Analytical procedure is a part of auditing process which involves calculation of key financial ratios which enables to compare and analyse the performance of the company. It helps the auditor to form an overall opinion on the financial statement that whether they are showing true and fair view or not. It helps in comparing the past performance of the company with the present performance. The financial statements should be consistent so that it can create a better understanding of the firm. As audit is an independent examination of the financial statements, the auditor is able to give an opinion that there is a presence of material errors in the financial statements or not. The auditor must find out the reasons if there is any major changes or inconsistency found while examining the financial statements (Basu, 2009)..
The auditor finds out some important financial ratios in order to compare the financial data of the company over the years. As per the case study that has been provided to us, the key financial ratios of DIPL are shown below along with the analysis (Blank, 2014).:
It is always a positive sign if the gross profit increases over the years as it is a result of efficient working of the company. We can see that the gross profit percentage has been decreasing over the years i.e. 1% every year for the past three years. This shows that the profit earned by the company is decreasing which may be the result of inefficient working. There may be many other factors which would have affected the gross profit percentage.
The current ratio of the company shows the ability of the company to pay off its short term liabilities with the help of its current assets. The current ratio is considered to be a type of liquidity ratio. Current ratio is considered good when it is equal or greater than 1. It has been shown in the above table that the current ratio has been increasing over the years which is considered favourable. However, Quick ratio shows more appropriate liquidity position than the current ratio as it includes the amount of inventories which may not be converted into cash immediately. Therefore, we can say that the quick ratio of the company helps us in determining the cash readily available with the company to meet its short term expenses (Boynton & Johnson, 2006). The quick ratio of the company is presently 0.84 whereas in the previous year it was 0.94 which shows that there is a decline in the good liquidity position of the company. The company may face certain obstacles in paying off its short term obligations.
Debt is a liability in the balance sheet of a company. The debt equity ratio is favourable only when it is considered low. The debt equity ratio of the present year is 0.61. If the debt equity ratio in any cases exceeds 1 then the loan provider may recall the amount of loan. In the current year the company had to spend a huge fund on the IT system but still the retained earnings shows an increment. Therefore, there is a possibility that there is any manipulations made.
This ratio is calculated in order to ascertain the capability of the company to pay off the interest. As we can see in the above table that the interest coverage ratio has fallen drastically over the years we can see there is a huge burden on the company to pay interest (Cahill & Kane, 2011)..
It is very important whether the financial statement contain any misstatements or not. Therefore, in the procedure of audit in order to find out this risk assessment procedure has to be followed. Inherent risk can be defined as those risk which results in lack of information or presence of misleading information (Knechel, Salterio & Ballou, 2017)..
Based on the case study of DIPL ltd, in which the books has been closed on 30th june every year. Two risk were identified on performing the risk assessment procedures:
Mistakes are very common when a huge number of transactions comes into play. However, In the case of DIPL Ltd it has been observed that the cashier of the company records the cash receipts in the register when he opens the mail. There is a huge chance of making mistake or negligence of the mail which would leas to omission of recording the cash receipt (GUPTA., 2016).
The cashier can at anytime manipulate and take personal benefits by deleting the mail and claiming that the money has been used in the workings of the company only.
It is the everyday job of the cashier to download the cash receipt of the previous day and sent it to the clerk in the accounts department (Horngren, 2017).. It is not safe to leave all the cash present in the hands of one person as there lies a risk of defalcation. There also lies a possibility that the clerk and cashier team up to manipulate the cash in hand.
There are certain points that has to be kept in mind while assessing the risk involved in manipulation of inventories:
We all know that the inventories are received by a person in charge in the warehouse. The person in charge maintains the record of the quantity of inventory and there is no second party involved who keeps a record of the same (Messier, 2016). It is possible that the person who records make certain manipulation so that he could gain some personal benefits out of it (Griffin, 2009).
If there is no regular stock check in the warehouse the entire year then there may be many wrong acts going on such as theft (Hooks, 2011). This will come before the eyes of the higher management at the end of the year when there is a proper check and any difference in the quantity may be then regarded as discrepancy.
Fraud means any activity performed in an organisation whether internally or externally intentionally in order to get a illegal advantage. It is commonly noticed that the fraud is done by the internal members of the company(Ramaswamy, 2015). There are certain factors that show the pressure of committing fraud, such factors are known as fraud risk factors. The presence of fraud risk factors depends upon the presence of following three factors: Incentives, opportunities and Attitude.
The following fraud risk factors were identified while studying the case study of DIPL limited (Khan and Jain, 2013).:
The board found that it was now really very important to make the accounting system of the company computerised so it pressurised the IT department of the company to install the advance system to make work much easier and faster. It was observed by the manager of the IT department that there was a huge mess because of lack of training and also because there was no proper testing done (Whittington & Pany, 2016). As it was a truly new thing for the company there was a very little knowledge about it. The reasons are here below:
DIPL ltd.had incurred huge expenses this year against which it had to raise a loan of 75 lakhs.
References:
Basu, S. (2009). Fundamentals of auditing. Delhi: Pearson.
Blank, R. (2014). The Basics of Quality Auditing. Hoboken: Taylor and Francis.
Boynton, W., & Johnson, R. (2006). Modern Auditing. Hoboken: John Wiley and Sons.
Cahill, L., & Kane, R. (2011). Environmental health and safety audits. Lanham, MD:Government Institutes.
Griffin, M. (2009). MBA fundamentals. New York, NY: Kaplan.
GUPTA. (2016). FINANCIAL ACCOUNTING FOR MANAGEMENT. [S.l.]: PEARSON EDUCATION INDIA.
Horngren, C., Datar, S. and Rajan, M. (2017). Horngren’s cost accounting. Harlow, Essex, England: Pearson Education Limited.
Hooks, K. (2011). Auditing and assurance services. Hoboken, NJ: Wiley.
Knechel, W., Salterio, S., & Ballou, B. (2017). Auditing. New York: Routledge.
Messier, W. (2016). Auditing & assurance services. [Place of publication not identifiedMcgraw-Hill Education.
Khan, M. and Jain, P. (2013). Management accounting. New Delhi, India: McGraw-Hill Education (India).
Kumar, P. (2014). CA-IPCC Auditing and Assurance. Delhi, India: S. Chand Publishing.
Pitt, S. (2014). Internal audit quality. Hoboken: Wiley.
Ramaswamy, M. (n.d.). Finance for nonfinancial managers.
Whittington, O., & Pany, K. (2016). Principles of auditing & other assurance services. NewYork, N.Y.: McGraw-Hill Education.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download