Comprehensive Audit Report and Analysis: DIPL Printing Press

This report presents an audit analysis of DIPL, a printing press, focusing on financial statement analysis, audit procedures, and risk assessment. The analysis includes ratio analysis of financial data from 2013 to 2015. The report identifies inherent risks such as non-routine procedures, new IT system implementation, and potential fraud risks related to segregation of duties and the new IT system. The report explores substantive and analytical audit procedures, internal controls, and the auditor's role in mitigating audit risk and detecting fraud. The report highlights the importance of proper controls and the auditor's responsibility in expressing an opinion on the financial statements and the steps an auditor should take in the case of identified risks. The report also emphasizes the significance of professional skepticism and expert opinions in audit processes. The report uses various sources of information to support its findings.

By student name
Professor
University
Date: 22 August 2017.

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Contents
Question no 1…………………………………………………………………...2
Question no 2…………………………………………………………………...5
Question no 3…………………………………………………………….....….6
Refrences.....……………………………………………………………….......8
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Question no 1
Audit of any entity has become an integral part of the compliance procedures since the
introduction of IFRS and other regulatory reforms even for the small and medium sized businesses.
Audit is done with the motive of giving reasonable assurance to its stakeholders (users of financial
statements) like the shareholders, creditors, debtors, customers, banks, loan institutions, government,
etc. a reasonable assurances to the accounts have been prepared on a fair basis and that it resembles
the true state of affairs of the company. Audit is an independent examination of the books of accounts
prepared by the management with the view to comment upon its viability and reporting. There may be
numerous assumptions and estimates, which may be put up by the management in the course of
bookkeeping, which needs to be checked by the auditor and commented upon (Raiborn, Butler & Martin
2016). The audit is not restricted to only large or small, profit or non-profit organisation but it may be
required for any entity depending upon the regulations. There are various procedures being followed by
the auditor to express an opinion, which may include substantive and compliance audit procedures.
Substantive audit procedures are concerned with checking the supporting evidences on the basis of
which the recording has been done in the books like invoice copies, bills, signatures, date, registration
no, proper disposal of the tax at the right time, vouching of related expenditures and the sales made to
the customers. Besides this, it also includes verification of the liabilities and assets reported in the
statement of affairs on the reporting date. It is done with the view to check whether false recording of
incomes or expenses has not been done, similarly only those assets and liabilities have been reported
which actually exist materially (Knechel & Salterio 2016).
In case the auditor does not gets sufficient confidence to comment upon the financials and finds
a risk of material misstatement in the books, he may take help of the analytical audit procedures. It
includes checking of the significant ratios, comparison of the company accounts with the budgeted
figures and forecasted figures, industry trend analysis and zero based budgeting analysis etc. All this
procedures assist the auditors in developing the problem statement and forming an audit plan to be
taken forward in further audit. This helps them to determine the areas which they need to focus more,
the timing, which needs to be allocated, and the extent to which the same needs to be examined. These
key result areas have a significant bearing on the results of the organisation (Sonu, Ahn & Choi 2017).
Internal financial control ascertains whether the auditor needs to focus more on the internal processes
and procedure or not. In case the it is strongly built in the organisation, less would be the risk and less
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would be the extent of checking red, however in case the internally built controls itself are weak, more
would be the extent of checking required (Jones 2017).
In the given case, DIPL, a printing press is the subject client, which has undergone huge changes
with respect to the system, the change in policies, estimates. Moreover, since the new auditors have
taken over from the old auditors, more would be responsibility as the opening balances also needs to be
verified. Given below is the ratio analysis being figured out from the financials being given for 2013,
2014 and 2015? In the absence of budgeted figures, the analysis has been restricted to actual basis only.
Further, since the industry ratios are not available, the same has not been taken into consideration.
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
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%
Ratio Analysis
1. Short term solvency or liquidity Ratios
2. Debt Management Ratios
Current Ratio = Total current assets/ Total current liabilities
Liquid ratio /Quick Ratio = (Total current assets - Inventory - Prepaid
expenses)/ Total current liabilities
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)
From the above ratios, it is clear that the DIPL is firmly placed in terms of current and liquid ratio with
both of them falling within the industry trend of 2 and 1 respectively. In addition, the debt management
ratio is well under control and the entity can take the benefit of trading on equity in the future and
increase returns to the shareholder. The profits have been stagnant at around 6% and the company has
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been finding it difficult to increase the margins. However, the collections have been on the weaker side
and the debtors receivable days have increased from 26 to 42 days.
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
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%
3. Asset management Ratios
Inventory Turnover = COGS/Inventory
Days' Inventory = 365/Inventory Turnover
Fixed Assets Turnover = Sales/net Fixed Assets
Total Assets Turnover = Sales/Total Assets
Profit Margin / Net Profit ratio = Net income / Sales
Operating Margin ratio = Operating Profit/Sales
Return on Equity = Net income/total owners' equity
