1. Audit of any entity has become an integral part of the compliance procedures since the introduction of IFRS and other regulatory reforms even for the small and medium sized businesses. Audit is done with the motive of giving reasonable assurance to its stakeholders (users of financial statements) like the shareholders, creditors, debtors, customers, banks, loan institutions, government, etc. a reasonable assurances to the accounts have been prepared on a fair basis and that it resembles the true state of affairs of the company. Audit is an independent examination of the books of accounts prepared by the management with the view to comment upon its viability and reporting. There may be numerous assumptions and estimates, which may be put up by the management in the course of bookkeeping, which needs to be checked by the auditor and commented upon (Raiborn, Butler & Martin 2016). The audit is not restricted to only large or small, profit or non-profit organisation but it may be required for any entity depending upon the regulations. There are various procedures being followed by the auditor to express an opinion, which may include substantive and compliance audit procedures. Substantive audit procedures are concerned with checking the supporting evidences on the basis of which the recording has been done in the books like invoice copies, bills, signatures, date, registration no, proper disposal of the tax at the right time, vouching of related expenditures and the sales made to the customers. Besides this, it also includes verification of the liabilities and assets reported in the statement of affairs on the reporting date. It is done with the view to check whether false recording of incomes or expenses has not been done, similarly only those assets and liabilities have been reported which actually exist materially (Knechel & Salterio 2016).
In case the auditor does not gets sufficient confidence to comment upon the financials and finds a risk of material misstatement in the books, he may take help of the analytical audit procedures. It includes checking of the significant ratios, comparison of the company accounts with the budgeted figures and forecasted figures, industry trend analysis and zero based budgeting analysis etc. All this procedures assist the auditors in developing the problem statement and forming an audit plan to be taken forward in further audit. This helps them to determine the areas which they need to focus more, the timing, which needs to be allocated, and the extent to which the same needs to be examined. These key result areas have a significant bearing on the results of the organisation (Sonu, Ahn & Choi 2017). Internal financial control ascertains whether the auditor needs to focus more on the internal processes and procedure or not. In case the it is strongly built in the organisation, less would be the risk and less would be the extent of checking red, however in case the internally built controls itself are weak, more would be the extent of checking required (Jones 2017).
In the given case, DIPL, a printing press is the subject client, which has undergone huge changes with respect to the system, the change in policies, estimates. Moreover, since the new auditors have taken over from the old auditors, more would be responsibility as the opening balances also needs to be verified. Given below is the ratio analysis being figured out from the financials being given for 2013, 2014 and 2015? In the absence of budgeted figures, the analysis has been restricted to actual basis only. Further, since the industry ratios are not available, the same has not been taken into consideration.
From the above ratios, it is clear that the DIPL is firmly placed in terms of current and liquid ratio with both of them falling within the industry trend of 2 and 1 respectively. In addition, the debt management ratio is well under control and the entity can take the benefit of trading on equity in the future and increase returns to the shareholder. The profits have been stagnant at around 6% and the company has been finding it difficult to increase the margins. However, the collections have been on the weaker side and the debtors receivable days have increased from 26 to 42 days.
2. Audit risk is the type of risk that states that there are certain risks in auditing that are present which might lead to material misstatement in the books of account. Even though the auditor applies all the major substantive and analytical procedures in auditing, there are high chances that there might be certain risk elements present overall. The three types of risk in any audit are – inherent risk, control risk and detection risk. Inherent risk occurs because of certain factors other than lack of proper internal control. There might be many reasons for the same but they are not in the hands of the management. It is usually high in cases where judgement is involved or complexity is high. In case of new organisation, the presence of inherent risk is considered high in comparison to well-established organisations. Control risks occur when the management fails to ascertain proper controls in the system that leads to material misstatement. Detection risk occurs when the auditor fails to detect certain errors that might be present in the system and where proper professional scepticism is not applied. In case of DIPL, there is certain inherent risk involved and the same are explained hereunder (Grenier 2017).
