring the fairness of financial statements, identifying fraud risk factors and specific instances of fraud, such as the recognition of storage fees and the adoption of a new IT system, which may impact the audit report. The report provides a comprehensive overview of the audit process and financial analysis, including the identification of potential fraudulent activities.

AUDITING AND ASSURANCE

ANSWER 1:
Analytical procedures are the procedures performed by the auditor at the end of the year in order to help
the auditor create overall opinion regarding financial statements in his report. It is done to ensure that the
financial statements are in the perspective of the firm’s auditor. It helps to distinguish between financial
and non-financial information, and also to differentiate between this year's and the previous year’s
financial information (Basu, 2009). If any inconsistency or any physical changes are seen, then the
auditors may interrogate with the administration or those charged for it or proceed with the
administration of auditing charges in the audit process so that the detailed study of their observations is
inconsistent. According to the DIPL case study, the main fundamental ratios are calculated for the
analytical procedure so that the planning can be prepared based on this approach: -
1. CURRENTRATIO
2013 2014 2015
1.38
1.4
1.42
1.44
1.46
1.48
1.5
1.52
1.42
1.47
1.5
CURRENT RATIO
CURRENT RATIO
2013 2014 2015
0.76
0.78
0.8
0.82
0.84
0.86
0.88
0.9
0.92
0.94
0.96
0.830000000000
001
0.940000000000
001
0.850000000000
001
QUICK RATIO
QUICK RATIO

The current ratio of the current year is 1.50, comparing to the previous years, which is 1.42 for
2013 and 1.47 for 2014, which indicates favorable conditions because the current ratio indicates
the liquidity of the company. However, the true sign of the liquidity of company is a quick ratio,
because the amount does not contain inventories which are done in order ensure that cash
available in the form of goods cannot be immediately converted into cash. However, the current
year's quick ratio is 0.85, which is less than that of the previous year 2014, which is 0.94, that
means the real cash is not available very much in hand if in this case, the company have to clear
its short-term transactions (Blank, 2014). This is not a good sign because the percentage of cash
in hand has decreased significantly in comparison to last year, which is an estimate of unusual
proceedings or company expenses than last year.
2. RETURN ON EQUITY
2013 2014 2015
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
25.78%
21.25%
24.26%
RETURN ON EQUITY
RETURN ON EQUITY
According to Equity percentage and Return on EPS calculation, profit before tax is Rs. 3059299
in 2015 but income tax is showing the amount of money as Rs. 87116 which is not possible
without any unnecessary change. It can also be done to show high net earnings as the EPS for the
current year is of about Rs. 132 but for the previous years, the EPS was as low as Rs. 104.85 for
2013 and Rs. 101.84 for the year 2014. It is necessary to evaluate this type calculation of PAT
(Profit After Tax) because the income tax calculation is very low, which can be used to display
high EPS so that the company can fulfill their sole objective of earning a profit by winning the
investor's trust. Also, these calculations of net earnings can be made high so that their return on
equity percentage increases as compared to the previous years because it states the amount of
return the investors receive on their investment.

3. DEBT TO EQUITY RATIO
2013 2014 2015
0%
1%
1%
0% 0%
1%
DEBT TO EQUITY RATIO
DEBT TO EQUITY RATIO
The only calculation of debt to equity ratio is for the current year which is 0.61. The company is in a
situation with the loan giver where if it doesn’t maintain a current ratio of 1.5 and debt-equity below 1,
then the loan giver is going to take the amount back.
In the case of pressure, it may be seen that in order to show huge shareholders equity balance, the
company printed in the books that the income tax liability was about Rs. 87116 for a profit of Rs.
3059299.In comparison to the previous year, there is an abnormal increase in the value of retained
income even after facing huge expenses in this current year such as the new IT system, takeover of a
new company named Nuclear Publishing Ltd., purchase of fixed assets in bulk, etc. thus, a detailed
observation should be done in such a case (Boynton & Johnson, 2006)..
4. INTEREST COVERAGE RATIO
2013 2014 2015
0
5
10
15
20
25
30
35
40
45
40.94 40.13
4.79
INTEREST COVERAGE RATIO
INTEREST COVERAGE
RATIO

In the ratio of interest coverage, we observe a drastic reduction in interest rates by the company, which
accounts from 41% to 5%, which may be because of the huge expenditures the company is facing.
5. GROSS PROFIT MARGIN
2013 2014 2015
14.00%
14.50%
15.00%
15.50%
16.00%
16.50%
17.00%
17.50%
18.00%
17.55%
16.13%
15.20%
GROSS PROFIT MARGIN
GROSS PROFIT MARGIN
There is a decrement of 1% in roughly three years which is not that suspicious in nature but, taking in
fact that there are a lot of susceptible factors; gross profit margin also comes under consideration of
suspicion (Cahill & Kane, 2011).

