Comprehensive Financial Audit Report Analysis for DIPL

This report presents a comprehensive analysis of an audit conducted on DIPL's financial statements. It begins with an overview of the audit process, emphasizing the importance of both substantive and analytical audit procedures. The report then delves into the inherent risks associated with DIPL, including those related to non-routine transactions, the implementation of a new IT system, and changes in accounting policies. It identifies potential material misstatements arising from these risks. Furthermore, the report addresses fraud risks, particularly those linked to the IT system installation and the lack of segregation of duties within the company. The auditor's approach to mitigating these risks is discussed, highlighting the need for thorough document review, reconciliation, and the implementation of robust internal controls. The report concludes by emphasizing the auditor's role in providing assurance on the fairness of financial statements and the importance of addressing potential fraud.

By student name
Professor
University
Date: 18 August 2017.

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Contents
Question no 1…………………………………………………………………...2
Question no 2…………………………………………………………………...6
Question no 3…………………………………………………………….....….8
Refrences.....……………………………………………………………….......10
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Question no 1
The process of audit is integral to the business and viability of the financial statements prepared
by the entity. It gives the reasonable assurance to the management, users of the financial statements,
both internal and external that proper procedures have been followed while preparing it and utmost
care has been taken as it carries the decision making of many stakeholders. Audit is an independent
examination of the books of accounts of the entity, whether profit oriented or not, with the view to
express an opinion that it has been prepared on the unbiased basis and it follows the respective
financial reporting framework prescribed by various international bodies. The foremost responsibility of
the auditor is not to find out the frauds and errors committed by the management but to highlight the
key financial designs being followed by the entity and whether it is sufficient or not. There are various
audit procedures being followed by the auditor which mainly includes substantive audit procedures and
analytical audit procedures (Knechel & Salterio 2016). Substantive audit procedures are those, which
deal with checking of the various documents and supporting for financial transactions entered into in
the current financial year, this gives assurance that the consistency in maintaining the books of accounts
is being followed. This include vouching of incomes and expenses incurred and recorded in the books in
the mentioned period & verification of assets and liabilities as recorded in balance sheets at the end of
the period. But in case the view is not clear on the financials & the auditor wants to investigate further,
then he has to resort to the analytical procedures which includes analysis of key financial ratios, trend
analysis, comparison of the actual data of the company with the planned or forecasted data, budgetary
and variance analysis. The nature timing and extent of the audit procedures to be undertaken by the
auditors while performing the audit is determined by the results of these preliminary analytical
procedures. If the internal financial control were weak, more would be the risk and more would be audit
procedures red and vice versa. All this helps the auditor to comment on whether there are risks of any
material misstatements in the financial accounts prepared (Grenier 2017).
Further, in case of given case of DIPL, the new auditors are taking over from the old auditors, so
the extent of checking would be increased in order to validate the opening balances of the concern.
Besides this, audit planning as to what will be the critical areas to be checked, what will be auf=did
procedures, what is the time to be given to a particular area, what all needs to be discussed with the
management also depends on the results of the these analytical procedures. Moreover, since the
industry data is not available, we have just kept our discussion and analysis to the ratio analysis and the
trend for the last 3 years (Jones 2017).
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On comparison of the critical ratios like liquidity ratios, profitability ratios, debt management
ratios and asset management ratios for the three financial years, following were the major observation:
1. Short term solvency or liquidity Ratios
2013 2014 2015
Total current assets 5,385,938 7,509,150 9,600,929
Total current liabilities 3,780,000 5,120,250 6,397,500
Result 1.42 1.47 1.50
2013 2014 2015
Total current assets - Inventory - Prepaid expenses 3,129,750 4,837,788 5,420,429
Total current liabilities 3,780,000 5,120,250 6,397,500
Result 0.83 0.94 0.85
Ratio Analysis
It shows the firm's use of financial leverage in its capital mix to generate the profits, & maintaining the cost of funds at the
lowest by keeping the optimum mix of outside funds & own funds. Since debt is generally used to represent low cost of
financing & equityshareholders expect higher returns, there needs to be an optimum mix of the capital. The current ratio
has moved to 1.42 in 2013 to 1.50 in 2015 which states that the company has a stable current ratio & possesses the ability to
meet its present obligations from its current assets. Also, Liquid ratio has marginally increased from 0.83 in 2013 to 0.85 in
2015 which again is best as per the industry trends of 1 such that the company is able to convert its liquid assets readily into
cash to meet its immediate obligations.
