Financial Analysis of DIPL

This report presents a comprehensive financial analysis of DIPL, focusing on key financial ratios from 2013 to 2015, including current ratio, debt ratio, and gross profit ratio. It also discusses inherent and control risks associated with the company's financial statements, emphasizing the importance of understanding these risks for effective auditing. The analysis highlights trends in financial performance and provides insights into the company's management of debt and profitability.

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Name:
Course
Professor’s name
University name
City, State
Date of submission

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Introduction
Q1 Financial and ratio analysis of DIPL for the years 2013, 2014, 2015
Ratios give the company’s position in relation to many portfolios that are happening within
the company. Ratio analysis in this case will improve a companies and managements level
of knowing how to make decisions that are for the betterment of the company (Advanced
audit and assurance, 2013).
Ratio
Formula
2015 2014 2013
Curre
nt
ratio
Current
Assets
Current
Liabilitie
s
9600929/6397500
=1.50
7509150/5120250
=1.47
5385938/3780000
=1.42
Debt
ratio
Total
Liabilitie
s
Total
Assets
6397500/26147991
=0.24
5120250/15903900
=0.32
3780000/12930000
=0.29
Quick
Ratio
Cash +
Accounts
347120+5073309/6397
500
517788+4320000/5120
250
647250+2482500/3780
000

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Receivab
le
Current
Liabilitie
s
=0.85 =0.94 =0.82
Debt
Equity
ratio
Total
Debt
Total
Equity
6397500/12250491
=0.52
5120250/10783650
=0.47
3780000/9150000
=0.413
Gross
profit
Ratio
Gross
Profit
Net Sales
6604500/43459500
=0.152
6079500/37699500
=0.161
6004500/34212000
=0.175
Net
profit
Ratio
Net
Income *
Net Sales
2972183/6604500
=0.45
2291362/6079500
=0.38
2359190/6004500
=0.39
Time
Interes
t Ratio
EBIT
Interest
Expense
3867337/808038
=4.79
3357037/83663
=40.12
3454650/84379
=40.94

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Ratio
formula
2013 2014 2015
Return
on Equity
Net
Income *
Equity
2972183/ 12250491
=0.242
2291362/ 10783650
=0.212
2359190/ 9150000
=0.257
ROA Net
Income *
(Beginnin
g + Ending
Total
Assets) / 2
2972183/26147991=
=0.114
2291362/15903900=
=0.144
2359190/12930000=
=0.182
Days in
recievabl
e ratio
Gross
Receivable
s
Annual
Net Sales /
365
4180500/6604500/36
5=
230.96 days
2797238/6079500/36
5=
167.86 days
2362500/6004500/36
5=
144.01 days
Inventory
turnover
ratio
Cost of
Goods
Sold
Average
36855000/4180500
=8.816
31620000/2671362=
=11.88
28207500/2256188
=12.50

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Inventory
Receivabl
e
turnover
ratio
Net Sales
Average
Gross
Receivable
s
6604500/5073309
=1.30
6079500/4320000=
=1.40
6004500/2482500
=2.41
Ratio analysis
Current ratio- Current assets and current liabilities in DIPL is measured in this ratio. In 2013, it
stood at 1.42, in 2014 it rose to 1.47 and in 2015, it jumped further to 1.5. this shows that a
company has a good chance of recovery.
Debt ratio- total liabilities over total assets is calculated in this ratio. In 2013, it was set at 0.29,
in 2014 it rose to 0.32 and in 2015, it nose -dived to 0.26. The management is doing a good job
at DIPL in management of debt.
Quick Ratio- this ratio is a derivative of account receivable and cash divided by the current
liabilities. In 2013, it stood at 0.82, in 2014 it increased to 0.92 and in the year 2015 it dropped to
0.85.
Gross profit Ratio- DIPL gross profit ratio from 2013 reduces. It is at 0.175, in the year 2014
but suddenly drops to 0.161 and in 2015 it further reduces to 0.152. This means that there is
reduced profit in comparison sales of the company. The cost of doing business should also be
checked.

