Analyzing Results From Analytical Procedures In DIPL And Its Effects On Audit Planning

HI6026 Audit, Assurance and Compliance

Preliminary analytical procedures

The purpose behind this writeup is to perfom analytical procedures for Double ink printers limited (DIPL), analysis results from analytical procedures and effects of results from analytical procedures on audit planning. Moreover, this writeup will also explain regarding inherent risk in the DIPL. At the end of the write up fraud risk factors of DIPL will also analyze.

DIPL is printing company provides printing on demand i.e. company prints number of prints require by the clients only not more not less. Previously this company was audited by Jay and Associates and from the audit of the year ended 2015; new audit firm undertakes the audit of this firm. The company makes purchases from Australian and Indian sources. The company also provides electronically searchable books with publisher’s tile i.e. e-books.  

The write up will use Australian auditing standards for providing understanding as well as a proof for performing analytical procedures, make decisions regarding inherent risk factors and fraud risk factors.

Besides the audit procedures analysis for DIPL, this writes up will also present an explanation about the Australian auditing standard 520 for analytical procedures,  Australian auditing standard 200 for inherent risk and Australian auditing standard 240 for fraud risk.

1.Preliminary analytical procedures are those procedures which performed by the auditor to make an estimate regarding the nature time and extent of substantive analytical procedures required by the audit of the specific organization (Anon., 2016). Under preliminary analytical procedures, auditor requires making an understanding regarding the business of organization for which audit will perform (BIGGS et al., 1999). Background information of the company demonstrates that company is in make revenues from two ways one is from printing books, magazines etc and another is from e-books. The company is having set order completion cycle i.e. two days from small order and five days for big orders. But the company did not define small and big order; it means this can be easily manipulated order processing by manipulating by order as small and small order as big. One more area which requires taking into consideration is, in 2014 company acquired a company Nuclear Publishing Limited for earning revenues from medical textbooks, but as per an article in a medical journal, the company will become unable to generate revenue from medical textbook data because of the new theory. Hence auditor of the company requires making extensive procedures during the audit to know whether new theory explained in the journal article is relevant or not and if the article is relevant the company requires to reduce the value of its assets due to lower expected revenues from assets related to Nuclear Publishing Limited book data.

Substantive analytical procedures

Moreover, as per Australian auditing standard 520, substantive analytical procedures refers to the analysis of financial statement of the organization on the basis of ratios, comparing company’s performance with other company in the industry and comparing company’s current year’s performance with company’s previous year’s performance (Auditing and Assurance Standards Board, 2009). Results of substantive analytical procedures determine extant of a test of details require in the audit.

	2013	2014	2015
Current ratio	1.4249	1.4666	1.5007
Net profit ratio	6.896%	6.078%	6.839%
Asset turnover ratio	2.6459	2.3705	1.6621
Accounts receivable turnover ratio	13.7813	8.7267	8.5663
Debt equity ratio	0.4131	0.4748	1.1344
Revenue growth	–	10.194%	15.279%

Comparison of company’s current year data with previous year data demonstrates that company is having an increasing current ratio which is good for the company because loan conditions require that company should maintain current ratio more than 1.5. Net profit ratio is not showing as much growth as shown by revenue in the company hence this assertion requires extensive procedures for ascertaining whether the company is showing accurate revenue and expenditures or not. As per loan condition, company’s debt equity ratio must be lower than one but in 2015 company’s debt equity ratio is more than which enhance the risk of recalling loan by BDO finance limited. If the loan will recall by financing company then the company will face non availability of funds. Hence it is also required extant procedures for this assertion that auditor could make confirmation regarding the non presence of a risk of liquidation due to non availability of funds.

Analytical procedures of the company influence the planning of audit extensively. Main aim to perform the substantive analytical procedure is to determine areas related to company’s financial and non financial data which require extensive procedures. The second aim of this analytical procedure is to plan audit (Glover et al., 2000). Substantive analytical procedures and preliminary analytical procedures effect the planning decision for an audit of the company in this way, these procedures concluded that company needs to plan audit procedures extensively for higher debt equity ratio and its effects, the value of assets acquired from Nuclear Publishing Limited and relevance of journal article. In addition to this company needs to plan audit procedure regarding reasons behind variations in revenue and net profit growth.

Risk assessment procedures are the procedures those are performed by auditors for making an understanding regarding internal controls of the organization and making an understanding regarding the organization for assessing the risk of material misstatement in the financial statements and notes to accounts of the organization. Such risk can arise due to fraud or error (Auditing and Assurance Standards Board, 2011). In performing risk assessment procedures auditor needs to perform analytical procedures, enquiry, observation, and inspection.

Results of substantive analytical procedures

Inherent risk refers to the risk of material misstatement in any assertion due to nature of that assertion or transactions related to that assertion. This risk assessment does not need the consideration regarding the controls applied by the organization regarding that assertion or not. The materiality of misstatement can be on an individual basis or on an aggregate basis (Auditing and Assurance Standards Board, 2009).

Inherent risks present in the DIPL for the year ended 2015 are,

1.The company invests in a new fully computerized IT system for integrating all accounting process of the company. The company installed new procedure in June without having appropriate staff for reconciliation. Preliminary testing of such new system shows that some transactions which were performed in the year end of the current year were not shown in the accounts of the current year.

This is a risk factor because due to new IT system company made a material misstatement and made the inappropriate allocation of year end transaction to another year.

