1.Analytical method has utmost significance for the analysis and evaluation of the financial information of the companions from the financial reports. At the time of developing the audit, plan for the Double Pink Printers Limited (DIPL), the analytical method of financial information is considered as most valuable aspect. It needs to be mentioned that the audit plan of the companies provides necessary direction or path to the auditors at the time of audit process. On a more specific note, audit plan helps the auditors to maintain the audit cost in order to avoid misunderstanding with the audit clients (Anandarajan, Anandarajan and Srinivasan 2012). The analytical approach of the financial information of the DIPL refers to the process of spreading the financial information from different kinds of financial declaration of the company. It can be seen that there are different kinds of mechanism that help to carry on the analytical process of financial information. With the assistance of analytical methods for the assessment of financial information, the financial managers and accountants of the company use this information in order to take different kinds of financial and accounting decisions. In addition, with the help of common size analytical approach of financial information, the financial managers of the companies become able to dissect the financial declaration of the company from different financial perceptions. One of the major benefits of this is that it helps to provide support in the development of financial reports and compare the financial reports of the companies for different financial years (Healy and Palepu 2012).
With the help of analytical methods, the financial managers of the companies can use various financial items from the financial report and they can verify the process of financial reporting of those items. For example, the financial reporting process of net liabilities and owner’s equity can be considered in this regard along with the digression of these items. It needs to be mentioned that Benchmarking is considered as the major analytical methods of financial information and it can also be used for the development of organization’s audit plan (Leang, Zahariev and Gordon 2012). With the assistance of benchmarking process, financial managers can identify the variances in the financial reports of the companies (Rolstadas 2013). Apart from this, the actual reason of these variances along with their root causes can be identified. Along with the process of benchmarking, Ratio Analysis is considered as another major analytical method of the financial information. Ratio analysis helps in the development of audit plan by comparing the financial statements of two or more companies (Healy and Palepu 2012).
Explanation: According to the provided case study, the adopted analytical method has important effect on the preparation of audit plan. In addition, it also has its importance in spreading the financial information among various financial and accounting departments of the company. As a part of analytical process, the following ratio analysis is provided:
|
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: Ratio Analysis
(Source: as created by Author)
From the above table, it can be seen that there is an increase in the current ration of the company from 2013 to 2014 that is 1.42 to 1.46; and in 2015, it became 1.50 in 2015. Major fluctuation can be seen for the company over the three years that reveals the amount of net profit of the company from net sales. Apart from this, with the help of profitability analysis of the company, the financial managers get insight about the expenditures of the company. Most importantly, with the help of this analysis, the financial managers can get the insight about the effectiveness of the company’s budget along with the diversification needs of the businesses (Higgins 2012).
The auditors of DIPL can get an idea about the current financial position of the company by observing the ratios and financial difficulties. From the above table, it can be seen that there is a decrease in solvency ratio of the company from 2013 to 2015. This particular trend in solvency ratio can helps the financial managers in the determination of financial performance of the company. With the help of this ratio analysis, the financial managers can ascertain the amount of cash flows in order to meet both long-term and short-term obligations of the company (Brigham and Houston 2012). Moreover, it can be said that the evaluation and comparison of the company’s performance and ratios make the financial managers enable to determine the financial performance and position of the company overt the period of three years. Apart from this, the financial managers can ascertain whether the current financial position of the company is favorable or not. In case the situation is not favorable, the financial managers of the companies need to take corrective measures to revive the financial position of the company. Thus, based on the above analysis, it can be said that the analytical methods of financial information has major values for the companies (Brigham and Ehrhardt 2013).
2.In the current business operations of DIPL, it can be seen that there are certain risk factors. According to the provided case study, it can be seen that the management of DIPL has failed in entering certain financial transactions of the company. As per the observation this omitting mistakes of the management has direct connection with ineffective and inconsistent planning of various marketing and sales activities of the company. As per the total financial analysis of DIPL, the failure of the company to achieve the targeted profit margin out of the total sales of the company can be seen. The ineffectiveness and inefficiency of the management team regarding business operations of the company can be held responsible for this. Hence, it can be observe that the management of the company has totally failed to foresee or gauge the effects of various macro and micro factors on the business operations of DIPL; some of these factors are political factors, economic factors, social factors and others. Thus, based on the above discussion, it can be said that lower profit marking along with lower revenue of the company contributes to the birth of inherent risks in the company (Grant 2016).
