Auditing and Assurance Report for Double Ink Printers

This report provides an in-depth analysis of the auditing and assurance practices applied to Double Ink Printers Limited. The report begins with an application of analytical procedures, including profitability, liquidity, efficiency, and solvency ratio analyses for the years 2013-2015. It then discusses the impact of analytical review on audit planning, highlighting the identification of financial risks, going concern issues, and the need for detailed analysis of inventory allowances and debt covenants. The report further identifies inherent risk factors arising from the nature of Double Ink Printers' business operations, such as financial risk, information technology risk, and debt covenants. Finally, it examines key risk factors related to misstatements in financial reporting, like debt covenants and the control environment, and their effects on the conduct of the audit, emphasizing the importance of verifying inventory balances, retained earnings, and accounts payable. The report utilizes various financial ratios to assess the company's performance and risk profile and provides recommendations for audit planning based on the identified risks.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student:
Name of the University:
Author Note:

2
AUDITING AND ASSURANCE
Table of Contents
Question 1........................................................................................................................................3
Part A...............................................................................................................................................3
Application of analytical procedures to the financial report information of Double Ink Printers
Limited.............................................................................................................................................3
Profitability Analysis...................................................................................................................3
Liquidity Analysis.......................................................................................................................6
Efficiency Analysis......................................................................................................................7
Solvency Analysis.......................................................................................................................8
Part B...............................................................................................................................................8
Impact of analytical review on audit planning for the year ending 30th of June 2015.....................8
Question 2........................................................................................................................................9
Identification of inherent risk factors that arise from the nature of business operations of Double
Ink Printers Limited.........................................................................................................................9
Question 3......................................................................................................................................11
Part A.............................................................................................................................................11
Key risk factors related to misstatement in financial reporting.....................................................11
Part B.............................................................................................................................................12
Effect of risk factors on conduct of audit......................................................................................12
Reference List................................................................................................................................13

3
AUDITING AND ASSURANCE
Question 1
Part A
Application of analytical procedures to the financial report information of Double Ink
Printers Limited
Ratio analysis technique had been applied for the analytical review after evaluating the
financial reports of Double Ink Printers Limited for three consecutive years (William, Glover and
Prawitt 2016).
Profitability Analysis
Profitability Ratio
Double Ink Printers Limited
2013 2014 2015
Gross Profit 6004500 6079500 6604500
Net sales 34212000 37699500 43459500
Gross Profit 17.55085935 16.1262086 15.1969075
Double Ink Printers Limited
2013 2014 2015
Net Income 2359190 2291362 2972183
Net Sales 34212000 37699500 43459500
Net Profit 6.895796796 6.0779639 6.83897192
Double Ink Printers Limited

4
AUDITING AND ASSURANCE
2013 2014 2015
Net Income 2359190 2291362 2972183
Total Assets 12930000 15903900 26147991
Return on assets 18.24586234 14.4075478 11.3667738
Double Ink Printers Limited
2013 2014 2015
Net Income 2359190 2291362 2972183
Shareholder Equity 9150000 10783650 12250491
Return on Equity 25.78349727 21.2484827 24.2617459
The above table shows profitability ratio of Double Ink Printers Limited and each ratio
indicate the profitability position of business enterprise.
The gross profit ratio of Double Ink Printers Limited for three consecutive years has
declined from 17.55% to 16.13% n 2014 and then again 15.20% in the year 2015.
The net profit of Double Ink Printers Limited for three consecutive years is 6.90%, 6.08%
and 6.84%. Increased net profit ratio for the year 2015 is because of higher interest
expense for that year borne by Double Ink Printers Limited (Simnett, Zhou and Hoang
2016).
The return on assets of Double Ink Printers Limited for three consecutive years is
18.25%, 14.41% and 11.37%. Declined trend of return on assets for the company is not
preferable and should engage in further acquisition of assets in the near future.
The return on equity of Double Ink Printers Limited for three consecutive years is
25.78%, 21.25% and 24.26% (Simnett, Carson and Vanstraelen 2016).

5
AUDITING AND ASSURANCE

6
AUDITING AND ASSURANCE
Liquidity Analysis
Liquidity Ratio
Double Ink Printers Limited
2013 2014 2015
Current assets 5385938 7509150 9600929
Current Liabilities 3780000 5120250 6397500
Current Ratio 1.424851 1.46655
9
1.500731
Double Ink Printers Limited
Current assets 5385938 7509150 9600929
Inventory 2256188 2671362 4180500
(Current assets-inventory) 3129750 4837788 5420429
Current liabilities 3780000 5120250 6397500
Quick ratio 0.827976 0.94483
4
0.847273
The above table shows liquidity ratio of Double Ink Printers Limited that had improved
significantly over three consecutive years.
The current ratio of Double Ink Printers Limited for three consecutive years arrives at
1.42, 1.47 and 1.50. The ideal current ratio is 2:1 (Simnett and Huggins 2015). This
reveals the fact that liquidity position of Double Ink Printers Limited had improved
marginally in the year 2015.

7
AUDITING AND ASSURANCE
The quick ratio of Double Ink Printers Limited for three consecutive years arrives at 0.83,
0.94 and 0.85. The ideal quick ratio is 1.5:1. This reveals the fact that the liquid assets of
Double Ink Printers Limited have not improved much in the year 2015.

