HI6026 Audit, Assurance & Compliance: Double Ink Printers Ltd Report

This report provides an analysis of audit, assurance, and compliance procedures within Double Ink Printers Ltd (DIPL). It emphasizes the importance of effective audit planning, including the potential need for an audit expert to ensure a true and fair view of the company's financial statements. The report highlights the significance of materiality in the audit process, discussing factors that influence its determination, such as the possibility of fraud, tolerance levels, the complexity of the organization's operations, inventory levels, and global transactions. It further elaborates on why these factors are crucial for calculating the preliminary figure for overall materiality, ensuring compliance with auditing standards and facilitating informed decision-making for the company's management.

HI6026 Audit, assurance and compliance
1

Table of Contents
Introduction:....................................................................................................................................3
Task 1...............................................................................................................................................4
As part of your planning process, you are considering whether you will need to use the
services of an expert in the audit of Double Ink Printers Ltd (DIPL).........................................4
Task 2...............................................................................................................................................7
2. (a) As part of your planning process, you are considering whether you will need to use the
services of an expert in the audit of Double Ink Printers Ltd (DIPL).........................................7
2. (b) Explain why the identified factors are relevant to the calculation of the preliminary
figure for overall materiality........................................................................................................9
2. (c) Describe how the identified factors will influence preliminary figure for overall
materiality in the audit planning process...................................................................................11
Conclusion:....................................................................................................................................13
References:....................................................................................................................................14
2

Introduction:
The project report highlights the need and importance of the audit system and compliance
procedure in the working operations of the Double Ink Printers Ltd (DIPL) and the need of
developing an effective planning process so as to implement it in its operation. The report further
explains the need and benefit of employing an audit expert for conducting the audit work so as to
have a true and fair view over the conduct of the concerned company. The project report also
highlights the concept of materiality and its significance in the concerned company at the
preliminary stages so as to enable the company to carry its operation in an effective manner.
Apart from this, the project report highlights the factors that would influence the concept of
materiality. The report has given key areas to be focused throughout the report enabling the
concerned organization to make a value judgment and thereby capturing a great share in the
market.
3

Task 1
As part of your planning process, you are considering whether you will need to use the
services of an expert in the audit of Double Ink Printers Ltd (DIPL).
Auditing of the company will provide the management of the company with a true and fair view
with regard to the income statement and the balance sheet of the company. The proper working
procedure of audit will provide the management of the company to gain valuable information
such as cost assessment, control procedure, to enhance the quality of the overall environment of
the company so as to increase the productivity level of the organization. As such, there exists a
great need for the appointment of the audit expert who could facilitate the management of the
company in the generation of the actual working pattern and position of the company.
According to Benli, et. al. (2014), the work of an audit expert is to be performed by such
individuals or organization which helps in possessing the required information to the company
and have relevant skills and knowledge in the field of accounting and auditing course of actions.
Audit expert is a person who assists the auditor in its working in the compilation of the suitable
audit evidence. The skill and knowledge of the auditor decide the viability and the need for the
information collected in his audit process. An audit expert needs to have the following skills and
knowledge such as:
Vision power: An audit expert needs to deal with various clients in various industries, therefore
it calls the auditor to clearly understand the nature of the business the client is dealing so as to
develop a clear picture of all the issues related to the concerned business.
Oversee a big scenario: An audit expert is required to understand and evaluate the working
operations and pattern quickly so as to enable him to develop all the planning stages with regard
to his audit working. Development of the audit planning stages requires an in-depth knowledge
and expertise level, therefore an auditor is required to oversee in a broad sense (Tepalagul & Lin,
2015).
Decision-making ability: Auditor expert after collection of information is required to evaluate
the relevant and irrelevant information. Therefore it requires the auditor to understand and judge
4

