Auditing and Assurance: Analyzing DIPL Ltd.'s Financial Statements

This assignment solution addresses auditing and assurance principles, focusing on the analysis of DIPL Ltd.'s financial statements. It begins by explaining substantive procedures and their importance in ensuring the accuracy of financial records, emphasizing the need for careful analysis of current situations. The solution then presents a detailed financial analysis of DIPL Ltd., utilizing profitability, liquidity, and solvency ratios over a three-year period. The analysis reveals trends in gross profit, net profit, current ratio, quick ratio, and debt-equity ratio, highlighting both strengths and weaknesses in the company's financial performance. The assignment further identifies and assesses inherent risks associated with DIPL Ltd.'s business operations, including risks related to a CEO's financial interests and the implementation of a new IT system. Finally, the solution explores fraud risks specific to DIPL Ltd., discussing potential vulnerabilities in the IT system and receipt processes, as well as the challenges auditors face when management is involved in fraudulent activities. The assignment stresses the importance of strong internal controls and robust reconciliation systems to mitigate these risks.

AUDITING & ASSURANCE

Auditing
Answer – 1
The various methods followed by an auditor for the well being of the account balances and many other
major transactions in the company at a substantive level is collectively known as Substantive procedures.
These methods if strictly followed by the auditor provide the organizations with an opportunity to plan
the future strategies. The evidence collected during the period can also be helpful in eliminating any
material misstatements that may have existed in the financial statements.
If a financial statement is legal and totally valid then it is easy for the auditors to present a clear view of
the state of affairs of the company. Thus for achieving the above-explained goals, the auditor must put
pressure for following the substantive methods. But it is necessary to analyze all the current situations
before following any methods (Heeler, 2009). In the case of DIPL Ltd also, the auditor must analyze all
the current situations before following any substantive measures. This procedure has proved to be a boon
to for the auditors by which they can easily detect any flaw in the financial statements. But it is important
to take into account valid evidence before applying substantive procedures (Gay & Simnet, 2015).
Financial Statements records of the company clearly show that the company has strong foundations. On
the basis of the records, analysis can be made with the help of ratio analysis, the pattern of trend and
scanning of the financial records. The trend factor in the financial statements is very crucial, as it depicts
the performance of the company over a limited mentioned period of time. The previous records are
always helpful in deciding the future performance (Elder et. al, 2010). Another procedure for the
evaluation of the ratios can be useful in determining the yearly performance and can be a decision making
a factor. The third factor that is the evaluation of the financial records can be taken into account for
depicting the relationship between different variables (Reding et. al, 2015). So the three factors can be
given the title of the decision making factors and are important for carrying out an audit.
In order to start a well mannered and to determine the financial performance, the following computation
of three years for DIPL Ltd is presented below. The profitability ratio depicts the way in which the
business functions, the liquidity ratio represents the potential of the company to credit the obligations and
lastly the solvency ratio determines the position of the company (Heeler, 2009).
Gross profit aligned with net profit ratio depicts the profitability ratio. The performance of a company in
its respective fields is denoted by the gross profit ratio; which in this case saw a trivial downfall in a span
of 3 years. The net profit ration also denotes the performance; which in this case had been stable for the
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Auditing
year term depicting that the company had performed equally in all the three years and has worked hard to
maintain the desired results (Guerard, 2013).
Gross profit ratio
Gross profit 6004500 6079500 6604500
Revenue 34212000 37699500 43459500
GP ratio
= gross profit/ net sales*100
17.55086 16.12621 15.19691
Net profit ratio
Net profit 2359190 2291362 2972183
Revenue 34212000 37699500 43459500
NP ratio =net profit/ net sales
*100
6.895797 6.077964 6.838972
Liquidity Ratio
It is the topic that current ration aligned with the quick ratio is evaluated together. A healthy current ratio
depicts that the company has a hard liquidity base; in this case, the ratio is 1:1 which is very positive for
the company as it increased in all the three years. Also, the quick ratio is a first-class indicator of
liquidity. This ratio does not consider the stock and hence is a better indicator as compared to the current
ratio (Guerard, 2013). Records show that the quick ratio also has seen a positive deflection. This also
shows that the liquidity is in a good state.