Current Ratio = Total current assets/ Total current liabilities
Liquid ratio /Quick Ratio = (Total current assets - Inventory - Prepaid
expenses)/ Total current liabilities
2. Debt Management Ratios
2013 2014 2015
Total Debts 3,780,000 5,120,250 13,897,500
Total Assets 5,120,250 15,903,900 26,147,991
Result 74% 32% 53%
2013 2014 2015
Total Debts 3,780,000 5,120,250 13,897,500
Total owners' equity 9,150,000 10,783,650 12,250,491
Result 41% 47% 113%
It shows the firm's use of financial leverage in its capital mix to generate the profits, & maintaining the cost of funds at the
lowest by keeping the optimum mix of outside funds & own funds. Since debt is generally used to represent low cost of
financing & equityshareholders expect higher returns, there needs to be an optimum mix of the capital. Here, Debt equity
ratio has increased from 0.41:1 in 2013 to 1.13:1 in 2015 which is again as per the industry trends of 2:1, which shows that the
company has used more of its own capital rather than the outside debts, thus in future it can use the debts to enjoy
leverage benefits.
Debt ratio = (Total Debts / Total Assets) or ((Total assets- total owners'
equity)/total assets)
Debt to Equity Ratio = (Total Debt/Total owners' equity) or ((Total assets-
total owners' equity)/total owners' equity)
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3. Asset management Ratios
2013 2014 2015
Sales 34,212,000 37,699,500 43,459,500
Accounts Receivable 2,482,500 4,320,000 5,073,309
Result 13.78 8.73 8.57
2013 2014 2015
No. of days 365 365 365
Receivable turnover 13.78 8.73 8.57
Result 26.49 41.83 42.61
2013 2014 2015
COGS 28,207,500 31,620,000 36,855,000
Inventory 2,256,188 2,671,362 4,180,500
Result 12.50 11.84 8.82
2013 2014 2015
No. of days 365 365 365
Inventory turnover 12.50 11.84 8.82
Result 29.19 30.84 41.40
2013 2014 2015
Sales 34,212,000 37,699,500 43,459,500
Net Fixed Assets 7,544,062 8,394,750 15,572,062
Result 4.53 4.49 2.79
2013 2014 2015
Sales 34,212,000 37,699,500 43,459,500
Total Assets 12,930,000 15,903,900 26,147,991
Results 2.65 2.37 1.66
Inventory Turnover = COGS/Inventory
Days' Inventory = 365/Inventory Turnover
Fixed Assets Turnover = Sales/net Fixed Assets
Total Assets Turnover = Sales/Total Assets
Receivables Turnover Ratio = Sales/Accounts Receivable
Days Receivable = 365/Receivable turnover
These ratios explains the abiliy of the company to generate the sales by managing its assets & inventories. It also shows the
how the company is managing its' credit policy & inventory like receivable & inventory turnover ratio. Here also the credit
days have increased froom 26 to 42 days which means that the collection cycle has weakened in the long run.
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4. Profitability ratios
2013 2014 2015
Net income 2,359,190 2,291,362 2,972,183
Sales 34,212,000 37,699,500 43,459,500
Result 6.90% 6.08% 6.84%
2013 2014 2015
Operating Profit 6,780,000 7,230,000 8,308,088
Sales 34,212,000 37,699,500 43,459,500
Result 19.82% 19.18% 19.12%
2013 2014 2015
Net income 2,359,190 2,291,362 2,972,183
Total owners' equity 9,150,000 10,783,650 12,250,491
Result 25.78% 21.25% 24.26%
This measures the firm's profit generation capability. It also measures what percentage of profit is earned against the
income generated in the normal course o fteh business. It also shows how the debt & the assets of the firm are being
manged to generate the income. IN case of DIPL, the net profit ratio has remained constant from 6.90% in 2013 to 6.84% in
2015 indicating the profit margin has neither increased nor decreased & there is a kind of stagnancy in the company and it is
not being able to grow in terms of absolute numbers.
Also, the Return on equity (ROE), has gone marginally down from 25.78% in 2013 to 24.26% in 2015 which is indicative of the
fact the company is struggling to meet its shareholders' expectations.
Profit Margin / Net Profit ratio = Net income / Sales
Operating Margin ratio = Operating Profit/Sales
Return on Equity = Net income/total owners' equity
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Solution 2
There are various types of risks that are associated with an audit, and that often leads to material
misstatement. Risks are there because many interventions are present while management and
preparation of the books of account. In addition, it is possible that there will be material misstatement
because of the same. In the case of DIPL, also, there are few inherent risks and that are explained
hereunder-
Inherent risk Reasons of Risk Risk of material misstatement.
The one of the major risk that
the company faces is the one
that is in association with
adoption of non routine
transactions. They are not in
sync with the general policies of
the company and the basic
functionalities (Fay &
Negangard 2017).
The main reason of risk is that
the company has installed a
new IT system which is not in
line with the policies of the
company and that is the reason
why there is risk associated
with the same. It is not a
function of routine nature; the
company is using the same for
the first time. The
management has not also done
proper reconciliation in that
matter (Raiborn, Butler &
Martin 2016).