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Time Interest Ratio-keeps declining on year end from 2013 to 2015. It means that the interest
rates are rising and thus affecting the overall profits of DIPL as the year’s progress.
Return on Equity- net income comparable to equity is the result of this ratio. In 2013, it was
stagnant at 0.257, in 2014 it stood at 0.212 and in 2015 it increased to 0.242. The higher the ratio
the better the company’s position (Arens, Elder and Beasley, 2014)
Net profit Ratio- it is the ratio of net sales and overall profits. It increases as the year goes on
and this is good for the company.
Debt equity ratio- total debt over equity ratio is what the result of this ratio is. It increases albeit
in small proportions from 2013 to 2015. It shows that the debt of the company may increase as
the pace is checked on equity levels of the company.
Days in sales receivable ratio- shows the number of days for receivables to be sold. In 2013 it
was at 143.6 days, in 2014 it was at 167.94 days and in 2015 it rose to 231 days. This means that
the company is not doing too well on sales receivables due to increase in number of days
especially in year 2015.
Inventory turnover ratio- just like receivable turnover, DIPL is doing a good job in turnover of
inventory. In 2013, it was at 12.50, in 2014, it was at 11.88 and in 2015 it stood at 8.82
ROA- a ratio that shows how fast an asset will repay itself.. This means that overtime the ROA
is dropping meaning the company is not faring well on return on assets.

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Receivable turnover ratio- this is the number of days for inventory to be sold. In 2013 it was at
2.41, in 2014 and 2015 it was at 1.30 and 1.40 respectively. DIPL is doing great on this front in
turnover of receivable (Halpert, 2011).
Question 2
Inherent risk that affect the risk of a company in the misstatement of a company financial
What is inherent risk?
The inherent risk is the susceptibility that an assertion, on a type of transaction, balance in
accounts or other disclosure of information, contains errors and is material, either individually or
in aggregate form with other errors, before taking into account the possible controls
Corresponding.
Inherent risks, both business and fraud, are identified and documented prior to any internal
control consideration that might mitigate those risks.
. Review of financial performance
2. Internal control
In-depth understanding of these six areas is also useful for identifying and responding to possible
scenarios of fraud. Some of the risk factors identified will have an impact on specific areas of the
financial statements; While other factors will be dominant and will relate to many areas of the
financial statements (Gay and Simnett, n.d.). Dominant risks usually stem from weak control and
can potentially affect many areas, disclosures, and financial statement assertions. For example, if
the senior accountant is incompetent, errors are likely to affect several areas of the financial
statements and this situation may constitute an opportunity for someone to commit fraud. Thus,

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an inherent business risk can become a fraud risk.
Steps to identify inherent risks:
At this stage, each of the six areas of understanding of the company that represent sources of risk
should be analyzed in depth. Design and carry out risk identification and assessment procedures:
at this stage the sources of risk of material misstatement must be identified (Good, 2003).
Inquiries should also be made with Management on how risk factors (particularly fraud) are
identified and managed in the enterprise.
Finally, the identified risks should be related or mapped to the specific areas of the financial
statements, disclosures and affected statements. If the identified risk is dominant, the relationship
with the financial statements as a whole should be made.
There is a tendency among auditors to focus solely on financial statements when identifying
inherent risks; However, there are other aspects that need to be considered in order to achieve a
complete list of risks (Ricchiute, 2006).
Missing balances or transactions
It is necessary to go beyond the financial statements if you want to identify transactions that were
not recorded and misappropriation of monies and assets.
Causes of inaccuracies
It is imperative to use the effects or consequences of risk to identify its causes. That is, the
auditor should not settle for only identifying the effects generated by a risk, but must be able to
find and document the risk itself; the cause. For example, errors in the inventory balance are the
consequence

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To avoid this, key risks must be correlated with the financial statements as a whole.
Documentation in the process of identifying and assessing inherent risks (Vona, n.d.).The
inherent risks are always valued without considering any internal controls that could mitigate
them.
In accordance with ISA 315.26 the auditor:
On the other hand, risk assessment involves considering two main attributes: probability of
occurrence and magnitude or impact. Here's how to evaluate these two attributes.
What is the probability that incorrectness will occur as a result of the risk?
To evaluate this probability, it can simply be labeled as high, medium or low, or a numerical
score of 1 to 5 can be assigned, with 5 being the highest probability that the risk occurs. The
numerical score gives a slightly more accurate assessment.
To know what the monetary impact would be if the risk occurred, this attribute should be valued
against a specified monetary amount, such as the relative importance of execution. This
calculation is useful to identify the existence of significant risks (Vona, n.d.). An auditor can also
draw a chart with some of the possible combinations, in terms of high or low, of probability and
impact.
Design and carry out risk identification and assessment procedures: at this stage the sources of
risk of material misstatement must be identified. Inquiries should also be made with
Management on how risk factors (particularly fraud) are identified and managed in the enterprise
especially in DIPL transaction in the number of turnover in days of production.

