Discuss about the Statement Fraud and Corporate Governance.
In the process of decision making, systematic methods may be helpful for an organization or firm for the purpose of auditing and management. This just doesn’t improve the financial aspects of the firm but also helps the nonfinancial aspects of the firm to overcome the faults and grow. The case provided by DIPL Limited also the methods of analytical approaches have been utilized to apex the real potential of the firm and also it helped the top level management to make decisions. If there is by any chance any misinterpretation of the financial statements, these processes can be taken into power to mend the false or incorrect results (Elder et. al, 2010). Therefore it is also found that many of the organizations also use these types of methods in order to achieve the desired objectives as it make it easier for the firm to approach its goals.
The first ever operation conducted on the firm DIPL limited is the trend analysis. In this process, a firm tries to find the contrast between the financial statements of the current year to that of the past. This helps the firm to find the variations in the data and thus helping to improve the process of decision making. Therefore it can be said that trends and patterns help in the decision-making process of the firm and also they may help to raise the future concerns and complication for which the firm should be ready with a rescue plan. According to the financial statements of the firm DIPL limited, it can be clearly understood that the sale figures are rising higher which lead to revenue generation, thus creating a positive impact for the firm’s financial position. It should also be noticed that even the sales figures being high, the difference between underlying stocks of company and sales is huge which is not normal and thus becoming a matter of concern for the firm (Coram et. al, 2011). The figure of the stocks does not give the firm a positive environment thus it should be evaluated by the auditor as the trend followed by the financial statements of sales and stock are not in a scrupulous manner.
The second process consists of the formulation of the ratios which has been conducted in order to find the true financial condition of the firm. Many ratios can be calculated for achieving the desired results and also be compared to the last year’s figures which may be helpful in ascertaining the true condition of the firm. The solvency, liquidity and profitability ratios of the firm DIPL limited may be proved to be helpful for the trend and growth analysis. Liquidity ratios are calculated to find the liquid position of the firm, i.e. to find that the firm will be able to clear its credit balances or not. Solvency ratios help to calculate if the firm is having a suitable amount of balance in the form of capital or not. At last, the profitability ratios help to ascertain that the firm is incurring margined revenues or not, that is it is gaining profit or loss (Gay & Simnet, 2015).
|
Ratio |
Formula |
2015 |
2016 |
2017 |
|
Current Ratio |
Current Assets/ Current Liabilities |
1.42 |
1.47 |
1.50 |
|
Gross Profit Ratio |
Gross Profit/ Sales |
17.55 |
16.13 |
15.20 |
|
Net Profit Ratio |
Net Profit after tax/ Sales |
6.89 |
6.07 |
6.84 |
|
Debt Equity Ratio |
Debt / Equity |
_ |
_ |
0.61 |
After the assessment of the calculation, it can be commented that the moral responsibility of an auditor is to take into consideration various concern before undertaking any analytical mechanism to provide a judgement. From the financial of the company, it can be witnessed that the debts have projected a huge increment over the years and is not a good indicator for the company. Moreover, the balance of cash has also projected a falling trend that projects lack of resources that are required to fund the process of working capital. Moreover, the company payables have signalled an increasing trend and indicate that inefficiency of the company in terms of discharging the obligations. The auditor is needed to assess all concern before implementing any policies. Such concerns are projected clearly in the DIPL financial that indicates the inefficiency in addressing the problems. Future problem may arise in this scenario. Further, if the auditor is influenced by the material misstatement then the auditor might not be able to provide a true and fair view (Geoffrey et. al, 2016).
