Audit & Assurance: Detailed Financial Analysis of DIPL Limited

This assignment provides a detailed analysis of DIPL Limited's financial statements, focusing on audit and assurance principles. It begins by utilizing analytical approaches such as trend analysis and ratio formulation to assess the company's financial health and identify potential issues. The report highlights concerns such as discrepancies between sales and stock figures, increasing debt, and declining cash balances. Furthermore, it identifies inherent and fraud risks within the company, including immoral appointment standards and incorrect record-keeping of accounts receivable. The assignment also explores how these risks can influence the preliminary audit figures and the auditor's opinion. The analysis emphasizes the importance of substantive audit procedures and strong analytical skills to provide an independent and accurate assessment of DIPL Limited's financial condition, noting that a fruitless audit report may arise from fraudulent factors and inaccurate financial measures.

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AUDIT & ASSURANCE

Audit DIPL
Answer 1
In the process of decision making, systematic methods may be helpful for an organization or
firm for the purpose of auditing and management. This just doesn’t improve the financial
aspects of the firm but also helps the nonfinancial aspects of the firm to overcome the faults
and grow. The case provided by DIPL Limited also the methods of analytical approaches
have been utilized to apex the real potential of the firm and also it helped the top level
management to make decisions. If there is by any chance any misinterpretation of the
financial statements, these processes can be taken into power to mend the false or incorrect
results (Elder et. al, 2010). Therefore it is also found that many of the organizations also use
these types of methods in order to achieve the desired objectives as it make it easier for the
firm to approach its goals.
The first ever operation conducted on the firm DIPL limited is the trend analysis. In this
process, a firm tries to find the contrast between the financial statements of the current year to
that of the past. This helps the firm to find the variations in the data and thus helping to
improve the process of decision making. Therefore it can be said that trends and patterns help
in the decision-making process of the firm and also they may help to raise the future concerns
and complication for which the firm should be ready with a rescue plan. According to the
financial statements of the firm DIPL limited, it can be clearly understood that the sale
figures are rising higher which lead to revenue generation, thus creating a positive impact for
the firm’s financial position. It should also be noticed that even the sales figures being high,
the difference between underlying stocks of company and sales is huge which is not normal
and thus becoming a matter of concern for the firm (Coram et. al, 2011). The figure of the
stocks does not give the firm a positive environment thus it should be evaluated by the
auditor as the trend followed by the financial statements of sales and stock are not in a
scrupulous manner.
The second process consists of the formulation of the ratios which has been conducted in
order to find the true financial condition of the firm. Many ratios can be calculated for
achieving the desired results and also be compared to the last year’s figures which may be
helpful in ascertaining the true condition of the firm. The solvency, liquidity and profitability
ratios of the firm DIPL limited may be proved to be helpful for the trend and growth analysis.
Liquidity ratios are calculated to find the liquid position of the firm, i.e. to find that the firm
will be able to clear its credit balances or not. Solvency ratios help to calculate if the firm is
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Audit DIPL
having a suitable amount of balance in the form of capital or not. At last, the profitability
ratios help to ascertain that the firm is incurring margined revenues or not, that is it is gaining
profit or loss (Gay & Simnet, 2015).
Ratio Formula 2015 2016 2017
Current Ratio Current Assets/
Current
Liabilities
1.42 1.47 1.50
Gross Profit
Ratio
Gross Profit/
Sales
17.55 16.13 15.20
Net Profit Ratio Net Profit after
tax/ Sales
6.89 6.07 6.84
Debt
Equity Ratio
Debt / Equity _ _ 0.61
After the assessment of the calculation, it can be commented that the moral responsibility of
an auditor is to take into consideration various concern before undertaking any analytical
mechanism to provide a judgement. From the financial of the company, it can be witnessed
that the debts have projected a huge increment over the years and is not a good indicator for
the company. Moreover, the balance of cash has also projected a falling trend that projects
lack of resources that are required to fund the process of working capital. Moreover, the
company payables have signalled an increasing trend and indicate that inefficiency of the
company in terms of discharging the obligations. The auditor is needed to assess all concern
before implementing any policies. Such concerns are projected clearly in the DIPL financial
that indicates the inefficiency in addressing the problems. Future problem may arise in this
scenario. Further, if the auditor is influenced by the material misstatement then the auditor
might not be able to provide a true and fair view (Geoffrey et. al, 2016).
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Audit DIPL
Answer 2
a. Determination of preliminary figures
Inherent risks are the types of risks which are not easy to get rid off as they are mostly
present in the financial system of the firm. These types of risks are also not even under the
control of the internal control policies or the audit processes because these risks are not
caused by the material misstatements or error, they are caused because of internal
malfunctions prevailing in the financials of a firm (Heeler, 2009). The risks prevailing in the
DIPL limited firm are:
1. Immoral appointment standards: While the appointment of a new executive in the firm, it
should be taken into consideration that the person is having no means of bad interest for the
firm and also he is ready for undertaking the responsibility of his position. Thus, when the
appointment of the CEO of the firm DIPL limited is conducted, it should be checked that the
person holding the post has no self-financial interest with the financial terms of the company
(Hoffelder, 2012). Whatsoever, it has already been noticed that the CEO of the firm was
trying to obtain 10 percent more profits over his current 10 percent share of profits in its
operations. This is one of the biggest dangers for the company because the top management
structure has the power to manipulate the rules and conditions of the business and as the CEO
is part of the top management structure, he may change his share of profits without the
agreement of the firm’s financial position (Carcello, 2012). The ECO of the firm may also
have changed the values in the financial statements of the firm in such a manner which may
help his to earn more interest and therefore increasing his share of profit unknowingly.
