Analyzing Financial Statements Of Double Ink Printers Limited (DIPL) And Its Impact On Audit Planning

Explanation

The current assignment aims to evaluate the financial statements of Double Ink Printers Limited (DIPL). The organisation is engaged in printing books, magazines and advertising stuffs for publication, advertising and educational industries on a print-on-demand basis. In this context, Birkey et al. (2016) advocated that print on demand signifies that the publishers could print the right quantities ordered on the part of retail outlets, instead of advance estimations of the requirements. The average turnaround time related to printing for DIPL is two days for small-sized orders and five to ten days for large-sized orders.

Moreover, DIPL has diversified its earnings base by enabling the availability of the publisher’s title as searchable e-books, which the readers could download directly from the website of DIPL. Therefore, the organisation has approached Stewart and Cathy to carry out its audit work, and the senior manager of the organisation would undertake the same. Thus, the current assignment aims to apply analytical procedures to the information of financial report of DIPL for the past three years. The second section of the assignment aims to identify and explain two inherent risks that the organisation could encounter and their impact on the risk of material misstatements in the financial report. The final segment of the assignment sheds light on identifying and explaining two major fraud risk factors associated with misstatements arising from fraudulent financial reporting related to the susceptibility of the organisation.

The analytical methods relating to the financial statement information of DIPL could help in forming the overall audit plan. This plan of audit could be considered in the form of a particular standard to be adopted while carrying out the overall audit work. Especially, this enables the assessor in maintaining the overall audit costs at an appropriate level along with helping in eliminating misunderstanding with the clients (Burton et al. 2014). The analytical method associated with the financial announcements of DIPL is the method of propagation of information from its overall financial declarations. There are various mechanisms that help in conducting the entire process of evaluation. Conversely, in order to seek information, financial assessors and accountants could use the analytical procedure related to the financial statement assessment (Byrnes et al. 2015).

There is relationship between common sizing and analytical method through which the financial declarations could be dissected to a prevalent referential point. This would enable in contrasting the financial reports in relation to various timeframes or in relation to various organisations. It is necessary for the auditors to consider the diverse lines of items laid out in the financial reports and the entire reporting method is verified. For example, there are various ways through which items like net assets, net liabilities and owners’ equity could be registered in the financial statements of the organisation and then investigation is made to digress from the normal situation (Christensen et al. 2016). One of the most crucial analytical processes is benchmarking, as the plan of audit could be dissected with the help of the same. The deviation of real financial announcement from the yardstick plays a crucial role in realising the difference along with helping in evaluating the reason of the identified variance for ascertaining the root cause.

In addition to this, another pertinent analytical procedure is ratio analysis through the financial declarations could be differentiated and it is possible to analyse the plan of audit. With the help of ratio analysis, the different aspects of operating and financial performance of the organisation could be assessed like profitability, liquidity, efficiency and solvency (Cohen, Krishnamoorthy and Wright 2017). The trend of these ratios is evaluated to determine whether they are improving or declining. Furthermore, these ratios could be considered for comparing across similar type of organisations falling in the same industry to obtain an insight of the comparative valuations. Thus, it could be adjudged as a cornerstone for fundamental analysis.

There are certain outputs that could be related with planning decisions required to plan audit and the outputs of the analytical process enforced for release of information from the financial reports have direct effect on them. For instance, three major ratios have been considered that comprise of current ratio, net margin and solvency ratio. The detailed breakdown of these ratios has been depicted in the form of a table as follows:

Particulars	Details	2013	2014	2015
Current assets	A	$     5,385,938	$     7,509,150	$     9,600,929
Current liabilities	B	$     3,780,000	$     5,120,250	$     6,397,500
Current ratio	A/B	1.42	1.47	1.50
Net income	C	2,359,190	2,291,362	2,972,183
Revenue	D	34,212,000	37,699,500	43,459,500
Net margin	C/D	6.90%	6.08%	6.84%
Total liabilities	E=C/D	$     3,780,000	$     5,120,250	$   13,897,500
Depreciation	F	$        249,375	$        274,312	$        472,688
Solvency ratio	(C+F)/E	69.01%	50.11%	24.79%

Based on the above table, it is inherent that the current ratio of DIPL has shown a steady and slow progress over three-year period from 1.42 in 2013 to 1.50 in 2015, while it was 1.46 in between the two years. This ratio helps in denoting the ability of an organisation to meet its existing dues and obligations with the available short-term assets (Cohen and Simnett 2014). Thus, a higher current ratio is always desirable for an organisation to discharge its short-term obligations. However, as argued by Earley et al. (2016), a greater current ratio often results in huge amount of idle cash for the organisation, which might minimise its scope for further business expansion. In this case, the ratio for DIPL tends to be on the rising scale, which denotes its increasing ability to deal with the short-term dues.