the best decision and implement it in its working so as to have a knowledge of company's
position. The client requires an audit expert to be a strong and effective decision makers.
Leadership quality: According to Tepalagul & Lin (2015), a good audit expert calls for
possession of leadership qualities so as to gain the confidence of the client. The client expects the
auditor to be a good mentor as well as coach. The client also expects the auditor to provide an
appropriate solution to the critical problems so that the working of the organization is not
affected.
The need of an auditor is required in multiple fields such as :
 In risk evaluation
 In assessment of reliability and integrity
 Helps in business plan initiatives
 Providing the safe working environment
 Ensuring that the accounts are prepared in accordance with the norms
 Supports in verification of documents
 Computation of tax liability.
In case of Double Ink Printers Ltd (DIPL), the concerned company is engaged in multiple
activities and operating in a dynamic environment that involves multiple changes as such brings
out many complex issues with regards to its working and affect its operation. The company
needs to focus on all such issues which negatively acting as a barrier to its progress thereby
requires a call for the appointment of the audit expert. However, the company is required to
ensure that the auditor is appointed possess relevant skills and knowledge and is able to work
with the prescribed norms.
The auditor is required to take into consideration before making any judgment is that all the
financial statements and report are prepared in accordance with the set standards. The
compliance of all rules and regulation will enable the management of the concerned company to
be free from all aspects and issues an further concentrate in its working process. With all the
aspects covered it is essential for Double Ink Printers Ltd (DIPL) to appoint an audit expert so as
5

to ensure a smooth working and concentrate on the issues of the stability and growth (Benli,
et.al., 2014).
6

Task 2
2. (a) As part of your planning process, you are considering whether you will need to use
the services of an expert in the audit of Double Ink Printers Ltd (DIPL).
Considering the given case of Double Ink Printers Ltd. (DIPL), it can be observed that there are
various factors affecting the determination of materiality level before starting the audit of DIPL.
Out of these factors, some are directly influencing while some affects indirectly. The prominent
feature that needs to be considered is that materiality level is different from significance level.
Both are interrelated and are dependent on each other. The level of materiality needs to be
determined at the time of audit planning. Also, it may be revised and modified accordingly
during the conduct of the audit. In other words, the determination of materiality level is a flexible
decision and as such can be updated or revised as per the requirement of the audit procedures
conducted. According to Baldauf, et. Al(2015), the careful consideration of all the factors
affecting the determination or modification of materiality level is very important. Purpose of
conducting audit can be successful only after correct determination of the materiality level as
well as the significance level. Ignorance of any one factor will not provide the desired result
from the audit procedures. Also, decisions taken at audit planning will be worthless. For the
better result of audit procedures, audit materiality level needs to be determined at the audit
planning stage itself. For this purpose, the audit team should have a basic understanding of the
type of business in which the organization is engaged in. However, five major or dominant
factors which need careful evaluation throughout the audit are listed below:
 The possibility of fraud: The possibility or occurrence of fraud in the auditee
organization is the major factor in the determination of materiality level.
 Tolerance level: The level of tolerance is the level under which misstatement which can
be tolerable or acceptable by the concerned audit team. The determination of tolerance level
requires careful consideration of various factors (Baldauf, et. Al., 2015).
 Working of the organization: The working and type of the organization assist in
determining the level of materiality. It is also equally important to understand the proportion
of each segment or division towards the overall revenue of the organization.
7

 Level of inventory: The inventory or stock level is dependent on the type of the business
the company is engaged in. Inventory is one of the balance sheet items which require detailed
audit procedures since there is the possibility of fraud in relation to inventory.
 Global and multinational transactions: In the dynamic environment, every
organization, whether manufacturing or service-oriented industry, need to transact globally.
The above five major factors do not imply that only these factors need to be considered. There
are other factors as well which are equally important in materiality level determination. Other
influential factors may be previous audit report, fraud committed earlier, frequent change in top-
level management, division-wise turnover of the concerned organization, related party
transactions and so on. Thus it can be seen that there are numerous factors which help in the
determination of the audit materiality level. But the above factors need to be continuously
reviewed as such change in any of the above factor may seriously affect the materiality level
(Ratanasongtham & Ussahawanitchakit, 2015).
8

