ASSIGNMENT 1

NAME - MOINBHAI VAHORA

SUBJECT - HI6026S: AUDIT, ASSURANCE,
AND COMPLIANCE
STUDENT ID EAB2712
Question 1: As an auditor, you are conducting your preliminary analytical procedures based on
the background information for DIPL contained in the case. Apply analytical procedures to the
financial report information of DIPL for the last three years. Explain how your results influence
your planning decisions for the audit for the year ending,

Answer:

As auditor preliminary analytical procedures includes the analysis of the past financial data and
information using different financial analysis and planning tools. Here for DIPL case we will use
ratio analysis method for planning decisions for the audit.

Ratio Analysis for DIPL Ltd

Analyzing ratios shows the stand of company in different functional areas of the company like
liquidity, debt position, turnover, profitability etc. It helps company in making important
decisions in management decisions for the better growth of the company.

Current Ratio

Ratio 2015 2014 2013

Formula

Current ratio Current 9600929/639750 7509150/512025 5385938/378000

Assets/Current 0 0 0
Liabilities
=1.50 =1.47 =1.42

(2015) (2014) (2013)

Using current assets and current liabilities of DIPL we found the current ratios for all three years
and the current ratio shows increasing trend throughout this years because from 2013 to 2014
it increased from 1.42 to 1.50 which shows good liquidity in company.

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Debt Ratio

Debt Total Liabilities / 6397500/26147991 5120250/15903900 3780000/12930000

ratio Total Assets
=0.24 =0.32 =0.29

(2015) (2014) (2013)

Using this ratio we discovered the liabilities over assets and which fluctuated in this three years
but in last year management managed to minimize the ratio and it fall down to 0.24 in 2015
which shows effective control of management over liabilities.

Quick Ratio

Quick Cash + 347120+5073309 517788+4320000/ 647250+2482500/3780000

Ratio Accounts /6397500
Receivable/ 5120250 =0.82
Current =0.85
=0.94 (2013)
Liabilities (2015)
(2014)

The quick ratio for DIPL shows quite disappointing results because in 2013 it was 0.82 which
increased in 2014 at 0.92 and in 2015 it fallen to 0.85. This indicates that management should
take effective steps regarding cash and accounts receivables.

Debt Equity Ratio

Debt Equity Total Debt/ 6397500/12250491 5120250/10783650 3780000/9150000

ratio Total Equity
=0.52 =0.47 =0.413

(2015) (2014) (2013)

The debt and equity ratio shows that the proportion of debt increased throughout the year and
the ratio continuously increased from 0.41 to 0.52 and it should be suggested to management
to maintain this ratio.

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Gross Profit Ratio

Gross profit Gross Profit/ 6604500/43459500 6079500/37699500 6004500/34212000

Ratio Net Sales
=0.152 =0.161 =0.175

(2015) (2014) (2013)

Continuous fall observed in profitability ratio of DIPL from 2013 to 2015 profit reduced
compared to the sale of the each year. It indicates that COGS of the DIPL increased over the
years and which affected the profit of business.

Net Profit Ratio

Net profit Net Income/ 2972183/6604500 2291362/6079500 2359190/6004500

Ratio Net Sales
=0.45 =0.38 =0.39

(2015) (2014) (2013)

The net profit ratio of DIPL continuously increased in this time lag of 2013 to 2015 and the net
income of the business over the net sales of business increases year by year and its really good
for DIPL and they should maintain this performance.

Time Interest Ratio

Time Interest EBIT/ 3867337/808038 3357037/83663 3454650/84379

Ratio Interest Expense
=4.79 =40.12 =40.94

(2015) (2014) (2013)

The interest expense increased ten times in year ending 2015 which lead the time interest ratio
to fall from 40.94 to 4.79 and the increase in these expenses affects the overall profit of the
DIPL.