There is a risk of material
misstatement because there
might be possibility that the
management has failed to
include certain material facts
about the new It system. As
there has been no
reconciliation hence it exposes
the company to a risk of huge
material misstatement. This
might be explained by the
overvaluation or
undervaluation of the system,
which may affect the overall
profitability of the company.
This is the way in which the
adoption of the new system
might affect the materiality of
the organisation.
One of the other risks is the
one that is associated with the
change in accounting
assumptions and policies and
that makes the work of the
The management of the
company is undertaking new
assumptions of changing the
method of valuation of
inventory and also the method
There is a risk of material
misstatement associated with
the same because the company
is changing the accounting
policies without any proper
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auditor difficult. of depreciation. The new CEO
wants to calculate depreciation
by considering life of the asset
to be 30 years whereas the
industry standards say that the
life will be 20 years. It is not
based on any research and is
only based on the experience of
the individual. So there are high
chances of inherent risk
involved in the same because it
is not in the hands of the
individual but in the hands of
the management (DeZoort &
Harrison 2016).
research and that might have
some material effects on the
books of account of the
company. It is thus important
on part of the management to
ascertain that all the necessary
disclosures are properly given.
All the details are properly
recorded and before making
any changes in the accounting
estimates that might affect the
overall materiality of the
company. The management
must conduct research and
analysis on his part and then
take such important decisions
in regard with the functioning
of the company. All risks of
material misstatement must be
avoided by the company and
the auditor must properly verify
all avenues to do the same.
Solution 3
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Fraud occurs due to certain malpractices by the employees or the management of the company for their
personal benefits. It occurs when the employees wants to take certain advantages of the negligence of
the management. The main role of the auditor is to conduct the audit in such a manner that all types of
associated risks of fraud are eliminated.
Fraud Risk Risk Factor Identified Approach of the auditor
The main area where there can
be risks of fraud is in the
instalment of the new IT system
by the management, that was
done without any research and
no reconciliation was done
after the installation of the
same by the management (Bae
2017).
The main risk factor associated
with the same is that there may
be personal motive of the
management involved in
installing the new system,
without any proper care. There
was no reconciliation done by
the management of the results
with the standard. Thus it is an
area of fraud where the
management might have some
personal motives behind their
actions.
The approach of the auditor
should be to ask the
management to provide all
necessary documents regarding
the new system. The new
system must be properly
reconciled, third party opinion
must be asked for to judge the
efficiency of the same. All this
will help in mitigating the
overall risks that might be
associated with the installation
of system without proper
checking.
The other type of fraud risk is
factor is that there is no
segregation of duties. One
person is given the job of
handling key departments and
no proper checks are available
for the same. There is lack of
proper internal control by the
management which has lead to
such fraud risk (Sonu, Ahn &
Choi 2017)
The main risk factor associated
is that in the company, the
clerk is given the important job
of handling the accounts
receivable. He is entrusted with
the formation of the invoice,
verification of the payment and
authorising the same, In case of
collection of receipts from the
debtors, a single employee is
given the job of downloading
The auditor can mitigate the
same by asking the
management to ensure proper
segregation of important work
departments and should also
see that third party checks is
done to ensure that the
employees are loyal in their
work. In this way the
management can mitigate the
fraud and make sure that the
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the receipts, verifying the
payments, and entering them
in the books of the company
and also verify the same. This
leads to a major disability on
part of the accounts
maintenance and
establishment of proper
control.
employees are doing their work
effectively. And also proper
internal control measures must
be established that will be very
helpful for the organisation,
and also for the auditor. It will
reduce the overall chances of
risk on part of the
management.
References
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Bae, SH 2017, 'The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From
Korea', Journal of Applied Business Research, vol 33, no. 1, pp. 153-172.
DeZoort, FT & Harrison, PD 2016, 'Understanding Auditors sense of Responsibility for detecting fraud
within organization', Journal of Business Ethics, pp. 1-18.
Fay, R & Negangard, EM 2017, 'Manual journal entry testing : Data analytics and the risk of fraud',
Journal of Accounting Education, vol 38, pp. 37-49.
Grenier, J 2017, 'Encouraging Professional Skepticism in the Industry Specialization Era', Journal of
Business Ethics, vol 142, no. 2, pp. 241-256.
Jones, P 2017, Statistical Sampling and Risk Analysis in Auditing, Routledge, NY.
Knechel, WB & Salterio, SE 2016, Auditing:Assurance and Risk, 4th edn, Routledge, New York.
Raiborn, C, Butler, JB & Martin, K 2016, 'The internal audit function: A prerequisite for Good
Governance', Journal of Corporate Accounting and Finance, vol 28, no. 2, pp. 10-21.
Sonu, CH, Ahn, H & Choi, A 2017, 'Audit fee pressure and audit risk: evidence from the financial crisis of
2008', Asia-Pacific Journal of Accounting & Economics , vol 24, no. 1-2, pp. 127-144.
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