Financial Statement Analysis and Auditing of DIPL Ltd. (2013-2015)

This report presents an analysis of the audit of DIPL Ltd., focusing on the financial statements from 2013 to 2015. It begins by outlining the audit procedures, including substantive and analytical procedures, with a specific focus on the calculation and interpretation of key financial ratios such as the current ratio, debt-to-equity ratio, net profit margin, interest coverage ratio, and return on assets. The analysis reveals trends in DIPL Ltd.'s financial performance, highlighting areas of strength and concern, such as the increasing debt and fluctuating profitability. The report also delves into the risks faced by the auditor, including financial-level and assertion-level risks, with a detailed examination of inherent risks like inventory valuation and unusual pressures within the entity. The discussion includes the potential for manipulation and the impact of accounting changes. Finally, the report clarifies the auditor's responsibilities, emphasizing the need for an unbiased opinion and the identification of material misstatements, while also addressing fraud risk factors identified within the case study, such as the implementation of a new IT system and the recognition of storage fees, thereby violating accounting principles.

AUDITING AND ASSURANCE

Answer 1.
Audit is an independent examination of the financial statement performed by the auditors in
order to give an unbiased opinion about it. The auditing procedure is broadly classified into
two categories- substantive procedures and analytical procedures. The analytical procedures
deal with the calculation of the significant accounting ratios that enables to analyse the
performance and position of the company and compare the current status with that of the past
periods (Basu, 2009). This helps the auditor to understand the financial statement in a more
better and precise manner. The auditor sets up an enquiry if he finds that there are certain
manipulations done in the financial statements. He extends the nature and timing of carrying
out his audit procedures.
According to the case study of DIPL Ltd. , following are the few financial ratios calculated to
evaluate the performance of the company for the year ended:
1. Current ratio
PARTICULARS 2013 2014 2015
CURRENT
ASSETS
538593
8
750915
0
960092
9
CURRENT
LIABILITIES
378000
0
512025
0
639750
0
CURRENT RATIO
( CURRENT
ASSETS/CURREN
T LIABILITIES)
1.42 1.47 1.50
1 2 3
1.38
1.40
1.42
1.44
1.46
1.48
1.50
1.52
CURRENT RATIO ( CURRENT
ASSETS/CURRENT LIABILITIES)
CURRENT RATIO (
CURRENT
ASSETS/CURRENT
LIABILITIES)
Current ratio can be calculated by dividing current assets by current liabilities. This ratio is
classified as liquidity ratio as it evaluates the capability of the company to meet it short term
liabilities with the help of short term assets of the company. As we can see in the above table,
the current ratio is growing over the years. This is a positive sign for liquidity as the company
has a strong financial health to meet its current liabilities.

2. Debt to Equity ratio.
PARTICULARS 2013 2014 2015
INTEREST-BEARING
DEBTS 0 0 7500000
SHAREHOLDER'S
EQUITY
915000
0
1078365
0
1225049
1
DEBT TO EQUITY
RATIO (TOTAL
DEBT/SHAREHOLDER
'S EQUITY)
0.00 0.00 0.61
1 2 3
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
DEBT TO EQUITY RATIO (TOTAL
DEBT/SHAREHOLDER'S EQUITY)
DEBT TO EQUITY
RATIO (TOTAL
DEBT/
SHAREHOLDER'S
EQUITY)
Debt appears on the liability side of the balance sheet and there is always a burden on the
company to pay off in the future. In this case study, we can find that there was no debt in the
initial two years but subsequently in the third year the company had to raise debt which
increased the debt equity ratio from 0 to 0.61. Although the ratio is not very high but when
compared to previous years it does not reflect a good financial health(Blank, 2014).