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Return on Equity

Return on Equity Net Income/ 2972183/ 2291362/ 2359190/

Equity 12250491 10783650 9150000

=0.242 =0.212 =0.257

(2015) (2014) (2013)

This ratio is very important to consider for any business because higher numbers of this ratios
indicates higher position of the company and in case of DIPL the ratio was fall to 0.212 in 2014
but management maintained the ratio again in 2015 with improved ratio of 0.242. which
indicates good signs for DIPL.

Return on Assets

ROA Net Income/ 2972183/26147991= 2291362/15903900= 2359190/12930000=

(Beginning +
Ending Total =0.114 =0.144 =0.182
Assets) / 2 (2015) (2014) (2013)

Return on assets ratio indicates that how fast assets repay. In case of DIPL this ratio shows
decreasing trend and it decreased very badly from 2013 to 2015. And it shows that
management is not doing well on return on assets.

Days in Receivable Ratio

Days in Gross 4180500/6604500/36 2797238/6079500/36 2362500/6004500/36

receivab Receivables 5 5 5
le ratio /
Annual Net =230.96 days =167.86 days =144.01 days
Sales / 365 (2015) (2014) (2013)

This ratio describes the time frame of receivables recovery of business in days. DIPL reported
very weak in recovering the receivables in this three years because the days of recovery
continuously increased in last year it was 230.96 days increased by 86 days as compared to

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2013 and which is not good for DIPL. Management must have to take corrective steps to reduce
this.

Inventory Turnover Ratio

Inventory Cost of 36855000/4180500 31620000/2671362= 28207500/2256188

turnover Goods Sold/
ratio Average =8.816 =11.88 =12.50
Inventory (2015) (2014) (2013)

Inventory turnover of DIPL gave very good results the inventory turnover ratio decreased over
the years by approximately 4 times and which shows overall good performance.

Receivable Turnover Ratio

Receivable Net Sales/ 6604500/5073309 6079500/4320000= 6004500/2482500

turnover ratio Average Gross
Receivables =1.30 =1.40 =2.41
(2013)
(2015) (2014)

This ratio indicates period in which the whole inventory sold in days. And DIPL growing very fast
because continuously boost their sales. The receivable turnover decreased by approximately 1
day in this three years and it is good for DIPL.

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Question 2: You are conducting your risk assessment of DIPL, as part of the planning for your
audit for the year ended 30 June. Identify two inherent risk factors that arise from the nature of
DIPLs business operations. Explain why it is a risk and how it may affect the risk of material
misstatement in the financial report.

Answer:

The inherent risk is weakness of the auditing which accurse due to the errors in transaction,
errors in opening closing balances of accounts or other disclosure data, it may be in individual
or in aggregate form with any other errors.

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).

Two risks identified.

1. Inventory valuation

One of the inherent risks is that DIPL follows the average cost method for the valuation of
raw material inventory and which is not appropriate as the current raw material prices are
substantially above the average cost. It is risk because following the average cost method
for valuation results in underestimation of the available raw material inventory and which
affects the financial statements of the company.

It also causes material misstatement in financial report because if DIPL does the valuation at
average cost of all raw materials the current purchased materials are undervalued and
which affects directly the financial reports when the total inventory recorded into the
financial reports at average cost.

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 2. Depreciation policy.

Another inherent risk is DIPL estimated the life of printing presses at 20 years but in
printing industry the potential life of printing presses are 30 years. But DIPL adopted
straight line depreciation method for 20 years for their printing presses. So it indicates high
depreciation expenses in the business.

It causes material misstatement in financial reports because the potential life of printing
presses are 30 years and it considered as 20 years for depreciation purpose so in financial
report its error which creates misstatement in financial reports because the deprecation
treatment will give more depreciation expenses and it will affect the profit in the financial
reports.

Question 3: As part of your audit of DIPL for the year ended 30 June 2015, you are considering
the risk that fraud may have occurred (a) Based on the background information for DIPL
contained in the case, identify and explain two key fraud risk factors relating to misstatements
arising from fraudulent financial reporting to which DIPL may be susceptible. (b) Explain how
the risk factors identified in (a) above would affect the conduct of the (a) audit.

