Audit Assignment Report: Financial Statement Analysis and Audit

This audit assignment report analyzes the financial statements of Double Ink Printers Limited, focusing on analytical procedures, risk assessment, and fraud risk factors. The report begins with an overview of analytical procedures, including preliminary and substantive analytical procedures, and their impact on audit plans. It examines financial ratios such as gross profit, net profit, return on assets, return on equity, debt-equity ratio, and various turnover ratios, highlighting significant changes and their implications for audit procedures. The report then delves into risk assessment procedures, identifying inherent risks related to inventory valuation methods and the implementation of a new IT system. Finally, the report addresses fraud risk factors, including changes in inventory valuation and a loan condition tied to the current ratio, and their impact on audit procedures. The analysis provides a detailed examination of financial data and potential risks, offering valuable insights for audit planning and execution.

Audit assignment
August 23, 2017
Audit assignment
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Audit assignment
Table of Contents
Contents
Table of Contents.............................................................................................................................2
Question 1........................................................................................................................................2
Question 2........................................................................................................................................7
Question 3........................................................................................................................................9
References......................................................................................................................................11
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Audit assignment
Question 1
Analytical procedures are procedures those help the auditor in making auditor plan and plan how
to conduct an audit, which areas of the company’s financial report needs a greater number of
procedures etc (Glover et al., 2000). Analytical procedures can be performed in two steps in first
step auditor makes understanding regarding entity, business environment surrounded by entity,
internal controls applied by entity in its daily operating procedures, this step is known as
preliminary analytical procedure study (Auditing and Assurance Standards Board, 2009) and in
second step auditor calculates ratios from financial information as well as apply some statistical
tools and this step is known as substantive analytical procedure (HIRST & KOONCE, 1996).
Preliminary analytical procedures on the company Double ink printers limited results that
company is a public company, working in the service sector business enviournemnt. Copamy’s
major service is to provide print on demand i.e. company prints various paper print materials for
the clients for theire exact order requirment. The secondry way of earning revenue for the
company is to provide e-books with titles of publishers, for providing this service company
change commission as well as fees. Company’s internal conrol from the view point of
preliminary procedures seems good except for the non-application of seggeregation of duties.
Application of substantive analytical procedures on the company will impact audit plans and
audit procedures on the following way,
2013 2014 2015
Gross Profit 6004500 6079500 6604500
÷ Revenue from Operations 34212000 37699500 43459500
Gross profit 17.55% 16.13% 15.20%
Net profit 2359190 2291362 2972183
÷ Revenue from Operations 34212000 37699500 43459500
Net profit ratio 6.90% 6.08% 6.84%
Net profit ratios show profitability percentage of the company for total profit and gross profit
ratio shows profitability percentage for profit from direct activities of the company. In the
present case, net profit ratio is increased in 2015 even after a decrease in the gross profit ratio for
the same year. This is unusual assertion hence this will impact audit procedures by an increase in
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Audit assignment
a number of procedures for all assertions present in income statement especially those assertions
which can be changed by an organization with own discretion like accousting estimates,
valuation methods etc.
Net profit 2359190 2291362 2972183
÷ Total Assets 12930000 15903900 26147991
Return on asset 18.25% 14.41% 11.37%
Net profit 2359190 2291362 2972183
÷ Total Equity 9150000 10783650 12250491
Return on equity 25.78% 21.25% 24.26%
Return on asset shows the profitability of company for total asset invested in the company and
return on equity shows the profitability of company for total equity invested in the company. In
the present case, return on equity is increased in 2015 and return on asset ratio decreased for the
same year. Return on asset ratio decline due to higher investment in the assets of the company.
This will impact audit procedures by an increase in a number of procedures for all transactions
related to assets especially for the transactions related to assets purchase and method of asset
valuation.
Total Liabilities 3780000 5120250 13897500
÷ Total Equity 9150000 10783650 12250491
Debt/ equity 41.31% 47.48% 113.44%
EBIT 3454650 3357037 3867337
÷ Interest expense 84379 83663 808038
Time interest 40.94 40.13 4.79
In the year 2015, company’s debt increased with a very higher amount hence debt financing is
also increased and entity becomes more leveraged. A Higher level of leverage increase risk
because non-payment of debt related obligation may result in company’s liquidation. Due to this
debt-equity ratio increased and times interest ratio decreased during the year. This will impact
audit procedures by an increase in a number of procedures for making understanding regarding
the need for new debt capital.