3. Net profit margin
PARTICULARS 2013 2014 2015
NET EARNINGS 2359190 2291362 2972183
NET REVENUES 3421200
0
3769950
0
4345950
0
NET PROFIT MARGIN
[(NET PROFIT/NET
REVENUES)*100]
6.90% 6.08% 6.84%
5.60%
5.80%
6.00%
6.20%
6.40%
6.60%
6.80%
7.00%
NET PROFIT MARGIN [(NET
PROFIT/NET REVENUES)*100]
NET PROFIT
MARGIN [(NET
PROFIT/NET
REVENUES)*100]
Net profit margin shows the financial performance of the company at the year end. However,
we can also compare the net profit of the company over the years. It is clearly visible to us in
the above graph that in the year to 2014 there was a fall in the net profit which reflects the
inefficiency in the working of the management. The net profit of the year 2015 is slightly
lower than the year 2013 which shows that the company needs to be more efficient towards
its workings Boynton & Johnson, 2006)..
4. Interest Coverage Ratio.
PARTICULARS 2013 2014 2015
NET EARNINGS 235919
0
229136
2
297218
3
INCOME TAX
EXPENSE
101108
1 982012 87116
INTEREST EXPENSE 84379 83663 808038
EBIT ( EARNINGS
BEFORE INTEREST
AND TAX)
345465
0
335703
7
386733
7
INTEREST COVERAGE 40.94 40.13 4.79

RATIO (
EBIT/INTEREST
EXPENSE)
1 2 3
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
INTEREST COVERAGE RATIO
( EBIT/INTEREST EXPENSE)
INTEREST
COVERAGE
RATIO
( EBIT/
INTEREST
EXPENSE)
The method of calculating interest coverage ratio is to divide the net income of the company
by earnings before interest and tax expenses (EBIT). The interest coverage ratio is calculated
to see whether the company earns sufficient profits to pay interest on the amount of the debt
borrowed by the company. It is adverse for the company if the ratio falls which is clearly seen
in the graph above (Cahill & Kane, 2011).
5. Return on assets.
PARTICULARS 2013 2014 2015
NET INCOME 2359190 2291362 2972183
TOTAL ASSETS 1293000
0
1590390
0
2614799
1
RETURN ON ASSETS
(NET INCOME/TOTAL
ASSETS)*100
18.25% 14.41% 11.37%

1 2 3
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
RETURN ON ASSETS (NET
INCOME/TOTAL ASSETS)*100
RETURN ON ASSETS
(NET INCOME/TOTAL
ASSETS)*100
Return to asset is calculated by dividing net income by the total assets. This asset helps in the
determination whether the company is making optimum utilisation of its assets or not. If the
company is using the assets efficiently then the graph will be upwards which is favourable
whereas if the company is not being able to make full utilisation of the assets that are present
in the company then the graph will slope downwards. A downward sloping graph is not
considered good (GUPTA., 2016).
6. Proprietory ratio.
PARTICULARS 2013 2014 2015
SHAREHOLDER'S
FUND 9150000 1078365
0
1225049
1
TOTAL ASSETS 1293000
0
1590390
0
2614799
1
PROPRIETARY
RATIO
(SHAREHOLDER'S
FUNDS/TOTAL
ASSETS)
0.71 0.68 0.47
1 2 3
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
PROPRIETARY RATIO (SHAREHOLDER'S
FUNDS/TOTAL ASSETS)
PROPRIETARY RATIO
(SHAREHOLDER'S
FUNDS/TOTAL ASSETS)

A company calculates the proprietary ratio by dividing the total of shareholders fund by the
total assets of the company. It helps in determining the capitalisation done in order to manage
and support the business. As we know, it is not possible to carry on business without assets.
So, the proprietary ratio helps to know the proportion of shareholders fund that has been
invested in the assets of the company (Horngren, 2017)..