2. Incorrect record of accounts receivable: The cashier of the firm have the task of
recording all the transactions related to the money received on a regular day to day basis
which he records in the financial statement using the mails he has received in the past. This
states that the value recorded by the cashier is the value of the cheque, draft or cash which the
debtor sent through the mail. This shows that there is no mechanism present in the company
relating to the adjustments of the cheque receivable and the encashment of the cheques. Also
it have been noticed that the reconciling of the bank statements is done by another official
which lets us to the fact that there is no systematic procedure of work being followed in the
firm and this may further result in the vast differences in the financial statement of the
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Audit DIPL
company which may misguide the auditors during the time of auditing and thus make them
pursue wrong judgements. Hence the issues should be cordially analyzed and then make
further judgments (Holland & Lane, 2012).
These two risk may cause massive destruction in the firm’s financial position thus letting the
downfall as it may not only change the financial position of the firm but it may also misguide
the auditors leading to the poor profit figures which have been obtained by fraudulent
measures (Merchant, 2012).
Answer 2(b)
Identification of the factors
Fraud risks are the risks that prevail inside the firm’s financial condition which may have
been caused because of the fraud measures of the management of any other officials. The
main fraud risks that may prevail in the case of DIPL limited are:
1. Inventory valuation: After analyzing the financial information, it is seen that the sales
have increased but it is not appropriate that the stock turnover has not depicted a downward
trend. This may be a huge factor of risk for the company as there may have been
manipulation in the management or accounts which have to lead to the inaccurate increase in
the inventory turnover (Cappelleto, 2010).
2. Mail revenue recognition: The Company may face problems because the cashier uses
mails to check the encashment of the cheques. The reason for the risk is that there is no prior
information which can be used to match the values of the cheque and the bank statement. The
officials may manipulate the data thus committing a fraud with the firm which may not be
recognized by it. The officials of the company may not report the actual resources of the
company and thus credit the same personal account (Kaplan, 2011). This will not only result
in the degradation of firm’s financial condition but it will also lead to the damage of firm’s
reputation. Hence a proper reconciliation system and a trusted official must be appointed in
order to check this fraud which will not only help the firm to have strong governance over its
employees but also it will help to create transparency of the financial transaction (Black,
2010).
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Audit DIPL
Therefore it should be duly noted that these two above mentioned risks are kept in mind and
tried to be corrected as soon as possible otherwise the business may suffer great loss in future
because of the incompetent employees and the deteriorated finance system (Livne, 2015).
This may also result in the auditor’s mishandling of the reports thus leading to a bad opinion
of the auditor for the firm.
Answer 2(c)
Influence on the preliminary figure
A fruitless audit report may be created if there are too many fraudulent factors prevailing
inside a business firm. Fraud measures affect the audit process directly thus leading to the
manipulation of the auditor's opinion by the inaccurate and inattentive financial measures of
the firm. The above-mentioned risks should be formerly taken into light and measures should
be taken to remove present risks as they create a dissentious impact over the firm’s financial
condition which may have been made in order to earn maximum revenues or good reputation
(Ruhnke & Schmidt, 2014). Because of the prevailing problem with the recording of the trade
receivables, the auditor may leave with a bad concern of the financial position of the firm
thus calling the financial statements of the firm to be false (Niemi & Sundgren, 2012). This
will be caused because the auditor would have noticed that the transactions entered in the
statements are in the wrong period or the transactions are not verified which may lead to the
claim of false statements (Manoharan, 2011). If there is no sufficient information available
about the fraudulent activities then the auditor cannot report or make any bad opinion about
the firm whereas if he will notice any difference or malpractice of the firm then he may
question the same and make a bad opinion about the firm’s financial condition (Roach, 2010).
The inventory valuation system of the firm was also inappropriate and this may result to
attract the auditor’s attention towards it. It may happen that the values of the inventories have
been changed by the officials in order to steal the goods which may result in the auditor’s
unsatisfactory opinion (Merchant, 2012). Thus because of such prevailing fraudulent
measures, an auditor must always be attentive and he must use his best skills while
conducting the audit process for a firm.
From the computation below, it can be commented that the auditor needs to be substantive in
nature with a strong eye on analytical skills because the auditor needs to provide an
independent opinion. Moreover, there is no regulation that can stop the auditor from
conducting an audit and following the proper mechanism.
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Audit DIPL
Revenue of Double Ink Printers Limited
AUD Years
Details 2015 2016 2017
Revenue 34,212,000.0
0
37,699,500.
00
43,459,500.0
0
Gross Profit 6,004,500.0
0
6,079,500.
00
6,604,500.0
0
Add: Indirect incomes
Operating income 6,780,000.0
0
7,230,000.
00
8,308,088.0
0
Profit before interest and taxes (A-
B)
3,454,650.0
0
3,357,037.
00
3,867,337.0
0
Profit before tax 3,370,271.0
0
3,273,374.
00
3,059,299.0
0
Profit after tax 2,359,190.0
0
2,291,362.
00
2,972,183.0
0
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Audit DIPL
References
Black, W. K. (2010). Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles
and Crises. Working paper, University of Missouri-Kansas City.
Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ,
Carcello, J. (2012). What do investors want from the standard audit report?. CPA Journal,
82(1), 7-12. http://dx.doi.org/10.2139/ssrn.2930375
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auditor’s report. Australian Accounting Review, 21(3), 235-252.
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auditor-independence-and-possible-remedies?full
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Manoharan, T.N. (2011). Financial Statement Fraud and Corporate Governance. The
George Washington University.
Merchant, K. A. (2012). Making Management Accounting Research More Useful. Pacific
Accounting Review, 24(3), 1-34. https://doi.org/10.1108/01140581211283904
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