The first case is where the management is applying and adopting non-routine procedures and operation without proper judgement. This might lead to material misstatement. The management is considering new methods of calculation of inventory, which is different from the normal method that the company follows. In addition, the company wants to adopt new methods of calculation of depreciation, considering the life of asset to be twenty years, whereas in normal procedures the life is considered thirty years. They management is adopting the same without any proper research just based on his own judgement. What we can ascertain from the same is that this is a deviation from the routine transactions that the company follows. It makes it difficult to properly verify the records and it might lead to under or over valuation of property and assets. The second type of inherent risk is present in the adoption of the new IT system without any proper research and verification on part of the management. The management has not done any reconciliation, pre instalment precaution where not taken by the management. This might lead to overvaluation or undervaluation of the system and that might lead to material misstatement. It is thus important that the management must apply proper control so that risk can be mitigated and expert help can be taken. Before installing any system or making any changes in the overall operations, the management must make sure that proper verification of the system must be done. In addition, there must be measures on part of the auditor to mitigate the risk as much as possible. As we see in the case of the DIPL, inherent risk might affect the overall profitability of the company (Fay & Negangard 2017).
3. In case of auditing, one of the most important work of the auditor is to ascertain any kind of fraud that might be present in the system and that might affect the overall functioning of the system and might lead to discrepancies in the financial statement. It is important that the auditor apply proper substantive and analytical procedures that might help in mitigating of the risk. Fraud occurs when the management or the employee indulges in certain activity that might affect the financial system and the profitability for his or her own personal motives. There are various measures to mitigate the fraud. Few of the fraud elements in case of DIPL is ascertained hereunder-
In first case, there are chances of fraud involved in non-segregation of important duties by the management. It is important the work must be properly segregated such that at each level the management can establish control. (Bae 2017) Where one person is handling the entire system, they might hamper the same for their own benefits. It can be seen in the case of DIPL, where the major departments like management of the account receivables and handling the cash receipts is given to one person. A single clerk is responsible for collection of data, pricing, making and verifying the payment and reconciling the account. In case of accounts receivable also, one clerk is given all the responsibility and there are no proper control ascertained by the management. If the clerk indulges in defalcation, it will be hard for the management to identify the same. Thus, it is important that segreagt6ion of work must be there; timely checks must be done in absence of the employees. Proper responsibility must be established so that people can be held up in case there is any fraud. The auditor should bring this to the management and make sure that the management does it work properly and make sure that the duties are properly segregated and proper control is established. One more fraud risk is present in the adoption of the new IT system without any proper research and verification. There are high chances that some personal motives of the management must be involved because the decision was taken in a lot of haste and the management also failed to properly reconcile the overall cost and the expected profit from the new system. Thus tree are high chances of fraud and the auditor can mitigate the same by making sure that expert opinion is taken for the new system and its valuation. The pre instalment cost must be considered along with the overall expected profitability. The new system may be over and undervalued, affecting the overall profitability of the company. Thus, it is important that the management should ascertain proper control and the auditor must do complete verification to make sure that major cancels of fraud are reduced. The management must be held responsible and in case the management fails to provide proper support to the auditor, the auditor can modify the audit report and can give an unfavourable or disclaimer opinion in respect of the same. These are the few methods by which fraud risk can be mitigated effectively (DeZoort & Harrison 2016).
References
Bae, SH 2017, ‘The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea’, Journal of Applied Business Research, vol 33, no. 1, pp. 153-172.
DeZoort, FT & Harrison, PD 2016, ‘Understanding Auditors sense of Responsibility for detecting fraud within organization’, Journal of Business Ethics, pp. 1-18.
Fay, R & Negangard, EM 2017, ‘Manual journal entry testing : Data analytics and the risk of fraud’, Journal of Accounting Education, vol 38, pp. 37-49.
Grenier, J 2017, ‘Encouraging Professional Skepticism in the Industry Specialization Era’, Journal of Business Ethics, vol 142, no. 2, pp. 241-256.
Jones, P 2017, Statistical Sampling and Risk Analysis in Auditing, Routledge, NY.
Knechel, WB & Salterio, SE 2016, Auditing:Assurance and Risk, 4th edn, Routledge, New York.
Raiborn, C, Butler, JB & Martin, K 2016, ‘The internal audit function: A prerequisite for Good Governance’, Journal of Corporate Accounting and Finance, vol 28, no. 2, pp. 10-21.
Sonu, CH, Ahn, H & Choi, A 2017, ‘Audit fee pressure and audit risk: evidence from the financial crisis of 2008’, Asia-Pacific Journal of Accounting & Economics , vol 24, no. 1-2, pp. 127-144.
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