This shows that reason behind the installation of new IT system could be for execution of fraud and for making misstatement regarding year end transactions and make manipulations in the financial statements of the company for the year ending 2015. Due to new system profits and assets of the company may be overestimated.

2.The company charges storage fees from the publishers for keeping the books of publishers in the e-book services of the company. Company charge such fees in advance for 12 months but company recognize such fees in the month in which books downloaded. This may make variations between fees recognized and charged.

This is a risk factor because due to this type of practice company may make a material misstatement and make the inappropriate allocation of storage fees revenue.

Due to this practice company may manipulate revenue from storage fees and in turn net profits of the company hence this assertion can impact financial statements materially.

Fraud means a deliberate misstatement. Fraud is an act which done by fraudster intentionally for taking unfair or illegal advantages (Singleton et al., 2006). Such fraud can be conduct be employees, management, those charged with governance or any other individual of the organization.

Fraud risk factors refer to the risk factors present which show any pressure like extensive losses or opportunity of doing fraud like extensive rights to a single person or group of person those can commit fraud (Zimbelman, 1997).

Risk assessment procedures

As per Australian auditing standard 240, for an auditor detection of fraud risk factor is trickier then misstatement arise from error because in the case of deliberate misstatement fraudster use some procedures to deceive that fraud (Auditing and Assurance Standards Board, 2013).

In the company DIPL, there are many fraud risk factors which indicate risk of fraud; two major fraud risk factors are,

1. Whenever company receives inventory at warehouse then accounts payable clerk of company records the arrival of the inventory, as well as records, accounts payables. This indicates the fraud risk factor due to excessive rights to the accounts payable clerk. Accounts payable clerk may make misstatement in inventory value as well as accounts payable value during the recording of both and can embezzle money of company. This risk factor effects the audit procedures and the auditor will make extensively procures for reconciling amount due on behalf of accounts payable and value of inventory. For a reconciliation of amount of accounts payable auditor may send a confirmation to accounts payable for confirming their due balance and for reconciling inventory, the auditor may attend physical count of inventory.
2. In September 2014, the company made an investment in net assets of Nuclear Publishing Ltd by stating reasons that Nuclear Publishing Ltd is having large data of medical text books which can be helpful for the company in generating revenues. But as per a journal article medical universities are going to apply new technology due to which this data become useless and assets of Nuclear Publishing Ltd become nil value. This transaction arises fraud risk factor of money transfer of company from the company to another company whose assets will have no value in near future.  This fraud risk factor enhances a number of the audit procedures applied by the auditors of the company. After identification of such fraud risk factor auditor should make some procedure to know whether this transaction was a deliberate misappropriation of shareholder’s wealth of company or was an innocent transaction for making the investment and increasing company’s revenue.

Conclusion 

This write up concludes that audit is a procedure which must be done by the auditor with due care so that auditor must reach to the true material misstatement and fraud. Risk can arise due to organization’s environment or nature of business such risk is known as inherent risk and this risk can only be reduced by the company making substantive procedures. DIPL Company made various transactions during the year some of those transactions or procedures of the company shows inherent risk those transactions includes a recording of revenue from storage fees and new IT procedure applied by the company. In addition to this, some transactions showing fraud risk factors hence those transactions require extensive procedure because fraud conceals by the person making fraud through means to deceive that fraud. Transactions showing fraud risk factors are, purchase of net assets of Nuclear Publishing Ltd by company and non-availability of segregation of duty for recording inventory and accounts payable. The conclusion of this write up is, for each transaction which shows any type of risk factor during the audit or planning of the audit, the auditor must increase the number of substantive procedures.

References

Anon., 2016. Analytical procedures. [Online] Available at: https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html [Accessed 16 August 2017].

Auditing and Assurance Standards Board, 2009. ASA 520 Analytical Procedures. [Online] Available at: file:///C:/Users/DELL/Downloads/F2009L04090ES.pdf [Accessed August 16 2017].

Auditing and Assurance Standards Board, 2009. Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_27-10-09.pdf [Accessed 16 august 2017].

Auditing and Assurance Standards Board, 2011. Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. [Online] Available at: file:///F:/GS%20Solution%20(60%20paise)/Aug/16/risk%20assement%20procedure.pdf [Accessed 16 august 2017].

Auditing and Assurance Standards Board, 2013. Auditing Standard ASA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_240.pdf [Accessed 2017 August 16].

BIGGS, S.F., MOCK, T.J. & SIMNETT, R., 1999. Analytical Procedures: Promise, Problems, and Implications for Practice. Australian Accounting Review, 9(17), pp.42-52. 10.1111/j.1835-2561.1999.tb00098.x.

Glover, S.M., Jiambalvo, J. & Kennedy, J., 2000. Analytical Procedures and Audit?Planning Decisions. AUDITING: A Journal of Practice & Theory, 19(2), pp.27-45.

Singleton, T.W., Singleton, A.J., Bologna, G.J. & Lindquist, R.J., 2006. Fraud Auditing and Forensic Accounting. 3rd ed. New Jersey: John Wily & Sons, Inc.

Zimbelman, M.F., 1997. The Effects of SAS No. 82 on Auditors’ Attention to Fraud Risk Factors and Audit Planning Decisions. Journal of Accounting Research, 35, pp.75-97. DOI: 10.2307/2491454.