Audit Assurance and Compliance Report: DIPL Financial Analysis

This report presents an analysis of audit assurance and compliance, focusing on a case study of DIPL. It begins by exploring analytical procedures, such as ratio analysis (current, solvency, and profitability ratios), to assess DIPL's financial performance over three years. The report then identifies inherent risk factors stemming from the nature of DIPL's business operations, including information technology and financial risks. Furthermore, it details two types of fraud risk factors related to material misstatements arising from fraudulent reporting, focusing on the nature of the control environment and debt covenants. The report concludes by examining the impact of these identified fraud risks on the conduct of the audit plan, emphasizing the importance of thorough verification and reconciliation processes to mitigate potential risks. This comprehensive analysis provides valuable insights into the complexities of audit assurance and compliance in a real-world business context.

Running head: AUDIT ASSURANCE AND COMPLIANCE
Audit Assurance and Compliance
Name of Student:
Name of University:
Author’s Note:

1AUDIT ASSURANCE AND COMPLIANCE
Answer to Question 1:
Analytical procedures deal with the evaluation of financial information and the use of this
procedures helps in increasing the efficiency of auditors. Procedures deal with the analysis and
evaluation of expected and plausible relationship between non-financial and financial data by
auditors. It might involve use of simple methods for analysis purpose along with using complex
models comprising of elements of data and existing of relationships. Using the analytical
procedures is helpful to auditors in planning state or preliminary stage. Investigation threshold of
auditors helps in increasing the efficiency of procedures in planning stage. This would help in
increasing the understanding of audit about the nature of business of clients and recognize any
audit risks that would arise by considering unexpected balance or unexpected relationship
between data presented. Auditors modify audit plan by depicting the extent of deviations from
expected values (Knechel et al., 2016).
Several tools that are used in analytical procedures include common size analysis, ratio
analysis and benchmarking. Common sizing helps in making the financial performance between
the entities over the time and it also makes comparison of financial performance over two
different time periods. Auditors such as assets can consider many items and liabilities for
examining deviations arise. The audit plan can be analysed by auditors by using the
benchmarking tool. Such tool will assist auditors in ascertaining the cause of deviations for
detecting variances and determining the root cause. In the current case study, the analytical
procedure use by auditors would be ratio analysis. This particular tool helps auditor in
identifying the performance tends of DIPL over the period of time and comparing it with other
indicators. In the particular case study, calculation of several ratios has been done such as current
ratio, solvency ratio and profitability ratio. Application of technique of ratio analysis has been

2AUDIT ASSURANCE AND COMPLIANCE
applied in the evaluation of financial information provided by DIPL over the period of three
years (Decaux & Sarens, 2015).
Particulars 2013 2014 2015
Profit margin 0.068 0.60 0.06
Solvency ratio 0.62 0.44 0.21
Current ratio 1.42 1.46 1.50
Ratio Explanation Audit impact
Current ratio The liquidity position of DIPL is
depicted by calculation of
Current ratio. DIPL has
witnessed an improvement in
their liquidity position as
demonstrated by increase in
current ratio over the time period.
Ratio stood at 1.42 in financial
year 2013 and it increased to 1.46
and further to 1.50 in financial
year 2014 and 2015 respectively.
Increase in current ratio is
indicative of the fact that ability
of DIPL to meet its current
obligations using its current
Improvement in current ratio 0f
DIPL is mainly associated with is
writing back of allowance for
loss resulting from inventories.
Auditors would be efficient while
planning the audit because it will
assist them in evaluating the
financial position of organization
(Knechel, 2016).

3AUDIT ASSURANCE AND COMPLIANCE
assets.
Profitability ratio The comparative analysis is
depicted by calculation of
profitability ratio for three-year
period. Profit margin of IPL has
remained more or less same for
three year. Ratio stood at 0.068.
0.60 and 0.60 for financial year
2013, 2014 and 2015
respectively. There have been
variations in the ratio only by
fewer points. Increased profits
have been mainly associated with
saving of tax amount resulting
from higher amount of interest
expenses.
Any deviation in ratio would
assist auditors in ascertain the
reason behind the deviation
compared to previous years.
There has not been any
improvement in profitability
ratio. Auditors will be able to
assess the going concern ability
of DIPL by analysing the reason
for falling ratio. Future prospects
of organization will be planned
due to analysis of this ratio
(Earley et al., 2016).
Solvency ratio From the above figure, it can be
seen that there has been fall in
solvency ratio is indicative of
fact that there is high probability
that company will make default
on its debt obligations. Solvency
ratio for financial year 2013
stood at 0.62, 0.44 and 0.21 for
financial year 2014 and 2015
respectively. Falling ratio
Auditors would be assessed in
determining financial stability
during favourable and
unfavourable conditions. This
particular ratio helps in
identifying that there is an
increase in financial risks and it
is required by DIPL to maintain
adequate flow of cash for
meeting long and short-term