Inherent risks are the types of risks which are not easy to get rid off as they are mostly present in the financial system of the firm. These types of risks are also not even under the control of the internal control policies or the audit processes because these risks are not caused by the material misstatements or error, they are caused because of internal malfunctions prevailing in the financials of a firm (Heeler, 2009). The risks prevailing in the DIPL limited firm are:
Immoral appointment standards: While the appointment of a new executive in the firm, it should be taken into consideration that the person is having no means of bad interest for the firm and also he is ready for undertaking the responsibility of his position. Thus, when the appointment of the CEO of the firm DIPL limited is conducted, it should be checked that the person holding the post has no self-financial interest with the financial terms of the company (Hoffelder, 2012). Whatsoever, it has already been noticed that the CEO of the firm was trying to obtain 10 percent more profits over his current 10 percent share of profits in its operations. This is one of the biggest dangers for the company because the top management structure has the power to manipulate the rules and conditions of the business and as the CEO is part of the top management structure, he may change his share of profits without the agreement of the firm’s financial position (Carcello, 2012). The ECO of the firm may also have changed the values in the financial statements of the firm in such a manner which may help his to earn more interest and therefore increasing his share of profit unknowingly.
Incorrect record of accounts receivable: The cashier of the firm have the task of recording all the transactions related to the money received on a regular day to day basis which he records in the financial statement using the mails he has received in the past. This states that the value recorded by the cashier is the value of the cheque, draft or cash which the debtor sent through the mail. This shows that there is no mechanism present in the company relating to the adjustments of the cheque receivable and the encashment of the cheques. Also it have been noticed that the reconciling of the bank statements is done by another official which lets us to the fact that there is no systematic procedure of work being followed in the firm and this may further result in the vast differences in the financial statement of the company which may misguide the auditors during the time of auditing and thus make them pursue wrong judgements. Hence the issues should be cordially analyzed and then make further judgments (Holland & Lane, 2012).
These two risk may cause massive destruction in the firm’s financial position thus letting the downfall as it may not only change the financial position of the firm but it may also misguide the auditors leading to the poor profit figures which have been obtained by fraudulent measures (Merchant, 2012).
Fraud risks are the risks that prevail inside the firm’s financial condition which may have been caused because of the fraud measures of the management of any other officials. The main fraud risks that may prevail in the case of DIPL limited are:
Inventory valuation: After analyzing the financial information, it is seen that the sales have increased but it is not appropriate that the stock turnover has not depicted a downward trend. This may be a huge factor of risk for the company as there may have been manipulation in the management or accounts which have to lead to the inaccurate increase in the inventory turnover (Cappelleto, 2010).
Mail revenue recognition: The Company may face problems because the cashier uses mails to check the encashment of the cheques. The reason for the risk is that there is no prior information which can be used to match the values of the cheque and the bank statement. The officials may manipulate the data thus committing a fraud with the firm which may not be recognized by it. The officials of the company may not report the actual resources of the company and thus credit the same personal account (Kaplan, 2011). This will not only result in the degradation of firm’s financial condition but it will also lead to the damage of firm’s reputation. Hence a proper reconciliation system and a trusted official must be appointed in order to check this fraud which will not only help the firm to have strong governance over its employees but also it will help to create transparency of the financial transaction (Black, 2010).
Therefore it should be duly noted that these two above mentioned risks are kept in mind and tried to be corrected as soon as possible otherwise the business may suffer great loss in future because of the incompetent employees and the deteriorated finance system (Livne, 2015). This may also result in the auditor’s mishandling of the reports thus leading to a bad opinion of the auditor for the firm.
A fruitless audit report may be created if there are too many fraudulent factors prevailing inside a business firm. Fraud measures affect the audit process directly thus leading to the manipulation of the auditor’s opinion by the inaccurate and inattentive financial measures of the firm. The above-mentioned risks should be formerly taken into light and measures should be taken to remove present risks as they create a dissentious impact over the firm’s financial condition which may have been made in order to earn maximum revenues or good reputation (Ruhnke & Schmidt, 2014). Because of the prevailing problem with the recording of the trade receivables, the auditor may leave with a bad concern of the financial position of the firm thus calling the financial statements of the firm to be false (Niemi & Sundgren, 2012). This will be caused because the auditor would have noticed that the transactions entered in the statements are in the wrong period or the transactions are not verified which may lead to the claim of false statements (Manoharan, 2011). If there is no sufficient information available about the fraudulent activities then the auditor cannot report or make any bad opinion about the firm whereas if he will notice any difference or malpractice of the firm then he may question the same and make a bad opinion about the firm’s financial condition (Roach, 2010). The inventory valuation system of the firm was also inappropriate and this may result to attract the auditor’s attention towards it. It may happen that the values of the inventories have been changed by the officials in order to steal the goods which may result in the auditor’s unsatisfactory opinion (Merchant, 2012). Thus because of such prevailing fraudulent measures, an auditor must always be attentive and he must use his best skills while conducting the audit process for a firm.