2. (b) Explain why the identified factors are relevant to the calculation of the preliminary
figure for overall materiality.
Out of the various factors, major 5 factors have been identified affecting the determination or
identification of the audit materiality level which is determined at the audit planning level.
Before depicting the reason for choosing 5 factors out of various factors, it is impulsive to
understand the role and importance of determining audit materiality level. The audit team along
with concerned auditor needs to understand the advantages and importance of determination of
audit materiality level. Determination of materiality level is mandatory as per auditing and
assurance standards of some nations across the globe.
This is why it is said that identification of factors relevant to the determination of the audit
materiality level is a cumbersome task and requires expertise level.
The reasons for choosing such major factors are explained below in detail:
According to Kristensen (2015), the auditor needs to consider all the types of fraud that may
occur in the organization along with their chance of occurrence. The occurrence of fraud is
concerned with the probability of occurrence and is denoted in percentage terms. The fraud can
be committed by the outsider or it can be committed by the insider to the organization. The fraud
committed by an insider is difficult to detect since insider is well-aware about various techniques
regarding how to hide and cover such fraud with the help of window dressing.
If the misstatements are under the tolerance level, then the audit team needs not to worry since it
denotes that misstatements are under control. The level of tolerance needs to be determined after
the determination of the materiality level. It can also be stated that tolerance level and materiality
level are mutually interrelated as well as interdependent. The level of tolerance is directly
concerned with the errors associated with the accounting principles (Ratanasongtham &
Ussahawanitchakit, 2015).
If an organization is engaged in multiple and various operations then the level of materiality will
be high since there may be the possibility of misstatements in the books of accounts of either
operation. The organization may try to conceal fraud in one segment in another segment or
9

division since in case of corporations engaged in one single business, the concerned company
requires the assistance of the third party to conceal the fraud.
There are many organizations which need to maintain a high level of stock at every time. On the
other hand, some business concerns need not maintain so much stock since they produce goods
on order basis. Determination of the inventory level requires various aspects such as Economic
order quantity, just-in-time policy, and similar aspects.
As the no. of foreign transactions increases, it becomes essential to devote time and effort in such
transactions. The business enterprise can be indulged in export or it can be importing goods. As
such, the classification of transactions and their respective amount need to be considered in the
determination of materiality level. There are various aspects which need to be considered while
verifying the books of accounts of any business corporation who is engaged in international
business (Kristensen, 2015).
10

2. (c) Describe how the identified factors will influence preliminary figure for overall
materiality in the audit planning process.
To elicit how the identified factors are affecting and influencing preliminary figure for
considering overall materiality can be better understood by linking the factors identified earlier
with the given case study of DIPL.
Thus, an attempt has been made to associate the identified factors with the cited example of
DIPL.
The linkage can be explained with the help of following points:
 The possibility of fraud: Since DIPL is also earning revenue from its online business by
selling e-books through its official website, it is exposed to cyber fraud. Also, it is earning
substantial revenue from ‘print on demand’ criteria. There may be a possibility in regard to
such transactions. Besides, cyber fraud the company is also exposed to other frauds. As a
result, the occurrence of fraud is a major influential factor affecting the level of materiality.
 Tolerance level: The tolerance level should not be too high otherwise it will
implementation of audit procedure will not provide the desired result. On the other hand,
fixing of low tolerance level will bring disrepute the functioning of the concerned auditee
organization. Mode of payment or extent of credit allowed to debtors need to be taken into
consideration while determining the level of tolerance (Ratanasongtham &
Ussahawanitchakit, 2015).
 Working of the organization: Double Ink Printers Limited is engaged in the business of
printing materials as well as advertising on order basis. Besides this, one of the major sources
of revenue comes from the downloading of e-books from the website of the DIPL. Thus it
becomes important to consider the business of DIPL in consideration while determining the
level of materiality. Memorandum of the DIPL will help to understand the working of the
organization.
 Level of inventory: DIPL is maintaining different types of inventory. The level and type
of inventory depending on the order taken. It can also be interpreted that the materiality of
order determines the amount and extent of inventory. For instance, printing the exact
11

quantities as ordered by the concerned customer is very important otherwise it will create
wastage and as such DIPL will have to incur the cost associated with such scrap. Valuation
of inventory is another critical aspect which needs to be taken care of since DIPL adopts an
average method for valuing its stock.
 Global and multinational transactions: DIPL is purchasing its required raw material
from Australia as well as some Asian countries. As such, the company is exposed to foreign
currency translation exposure. Also, accounting for such foreign currency denominated
purchase transactions is another critical issue. Application of wrong accounting principles
will not present a true and fair view of the final accounts of DIPL (Kristensen, 2015).
12