2013 2014 2015
Current Ratio
Current assets 5385938 7509150 9600929
Current liabilities 3780000 5120250 6397500
Current Ratio = CA/CL 1.424851 1.466559 1.500731
Quick Ratio
Quick assets 3129750 4837788 5420429
Current liabilities 3780000 5120250 6397500
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Auditing
Quick ratio 0.827976 0.944834 0.847273
Solvency Ratio
It is crystal clear that the debt and equity gather together to form the debt equity ratio. Records show that
the debts of the company increased highly in the year 2015. It is also seen that the debt equity ratio stands
to cross 1 which is fatal for the company. Due to this reason the company will be exposed to a higher
interest rate thus unable to obtain extra loans (Libby et.al, 2011).
Debt Equity Ratio 2013 2014 2015
Debt 3780000 5120250 13897500
Equity 9150000 10783650 12250491
Debt Equity Ratio
= Debt/ Equity
0.413115 0.474816 1.134444
Thus it is clear from the overall view that the finances of the company are not at all stable right now due
to drop in cash position in three past three years. This situation simultaneously calls for the liquidity
problem. Also, a cut off in funds is visible from the accounting receivables which depict the loss of
potential in the realization system. The major factor of increase in the bad debts is the improper concept
of the stock evaluation. The debt proportion has increased considerably leading to a surge in the debt
capacity of the company (Johnstone et.al, 2014). It needs to be noted that if the debts increase in major
proportion then the company faces several risks like unavailability of the loan, higher interest rate
payment, etc. Moreover, the ability of the company is highly doubted if debt proportion enhances beyond
the limit.
4

Auditing
Answer – 2
Going through the financial statement of the company of DPIL it can be observed that it had distinctive
risks observed from its business operations. Even though the company operates through proper internal
control over all its operations, there are certain risks still prevailing in the financial report of the company.
An inherent risk is the one that is present in the company and is difficult to be eliminated. Such risks need
to be faced with the strong internal control mechanism and cannot be removed in totality (Gay & Simnet,
2015). The risks observed from its system of business operations are as follows:
a) A person having a financial interest in the company assigned to vital appointments.
In case of the company DPIL Ltd, it is observed from the information available that a new CEO is
appointed who pursues a financial interest with the organization. The Chief Executive Officer appointed
has been granted with a benefit wherein he will be given a ten percent share in the profit of the company
if the business growth exceeds more than ten percent revenue growth. In addition to this, the CEO has
appointed a team of an internal auditor under his command and work under him. The risk prevailing in
this case that the CEO is in a position that he might use unethical ways and means to enhance the
revenues of the company by manipulating the books of accounts. The team of the internal auditor that has
a link with the CEO might be influenced to hide the manipulations and hence, the financial statements
might project a different scenario. It is vital to be noted that the CEO should have a financial pecuniary in
the company as it will lead to biased decision making (Matthew, 2015). Henceforth, this is a fundamental
risk for the company that can play a vital role in the decision-making process. If the board of directors
would have undertaken such decisions in appointing the internal auditors, such risks would have been
avoided.
b) Migrating to the new information technology system from the old information technology
system.
A decision has been taken by the board of DPIL Ltd to implement a new information technology system
for a transparent and better accounting process. Though, the decision to adopt a new system for a better
accounting method, yet the new technology has not been implemented properly into the system in place
of the old system. Further, the company has neither taken care of in providing proper training facilities to
its existing personal or they hire fully trained persons that are required to work on new technology
implemented into the system (Church et. al, 2008). Furthermore, all the employees have been allowed to
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Auditing
access the new system has given rise to the inherent risk to the company. In respect to this, dealing with
the new technology system, only the senior executives and accountants must be given permission to
access the new technology system that are in turn answerable to the management and auditors of the
organization. As because, of incomplete footstep taken by the company prior to implementing the new
technology into the system, might have adversely impacted the financial report thereby impacting the
image of the company.
Taking into consideration of the observations and the two obvious risks implies a bigger threat for DPIL
Ltd., and punitive measures must be swiftly taken for a smooth, effective and transparent functioning of
the company to improve the financial performance and overall business environment.
