Comprehensive Financial Auditing and Assurance Report of DIPL Ltd.

This report provides a comprehensive auditing and assurance analysis of DIPL Ltd. It begins by outlining how the auditor can utilize analytical procedures, such as financial data comparison and ratio computation, to make informed decisions and assess the company's financial performance. The report then identifies the inherent risks associated with the business, including the replacement of the IT system and the appointment of a CEO with financial interests. Furthermore, it details management risks stemming from software issues, inventory discrepancies, and strategic decisions. The report summarizes the actions that should be taken by the auditor. Finally, the report includes profitability, liquidity, and solvency ratios, which are essential for understanding the financial health of the company. The analysis highlights the need for auditors to scrutinize financial records, assess potential fraud, and ensure the accuracy of financial statements.

AUDIT & ASSURANCE

Auditing
Answer – 1
Going by the case of DIPL Ltd, the auditor can take the help of various analytical procedures
that will help in taking crucial decisions. Moreover, it will highlight a correct view of the
entire business. The auditor needs to use the analytical procedure because it is vital for the
auditor to provide an unbiased decision. To ensure this, the financial records need to be
evaluated and from the observation, a detailed analysis can be made.
In the case of DIPL, the auditor can use the analytical process in the following manner:
i. Financial data comparison
The data of the current year can be compared with that of the previous year that will enable
forecasting for the future course of time or any other peer group. A comparison is just process
of evaluation that sheds light on the company performance and the trend that it has witnessed.
To ensure a good comparison it is imperative for the auditor to compare the current data with
that of the previous year that will highlight the variations (Carcello, 2012). Moreover, an
increase or decrease in the figures can be a note with ease. The changes can be studied in the
light of the prevailing situation and a judgment can be made accordingly. The changes that
happened in the sales, turnover, debtors and creditors information needs to be analyzed by the
auditor to gain an advantage in the process (Baldwin, 2010). The same comparison can be
made with of the peer group to find the trend and the performance.
ii. Computation of Ratio
Ratio computation can be defined as the best practice when it comes to evaluation of the data.
Ratio sheds light on the performance of the company. The major ratios that speak volume of
the company’s scenario are the profitability, liquidity, efficiency and solvency ratios. The
profitability ratio of the company denotes that DIPL has performed on a consistent basis. The
gross profit has declined in the past three years but the margin is a string. On the other hand,
the net profit margin has increased in the past year signifying a strong control over the cost of
goods sold. Further, the liquidity scenario of the company is strong and hence, no problem
will arise in honoring the obligations (Brigs, 2013). The auditor needs to stress on the ratios
and check whether the data align with the financial records. If there is a deviation then the
same needs to highlight to the management. Moreover, the auditor needs to have applied the
skills of due diligence so that any differences can be addressed.
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Auditing
iii. The balances of the debtors and the creditors need to be cross checked so that no
misstatements have been done in this regard. The balances might be collected but
not shown in the statement leading to differences (Bedard et.al, 2014). Hence, the
auditor must analyze such points.
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Auditing
Answer - 2
The inherent risks are the risks that are due to the nature and policies of the business. Going
by the analysis, the two inherent risk of the business are as follows:
i. Replacement of the old IT system with the new IT system
A new system of IT was introduced under a lot of pressure and the old one was discontinued.
The old system was abolished ignoring the fact that the employees were not trained with the
details of the new one. Moreover, there was a risk that the system was accessible by anyone
and hence, vulnerable to the threat of tampering (Blay et. al, 2011). Moreover, wrong data
was entered into the system leading to faulty results.
ii. Internal audit team selection having a financial interest
The section of new CEO was vague as the CEO was having a financial pecuniary in the
company. The CEO will receive a whopping 10% share in profit if the growth exceeds 10%
or more. In this scenario, there is a possibility that the CEO will work hard to enhance the
profit but might indulge into window dressing too (Church et. al, 2008). Hence, it constitutes
an inherent risk.
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Auditing
Answer – 3
(a) Firstly, the software fails to record the entries that pertain to the previous year. This
might be an act of the management to alter the accounts or to conceal any transactions
so that the statement can mislead. When it comes to the year 2015, it can be seen that
the cash position has declined and the same reason can be cited in this regard.
Secondly, in the third year there is a significant increment in the level of inventory
