Application of Analytical Procedures-Free-Samples for Students

Questions: 1.Explain how your results Influence your Planning decisions for the audit for the year ending 30 June 2015 2.Explain why it is a risk and how it may affect the risk of material misstatement in the financial report 3.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. 3.b.Explain how the risk factors identified in above would affect the Conduct of the audit. Answers: 1.Application of Analytical Procedures In the process of accounting and finance, analytical process of the financial information has significant importance. On the other hand, audit plan also has its importance in the audit process of the companies. With the help of proper audit plan, the accountants and financial analysts of the companies can maintain the auditing cot and prevent misunderstanding regarding financial information with the clients. In Double Ink Printers Limited (DIPL), financial analytical approach refers to the spreading of accounting and financial information from different financial declaration. There are various mechanisms or methods are available for analytical approach. With the help of analytical approach, financial managers of the companies can analyze the financial information for various purposes (Louwers et al. 2015). Common sizing analytical approach helps to analyze the information from various financial declarations from different organizational perceptions. With the help of this, the financial managers can compare the financial statements from different financial years. The financial managers can validate all the financial items of the financial reports and they also check the recording process of theirs in the financial statements. For example, it can be said that the reporting system of liabilities is different from the reporting system of owners equity. Benchmarking is considered as the major process of analyzing the audit plan. With the help of benchmarking process, variance between the actual and benchmarked financial performance can be identified. This process helps in taking corrective measures to minimize those variances (Nalewaik and Mills 2016) Explanation of Influence of Results on Planning Apart from this, another major analytical mechanism is the Ratio Analysis. Ratio analysis is used as a crucial tool to compare the financial statements of different years and to assess the audit plan. Particulars 2013 2014 2015 Current ratio 1.42 1.46 1.50 Profit margin 0.068 0.60 0.06 Solvency ratio 0.62 0.44 0.21 Table 1: Analysis of Ratios (Source: As created by Author) The results of analytical approach influence the audit planning process of the companies for spreading information of the financial statements. For example, the results of the ration analysis can be considered. As per the above table, it can be seen that the current ratio of DIPL for the financial year 2013, 2014 and 2015 are 1.42, 1.46 and 1.50 respectively. On the other hand, the profitability ratio of DIPL for the financial year 2013, 2014 and 20115 are 0.068, 0.60 and 0.06 respectively. Profitability ratios are helpful for analyzing the earned net income in respect to total sales. Apart from this, with the help of profitability ratio, the financial managers can assess whether the expenses of the companies are high or low. It also indicates that whether the business organizations have sufficient financial power for expansion. From the above table, it can also be seen that the solvency ratio for the year 2013, 2014 and 2015 are 0.62, 0.44 and 0.21 respectively. With the help of sol vency ratios of the companies, the financial managers can judge the solvency position of the companies. Different types of ratio analysis for the years helps to make the financial managers of the companies understand whether the overall cash flow of the company is enough to meet the long as well as short-term obligations of the company (Hayes, Wallage and Gortemaker 2014). 2.From the business operations of DIPL, several risk factors are raised. However, there are two major risk factors. These two risk factors are discussed below: According to the provided case study, it can be seen that the accountants or the management of the company has omitted numerous accounting transactions. The aspects show the ineffectiveness and inconsistency of the accountants and management of the company. In addition, the analysis of financial reports has shown the failure of the company in achieving the required level of profit from the sales. From this, it can be understood that the management of the company has failed to identify the specific requirements for the smooth running of the organization. Thus, it can be said that the management of DIPL has failed to assess the impact of different micro and macro economic factors on the organization. This factor increases the inherent risks of the company (Duncan and Whittington 2014). |The employees of the company have also increased the inherent risks of the company. The success of the business organizations lies on the hands of their employees. In this case, the employees of DIPL lack efficiency and experience. For this reason, they fail to contribute towards the success of the company. This factor massively increases the inherent risk factors of the company. It is expected that the inexperience and non-proficient employees of the company will make mistakes while doing their jobs. For this reason, the inherent risk factors can be increased (Cannon and Bedard 2016). There are some reasons that lead to the material misstatements in the financial reports of the companies. Excessive pressure on management is a major reason. Excessive pressure on the employees contributes to the ineffective bookkeeping process. For this reason, various issues in the organization can be seen like issues in cash flow, liquidity issues, ineffective operating outcome and others. Another major issue is the incorrect interpretation. The incorrect interpretation of the financial statements crates negative effects on the materiality of the financial statements. In addition, as per the provided case study, it can be seen that the management team of DIPL lacks integrity and honesty in their jobs. Therefore, the entire reputation of the company can be lost. The management of the company faces excessive pressure in order to achieve the benchmarked target. All the above discussed reasons jointly contributes towards the material misstatements of the financial statements. 3.a Name of Fraud Risk Explanation Engagement of Workforce in Fraud Actions Engagement of the employees of DNPL in different types of fraudulent activities is a major fraud risk for the company. This risk happens due to the dissatisfaction of the employees towards their jobs. According to the provided case study, it can be seen that there are huge pressure on the employees for the adoption of new accounting system. This excessive pressure on the employees may lead to fraud risks. It states that the employees may choose the way of fraudulent for the reconciliation procedure. This also leads to material misstatements of the financial statements (Arens et al. 2016). Fraud Risk in Financial Reporting Financial reporting fraud risk is another type of fraud risk. When the stakeholders of the company have specific performance requirements from the company, then there is a high risk of fraud. It can be seen that the management often manipulates the financial position of the company in order to fulfill the expectations of the stakeholders. As per the financial statements of the company, from 2013 to 2015, there was an increase in the revenue of the company. However, the current and total assets of the company have also increased. 3.bAs per the case study, the valuation process of different raw materials of the company in the average cost is not suitable as the present cost is higher than the average cost of the company. With the help of monitoring process in the different phrases of activities, identification risks of fraudulent actions regarding the implementation of new IT system can be executed. On the other hand, the with the help of analysis and evaluation of financial statements, the risk of financial reporting can be identified (Arens, Elder and Mark 2012). Thus, it can be seen that the risk factors identified in the above section largely affects the various audit operations of the company. References Arens, A.A., Elder, R.J. and Mark, B., 2012.Auditing and assurance services: an integrated approach. Boston: Prentice Hall. Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016.Auditing and assurance services. Pearson. Cannon, N. and Bedard, J.C., 2016. Auditing challenging fair value measurements: Evidence from the field.The Accounting Review. Duncan, B. and Whittington, M., 2014, September. Compliance with standards, assurance and audit: Does this equal security?. InProceedings of the 7th International Conference on Security of Information and Networks(p. 77). ACM. Hayes, R., Wallage, P. and Gortemaker, H., 2014.Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed. Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015.Auditing assurance services. McGraw-Hill Education. Nalewaik, A. and Mills, A., 2016.Project Performance Review: Capturing the Value of Audit, Oversight, and Compliance for Project Success. CRC Press