8
AUDITING AND ASSURANCE
Efficiency Analysis
Efficiency Ratio
Double Ink Printers Limited
2013 2014 2015
Cost of goods sold 28207500 31620000 36855000
Average inventory 2256188 2671362 4180500
Inventory Turnover ratio 12.50228261 11.8366586 8.815931109
Double Ink Printers Limited
2013 2014 2015
Net credit sales 34212000 37699500 43459500
Average accounts receivable 2482500 4320000 5073309
Debtors Turnover Ratio 13.78126888 8.72673611 8.566302585
The above table shows efficiency ratios for the company Double Ink Printers Limited for
three consecutive years (2013, 2014 and 2015).
The inventory turnover ratio of Double Ink Printers Limited for three consecutive years
arrives at 12.50, 11.84 and 8.82 (Neri and Russo 2014).
The debtor’s turnover ratio of Double Ink Printers Limited for three consecutive years
arrives at 13.78%, 8.73% and 8.57.

9
AUDITING AND ASSURANCE
Solvency Analysis
Solvency Ratio
Double Ink Printers Limited
2013 2014 2015
Total
Liabilities
3780000 5120250 13897500
Total Equity 9150000 10783650 12250491
Debt to
Equity Ratio
0.413115 0.474816 1.134444326
The above table shows solvency ratio for three consecutive years for the company
Double Ink Printers Limited.
Debt to equity ratio of Double Ink Printers Limited for three consecutive years arrives at
0.41, 0.47 and 1.13 (Louwers et al. 2015)
Part B
Impact of analytical review on audit planning for the year ending 30th of June 2015
There are several risks identified on the basis of analytical review as well as evaluating
financial reports of Double Ink Printers Limited that aligns with the impact on the audit planning
that are mentioned below with proper justification:
The profitability position of Double Ink Printers Limited had not improved in the year
2015. In addition, there is decline in profits in future period that can raise the issue of

10
AUDITING AND ASSURANCE
going concern ability of business enterprise. It is important to conduct in-depth analysis
of Double Ink Printers Limited that should be planned for exploring the future prospects
(Knechel and Salterio 2016).
The current ratio of Double Ink Printers Limited had improved in the year 2015. The
reason behind the improvement is writing back the allowance for loss in inventory.
Therefore, detailed analysis need to be done on inventory allowance for checking the
level of validity (Junior, Best and Cotter 2014).
There is increased financial risk present at Double Ink Printers Limited. The disclosures
are related to such type of risk that need to be evaluated after checking the fact whether
information for the same has been mentioned in the reports.
There is decline in the efficiency of management at Double Ink Printers Limited who
cannot manage their current assets and should make an effort to identify the possible
reasons at the same time (Eilifsen et al. 2013).
Question 2
Identification of inherent risk factors that arise from the nature of business operations of
Double Ink Printers Limited
Double Ink Printers Limited
Risk Material misstatement in financial reports
Financial risk
Financial risk can be referred to as the inability of
any business to repay its long-term liabilities on
timely manner.
There is a possibility that Double Ink Printers
Limited may try to manipulate in its financial
records so that they can maintain its current ratio
and debt to equity ratio as mentioned in the

11
AUDITING AND ASSURANCE
agreement with the lending company. In order to
maintain the current ratio, Double Ink Printers
Limited may have inflated its current assets
through increased values of receivables or stock. In
order to maintain its debt to equity ratio, Double
Ink Printers Limited may have inflated the value of
equity through increased value of retained earnings.
Information technological risk
Adopting information technology give rise to
serious threats to any business organization. In that
case, any deficiency in the information technology
control may have adverse impact on the business
enterprise (Cohen and Simnett 2014).
Double Ink Printers Limited could not maintain
balance between new accounting system as well as
existing software system. In addition, there was an
issue with improper allocation of transactions for
given period of time. The accounting concept of
periodicity was not followed and it could result to
inaccurate presentation of profitability position as
well as financial position of Double Ink Printers
Limited (Becker, Stead and Stead 2016).

12
AUDITING AND ASSURANCE
Question 3
Part A
Key risk factors related to misstatement in financial reporting
Debt covenants- One of the key risk factor that are faced by Double Ink Printers Limited
is debt covenants. There is huge pressure on the Finance Department of Double Ink
Printers Limited for meeting different debt covenants. In addition, a loan of 7.5 million
was taken from BDO Finance Limited in the year 2015 based on two covenants. Ideal
current ratio is 2:1 and debt ratio should be less than 1 (Arens et al. 2016). If the
company fails to meet these two conditions, the loan will be taken back that can
negatively affect the operations of business enterprise. There is possibility that current
assets might have inflated so that ideal current ratio can be maintained. There can be
manipulation of retained earnings where the debt ratio should be less than 1.
Nature of control environment- One of the risk factor that lead to existence of
fraudulent practices in financial reporting is existence of poorly defined job description as
well as poor segregation of work. There is a possibility that inventory can be manipulated
through showing fewer stock at the time of arrival of cash. Therefore, there is improper
system used for documentation purpose that helps in fraud prevention.