Audit - Assurance and Compliance for Double Ink Printers Limited

Question: Discuss about theAudit, Assurance and Compliance for Double Ink Printers Limited. Answer: While developing the plan of audit relating to Double Ink Printers Limited (DIPL), the analytical procedure related to financial information offers great benefits. On the other hand, the plan of audit offers the needed guidelines and directions to the auditors during the operations of audit. In other words, the plan of audit helps the auditors to maintain the audit cost in a certain limit to curb confusion with the audit clients (Carson, Redmayne and Liao 2014). The procedure of evaluating the financial performance of the organisation could be formed with the help of various mechanisms. It has become possible for the financial analysts and accountants to utilise the financial information in order to make various business decisions through the analytical method. The common size analytical method helps in the process of evaluating the financial declaration of the organisation from the prevalent referential points. The fundamental merit is that it lends support to compare the financial statement from different financial timelines. The financial analysts and accountants could make use of various lines of items from the financial statements and accordingly, the base of preparation could be made for the firms. For example, the process of registration of various accounting and financial items in the financial statements like owners equity, overall liabilities and assets could be taken into account along with the dissection of digression from the normal position (Carson et al. 2014). One of the primary analytical processes related to financial information is benchmarking, which could be used to evaluate the plan of audit. In addition, ratio analysis is a fundamental analytical procedure associated with the financial information of a firm, as it could be used to compare the performance of the firm with its competitors to develop the audit plan (Cohen and Simnett 2014). Explanation: The analytical methods of the organisations to dissect the financial information has considerable impact on the process development associated with audit planning and this is vital for flowing financial information amongst the certain departments of the organisations. Certain ratios in the context of DIPL have been taken into account for this purpose: Particulars 2013 2014 2015 Profit margin 0.068 0.60 0.06 Current ratio 1.42 1.46 1.50 Solvency ratio 0.62 0.44 0.21 Based on the above table, it could be stated that the organisation has experienced an improvement in liquidity position with the increase in current ratio over the years. However, the fluctuating profit margin has helped in disclosing the net income gained compared to overall revenues generated (Fernandez-Feijoo, Romero and Ruiz 2016). Along with this, such profitability evaluation provides the accountants and financial analysts with an insight of ascertaining the expenses of the firm. Furthermore, an insight about the efficacy of the company budget has been obtained, which would serve the need for business expansion. The favourable as well as unfavourable modifications in the financial performance and ratios of the organisation help the auditors in developing an overview of the present financial condition of the organisations. In this regard, the consideration of solvency ratio has been made that has declined over the years. Such assessment is crucial to ascertain the desirable or undesirable movement of the firm performance over consecutive years. In other words, it could be stated that the evaluation and comparison of ratios and financial performance help the accountants and financial analysts to determine the relative financial condition of the organisation over the years. It helps to determine whether the current financial condition of the firm is feasible or not. If the condition is not feasible, the management needs to implement corrective measures to improve its financial performance. Hence, the analytical process associated with financial information has immense value (Gu, Simunic and Stein 2017). Based on the provided case, the management has failed to record certain business transactions. Such method has direct association with the inconsistencies associated with the planning of various sales and marketing activities of the organisation (Hardy 2014). The financial evaluation of DIPL implies that the profit level is inadequate when compared with the overall revenues generated. The fundamental cause is the inefficiency and ineffectiveness of the management in handling its business operations. In addition, the organisation has not been able in measuring the influence of various macro and micro-economic factors on the business functioning of DIPL. Thus, these factors have lead to lead inherent risk for the organisation (Jones 2016). In addition, the employees of DIPL have grown rapidly resulting in increased inherent risk. The lack of experience and professionalism of the staffs of the organisation has increased the level of inherent risk, as they could conduct serious mistakes. According to the provided case study, the problems could be identified in the CEO succession procedure of the organisation. Due to this, such procedure has lead to increase in inherent risk of the organisation. However, this procedure has not been effective in DIPL. Along with this, it could be seen that DIPL does not have adequate employees in handling its business operations, which has again lead to increased