Accounts Receivables 2482500 4320000 5073309
* Days 365 365 365
÷ Revenue from Operations 34212000 37699500 43459500
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Audit assignment
Days sales outstanding 26.49 41.83 42.61
Revenue from Operations 34212000 37699500 43459500
÷ Accounts Receivables 2482500 4320000 5073309
Accounts receivable turnover ratio 13.78 8.73 8.57
Accounts receivable turnover ratio shows frequency of collecting debts by the company its
receivables. Days sales outstanding in how many days company can convert its debts into cash.
In the present case Accounts receivable turnover declined and days sales outstanding decline due
to increase in accounts receivable. It indicates that company starts to give longer credit period
which may increase bad debts. Hence auditor must make procedures regarding accounts
receivable outstanding and check whether is there are any fake accounts receivable???
Revenue from Operations 34212000 37699500 43459500
÷ Total Assets 12930000 15903900 26147991
Asset turnover ratio 2.65 2.37 1.66
Asset turnover ratio shows revenue earned by the company for per dollar investment in assets of
the company. Higher the ratio better will be for the company. In the present case in 2015 this
ratio declining due to huge investments in assets of the company. This will impact audit
procedures by an increase in a number of procedures for all transactions related to assets
especially for the transactions related to assets purchase and method of asset valuation.
Current Assets 5385938 7509150 9600929
÷ Current Liabilities 3780000 5120250 6397500
Current ratio 1.42 1.47 1.50
Quick Assets 3129750 4837788 5420429
÷ Current Liabilities 3780000 5120250 6397500
Quick ratio 0.83 0.94 0.85
These both ratios show that how efficiently a company uses its short term assets for paying
current obligations. Current ratio increased but quick ratio decreased it means current ratio
increased due to increase in inventory. This will impact audit procedures by an increase in a
number of procedures for all transactions related to inventory especially for the transactions
related to inventory valuations and estimates related to the assertion of inventory like inventory
obsolesce provision.
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Audit assignment
Analytical procedures are procedures those help the auditor in making auditor plan and plan how
to conduct an audit, which areas of the company’s financial report needs a greater number of
procedures etc. Results from these procedures will increase the procedures for the above
mentioned assertions and transactions.
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Audit assignment
Question 2
Risk assessment procedures are performed by organizations for examining the risk present in the
financial reports which may misstate financial reports of the company significantly (Auditing
and Assurance Standards Board, 2011), due to which decisions of users of financial statements
will effect considerably. This process is a relevant process for conduct of the audit. Under this
process auditor of the organization obtain assurance that risk falsehood in the financial report is
at the level which can be accepted by the auditor. Risk of significant falsehood in the financial
statements can arise due to three reason i.e. due to nature of transactions, due to the absence of
appropriate controls or due to non-detection significant falsehood by auditor because of the
lower number of audit procedures. Risk arises because of first, second and third reasons termed
as inherent risk, control risk, and detection risk respectively (Houston et al., 1999).
In the present case in Double ink printers limited, following are inherent risk factors,
Change in inventory valuation method
In the present case Double ink printers limited change its method for estimating the carring
amount of inventory. Previously company used average cost method where the average cost of
all puchases applied to closing inventory, but in 2015 company stoped using average cost
method and starts using first in fist out method, where inventory valuation made on the basis of
the purchase price of units purchased just before the end of the period. Due to inflation first in
first out method always provide higher inventory value. Incerease in carring amount of closing
inventory incerease the amount of profit earned by copany during the year in the income
statement. Incerease in the amount of profit earned by copany during the year in the income
statement surely impacts the decisions of person useine financial repors for making decisions.
Application of new IT system
During the year company set new system for accounting processes. This system will be fully
automated and will also integrate general ledger system of the company. This system imposed by
the board of a company with pressure without having appropriate staff and after receiving
complaints form IT department of the company after application of the system. Application of
this system results in many problems like interfacing between the previous and new system, non-
allocation of year end entries to the appropriate accounting year. Due to this transaction in the
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Audit assignment
year, there may be a higher number of inappropriate allocations of significant transaction year
end entries that can influence decisions of person useine financial repors for making decisions.
