Analysis of Analytical Procedures and Risk in DIPL Auditing Case

This assignment analyzes the DIPL auditing case, focusing on analytical procedures, risk assessment, and fraud risk factors. The analysis begins with a review of key financial ratios such as the current ratio, return on equity, and debt-to-equity ratio, highlighting potential inconsistencies and areas of concern in the financial statements. It then delves into inherent risks, particularly those related to inventory control and the impact of a new CEO and internal audit firm. Finally, the assignment identifies fraud risk factors associated with the adoption of a new IT system and plant and equipment asset valuation. The analysis emphasizes the need for detailed examination and further audit procedures to address the identified risks and ensure the accuracy of the financial statements. The analysis highlights potential manipulation of financial figures and the importance of thorough investigation to identify and mitigate financial risks.

AUDITING

Answer-1 :
Analytical procedures are the procedures performed by the auditor at the year end so as to assist
the auditor to form an overall opinion about the financial statements in his report. It is carried out
so as to determine the fact whether the financial statements are in consistent with the auditor's
understanding of the firm. It helps to compare the financial information with previous years by
determining the possible relationships between both financial and non-financial data. If any
inconsistency or any material changes are being observed, the auditor then either make enquiries
with the management or those charged with governance or the auditor carries out further audit
procedures so as to make a detailed study of his observations indicating towards inconsistency.
As per the given case study of DIPL (Auditing & Assurance Services + Connect 2s Access Card,
2016), the main key ratios are being calculated to perform analytical procedures so as to accordingly
formulate the planning process based on these results :
1. CURRENT RATIO
PARTICULARS 2013 2014 2015
CURRENT ASSETS 5385938 7509150 9600929
CURRENT LIABILITIES 3780000 5120250 6397500
CURRENT RATIO
( CURRENT
ASSETS/CURRENT
LIABILITIES)
1.42 1.47 1.50
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 favourable condition as current ratio is an indication of liquidity of the
company (Blank, 2014). 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.
2.RETURN ON EQUITY
PARTICULARS 2013 2014 2015
NET INCOME 2359190 2291362 2972183
SHAREHOLDER'S EQUITY 9150000 10783650 12250491

RETURN ON EQUITY (NET
INCOME/TOTAL
EQUITY)*100
25.78% 21.25% 24.26%
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 (Boynton & Johnson, 2006).
3. DEBT TO EQUITY RATIO
PARTICULARS 2013 2014 2015
INTEREST-BEARING DEBTS 0 0 7500000
SHAREHOLDER'S EQUITY 9150000 10783650 12250491
DEBT TO EQUITY RATIO
(TOTAL
DEBT/SHAREHOLDER'S
EQUITY)
0.00 0.00 0.61
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
inspite 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 (Boynton & Johnson, 2006).
4. INTEREST COVERAGE
RATIO
PARTICULARS 2013 2014 2015
NET EARNINGS 2359190 2291362 2972183
INCOME TAX EXPENSE 1011081 982012 87116
INTEREST EXPENSE 84379 83663 808038

EBIT ( EARNINGS BEFORE
INTEREST AND TAX) 3454650 3357037 3867337
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 (Cahill & Kane, 2011).
5. GROSS PROFIT MARGIN
PARTICULARS 2013 2014 2015
GROSS PROFIT 6004500 6079500 6604500
NET REVENUES 34212000 37699500 43459500
GROSS PROFIT MARGIN
[(GROSS PROFIT/NET
REVENUES)*100]
17.55% 16.13% 15.20%
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 alot of susceptible factors, gross profit
margin also comes under the suspicion.

Answer-2 :
While performing the audit, risk assessment procedures are being used so as to identify the risk
where the material misstatements exist or not. It is an important step as the whole aim of auditing
the financial statements is to find out whether the books are free of misstatements or not.
Inherent risk is one of the major types of audit risk that means the risk arising out of misleading
information or omission in financial statements due to certain reasons but not due to failure of
controls. Inherent risk occurs due to large number of similar transactions, heavy use of sampling,
human intuitions, and disclosure to the misstatements that can be material, or a number of small
misstatements contributing to a material misstatement together. The auditor assess this kind of
risk on the basis of his intuitions & judgments and his understanding of the entity's nature &
operations (Fountain, n.d.).
Considering 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:
 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) The warehouse closes only at the yearend 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 (Hooks, 2011). A periodic stock counting should take place rather than
conducting it only at the year end as stock taking only at the yearend 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.
(b) 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 (Knechel, Salterio & Ballou, 2017).

 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. 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 (Louwers, Blay, Sinason, Strawser & Thibodeau, n.d.).

Answer-3 :
Fraud is an act done intentionally by one or more individuals among the management itself be it
the employees or third parties or the top level management, so as to enjoy an illegal advantage.
Fraud risk factors are the factors that indicate a pressure or an incentive that can result in
committing fraud. Fraud risk factors can be generally classified into three conditions that usually
exists where a fraud occurs - Incentives, Opportunities and Attitudes/Rationalizations.
Based on the given case study, the two key fraud risk factor that DIPL is susceptible to are as
follow:
 Adoption of New IT System : The board under extreme pressure invested in the new IT
system so as to automate the entire accounting processes. 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. 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 (PAVAN KUMAR, 2014).
 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. 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 (Pitt, 2014). Therefore, the
following points are to be considered :
I. 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.
II. 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.
III. 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 (Whittington &
Pany, 2016).
It is susceptible in a way that such valuations can be for the purpose of wining the stakeholders
trust so as to enjoy the funding in the future and use such funding for fraudulent purposes. Thus,
such unusual transactions & such not much justified decisions are indicative of fraud risk factors.

References:
Auditing & Assurance Services + Connect 2s Access Card. (2016).
Blank, R. (2014). The Basics of Quality Auditing. Hoboken: Taylor and Francis.
Boynton, W., & Johnson, R. (2006). Modern Auditing. Hoboken: John Wiley and Sons.
Cahill, L., & Kane, R. (2011). Environmental health and safety audits. Lanham, MD:
Government Institutes.
Fountain, L. Leading the internal audit function.
Hooks, K. (2011). Auditing and assurance services. Hoboken, NJ: Wiley.
Knechel, W., Salterio, S., & Ballou, B. (2017). Auditing. New York: Routledge.
Louwers, T., Blay, A., Sinason, D., Strawser, J., & Thibodeau, J. Auditing & assurance services.
Messier, W. (2016). Auditing & assurance services. [Place of publication not identified]:
Mcgraw-Hill Education.
PAVAN KUMAR, K. (2014). CA-IPCC AUDITING AND ASSURANCE. [S.l.]: S CHAND &
CO LTD.
Pitt, S. (2014). Internal audit quality. Hoboken: Wiley.
Whittington, O., & Pany, K. (2016). Principles of auditing & other assurance services. New
York, N.Y.: McGraw-Hill Education.