From the provided case study, it can be seen that the number of staffs in the company has increase, the workforce of the company is inexperienced, and they lack professionalism. Thus, this lack of experience and professionalism of the employees of DIPL leads to the birth of inherent risks in the company. It is a universal fact that the success of any business largely depends on the employees of those companies. As the employees of the company lack experience and efficiency, it is natural that they will make mistakes during their jobs and this process leads to the inherent risks of the companies. Apart from this issue, the case study of DIPL also indicates that there are some major issues in the company regarding the succession of the CEO of the company. This issue around the succession of CEO is a major influencer behind the development of inherent risks in the company. Thus, the ineffective method of selecting the CEO of the company also leads to the inherent risks. In addition, it can be seen that DIPL does not have enough employees or staffs for properly carrying on the business operations of the company. This reason also contributes to the development of inherent risk factors in the business operations of DIPL. Thus, based on the above discussion, it can be seen that the above discussed reasons are the major reasons that are contributing towards the development of inherent risk factors in the company (Weil, Schipper and Francis 2013).
Explanation: From the provided case study, it can be seen that there is a huge amount of work pressure on the employees of DIPL. As a result of this excessive workload, inefficiency can be seen in the process of bookkeeping of the company. This poor process of bookkeeping leads to different kinds of issues like issues regarding cash flows, issues regarding the solvency and liquidity of the company and many others. Apart from this, there is a major negative effect of the financial errors of the company one the financial reports as this process lacks effective interpretation. Thus, the management of the company needs to play an important role in order to solve these issues in the company (Arens, Elder and Mark 2012). According to the provided case study, it can also be seen that the management of DIPL largely lacks integrity and honesty and for this reason, there is a possibility that the company may lose its reputation in the market. As DIPL has great incentive structure for its management, the management of the company is under massive pressure for performance. Thus, all these processes lead to the material misstatement of the financial reports.
3.a
|
Types of Risk |
Identification and Details |
|
Fraud Risk |
According to the provided case study of DIPL, it can be seen that the main risk of fraudulent is involved with the employees of the company, as they can be involved in the fraudulent activities. The main reason behind this risk is major dissatisfaction among the employees of the company. As per the provide case study of DIPL, it can be seen that there is massive pressure on the employees from the end of the boars in order to adopt the new accounting system. As the adoption of this accounting system creates massive pressure on the employees, there is high risk that the employees may be involved in fraudulent activities. Thus, in order to cope up with the process of reconciliation, the employee of the company may take the way of fraudulent and this process leads to the material misstatement of the financial statements. As per the provide case study, due to the ineffective implementation of the new accounting software, the accountants of the company failed to correctly record some of the primary accounting and financial transactions for the financial year. As a result of the inexperienced and inefficient employees of the company, there is a high chance of fraud risk. It is expected that the employees of the company will make mistakes in their jobs that will lead to fraud risk of the company. Apart from this, fraud risk can also be found in the process to select the succession of CEO of the company. As a result of this process, there can be high chance of inherent risks in the company (William Jr, Glover and Prawitt 2016). |
|
Risk in Financial Reporting |
In case of the business operations of DIPL, another major risk can be seen in the process of financial reporting of the company. In case the stakeholders of the company have major financial expectation from the company’s financial performance, there is a high chance of frauds in the financial reports from the end of the company. It has been seen that the management of the company manipulates the financial statements of the company so that the stakeholders can see that the company has financial growth and performance. Thus, it can be observed that the fraud risk in financial reporting is one of the major risks in the companies (DeFond and Zhang 2014). |
b.According to the provide case study, there is a massive lack in the raw material valuation of DIPL that is based on the process of average cost. The main reason is that the current cost of paper is higher than average cost. Thus, it is not en effective process. The primary risk in the implementation process of the new accounting software can be identified with the help of monitoring various phases of task in the organization. On the other hand, the analysis and evaluation of the financial reports of the companies helps the management to detect the fraud risk related with financial reporting. As per the earlier discussion, the analysis can be done with the help of various analytical mechanisms that is benchmarking, ratio analysis and others. It is crucial for the management of DIPL to conduct the analysis and evaluation process on a time basis (Wang, Li and Li 2012).
References
Anandarajan, M., Anandarajan, A. and Srinivasan, C.A. eds., 2012. Business intelligence techniques: a perspective from accounting and finance. Springer Science & Business Media.
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2), pp.275-326.
Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
Healy, P.M. and Palepu, K.G., 2012. Business analysis valuation: Using financial statements. Cengage Learning.
Healy, P.M. and Palepu, K.G., 2012. Business analysis valuation: Using financial statements. Cengage Learning.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Leang, S.S., Zahariev, F. and Gordon, M.S., 2012. Benchmarking the performance of time-dependent density functional methods. The Journal of chemical physics, 136(10), p.104101.
Rolstadas, A. ed., 2013. Benchmarking—theory and practice. Springer.
Wang, B., Li, B. and Li, H., 2012, June. Oruta: Privacy-preserving public auditing for shared data in the cloud. In Cloud Computing (CLOUD), 2012 IEEE 5th International Conference on (pp. 295-302). IEEE.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic approach. McGraw-Hill Education.
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