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Audit assignment
Question 3
Fraud is an illegal activity which performed for enjoying unjust benefits. Fraud is an intentional
act and cannot be interchanged with the error because the error is an unintentional act. Fraud is
performed with the intention hence person making fraud use ways to cover that fraud. Fraud is
covered by fraudster hence there is a higher chance of non-detection of fraud in comparison of a
chance of non-detection of error (Auditing and Assurance Standards Board, 2013). Fraud risk
arises when any person comes under the pressure of showing the better position of the financial
report in comparison of the actual position of financial report or it can arise when any person
having a higher level of privileges (Knapp & Knapp, 2001). Fraud can be initiated at any level of
the organization’s management, staff or employee.
In the present case following are the fraud risk factors arise,
Fraud risk
factor
Company changes its method for estimating the
carring amount of inventory. Previously
company used average cost method but in 2015
company stoped using average cost method and
starts using first in fist out method, Due to
inflation first in first out method always provide
higher inventory value. In addition to this
company stopped making inventory absolance
reserve. The company took a loan during the
year 2015 for BDO finance company which
includes a condition that loan can be recalled by
financing company due to the non maintenance
of current ratio at least one.
In previous year company
made an investment in the net
assets of Nuclear Publishing
limited company. A company
by stating the reason that this
company’s book data is
worthy and useful for
increasing revenue from e-
books.
Identification
of fraud risk
factor
Connecting both transactions with each other
emerge the doubt of the presence of fraud risk
factor because the company needs to increase
current ratio for meeting financial company’s
condition. Current ratio can be increased by an
increase in inventory value. Incerease in carring
In current year a journal
article reveals that book data
of Nuclear Publishing limited
can be loose its value due to
the implication of new theory.
This article emerges as fraud
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Audit assignment
amount of closing inventory incerease a number
of current assets. Incerease in the current assets
incerease current ratio and results in satisfaction
of loan condition.
risk factor due to arise of
doubt of misappropriating of
company’s resources for
taking unjust benefits.
Impact on
audit
This Identification of fraud risk factor will
increase the audit procedures for the inventory
valuation and professional skepticism of
auditor.
This Identification of fraud
risk factor will increase the
audit procedures for having
knowledge regarding the
reliability of journal article.
Auditor will also make the
procedure to know whether
person initiated the purchase
of net assets of Nuclear
Publishing limited company
was aware regarding new
theory or not.
References
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Audit assignment
Auditing and Assurance Standards Board, 2009. ASA 520 Analytical Procedures. [Online]
Available at: www.auasb.gov.au/admin/file/content102/c3/ASA_520_27-10-09.pdf [Accessed
August 23 2017].
Auditing and Assurance Standards Board, 2009. Auditing Standard ASA 200 Overall Objectives
of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing
Standards. [Online] Available at:
http://www.auasb.gov.au/admin/file/content102/c3/ASA_200_27-10-09.pdf [Accessed 23 august
2017].
Auditing and Assurance Standards Board, 2011. Auditing Standard ASA 315 Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity and Its
Environment. [Online] Available at: file:///F:/GS%20Solution%20(60%20paise)/Aug/16/risk
%20assement%20procedure.pdf [Accessed 23 august 2017].
Auditing and Assurance Standards Board, 2013. Auditing Standard ASA 240 The Auditor's
Responsibilities Relating to Fraud in an Audit of a Financial Report. [Online] Available at:
http://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_
240.pdf [Accessed 2017 August 23].
Glover, S.M., Jiambalvo, J. & Kennedy, J., 2000. Analytical Procedures and Audit‐Planning
Decisions. AUDITING: A Journal of Practice & Theory, pp.27-45.
HIRST, D.E. & KOONCE, L., 1996. Audit Analytical Procedures: A Field Investigation.
Contemporary Accounting Research, 13(2), pp.457-86.
Houston, R.W., Peters, M.F. & Pratt, J.H., 1999. The Audit Risk Model, Business Risk, and
Audit‐Planning Decisions. The Accounting Review, 74(3), pp.281-98.
Knapp, C.A. & Knapp, M.C., 2001. The effects of experience and explicit fraud risk assessment
in detecting fraud with analytical procedures. Accounting, Organizations and Society, 26(1),
pp.25-37.
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