Finance: Audit Theory Assignment Solution for DIPL Ltd

This document presents a comprehensive solution to an audit theory assignment focused on DIPL Ltd. The solution begins with an analytical procedure, utilizing ratio analysis to assess liquidity, profitability, and solvency over a three-year period (2013-2015), highlighting trends and potential issues...Read More

AUDIT THEORY

Audit
Answer – 1
The analytical procedure enables to provide a sound knowledge of the business and helps in
framing valid decision. For DIPL Ltd, the analytical procedure will comprise of ratio analysis
and project the trend of the business. The analysis will help in knowing the trend that will
shed light on the company’s performance. It will prove to be of major advantage in
forecasting and take judgment on the business scenario. Ratio analysis is an important
analytical procedure that enables to evaluate the financial performance by considering
various parameters and variables (Douglas et.al, 2015). It is a strong indication of the firm’s
performance in major areas and in the case of DIPL Ltd, the computation of ratio will
attribute to areas of liquidity, profitability and solvency.
Further, comparison and evaluation of the financial report of the three years will provide an
absolute knowledge of the trend that the business is going through. It gives a knowledge of
the trend that the business has (Elder et. al, 2015).
The computation of ratios has been done to analyze the business scenario:
Ratio 2013 2014 2015
Current Ratio 1.424 1.466 1.500
Quick ratio 0.827976 0.944834 0.847273
Net Profit Ratio 6.895 6.077 6.838
Gross Profit Ratio 17.550 16.126 15.196
Debt/Equity ratio 0.413115 0.474816 1.134444
As per the current ratio and the quick ratio, the business abounds in liquidity and it gives an
indication that the business will not face any liquidity crunch (Brealey et. al, 2011). The
company has maintained the liquidity position in all the three years thereby leading to the
greater position.
On the other hand, the profitability ratio indicates that the company has generated good
profits in all the three years. The gross profit ratio has slightly declined in 2015. Overall, the
profitability indicates that the company is having a strong hold on the cost of goods sold
(Geoffrey, 2016).

Audit
The debt-equity ratio falls under the category of solvency and it is noted that it is high in
2015 and should be controlled as higher interest payment needs to be done (Brigs, 2013).
The stock valuation mechanism is wrong and hence will impact the audit decision. Further,
the huge increment in the accounts receivable is another issue in the records. The audit
planning needs to be done in a manner that will address the problem otherwise the decision-
making will fall flat (Wright, 2015).

Audit
Answer – 2
The two inherent risks that form part of DIPL Ltd are as follows:
 The recording of transaction that comes from the debtor is done by the cashier on a
regular basis but the receipt happens through email. The receipts are recorded when
the cheques are issues and not when the cheque is encased. Hence, there lies a
difference between the realization and recording. Therefore, the adjustments of the
account will differ. This is an inherent risk owing to the policy adopted by the
company. This policy can bring widespread inaccuracies and lead to misstatements in
the financial report (Messier, 2013). Further, the entire audit process will be affected
because of the flaws in the entire process.
 Secondly, the new system of information technology attracts inherent risk because the
new system is implemented through force. Further, no prior evaluation has been done
and no staff control mechanism has been taken into account. The transactions
mismatch happened and due to such a system the profit was under or overstated
(Tepalagul, 2015).
The above two inherent risk will affect the risk of material misstatement because in both the
cases, the transactions are mismatched and hence, will impact the financial scenario. The
auditor will require additional analysis to overcome the issues.

Audit
Answer – 3
3 (a)
The two fraud risk that appears in the business of DIPL is:
 Issue with the system of IT
Since there was no strong evaluation of the new IT system, the entry of records was
inaccurate and hence, the figures in the report were affected. The account balance will
be easily disturbed. The accountants can indulge in fraudulent activities knowing
about the defect in the accounting software.
 Email facilities were used to record the transactions and hence, create a rift between
the actual and the bank balance. Proper verification needs to be done beforehand. The
internal control is weak too leading to major issues.
Answer 3 (b)
The fraud noted above will create difficulties for the auditor. Firstly, the auditor will need a
strong knowledge of the IT system and then only he can proceed on the same. Secondly, the
email facility that has been used will need special verification and the same needs to be
evaluated from the bank.

Audit
References
Brealey, R, Myers, S. & Allen, F 2014, Principles of corporate finance, New York:
McGraw-Hill/Irwin.
Brigs, A 2013, Financial reporting & analysis, Mason, Ohio: South-Western.
Douglas M.B, Todd, D.F & Hermanson, D.R 2015, ‘The Effects of Internal Audit Report
Type and Reporting Relationship on Internal Auditors' Risk’, Judgments.Accounting
Horizons, vol. 29, no. 3, pp. 695-718.
Elder, J. R, Beasley S. M.& Arens A. A 2010, Auditing and Assurance Services, Person
Education, New Jersey: USA
Geoffrey D. B, Joleen K, K. Kelli S & David A. W 2016, ‘Attracting Applicants for In-
House and Outsourced Internal Audit Positions: Views from External Auditors’, Accounting
Horizons, vol. 30, no. 1, pp. 143-156.
Messier, F. W 2013, Auditing and Assurance Services - A systematic approach, 9th ed.
Australia: McGraw Hill.
Tepalagul, N. & Lin, L 2015 ‘Auditor Independence and Audit Quality A Literature Review’,
Journal of Accounting, Auditing & Finance vol. 30, no. 1, pp. 101-121.
Wright, M.K. & Charles, J 2012, ‘Auditor independence and internal information systems
audit quality’, Business Studies Journal vol. 4, no. 2, pp. 63-84