From the computation below, it can be commented that the auditor needs to be substantive in nature with a strong eye on analytical skills because the auditor needs to provide an independent opinion. Moreover, there is no regulation that can stop the auditor from conducting an audit and following the proper mechanism.
|
Revenue of Double Ink Printers Limited |
|||
|
AUD |
Years |
||
|
Details |
2015 |
2016 |
2017 |
|
Revenue |
34,212,000.00 |
37,699,500.00 |
43,459,500.00 |
|
Gross Profit |
6,004,500.00 |
6,079,500.00 |
6,604,500.00 |
|
Add: Indirect incomes |
|||
|
Operating income |
6,780,000.00 |
7,230,000.00 |
8,308,088.00 |
|
Profit before interest and taxes (A-B) |
3,454,650.00 |
3,357,037.00 |
3,867,337.00 |
|
Profit before tax |
3,370,271.00 |
3,273,374.00 |
3,059,299.00 |
|
Profit after tax |
2,359,190.00 |
2,291,362.00 |
2,972,183.00 |
References
Black, W. K. (2010). Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and Crises. Working paper, University of Missouri-Kansas City.
Cappelleto, G. (2010) Challenges Facing Accounting Education in Australia. AFAANZ,
Carcello, J. (2012). What do investors want from the standard audit report?. CPA Journal, 82(1), 7-12. https://dx.doi.org/10.2139/ssrn.2930375
Coram, P., Mock, T. J., Turner, J., and Gray, G. (2011). The communicative value of the auditor’s report. Australian Accounting Review, 21(3), 235-252. https://doi.org/10.1111/j.1835-2561.2011.00140.x
Elder, J. R., Beasley S. M., and Arens A. A. (2010). Auditing and Assurance Services. Person Education, New Jersey: USA
Gay, G., and Simnet, R. (2015). Auditing and Assurance Services. McGraw Hill
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting Horizons, 30(1), 143-156. https://doi.org/10.2308/acch-51309
Heeler, D. (2009). Audit Principles, Risk Assessment & Effective Reporting. Pearson Press
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Holland., K. & Lane, J. (2012). Perceived auditor independence and audit firm fees. Accounting and Business Research, 42(2), 115-141. https://doi.org/10.2308/accr-10217
Kaplan, R.S. (2011). Accounting scholarship that advances professional knowledge and practice. The Accounting Review, 86(2), 367–383. https://doi.org/10.2308/accr.00000031
Livne, G. (2015, May 12). Threats to Auditor Independence and Possible Remedies. Retrieved from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full
Livne, G. (2015, May 12). Threats to Auditor Independence and Possible Remedies. Retrieved from: https://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-independence-and-possible-remedies?full
Manoharan, T.N. (2011). Financial Statement Fraud and Corporate Governance. The George Washington University.
Merchant, K. A. (2012). Making Management Accounting Research More Useful. Pacific Accounting Review, 24(3), 1-34. https://doi.org/10.1108/01140581211283904
Niemi, L., and Sundgren, S. (2012). Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs. European Accounting Review, 21(4), 767-796. https://doi.org/10.1080/09638180.2012.671465
Roach, L. (2010). Auditor Liability: Liability Limitation Agreements. Pearson.
Ruhnke, K., and Schmidt, M. (2014). The audit expectation gap: existence, causes, and the impact of changes. Accounting and Business Research 44(5), 572-601. https://doi.org/10.1080/00014788.2014.929519
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