Report: Financial Analysis of Double Ink Printers Limited Case Study

This case study provides a financial analysis of Double Ink Printers Limited, focusing on the accounting system and internal control procedures from an auditor's perspective. The report begins with an executive summary and introduction, followed by an analysis of analytical procedures perform...Read More

EXECUTIVE SUMMARY
The report has been prepared with the consideration of having the accounting aspect as the
important in the functioning of the company. Without the accounting no business can run
effectively and efficiently. Second major focus that has been thrown through this report is on the
internal control system and procedures of the company. It covers all the accounting policies
including the documentations that have been prepared to keep the finance function and other
related functions of the company operative. The major part of the report is that it has been
designed and presented from the part of the auditor instead of the company. The first major aim
of the report is regarding the plan that the auditor will prepare keeping in consideration the first
step of conducting the preliminary analytical procedures. The next aim of the report is to
ascertain the inherent risk factors that has occur because of the nature and the complexity of the
business. The last aim is to ascertain the possible areas where the chances of having fraud is high
and thus affecting the presentation of the financial statements. Having these aims the report has
been divided into different sections and the headings so that the users can have better
understanding.
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Table of Contents
Executive Summary 2
Introduction 4
Analytical Procedures to the Financial Report 5
Risk Factors and its Impact 8
Risk Factors leading to Fraud and its Impact 8
Conclusion and Recommendation 9
References 10
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INTRODUCTION
Every company shall have the sound accounting system clubbed with the internal control system
so as to have the effective and efficient working of the company. Accounting system plays
crucial in assessing the financial position of the company as on date and the financial
performance of the company which the company has gained over the period. Both the financial
position and the financial performance are judged by the financial statements of the company.
These financial statements are prepared by the accounting system. On these financial statements
the auditors of the company gives their opinion and they give their opinion after having the true
and fair audit of the books of accounts of the company. These financial statements give the
company an image in the market and in case it is not prepared in accordance with the relevant
accounting standards then the reputation of the company gets deteriorated not only in the market
but also in the eyes of the different stakeholders. Having the need of the proper financial
statements, the report has been prepared with defined aims and mainly from the auditors view.
The auditors view has been chosen so as to provide the insights of the financial information of
the company that the company has presented to their stakeholders. For the purpose of this report
the background information and the financial information of the company – Double Ink Printers
Limited has been made available.
The report has been started with the Executive summary detailing the major aims of the report
and the outline view of the report. Thereafter the brief introduction has been given detailing the
flow of the report as to how different topics of the report have been dealt. At first the analytical
procedures that is performed by the auditor in the financial report level has been discussed and
that too for the last three consecutive years and thereafter the results of the analytical procedures
are analysed as to how the audit plan of the auditor will differ from the normal plan of audit. At
the second level, the risk assessment has been conducted and the inherent risk factors that are
prevailing has been identified and detailed as to how it can affect the risk of material
misstatement in the financial reporting level. At the last in the main body of the report, the
factors has been considered which can lead to fraud at the financial reporting level and how it
will affect the audit has been detailed. In the last the report has been concluded with the due
recommendation.
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ANALYTICAL PROCEDURES TO THE FINANCIAL REPORT
For the report, the company - Double Ink Printers Limited has been made available. The
company is in the business of books printing, magazines printing and other articles which is
required to be printed and bind. The company prints the books or magazines as and when the
demand and order comes. The company follows the due procedures for the documentation and
the accounting of the revenue or other incomes during the year.
Analytical procedures are the first stage of the audit planning which every auditor performs
before starting up of the audit. It applies to all the companies whether small, medium or large
and the analytical procedures provides the insights to the auditors as to which areas more focus
of the auditors is required and to which areas less focus is required. The analytical procedures are
conducted for both the financial as well as non financial information (Anastasia, 2015). In the
given case of Double Ink Printers Limited the analytical procedures have been performed
basically for the financial information. The International Standard on Auditing has provided as to
how the analytical procedures are performed and has been provided through the standard number
315. It defines that the analytical procedures are required to be conducted throughout the process
of the audit till the time it does not gets completed and in the given case the preliminary
analytical procedures has been performed which is defined as the identification of the
relationship between different items like revenue, net profit, gross profit, debt and equity, current
assets and current liabilities, etc. Through the preliminary analytical procedures the auditor will
be able to find whether there is any risk which can have the material effect in the financial
statements leading to material misstatements (ACCA, 2016). The 315 standard has defined three
different processes of analytical procedures which includes preliminary, substantive and lastly
the final. As per the given relevant financial information of the company for the last three
co0nsecutive years ending 2013, 2014 and 2015, the analytical procedures have been performed
and the same have been detailed below in the table.
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ANALYTICAL ANALYSIS - DOUBLE INK PRINTERS LIMITED
S.