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Question 3
Inherent Risk-The company DIPL faces a risk known as inherent risk. This is when a company
acquires another company that has risks without knowing only to realize that it it has got some
risks such as products being obsolete. Nuclear publishing company became a subsidiary of DIPL
in the year 2014 through acquisition. The publishing company had a very big catalogue of
specialized medical books which became obsolete after a new theory in medical studies was
published. Nuclear publishing company was facing inherent risk.
Control Risk-DIPL may also face control risk, this is a risk that arises due to the failure or
absence of relevant controls in the entity. Both Nuclear publishing company as well as DIPL do
not have comprehensive internal control systems that may detect and prevent instances of fraud
and error. Control risk is presumed to be greater or higher in small sized companies such as
Nuclear publishing company in which duties are not segregated well and finanacial ststements
may have a lot of errors as they are prepared by individuals who do not have the technical
knowledge in finance and accounting. A new IT system that is intergrating the accounting
system with the ledger will be installed this means that the finanacial statements that are being
used by auditors might be having problems (Raysman, n.d.).
b) when an auditor starts work, the first step is to identify the risks that the company may be
facing. Thus the auditor should work with the assumpation that there are no internal controls put
in place by DIPL or Nuclear publishing company. Theauditor should should assess how
susceptible the financial statements of DIPL are when determining the risk of the company.
Inherent risk along with control risk are some of the factors that are used by an auditor to assess
risk of material misstatement in an audit area (Ricchiute, 2006). Audit procedures to be applied

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are determined by the level risk of material misstatement in the fianancial statements of DIPL.
For example, cash on hand is more susceptible to theft than any other assets so the auditor should
be more keen when auditing the cash account of the company. In an industry where there are
new developments in technology, products of companies are more likely to become obsolete, this
is shown by Nuclear publishers ltd medical catalogue becoming obsolete. Factors to consider
include; the economy, previous known misstatements in the finanacial statement of the company
to help the auditor assess the level of inherent risk in every area (Raysman, n.d.). The other
factor is the industry to help the auditor determine the level of inherent risk.
Determining risks is key when an auditor starts working with a client. The job of the auditor in
this case is to assess inherent risk to evaluate how susceptible DIPL financial statements are to
material misstatements While assessing inherent risk, the auditor should not put in place any
thought that the company has internal controls in place.. the following are also factors that can
affect the auditor when perfoprming his audit for the company: first, external environmental
factors for example rapid change in technology where inventory become obsolete Second, the
account balance of an asset that is susceptible to fraud or theft must be considered inherently
risky. These changes the amount of time an auditor is going to spend examining these accounts
as compared to when there were no cash transactions in the company . For a company like DIPL
where some of the clientshave been said to pay in cash. These are some of the factors that
determine the level of inherent and control risk.

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References
Advanced audit and assurance. (2013). Wokingham, Berkshire: Kaplan Pub.
Arens, A., Elder, R. and Beasley, M. (2014). Auditing and assurance services. Boston: Pearson.
Audit and assurance (United Kingdom). (2012). London: BPP.
Festing, M., Müller, B. and Yissefi, S. (2008). Careers in the auditing business. Berlin: ESCP-
EAP.
Gay, G. and Simnett, R. (n.d.). Auditing and assurance services in Australia.
Good, D. (2003). The politics of public management. Toronto, Ont.: University of Toronto Press.
Halpert, B. (2011). Auditing cloud computing. Hoboken, NJ: Wiley.
Raysman, R. (n.d.). Financial services IT 2015.
Ricchiute, D. (2006). Auditing. Mason, Ohio: South-Western/Thomson Learning.
Vona, L. (n.d.). Fraud data analytics methodology.