The net margin computed for DIPL has been obtained as 6.90%, 6.08% and 6.84% in the years 2013, 2014 and 2015 respectively. This profitability ratio could disclose the position of net profit earned on the part of the organisation in contrast to the overall net revenues (Jiang, Messier and Wood 2016). However, the auditor could benefit from this, as overview of the status of expenditure could be obtained along with identifying the need of whether the organisation requires cutting down its budget in relation to the rising expenditures. The favourable or unfavourable modifications in the ratio could be taken into account as a referential factor  for evaluating or auditing the effectiveness of the financial health and the entire financial position of the organisation DIPL.

In a similar manner, the solvency ratio of DIPL has been obtained as 69.01%, 50.11%v and 24.79% in the years 2013, 2014 and 2015 respectively. With the help of this ratio, the effective or ineffective trends could be identified to gain an insight of the overall financial performance of the organisation. The lower the ratio, the better it is for the organisation, as it helps in depicting sound financial condition of the organisation (Junior, Best and Cotter 2014). Thus, the auditors could be able to obtain an insight of the relative organisational position over three-year period along with dissecting the influential dynamics leading to favourable or unfavourable position of the organisation. 

In particular, there are certain attributes related to auditing that constitute of evidence of material misstatements in the financial declarations of a particular entity. However, it is of utmost importance for ensuring the availability of systematic as well as unsystematic risks signifying the method towards financial irregularities of the firms (Kend, Houghton and Jubb 2014). Both the financial and non-financial factors could be termed as the reason behind such detected risks. This could limit the ability of the organisation in signifying fair and true picture of the pertinent financial declarations. On the other hand, an assessor might find it demanding in identifying various risks. In order to support this statement, Kilgore, Harrison and Radich (2014) are of the view there is direct association between the identified risks and the risks pertaining to errors and omission that is extremely difficult for a bookkeeper to realise. Hence, the nature of business operations associated with DIPL could be the reason that has resulted in inherent risk for the organisation.

Based on the provided case, it could be ensured that the accountants or the management of the organisation DIPL omitted various financial transactions. However, this could help in sequential leading towards inconsistencies especially due to inappropriate planning of primarily the marketing as well as sales activities (Knechel and Salterio 2016). In addition, the analysis of the financial announcements of the organisation denotes the fact that the organisation has not achieved the desired level of profit from the overall revenues generated. Especially, this might be because of the failure of the management of DIPL in identifying the specific needs and subsequent adjustment of the overall organisational functionalities. To conclude, it could be said that there is failure on the part of DIPL in assessing the prevalent economic, social and political factors having impact on its overall business operations. This is depicted considerably based on the sales figure of the organisation along with various inherent risks (Lenz and Hahn 2015).

Besides these risks, the staffs working in DIPL have raised the entire inherent risks. Because of the lack of proficiency and experience of the staffs in the organisation, there is substantial escalation of the overall inherent risks. This is because the achievement of a particular business entity depends on the ability of the staffs in relation to business expansion and future growth (Louwers et al. 2015). The unproductive workforce could raise the inherent risks, as they are bound to conduct mistakes. Such mistakes could be in the form of expulsion error leading the way towards the inappropriate financial announcements.

Along with this, there is contribution of important factors towards inherent risk and they could be divided into different segments like environmental and external factors, material irregularities and unscrupulous practices in previous years. The diverse environmental factors directing the way towards inherent risk constitutes of raid modifications, in which there would be complexities related to inventory valuation, shortage of capital and intense competition in generic market (Marques, Santos and Santos 2016). Moreover, there is possibility of material irregularities on the part of the organisation that would cause inherent risk in the future years.

The current case dissection of DIPL signifies that several complexities are inherent in the organisation due to the incompetency in the succession process of the CEO; thus, causing inherent risk. Primarily, the CEO succession could be adjudged as different and the candidates need to be extreme individuals (Ojala et al. 2014). However, there are certain risks, which are evident in the succession process of the CEO, quality of method of selection and ease of transition with the handling of the overall process. Therefore, commencement of the process without conformance to the strategy, delayed start of the procedure, insufficient engagement of the CEO and turnover of staffs leaving the organisation might result in generation of inherent risks.

The assessment of the provided case denotes that the method of implementation of the system of information technology has resulted in various issues. Due to the lack of availability of employees in managing the procedure of execution and installation along with performing the reconciliation and testing before the new arrangement prior to the period end, DIPL has been struggling to carry out its business operations in an effective fashion. In addition, the primary testing disclosed that various transactions conducted are not allocated rightly to the accurate timeframe. Thus, it has resulted in material misstatements due to inherent factors, which could primarily be error or omission in a particular financial announcement (Peters and Romi 2014).

Furthermore, the record of cash receipts on the part of the financial analysts of the organisation might generate inherent risks, if they are not managed effectively. The staff members are expected to follow the right sequence so that there is effective registration of account receivable and maintenance of ledger related to account receivable. Along with this, proper records need to be kept in relation to the bank reconciliation (Pitt 2014). The registration of revenue formation from e-books and the textbook reprint consideration required in future could result in certain inherent risks due to complexity related to the process. The method of assessment of valuation related to various raw material inventories at specifically average cost is not effective due to the greater value of the paper cost in contrast to the average cost.

