Auditing Theory and Practice: Financial Statement Analysis Report

This report analyzes auditing theory and practice, focusing on the financial statements of DIPL. It examines audit planning using analytical methods like ratio analysis and benchmarking to assess financial health and identify trends. The report identifies inherent risks, including employee inexperience, environmental factors, and IT system implementation issues, which can lead to material misstatements. It explores fraud risks such as employee engagement in fraudulent activities and financial reporting manipulation, highlighting the impact of management pressure and business entity characteristics. The analysis also addresses inventory valuation issues and provides recommendations for mitigating identified risks. The report offers a comprehensive overview of auditing principles and their application in a real-world business scenario.

Running head: AUDITING THEORY AND PRACTICE
Auditing Theory and Practice
Name of Student:
Name of University:
Author’s Note:

1AUDITING THEORY AND PRACTICE
Table of Contents
Answer to question 1:......................................................................................................................2
Explanation:.................................................................................................................................3
Answer to question 2:......................................................................................................................4
Answer to question 3:......................................................................................................................7
Answer to part A:.........................................................................................................................7
Answer to part B:.........................................................................................................................9
References:....................................................................................................................................10

2AUDITING THEORY AND PRACTICE
Answer to question 1:
The investigative method corresponding to the fiscal information of the DIPL could be
facilitated in the groundwork of the audit plan. Such an arrangement can be done in a specific
way, focussing on the guidelines, which is important to be complied to at the time of undertaking
of the audit. Chiefly, the assessor is enabled to maintain the total amount of the audit at a
significant level which assists in the reduction of the thought processes related to the clients
(Zureigat 2015). The diagnostic approach to the financial statements of the DIPL shows the
information dissemination method from it. Such an evaluative method, is possible to be
conducted by the use of a number of methods and techniques. With the help of the evaluation
analysis method with regard to the financial announcements, several accountants as also
economic analysts can use the financial announcements to understand and evaluate them to
arrive at crucial business decisions (Barr-Pulliam et al. 2017).
The type of the common sizing analytic method allows the fiscal announcements
assessment to a common point of reference. This causes the possible contrast of the fiscal
statements in association to the several items lines stated in the financial report along with the
method of reporting. As an example, it can be said that, the registration of the items like the
assets, liabilities as well as the equity of the owners in the fiscal reporting of the company along
with the investigational digression form the normal scenario (Bayer and Cowell 2016).The
procedure of benchmarking is considered as a fiscal procedure and it should be utilised for the
assessment of the audit plan. The variance of the original financial declaration from the basic
enables the deviation understanding as well as the evaluation of the recognised variance reason.
Along with this, the ratio analysis can be adjudged as a suitable analytical method which can be

3AUDITING THEORY AND PRACTICE
used for contrasting the fiscal declarations along with the assessment of the audit plan (Bepari
and Mollik 2015).
Explanation:
The results of the choices of planning, related to the audit and its planning are influenced
majorly by the analytical method of disseminating the sources from the financial reports. The
following report is considered:
Particulars 2013 2014 2015
Solvency ratio 0.62 0.44 0.21
Profit margin 0.068 0.60 0.06
Current ratio 1.42 1.46 1.50
The table shown above states the present DIPL ratio which has improved over the years.
On the other hand, it can be said that the profit margin has been seen to change rapidly all over
the time periods. Taking the assistance of the specific ratio, the net profit of the specific
company, can be compared with the total generated revenue (Bryce, Ali and Mather 2015).
However, there is a chance of carrying high value to the assessor in obtaining an overview of the
statement regarding the fact that the expenses are higher or lower as also regarding whether the
management requires budget reduction as also its total expenses. Any favourable or unfavourable
alterations in the ratio can be utilised as a factor for the reference in order to ascertain the
soundness of the financial condition of the DIPL. For example, the calculated solvency ratio in
the above table helps in revealing the feasible as well as the unrealistic trends in the total fiscal
position of the specific firm. In a similar manner, the contrast of the ratio could give an insight

4AUDITING THEORY AND PRACTICE
into the long as well as short term business necessities. Thus it is possible for the auditors to gain
an insight into the DIPPL’s relative position over the entire time period along with the evaluation
of the factors which leads to a position of the organisation which is not desirable (Cason, Friesen
and Gangadharan 2016).
Answer to question 2:
Many noteworthy factors are intrinsic in the auditing procedure that comprises the
incident of materialistic misstatements in the monetary declarations of a particular unit. It can
however be said that different natures of both organised as well as unorganised risks highlighting
the method in which the economic misstatements exist in the fiscal announcements of the
organisation. In addition to this the identified risks may be because of the fiscal as well as non-
fiscal factors that can subsequently stop a particular unit from reflecting a view of the financial
announcements. Depending on this information from Devos and Zackrisson (2015), the obtained
risks may be related to many omission risks related to the risks of any unimaginable errors of
particular bookkeepers. Thus it can be stated that it is the business risk for the business functions
of the DIPL.
Apart from this, the workers of the DIPL are not experienced enough and do not have the
required skill that has led to the total inherent organisational risk. In addition to this, such a lack
of experience can cause occurrence of errors or mistakes, increasing the innate risks. This is
because of the fact that the workers contribute a significant part of the company and it is not
practicable for the firm to be sure about its success in the future without the proper amount of
inputs from the employees. Apart from this, the other aspects contributing to the innate risk can
be divided into numerous segments like the external as well as the environmental aspects as also