NO. Heads for Analysis YEAR 2013 YEAR 2014 YEAR 2015
1 Net Profit
Net Profit 2359190 2291362 2972183
Total Revenue 34212000 37699500 43459500
Net Profit Ratio
=
2359190/34212000
*100
=
2291632/37699500
*100
=
2972183/43459500
*100
6.90 6.08 6.84
2 Current Ratio
Current Assets 5385938 7509150 9600929
Current Liabilities 3780000 5120250 6397500
Current Ratio 1.42 1.47 1.50
3 Debt to Equity Ratio
Total Liabilities 3780000 5120250 13897500
Total Equity 9150000 10783650 12250491
Debt to Equity
Ratio 0.41 0.47 1.13
3 Finance Cost 84379 83663 808038
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Provision for Bad
Debts 6.23 46.36 4.52
5
Provision for Obsolete
Inventory 106312 125876 0
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6
Loss in Foreign
Currency 38500 49750 0
7 Loan 0 0 7500000
The above analysis depicts that if the analytical procedures has not been carried out then the
auditor would have been facing much difficulty and thereby giving the wrong picture of state of
affairs of the company and also the financial performance of the company. In order to have
further deep analysis of the analysis, following has been detailed one by one (Capital Markets
Advisory Committee Meeting, 2013).
 The net profit of the company has been at the rate of 6.90 in the year 2013, 6.08 in the
year 2014 and again 6.84 in the year of 2015. It depicts that the company has the
fluctuating revenue on year on year basis or the company in order to maintain the revenue
figure due to the pressure of the stakeholders.
 Current ratio has been sudden increased from 1.47 to 1.50. As per the background
information the company is required to keep the current ratio to the minimum to 1.50 so
as to enjoy the financing facility obtained from the BDO finance limited. Therefore, in
this case, there may be the chances that the company might have increased the debtors or
reduced the creditors so as to maintain the current ratio or also have modified the
inventory valuation.
 Interest has been gradually increased from the year 2013 to the year 2015. Despite of
increasing the interest the company has been able to earn the same net profit after tax
which the company has been earning before obtaining the loan facility from the BDO
Finance.
 The company has it made provision for doubtful debts with the very less amount detailing
that the company has overvalued its debtors so as to have the better current ratio. Also the
company has written back the provision for doubtful debts which again shows that the
company has manipulated its debtors.
 The company has not made the provision for obsolete inventory which again shows that
the company has manipulated with the inventory so as to have the better current ratio of
1.50 as stipulated by the BDO Finance Limited.
 For foreign exchange loss the auditor is required to check the transactions and the related
liability according to the relevant accounting standard (Cooper, 2015).
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The above analysis depicts that the planning decision of the auditor will automatically gets
affected and is required to consider the same while planning for the audit.
RISK FACTORS AND ITS IMPACT
Following are the two inherent risk factors that have been identified during the risk assessment
process:
 First inherent risk is of the valuation of the inventory. The company has been valuing the
inventory at the Average cost basis. As per the board meeting, the company decides to
change the inventory valuation on the basis of the First in First Out method. Due to this,
the value of inventory which has been coming with lower amount earlier will now come
with higher amount and thus, it is the inherent risk factors and may affect the risk of
material misstatements at the financial reporting level (Gary, 2017).
 Second inherent risk is of the acquisition of the Nuclear Publishing Limited along with
the patent and the copyright of medical books. As per the news article the same will
become redundant after sometime due to the introduction of new theory. Thus, it may
adversely affect the financial statements as the assets of the company will get deteriorated
suddenly.
RISK FACTORS LEADING FRAUD AND ITS IMPACT
Following are the two fraud risk factors which have been identified using the background
information and the financial information (Weiss, 2014).
 With the introduction of the new software, the employees of the company are under the
great pressure to get the new software implemented and made available to the company.
Due to this pressure there are high chances of having the mistakes and frauds being
committed at the end of the employees only.
 Second major risk factor that will lead to the fraud is the covenant made by the BDO
Finance Limited. The company has obtained 75 millions from the BDO Finance limited
with the stipulation that the company is required to maintain the current ratio of 1.50 and
in case it falls below than that then the facility given to the company will be withdrawn
from the immediate effect and thus the company will be at the liberty to commit the fraud
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and manipulate the financial statements so as to avail the facility from the BDO Finance
Limited at the best possible extent.
CONCLUSION AND RECOMMENDATION
The company has been in the business of printing since its inception and has been growing since
its incorporation. The financial information and the background information has been analysed
by the auditors by performing the analytical procedures and with the identification of the
inherent risk factors and the fraud risk factors and the same have been detailed. In order to end
the report the company has the sound internal control system subject to the audit observations
that has been noted separately at each stage.
It is recommended for the company to avoid such manipulative and fraud practices.
REFERENCES
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ACCA, (2016), “Analytical Procedures”, available on
http://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-
study-resources/p7/technical-articles/analytical-procedures.html accessed on 15-08-
2017.
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on
https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 16-
08-2017.
Capital Markets Advisory Committee Meeting, (2013), “Conceptual Framework”
available on
http://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP
%203%20conceptual%20framework.pdf accessed on 16-08-2017.
Cooper S, (2015), “A Tale of Prudence”, available on http://www.ifrs.org/Investor-
resources/Investor-perspectives-2/Documents/Prudence_Investor-
Perspective_Conceptual-FW.PDF accessed on 16-08-2017.
Gary S., (2017), “The Importance of Inherent Risk Factors: Auditor’s Perceptions”,
Australian Accounting Review, Vol 3, Pp 38-44.
Weiss D, (2014), “Faithful Representation” available on
http://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October
%202014.pdf accessed on 16-08-2017..
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