ANSWER 2:
The danger of material misstatement refers to the risk that the financial statements have been erased or a
physical change may have occurred. The auditor has to detect the risk of physical mistake at two levels:
1. At the financial level:
Here, the identity of risk is completely relative to financial statements as a whole because it
covers risks such as incompetent control system, lack of capital required to continue the
business, unusual pressures, unusual transactions, hasty decisions, etc.
2. At the Assertion level: Here, two types of risks are involved - The underlying risk that refers to
the risk is caused by errors or fraud which are physically false and may be stated individually or
in aggregate and have a material effect other than the failures of control. Control risk refers to the
risk that indicates physical misconceptions existing in the books because it cannot be separated
or stopped to enter in the accounts of business books by the internal control system, which in
turn indicates the risk due to the failure of controls in the firm (GUPTA., 2016).
According to the given question, the two aspects contained in DIPL can be described in the following
two points:
 Valuation of Inventory:
The Company evaluates raw materials according to the weighted average method. Now, the
valuation of the inventory directly affects the profitability of the company, because the incorrect
evaluation overstates or closing stock gets worse, resulting in higher or lower profits (PAVAN,
2014). For example, the closing stock is 20 units, whose opening stock is.100 units of Rs. 1000
and purchase 200 units of Rs.3000. After the average method, the stock valuation is Rs. 13.34
per unit, that is the closing stock of Rs. 267 but in fact, it is the purchase of 20 units where the
cost of one unit is Rs. 15 and so, the valuation value of the closing stock should be Rs. 300.
Thus, by following the average method, the lower closing stock price will be shown that will
lead to a decrease in overall profit. However, in the board meeting of June 2015, the company
had decided to change its valuation method based on the FIFO basis, which points to the cases
that it is trying to hide the money earned out of the wrong valuation of inventory. In addition, by
doing so, there is an increase of about 56% in inventory value, which indicates the high finishing
stock value as compared to the 2014 data, which shows high returns and thus shows the
company's better and stronger position which will help it for smooth future funding or to win the
trust of the investor or to satisfy the debtor that the company's earnings are a satisfactory
(Horngren, 2017).

 Unusual Pressure within the entity:
There are a lot of factors within the unit which indicates that the company is under unusual
pressure or a certain type of error or fraud, which the company is trying to hide from its people.
Such pressures can be described in the following points:
 In January 2015, the company appointed a new internal audit team, while its books were closed
in June. This is doubtful because, in the middle of the year, such a step is adopted as it may have
been adopted to identify fraudulent activities that management already has an intuition about.
Also, its CEO changed in the same month. Thus such changes have to be further investigated by
the management and with the previous CEO (Griffin, 2009).
 A loan of Rs. 7.5 million from BDO finance was taken from the company. It spent a huge
amount on the property but at the same time, it adopted a new IT system in the unit and even
took a company named Nuclear Publishing Ltd., despite the fact that the purchase price of the
plant and equipment already exceeds the load amount. Thus, the purpose of the loan and
expenditure made by the company is not appropriate. Also, it points to the unusual pressure that
some fraud risk factors do exist (Pitt, 2014).

ANSWER 3:
This is the responsibility of the auditor to follow their duties in such a way that to ensure proper
assurance that the financial statements are given to be true and fair, and also that the information given
in the statement is free from any misconstrued error and fraud (Hooks, 2011). Fraud is a legal
determination theory and the auditor is expected to not have enough expertise to make such legal
determination. Instead, the auditors are considered with the determination of the misunderstandings of
two things wrongly arising from it: First, from fraudulent financial reporting and secondly, by
misappropriations of assets.
Fraud risk factors are such situations that are generally present where there is a fraud. These are the
following conditions which may encourage a fraud risk factor:
i. Management or workers are encouraged to have an incentive or under pressure;
ii. Things are adequate to provide opportunity for conducting fraud; and
iii. Fraudsters involved are capable of rationalizing fraudulent activities carried out by them.
According to the study of the case given by DIPL, two identified frauds due to which the financial
reporting of the company is due, also for which the company is considered as an anesthetic and it has an
effect on the performance of audit report are as follows (Knechel, Salterio & Ballou, 2017):
 Recognition of storage fees from 'E-book facilities’: The company used to charge an annual
"storage fee" to the publishers to keep their e-books on its website.
However, these storage charges were due 12 months in advance and were fully accredited in the
month of their invoice, despite the fact that they are being recognized in advance, thus,
misinterpretation of accounting theory. The revenue recognition concept says that revenue is to
be recognized only when it is being earned, which means either goods have been provided or
services have been performed (Messier, 2016). Thus, without really providing a service or
without actually completing the service period, revenue for such months will not be considered
and will be treated as 'advance from the publishers' under current liabilities. However, the
meeting of the board came to the conclusion of income identification only after the completion
of the transaction. However, due to the internal audit team, this change had come and it may
have to be covered for previous wrong beliefs because of which higher revenue is shown in the
market so that it can show a strong position in the market.
 Adoption of New IT System:
The Company had put excessive pressure on the IT department to set up new computerized
systems in June 2015 when it closes its accounts. There was no clue at all about the fact that the
employees are properly trained for their work, or whether the new system has been tested before

properly or not (Ramaswamy, 2015). It just wanted to change its existing system, due to which
transactions were being transferred from one system to another because of which many
transactions were lost in this process. This action of management indicates the existence of fraud
risk factors such as some fraudulent activity has been initiated and with the fear of internal audit
teams which will definitely be able to rectify it, the replacement of the entire system with new IT
system was management’s idea so that they can skip the transactions and declare it to transaction
lost due to less knowledge or incapability of accounting system, IT department and the
employees. In addition, the same action acts as an opportunity for employees or other members,
who can take advantage of messed up accounts and thus, misinterpret the cash balances or
conduct an activity which may help him to earn personal money on account of the firm and after
all this blame the department for being so careless regarding the transfer of accounts from old
system to the new accounting system (Khan and Jain, 2013).

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