5AUDITING THEORY AND PRACTICE
the falsified exercises. The ecological aspects showing the method towards the innate risk
constitutes the speedy alterations where the matters can possibly be connected to the inventory
and its valuation, the immense market competition as also the lack of enough money. Barring
this, there is the possibility of materialistic misstatements which can direct the DIPL towards the
innate risks in the coming years.
The analytic procedure of the existing situation of the DIPL shows the fact that the issues
as well as the complexities relating to the succession of the CEO comprise the innate risks as
well. At heart it can be said that the CEO succession is vastly different as the candidates are
individualistic. Thus the procedural commencement without adhering to the said strategies, delay
in the initiation process as well as the ineffective connection in case of the CEO as well as the
staff may result in an intrinsic risk (Zureigat 2015).
The case analysis which is given implies that the implementation procedure of the IT
system has led to several issues. DIPL has employee shortage for managing the implementation
procedure as also the method of installing the reconciliation and the testing process which should
genuinely be done before the end of the time period (Stephenson et al. 2015). In addition to this,
the previous assessment stated was recorded in a specific manner as viable. Thus it results in the
materialistic misstatements due to the inherent factors where there is a deletion error in a definite
fiscal announcement.
The staff members of the DIPL, are required to follow an appropriate sequence for
registering the receivable accounts as well as the ledgers associated to the receivable accounts.
Along with this, bank reconciliation is necessary to be appropriately recorded as well (Mumford
et al. 2014).

6AUDITING THEORY AND PRACTICE
It can further be said that the registration of revenue found form the e-book as also taking
into account the reprinting of the textbook had a chance of possibly resulting in the inherent risks
due to the intricacies associated with the procedure. Finally, the valuation applicable to the raw
materials at an average cost is very much below the present cost of paper.
The inherent risks can be adjudged as the receptiveness of a specific assertion in
relevance to the material misstatements and are shown precisely as follows:
Increasing employee and management burdens:
It is due to the mounting burden on the DIPL and its staff that it has resulted in the
imprecise bookkeeping. As a result, numerous characteristics have taken place including the
propensity in the cash flow encountering, low level of liquidity as well as the operational results
(Nalewaik and Mills 2016).
Management Integrity as a whole:
Based on the case study, the management procedure of the DIPL does not possess the
right amount of integrity which is wanted for readiness towards any possible loss in the business
community (Milonas et al. 2016).
Excessive pressure on the management:
Sometimes, it might occur that there is the existence of incentives for the management.
As a result, the fiscal announcements have several misstatements.
Nature of Business Entity:

7AUDITING THEORY AND PRACTICE
DIPL contributes to the most valuable growth in the financial as well as the situations of
a competitive nature. Furthermore, these factors may have an impact on the inherent risks of the
business units for the method of audit planning evaluation in a significant fashion (Gani,
Wijeweera and Eddie 2017).
Answer to question 3:
Answer to part A:
Based on the findings in Saad (2014), the fraud risks had a possibility of resulting in
extreme losses of the assets due to huge amount of fraudulent activities. The deficiency of
motivation or the drive in the workforce because of the additional pressure of work on the staff,
can have a chance of causing significantly increased risks of fraud. Further, strong amount of
pressure is put on the management of the corporation due to the announcement of the particular
fiscal results in an effort to avoid the generation of the guarantees.
The major types of risks identified in the reference of the DIPL’s business operations
are briefly stated as follows:
Types of risk Identification
Engagement of entire work force in fraudulent
performances
The only risk of fraud that might take place due to
the DIPL’s business operations in the engagement
of the workforce in the activities of a fraudulent
nature because of a better nature and a better
dissatisfaction level of the employees. The case
study of the operations of the DIPL states that the
board has put several amount of pressure on the

8AUDITING THEORY AND PRACTICE
company while acquiring an interesting system of
accounting. Such an additional amount of the
pressure on the staff, while doing the installation of
the new information for the accounting might result
in fraud. This implies that the staff may be involved
in actives which are fraudulent in nature. These
activities might involve managing the behaviours
as well as the process of reconciliation in a suitable
fashion along with the materialistic misstatements.
The case provided shows that the ineffective
management of the procedural execution is related
to the implementation of the information
technology and results in incorrect allotment of
various transactions at the end of the period. This
results in severe loss due to the misstatements as
well as the fraudulent risks.
Method corresponding to economic reporting Another fraud risk may confront the business
operations of the DIPL in undertaking the risk
connected to the financial fraud of reporting into
account. At the time of specific situations, it has
been observed that the additional information from
external financers or the management. This method
of expectation is due to achieve the particular
targets of different types of goal performance to
qualify for getting the debt. There is an increased
risk of wrong declarations of an economic nature.

9AUDITING THEORY AND PRACTICE
Depending on the balance sheet statement of the
DIPL, the net revenue of the organisation
increased. It was because of the organisations’
failure in maintaining standards that it became
ineligible for acquiring the appropriate funds
(Graham 2015).
Answer to part B:
Based on the case study given, it can be said that the method of understanding related to
the inventory valuation of many raw materials at a particular range of average costs is not correct
or appropriate. This is because of the fact that the existing paper cost is higher in comparison to
the average cost (Gray et al. 2016). The associated risk related to the fiscal reporting might have
been recognised by the dissection of the economic statements on the part of the assessors.
Benchmarking is nothing but an analytical procedure which can be utilised for the assessment of
the audit plan. The actual financial declaration from the standard assists in recognising the
deviation and helps in the recognised variance evaluation.

10AUDITING THEORY AND PRACTICE
References:
Barr-Pulliam, D., Nkansa, P., Walker, K., appreciate helpful comments from Helen, W., Brown-
Liburd, A.G. and Stefaniak, C., 2017. From Compliance to Strategy: Using the Three Lines of
Defense Model to Evaluate and Motivate Internal Audit Contributions to Accounting Research.
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Economics, 70(1), pp.38-52.
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