Answer 2.
While performing the audit procedure the auditor always faces risk at two levels which will
be discussed further below. These risks are basically relating to any material changes or any
misstatements that may be involved in the preparation of the financial statements. The two
levels at which risk is observed are- financial level and assertion level.
First- Financial level risk is the one which is related to the financial statements of the
company. Such risk may include shortage in the required resources, inefficient management
and control system of the company, unusual transactions and difficulty in taking situations
Second- Assertion level risk further involves two types of risk- inherent risk and control risk.
Control risk is the errors or frauds that couldn’t be handled by the management. In simpler
language, if there occurs such error in the financial statement which cannot be separated then
such risk is known as control risk (Griffin, 2009). Assertion risk refers to presence of errors
in the financial statements either by an individual or a group of individuals which has a
material impact on the financial information of the company.
As per the case study of DIPL ltd, the two major inherent risk are described below:
1. Inventory valuation- There are various methods to do valuation of the inventory. The
method of valuation of inventory followed by DIPL ltd is weighted average method.
Inventory valuation has a great importance as it indirectly affects the profits of the
company. The wrong valuation of the inventory may overstate or understate the
closing stock of the company which may give a inappropriate information about the
financial performance of the company (Hooks, 2011). Suppose, if the closing
inventory is 20 units, purchases made during the year is 200 units of Rs.3000 and the
opening inventory of 100 units is Rs.1000. If we follow average method then the
value of stock per unit comes out to be Rs.13.34, so the total closing stock will be Rs.
267 but actually the 20 units left is left from the purchases made at Rs.15 per unit.
Hence, the conclusion is that the closing stock should be valued at Rs. 300. Now we
know that if the closing stock is understated then the profits for the year will also be
less than the actual profit of the company (Knechel, Salterio & Ballou, 2017). The
company proposed to change its method of valuation from weighted average to FIFO
in June, 2015. It decided to do so in order to hide the extra profits earned behing the
valuation of closing stock which is wrong. If the company does this then there will be
a rise in the closing stock of the company, it is expected to be 56% more than what it
was in the year 2014 which will result in showing higher profits. Such higher profits
will mislead the investors as it would make them feel that the company is in a good
financial health. The creditors or the lenders may also get misled and provide them
funds which could be resulting of loss in the future (Messier, 2016).
2. Unusual pressure within the entity- We may say after reading the case study that there
are certain factors that force us to believe that there is a presence of some kind of
unusual pressure or a certain kind of error of fraud that is happening in the company
which it is trying to hide. The following points describe the unusual pressure that are
identified:

 A new internal audit team was set up in the middle of the year also it is seen that the
company closes its book in the month of June which is a kind of unusual activity. This
has created a doubt in the management whether there are some fraudulent activities
going on in the company (Ramaswamy, 2015). Also, it is observed that a new CEO
has been appointed. Therefore, enquiries have to be done to the previous CEO as it is
important to know the reason for the change.
 A loan of 7.5 million was taken by the company. The lender of the loan was BDO
finance. The company invested a huge amount of funds in the assets as well as it also
spent money on installing the IT system. Apart from this it also made one huge
expense that was taking over another company whose name was nuclear publishing
limited. It was a matter of concern when it was identified that the purchase value of
the plant and equipment exceeded the loan amount. So, it is clear that the expenses
and the funds borrowed are not justifiable (Khan and Jain, 2013)..

Answer 3.
The responsibility of the auditor is to provide an unbiased opinion of the financial statement
and to identify if there are any major misstatements in them which could have a material
impact. However, the opinion of the auditor is not the assurance if the future viability
(Whittington & Pany, 2016). It is the duty of the auditor to identify the misstatements caused
due to inefficiency in financial reporting and if the company has made any manipulation with
the figures of the assets of the company. It is not the duty of the auditor to extend its audit
procedures to find out if there is any fraud happening because it requires the skill of legal
determination theory which is obviously not the expertise of the auditor.
Fraud risk factors are present only if there is a presence of fraud in the company. The
conditions are as follows:
1. The workers or the management are not provided the proper working conditions
which may create a pressure on them.
2. There are many opportunities available to them in order to commit fraud.
3. The fraudulent activities are being rationalised by the persons committing it.
As per the given case study of DIPL ltd, the following are the two risk factors that has
been identified (PAVAN, 2014):
1. Set up of new IT system- The Company introduced a new IT system in the month of
June itself. It advised the department to make the accounting system fully
computerised. It was not concerned whether the necessary training was provided to
the workers or not, it just wanted to install the system without even testing it. When
the new IT system was introduced all the accounts had to be transferred which created
a huge mess in IT department. This mess also gave advantage to some who were
involved in doing some fraud as they could cover it up.
2. Recognition of storage fees from 'E-book facilities- A storage fees was charged from
the publishers to keep their e-books on the website. However, the proper accounting
principle was not followed while recording such fees transactions. The fees were
received in advance for a year, the recognition for which was done in the month of
invoice outstanding (Pitt, 2014).. As we know, this is a violation of the accounting
principle as this should not be treated as revenue but should rather be treated as a
current liability in the books. This board accepted the fact that the transaction can be
recorded only after providing the service. However, this change took place because of
the newly set up internal audit team.