Answer:

Inherent Risk-The particular organization DIPL appearances a danger known as inalienable

hazard. This will be The point when an organization gets an alternate organization that need
dangers without Comprehending just on understand that it it need got exactly dangers for
example, results continuously outdated. Atomic distributed shares of the organization turned
into an subsidiary for DIPL in the quite a while 2014 through securing. Those distributed
particular organization required a huge inventory of particular medicinal books which got to be
outdated after another hypothesis on therapeutic investigations might have been distributed.
Atomic distributed shares of the organization might have been confronting intrinsic danger.

Control Risk-DIPL might additionally face control risk; this is a danger that arises because of
those disappointment or nonattendance of important controls in the substance. Both atomic
distributed organization and also DIPL don't have far reaching inside control frameworks that
might recognize What's more forestall instances from claiming cheating also lapse. Control
danger will be presumed with make more terrific alternately higher Previously, little measured
organizations for example, such that atomic distributed shares of the organization for which
obligations would not isolated great Also fiscal explanations might have a considerable measure
about errors Concerning illustration they would readied Toward people who don't bring the
specialized foul information On back What's more accounting. Another it framework that is
coordinating those bookkeeping framework for the record will make introduced this implies

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that those fiscal explanations that need aid constantly utilized by auditors might a chance to be
Hosting issues (Raysman, n. D. ).

B) At an evaluator begins work, those to start with step may be should distinguish those
dangers that the organization might make confronting. Accordingly those evaluator ought
further bolstering worth of effort for the supposition that there would no inward controls
placed set up Eventually Tom's perusing DIPL alternately atomic distributed agency. Those
evaluator ought further bolstering ought assess how powerless the fiscal explanations from
claiming DIPL would At deciding the hazard of the agency. Intrinsic hazard alongside control
danger are some of the Components that need aid utilized by a evaluator with survey danger
about material misquote to an review region (Ricchiute, 2006). Review methods will be
connected are dead set by the level danger about material misquote in the fiscal explanations
for DIPL. To example, trade available may be more powerless on robbery over whatever viable
benefits with the goal those evaluator if be additional sharp At auditing those money account
of the shares of the organization. For an business the place there would new developments in
technology, items of organizations need aid less averse on ended up obsolete, this is indicated
Toward atomic distributers ltd medicinal inventory turning into outdated. Elements on think
about include; those economy, past referred to misstatements in the monetary articulation of
the particular organization should help the evaluator survey those level from claiming
inalienable hazard done each range (Raysman, n. D. ). Alternate component is those industry on
assistance those evaluator figure out the level about intrinsic danger.

Deciding dangers will be way when an evaluator begins working with a customer. Those
employment of the evaluator in this body of evidence will be to survey intrinsic danger to
assess how defenseless DIPL fiscal explanations need aid will material misstatements same time
surveying intrinsic risk, the evaluator ought not placed set up whatever possibility that the
organization need inside controls set up.

The Emulating are likewise Components that could influence the evaluator The point when
performing as much review to those organization: In outside natural factors for instance fast
progress Previously, engineering the place stock turned outdated Second, the account
equalization from claiming a benefit that is powerless to duplicity or robbery must be
acknowledged naturally unsafe wander. These transforms the measure about the long haul an
evaluator is setting off to use all the looking at these accounts Likewise contrasted with The
point when there were no trade transactions in the agency. To an organization like DIPL the
place exactly of the customers need been said will pay in money. These would a few of the
Components that focus that level from claiming intrinsic Also control hazard.

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REFERENCES

- Mahdi Salehi, Ali Mansoury, and Zhila Azary , 2009. Audit Independence and Expectation
Gap: Empirical Evidences from Iran. Journal of Economics and Finance.

- BPP, 2012. Auditors Liabilities and Responsibilities. In: Advance Audit and Assurance.
London: BPP, pp. 46-65.

- 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

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