even considering the fact that the sales increased. This projects frauds and
misstatements.
(b) The fraud that has been traced above will have an impact on the financial statements.
This will affect the process of audit. The auditor needs to evaluate a huge data to
project such fraud. Since the top level executives are present in this fraud it will lead
to the immense problem and if the auditor fails to find the missing entries or rectify
such then will lead to material misstatement. The inventory levels are increased
considerably and this will impact the profit figures. If the judgment is not done
correctly then it will lead to an ineffective result (Cappelleto, 2010).
The management risks can be summarised through the following table:
Management Risks Auditors Actions
Replacement of Old
IT set up with a new
IT set up:
The new It system
was implemented in
a unplanned manner
as there was not
proper way to
implement it neither
any training was
imparted to the
employees for
running of new IT
system. The IT
system was not
discussed properly
within the company
nor its consequences
of non-
implementation were
Appointment of new
CEO and Audit team:
The company
appointed a new
CEO whose part of
remuneration was
linked to company
performance. The
CEO although had
vast experience in the
same line but he was
financially interested
as well with
performance of the
company. On the
basis of new CEO
recommendation, a
new Internal Audit
team was also
Acquiring of Nuclear
Publishing Ltd
(NPL):
The company DIPL
acquired NPL
keeping in mind
there market share in
medical textbooks
which had good
margins and also was
widely accepted in
many universities as
well. However after
some time it came to
knowledge that NPL
medical books were
soon becoming
obsolete or no use
due to some reasons.
E books will replace
Following actions
should be performed
by the auditor:
1.The Auditor should
take the services of
some professional IT
experts to
successfully
implement the new
IT set up and find out
errors and suggest
remedial actions to
correct them. Also
his audit programme
should incorporate
vast features to audit
the software.
2.The auditor should
take every precaution
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Auditing
understood. So all
this created a
situation where all
the entries were not
been captured by the
IT software properly.
It was a clear case of
mis-management
where the top
management was
also involved.
Internal control of
management failed to
find out the problems
and errors in IT set
up.
formed comprising of
an ex audit manager
and two new
qualified chartered
accountants. The new
team did not have
any experience of
running an Internal
audit department. So
the decision was not
a wise management
decision.
NPL textbooks so
acquire of NPL was
also a bad decision,
DIPL being a wise
company should have
understood the
market requirements
and its future. Also
one more reason
which creates doubt
is purchasing of Net
assets of NPL instead
of shares of NPL
which could have
resulted in total
ownership of the
company. So the
acquiring of NPL
was not wise
decision.
while conducting the
audit of this
company. The reason
behind these
precautions is that
the internal audit
department team did
not have any
experience of
running an Internal
audit department
before. Hence,
auditor will have t
monitor all the
internal control
factors.
3.When the new
company NPL was
acquired by DIPL
Ltd., it was not done
by the company after
thorough study about
the company and its
assets. The textbooks
of the NPL was soon
to become obsolete.
Now the auditor
needs to go through
each and every detail
about the acquisition
in order to make sure
that there was no
hidden transactions
in this acquire as it
may lead to material
misstatements in the
audit report and
financial statements.
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Auditing
References
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.
Bedard, J.N., Gonthier, B, & A. Schatt. (2014). Costs and Benefits of Reporting Key. Harvard
Press
Brigs, A. (2013). Financial reporting & analysis. Mason, Ohio: South-Western.
Blay, A. D., Geiger, M. A. & North, D. S. ( 2011). The Auditor's Going-Concern Opinion as
a Communication of Risk. Auditing: A Journal of Practice & Theory, 30 (2): 77- 102.
Cappelleto, G. (2010). Challenges Facing Accounting Education in Australia. Melbourne
Carcello, J. (2012). What do investors want from the standard audit report? CPA Journal 82
(1), 7.
Church, B, Davis, S & McCracken, S. (2008). The auditor’s reporting model: A literature
overview and research synthesis. Accounting Horizons, 22(1), 69-90.
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Auditing
Appendix
Profitability Ratio
Gross profit ratio 2013 2014 2015
Gross profit (I) 6004500 6079500 6604500
Sales (II) 34212000 37699500 43459500
GP ratio (I/II) 17.55% 16.13% 15.19%
Net profit ratio 2013 2014 2015
Net profit (I) 2359190 2291362 2972183
Sales (II) 34212000 37699500 43459500
NP ratio (I/II) 6.90% 6.08% 6.84%
Liquidity Ratio
Current Ratio 2013 2014 2015
Current assets 5385938 7509150 9600929
Current liabilities 3780000 5120250 6397500
CA/CL 1.42 1.47 1.50
Quick Ratio 2013 2014 2015
Quick assets 3129750 4837788 5420429
Current liabilities 3780000 5120250 6397500
Quick ratio = Quick assets/ Current
liabilities 0.827976 0.944834 0.847273
Solvency Ratio
Debt Equity Ratio 2013 2014 2015
Debt 3780000 5120250 13897500
Equity 9150000 10783650 12250491
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Auditing
Debt/Equity 0.41 0.47 1.13
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