inherent risk in the entire business operations of the organisation. Therefore, from the above assessment, it has been found that these are the fundamental reasons of increase in inherent risks in the business functioning of DIPL (Junior, Best and Cotter 2014). Explanation: As observed from the case study, the amount of work pressure on the employees of DIPL is extremely high. The rising workload leads to inaccurate bookkeeping of the firm and this issue further leads to various cash flow problems, ineffective solvency and liquidity positions along with unsuitable operating results for the organisation. Along with this, the error risk could be represented in the financial reports because of inappropriate interpretation. In this regard, the management of the organisation has a significant role to play. However, there is lack of integrity and accountability in the management of DIPL and because of this reason; they are facing the concern of reputation loss in the business community. The higher structure of incentive associated with management develops extra pressure on the management due to which there has been material misstatement in the financial reports (Kend, Houghton and Jubb 2014). In the present day business organisations, fraudulent risk is considered as the primary risk in the context of the same. Because of the occurrence of such risk, the business firm often face huge losses in its business assets (Rahim and Idowu 2015). In most of the situations, the basic dissatisfaction could be seen among the workforce and such dissatisfaction often force them to involve in different kinds of frauds in firms. Another cause of fraud is to meet the needs of the investors associated with an organisation. This is because it often promises to accomplish a specific financial position; thereby, leading to higher level of fraud (Shah and Nair 2013). Types of risk Identification Fraudulent risk In the context of the business functioning of DIPL, the major risk that could happen from the business operations is the engagement of the staffs in different types of fraud activities. This mainly arises with the fall in satisfaction level of the staffs. According to the case study of DIPL, it could be stated that the board of the organisation has exerted excessive pressure in adopting a new accounting system. The adoption of such system creates a huge pressure on the workforce of the organisation and this pressure has lead to fraud. Hence, it is evident that for dealing with such pressure of reconciliation, the staffs might adopt unscrupulous behaviour leading to wrong handling of the overall process, which further results in material misstatement (Singh et al. 2014). Based on the case study, it could be seen that the process of ineffective handling in implementing the new information technology leads to inaccurate treatment of accounting transactions at the year end. Such procedure might lead to loss of financial information and material misstatements. Procedure of financial reporting One of the primary audit risks is related to the process of financial reporting. The additional risk of incorrect financial announcements could be observed, if extra expectations could be seen from various stakeholders for the financial announcements. This holds good in case of management announcements for accomplishing a specific target of the goals for acquisition of debt. Depending on the financial statements of DIPL, it could be viewed that there is increase in revenue from 2013 to 2015. Along with this, the gross income and net income of the organisation have increased in tandem. The information collected from the case study states that DIPL has obtained a loan amount of 7.5 million from BDO Finance in 2015. The case study further reveals that the DIPL needs to maintain a current ratio of 1.5 and debt-to-equity ratio of below 1. The need of this specific arrangement might be to exert pressure on the firm to repay the loan according to the agreed timeline. These requirements could lead to fraudulent activities, as DIPL could manipulate its financial statements to win the trust and confidence of its investors. In case, it is unable in maintaining the desired benchmark, BDO Finance might not grant any further loan to the organisation (Stewart, Kent and Routledge 2015). According to the provided case, it has been assessed that the procedure of valuation associated with the raw materials of the organisation depending on average cost is not appropriate, since the current cost of paper exceeds the average cost. The primary risk in the identification of fraudulent activities of its staffs to implement new system of information technology could be detected through continual monitoring of the same in different job phrases. Alongside this risk, the risk pertaining to the procedure of financial reporting could be identified through assessment of the various financial statements and reports of the organisations and the responsibility lies on the financial analysts and accountants with the help of various analytical and control procedures. This process of reviewing as well as monitoring is needed to be carried out in a timely fashion (Sutherland 2017). Thus, it has become possible for the financial analysts and accountants to utilise the financial information in order to make various business decisions through the analytical method. References: Carson, E., Redmayne, N.B. and Liao, L., 2014. Audit market structure and competition in Australia.Australian Accounting Review,24(4), pp.298-312. 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