4AUDIT ASSURANCE AND COMPLIANCE
indicates that company has been
relying more on debts borrowed
from financial institutions.
obligations (Chambers & Odar,
2015).
Answer to Question 2:
Identification of two inherent risk factors due to the nature of operation of business of
DIPL:
The inability of business to meet their obligations and daily requirements lead to
generation of business risks.
Inherent risk Risk of material misstatement
Information technology risks An organization is posed to several threats due to
the adoption of advanced technology for carrying
out daily operations. Company adopted an
Information technology system in year 2015 for
integrating into general ledger system. There can be
adverse impact on operations of organization if
there exists any deficiency in technology system
adopted. DIPL has currently adopted a novel
accounting system and there are several risks
associated with it. Workers currently working in
organization do not have sufficient knowledge and
expertise in running the accounting system.
Moreover, installation and reconciliation of system

5AUDIT ASSURANCE AND COMPLIANCE
will put excessive workload on workers and this
will pressurize them to get indulge in fraudulent
activities. Accounting information system is
exposed to several risks due to some sort of
uncertainties arising from natural or manmade
disasters (Doelitzscher, 2014).
It becomes difficult for company to maintain
balance between existing system of accounting
software and the new advance system for
accounting. Furthermore, certain transactions were
not properly recorded as preparation of financial
statements did not adhere to periodicity concept in
accounting.
Financial risks
Financial risks are the risks that are related with the
inability of organization to meet their long-term
obligations. With increase in outside liabilities,
financial risks of DIPL will also increase. Over the
period of last three years, there has been increase in
proportion of debt in comparison to equity.
Organization has increasing burden of repaying the
amount of loan and regular payment of interest.
Inability of DIPL to make the regular payment of
interests and principal amount on time would
threaten the long-term solvency position of
It is certainly possible in the current scenario faced
by DIPL that certain transactions will not be
properly recorded in the financial statements. There
are several reasons associated with the fraudulent
activities due to manipulation by staff members an
workers working therein. Obtaining loan from the
lending institutions requires DIPL to maintain the
ratios at specific level in order to obtain required
loan amount. It is required by DIPL to maintain
current ratio at level or around 1.5 and solvency
ratio less than one. Maintaining such level of
current ratio requires organization to inflate their

6AUDIT ASSURANCE AND COMPLIANCE
organization (Hardy et al., 2014). current assets through increasing value of
inventories and receivables. For maintaining the
level of prescribed debt ratio has forced the
company and they have increased the value of
retained earnings through inflating value of equity.
In addition to this, there are certain factors that
would lead to material misstatement in the financial
statements presentations. Lack of proficiency and
inefficiency among employees has resulted in
improper recording of transactions and they are
bound to make mistakes (Duncan et al., 2014).
There are additional work load for installing the
accounting system and this would also results in
additional amount of errors.
Answer to Question 3:
Two types of fraud risk factors that are related with material misstatements arising from
fraudulent reporting due to fraud activities are discussed. There are possibilities on part of
operations of DIPL that my lead to evolving of Fraudulent activities.
Fraud risks Explanation
Nature of control environment Fraudulent practices in financial reporting of DIPL
would arise because of poor segregation of work
and improper definition for description of job.
Account payable clerk does the recording of all the

7AUDIT ASSURANCE AND COMPLIANCE
transactions related to inventories. Purchase,
valuation and quantity of inventories arrived in
organization is prepared by accounting clerk. It is
certainly possible that there can be manipulation of
inventories recording. This can be done by
mentioning fewer amount of inventories received
during the time of arrival and manipulation of cash
transactions can be done by mentioning that there
has been excess arrival of inventories. Moreover,
DIPL does not have any proper system of
documentation that would help in escalating fraud
activities. Other activities that can be accountable
as fraud is due to excessive work pressure on
existing workers resulting dissatisfaction. They will
be asked to maintain particular level of inventories
and ensure smooth running of novel accounting
system. This particular act would also force and
pressurized them to get engaged in activities that
might evolve fraud in organization.
Debt covenants It is required by the finance department of DIPL to
meet various criteria and requirements of lending
institutions such as maintaining prescribed level of
solvency ratio and current ratio. Two covenants
were required for acquiring loan of amount 7.5
million from BDO finance. It was required by
DIPL to maintain current ratio at around 1.5:1. In

8AUDIT ASSURANCE AND COMPLIANCE
addition to this, it was required by them to maintain
debt ratio lower than one. The operations of DIPL
would be adversely affected if the organization is
not able to maintain the ratio at the prescribed level
and loan would be taken back. It is certainly
possible that DIPL would be able to maintain and
stick on the conditions provided by indulging in
fraudulent activities (Bepari & Mollik, 2015).
DIPL can maintain dent ratio below one by
inflating value of retained earnings and inflating
current assets would help in maintaining the
prescribed level of current ratio. Therefore, in order
to meet certain stakeholders, DIPL would be
pressurized to indulge in some fraudulent activities.
Impact of above two identified fraud risks on conduct of audit plan:
It is required by auditors while conducting the audit of any organization to reduce the
level of risks faced to some possible extents and to certain acceptable level.
Fraud risks Impact of such risks on audit plan
Nature of control environment It is required by auditors to carry out investigation
for enquiring about any deflation in current
liabilities and inflation in the current assets. In
addition to this, there needs to bed one careful
verification of value of retained earnings mentioned