Receivables Turnover Ratio = Sales/Accounts Receivable
Days Receivable = 365/Receivable turnover
4. Profitability ratios
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Question 2
Audit risk is the type of risk that states that there are certain risks in auditing that are present which
might lead to material misstatement in the books of account. Even though the auditor applies all the
major substantive and analytical procedures in auditing, there are high chances that there might be
certain risk elements present overall. The three types of risk in any audit are – inherent risk, control risk
and detection risk. Inherent risk occurs because of certain factors other than lack of proper internal
control. There might be many reasons for the same but they are not in the hands of the management. It
is usually high in cases where judgement is involved or complexity is high. In case of new organisation,
the presence of inherent risk is considered high in comparison to well-established organisations.
Control risks occur when the management fails to ascertain proper controls in the system that leads to
material misstatement. Detection risk occurs when the auditor fails to detect certain errors that might
be present in the system and where proper professional scepticism is not applied. In case of DIPL, there
is certain inherent risk involved and the same are explained hereunder (Grenier 2017).
The first case is where the management is applying and adopting non-routine procedures and operation
without proper judgement. This might lead to material misstatement. The management is considering
new methods of calculation of inventory, which is different from the normal method that the company
follows. In addition, the company wants to adopt new methods of calculation of depreciation,
considering the life of asset to be twenty years, whereas in normal procedures the life is considered
thirty years. They management is adopting the same without any proper research just based on his own
judgement. What we can ascertain from the same is that this is a deviation from the routine
transactions that the company follows. It makes it difficult to properly verify the records and it might
lead to under or over valuation of property and assets. The second type of inherent risk is present in the
adoption of the new IT system without any proper research and verification on part of the management.
The management has not done any reconciliation, pre instalment precaution where not taken by the
management. This might lead to overvaluation or undervaluation of the system and that might lead to
material misstatement. It is thus important that the management must apply proper control so that risk
can be mitigated and expert help can be taken. Before installing any system or making any changes in
the overall operations, the management must make sure that proper verification of the system must be
done. In addition, there must be measures on part of the auditor to mitigate the risk as much as
possible. As we see in the case of the DIPL, inherent risk might affect the overall profitability of the
company (Fay & Negangard 2017).
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Solution 3
In case of auditing, one of the most important work of the auditor is to ascertain any kind of fraud that
might be present in the system and that might affect the overall functioning of the system and might
lead to discrepancies in the financial statement. It is important that the auditor apply proper substantive
and analytical procedures that might help in mitigating of the risk. Fraud occurs when the management
or the employee indulges in certain activity that might affect the financial system and the profitability
for his or her own personal motives. There are various measures to mitigate the fraud. Few of the fraud
elements in case of DIPL is ascertained hereunder-
In first case, there are chances of fraud involved in non-segregation of important duties by the
management. It is important the work must be properly segregated such that at each level the
management can establish control. (Bae 2017) Where one person is handling the entire system, they
might hamper the same for their own benefits. It can be seen in the case of DIPL, where the major
departments like management of the account receivables and handling the cash receipts is given to one
person. A single clerk is responsible for collection of data, pricing, making and verifying the payment and
reconciling the account. In case of accounts receivable also, one clerk is given all the responsibility and
there are no proper control ascertained by the management. If the clerk indulges in defalcation, it will
be hard for the management to identify the same. Thus, it is important that segreagt6ion of work must
be there; timely checks must be done in absence of the employees. Proper responsibility must be
established so that people can be held up in case there is any fraud. The auditor should bring this to the
management and make sure that the management does it work properly and make sure that the duties
are properly segregated and proper control is established. One more fraud risk is present in the
adoption of the new IT system without any proper research and verification. There are high chances that
some personal motives of the management must be involved because the decision was taken in a lot of
haste and the management also failed to properly reconcile the overall cost and the expected profit
from the new system. Thus tree are high chances of fraud and the auditor can mitigate the same by
making sure that expert opinion is taken for the new system and its valuation. The pre instalment cost
must be considered along with the overall expected profitability. The new system may be over and
undervalued, affecting the overall profitability of the company. Thus, it is important that the
management should ascertain proper control and the auditor must do complete verification to make
sure that major cancels of fraud are reduced. The management must be held responsible and in case the
management fails to provide proper support to the auditor, the auditor can modify the audit report and
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can give an unfavourable or disclaimer opinion in respect of the same. These are the few methods by
which fraud risk can be mitigated effectively (DeZoort & Harrison 2016).
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References
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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