There are certain inherent risks identified, as the vulnerability of a certain assertion associated with material irregularities and they are discussed as follows:

• The increased work pressure on the staff members of DIPL leads to inaccurate bookkeeping. This results various attributes like the proclivity in encountering cash flow problems, ineffective operating results and poor liquidity (Ratzinger-Sakel and Schönberger 2015).
• The reliability and convolution because of risks of errors and simultaneous misrepresentation is evident.
• Lack of integrity is observed in the DIPL management team, which makes it ready to face any type of reputation downfall in the entire business community(Srivastava, Rao and Mock 2013).
• The management often conducts irregularities in the financial statements, as they could be rewarded with unjust incentives.
• DIPL results in growth to significant economic and competitive scenarios. Moreover, these influential dynamics might have direct impact on inherent risk of DIPL so that the evaluation of the structure of audit planning is carried out effectively. 

As pointed out by Vasarhelyi et al. (2014), fraud risk results in considerable asset losses because of fraud. As the staffs of DIPL are not motivated due to additional workload imposed upon them, there is higher possibility that fraudulent activities might occur. Along with this, the investors have strong expectations regarding the financial performance of the organisation as well as the management for increasing its overall revenues and income. In addition, there is strong pressure in declaring particular financial outcomes in a bid for preventing the generation of guarantees.

Kinds of risks	Identification
Workforce involved in fraudulent tasks	The basic fraud risk expected to occur from the DIPL operations includes workforce involvement in fraudulent behaviours due to lower level of staff satisfaction. Based on the case study, it has been identified that the organisation has imposed huge pressure to obtain an effective accounting system. Such extra burden could lead to serious fraud at the time the organisation is planning to install a new information technology system. This denotes that the staffs might be engaged in fraudulent behaviours along with managing the reconciliation method in a wrong path; hence, leading to material misstatement (William Jr, Glover and Prawitt 2016). In addition, the case study depicts that the inaccurate management of the execution process associated with the implementation of IT for the system of accounting might result in inaccurate apportionment of various transaction around the financial year. Hence, loss is expected due to fraud risk and material misstatement.
Risk of financial reporting	When there is additional pressure regarding the expectations from external financiers in declaring particular financial declarations or from management in meeting particular performance targets or meeting certain goals to qualify for debt acquisition, greater risk is associated with the incorrect financial declarations. From the balance sheet statement of DIPL, the net revenues have increased over the years coupled with rise in gross income as well as net income. Moreover, the existing and total assets of DIPL have escalated as well. The case study reveals that it has sought a loan amounting to $7.5 million from BDO Finance. This loan has been taken based on an agreement that needs DIPL in maintaining the desired liquidity and solvency positions. Apart from this, the provided case depicts that the organisation has maintained a current ratio of 1.5, while the solvency ratio is below 1. It implies that such urgency might push DIPL to handle the financial ratios in relation to credit accumulation. In essence, the inability of DIPL in maintaining the desired benchmarks could make the organisation ineligible to obtain loans from BDO Finance (Wong and Millington 2014).

The provided case study clearly inherits that the process of valuing the inventories pertaining to raw materials particularly at average cost has been inappropriate due to the reason of excessive paper cost compared to average cost. The risk associated with identifying the fraudulent activities involved in initiating the proposed IT system could be carried out and it needs to be made by verifying different activities at different phases. The risk of financial reporting could be performed through dissecting the financial statements coupled with monitoring control mechanisms with the passage of time (Yee et al. 2017).

Conclusion:

The above evaluation clearly inherits that there is relationship between common sizing and analytical method through which the financial declarations could be dissected to a prevalent referential point. This would enable in contrasting the financial reports in relation to various timeframes or in relation to various organisations. Various item lines could be considered on the part of the assessor laid out in the financial reports for verifying the overall reporting method. The assessment of the provided case denotes that the method of implementation of the system of information technology has resulted in various issues.

Due to the lack of availability of employees in managing the procedure of execution and installation along with performing the reconciliation and testing before the new arrangement prior to the period end, DIPL has been struggling to carry out its business operations in an effective fashion. When there is additional pressure regarding the expectations from external financiers in declaring particular financial declarations or from management in meeting particular performance targets or meeting certain goals to qualify for debt acquisition, greater risk is associated with the incorrect financial declarations.

Both the financial and non-financial factors could be termed as the reason behind such detected risks. This could limit the ability of the organisation in signifying fair and true picture of the pertinent financial declarations. On the other hand, an assessor might find it demanding in identifying various risks. Along with this, there is contribution of important factors towards inherent risk and they could be divided into different segments like environmental and external factors, material irregularities and unscrupulous practices in previous years. The diverse environmental factors directing the way towards inherent risk constitutes of raid modifications, in which there would be complexities related to inventory valuation, shortage of capital and intense competition in generic market.

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