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Auditing
Answer to 3(a)
There are two types of fraud risks owing to the business nature of DIPL Ltd are as follows:
 As a result of the vague analysis of the new It system, improper details got introduces into the
system and thereby creating flaws in the accounting figures of the financial statements. In such cases, the
major dejection is formed by the misstatements of the accounting balances. Also because of the
potentially weak methods of evaluation, it is easy for the accountants to impact the financial statements in
a style by which they come under no allegation (Gilbert et. al, 2005). For example, an accountant may
settle some transaction outside the boundaries and may display it as outstanding amounts for self-benefits.
Thus it can be computed that the new IT system has loopholes in the form of inability to record correct
data.
 It is to be seen that the company records receipts through mailing facilities. This process can
easily be tampered with by the accountants for fraudulent activities as the bank certification is unavailable
in most cases. Thus in these cases, it becomes necessary to gain bank verification by the bank statements
so as to help the accountants to pass on any amount that requires substantiation. In some cases, it is also
seen that the bank itself is conducting some wicked internal control processes. Taking the advantage of
the above situation the accountants can cleverly transfer the assets of the company to an off beam person
or themselves can take advantages from it because of the flaw (Carcello, 2012). All this not only degrades
the financial position but also the assets of DIPL Ltd. It is thus demanded that to have a potentially strong
reconciliation system in the bank. Thus, it is the duty of the managing body to analyze minor details as
well to gain control over the information being put up in the financial statements.
Answer to 3(b)
The words of the auditor can fail to make an impact if the management itself has taken to fraudulent
ways. The major factor behind such massive conspiracies can be the immense power installed in the
hands of the management to change the financial statements as per their needs, which is a mere task for
them. Also, the changes made by the managing body in the financial statements are tough to get detected
by the auditor (Geoffrey et. al, 2016). Thus, it is the duty of the auditor to adopt such measures that will
not only highlight but also eliminate such manipulations in the financial statements. In order to eliminate
those documents like tax challans, ledgers, etc must be taken into account. Untimed entry of the assets of
the bank may not get recorded in the financial statements and thus may show the auditor’s work in a
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Auditing
negative way while showing the cash position of the company as weak (Black, 2010). Improper
financials made by the managing body can result in an unhealthy audit. It is also necessary that the
auditor is in compliance with the latest IT system, but due to the ineffective entry of the transaction in the
earlier stage, the audit can have a degraded quality. Poor checking of the systems may impact the audit
can are enough to set up loopholes for both the auditor and the company. This poor checking of the
system can also result in piracy, data breach, and many more fatal malfunctions. All these factors may
cause the decision of the auditor to be against the company. Thus, it is necessary for the auditor to be in
compliance with the new IT system. This will save the time that would have been required for the auditor
to get ready as per the system which would have otherwise resulted in mismanagement and would have
resulted in a negative decision on the company’s part.
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Auditing
References
Black, W. K 2010, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and
Crises, Working paper, University of Missouri-Kansas City.
Carcello, J 2012, ‘What do investors want from the standard audit report?’, CPA Journal vol.82,
no. 1, pp. 7-12
Church, B, Davis, S & McCracken, S 2008, ‘The auditor’s reporting model: A literature
overview and research synthesis’, Accounting Horizons vol. 22, no. 1, pp. 69-90.
Elder, J. R, Beasley S. M.& Arens A. A 2010, Auditing and Assurance Services, Person
Education, New Jersey: USA
Gay, G & Simnet, R 2015, Auditing and Assurance Services, McGraw Hill
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and Outsourced Internal Audit Positions: Views from External Auditors’, Accounting Horizons,
vol. 30, no. 1, pp. 143-156.
Gilbert, W. Joseph J & Terry J. E., 2005, ‘The Use of Control Self-Assessment by Independent
Auditors’, The CPA Journal, vol. 3, pp. 66-92
Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY:
Springer, pp. 78-81
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting. Pearson Press
Johnstone, K, Gramling, A & Rittenberg, L.E 2014, Auditing: A Risk Based-Approach to
Conducting a Quality Audit, 10th Edition, Cengage Learning
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Matthew S. E 2015, ‘ Does Internal Audit Function Quality Deter Management Misconduct?’,
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