Auditing Accomplish Objective Of Concluding-Myassignmenthelp.Com

Question: Discuss About The Auditing Accomplish Objective Of Concluding? Answer: Introducation: Analytical Procedure and Risk Assessment are two main activities performed by an auditor while auditing to accomplish the objective of concluding appropriate conclusion (DeFond and Lennox, 2017.). Analytical procedures are asignificant factor of the financial audit which assists an auditor to understand and identify its clients business and changes to determine possible risks in order to plan audit procedures. On the other hand, the Inherent risk is evaluated in each area with an objective of reducing it to an acceptable level (Cannon and Bedard, 2016). The present study is based on the application of analytical procedures, and risk assessment has been done for Double Ink Printers Ltd as an auditor. Further explanation relating to existing key fraud risk factors and inherent risk factors has been provided in the report. ASA 520 deals with therequirement and other explanatory details relating to theapplication of analytical procedures as substantive analytical procedures. In accordance with views of Griffith, Hammersley and Kadous, (2015) analytical procedures play an important role as an attention-directing device in the process of audit planning, used by auditors to identify the timing, nature and degree of their procedural. In accordance with the provision available in the standard the main purpose of using analytical procedures in this process is to make an increment in auditors plan for the better understanding of client business and determination of particular risks of anaudit by observing abnormal or unforeseen relationships or balances in data. In present scenario in case of audit planning of DIPL Ltd, the analytical procedures used might be inclusive of the following: Comparison of Accounting balance: make a comparison of the amounts of unadjusted trial balance with the amounts of adjusted tried balance of the preceding year balances available in balance sheet of DIPL Ltd.. Receivables and sales must be equal unless there is achange in the base of thecustomer, organizations credit policy or its practices of thecollection. Calculation of significant ratios: assessment of current ratio above various reporting periods of DIPL Ltd. This computing of current assets with current liabilities must be similar unless the business has changed its procedures regarding debtors and creditors. Estimate of ratios with the help of non-financial and financial data (Hayes, Wallage, and Gortemaker, 2014.). Regression analysis: Analyzing the amount relating to expenses of previous years and assessing the same for a present year along with adjustment of inflation of DIPL Ltd. The days sales outstanding metric of DIPL Ltd will be compared to the balance outstanding of previous years. This correlation between receivables and sales should remain about the same over time, unless some change in variant i.e. customer base exists, the manner in which credit is allowed to customers or its collection period. This procedure is part of ratio analysis. The balance which is carried to next year should be assessed and trend analysis of same should be analysed. This expense increase to a certain extent every year, thus inflation in same should also be assessed. If it is not assessed in appropriate manner than chances of fraudulent payments are more such as payment of fake employees etc. The four elements which are included as distinct stepsin the procedure of substantial analytical procedure have been specified below. They have been applied in context with data available regarding Double Ink Printers Ltd: Development of independent expectation:In thepresent scenario, accounts which are required to be analysed in detail are Purchases and Inventory, Revenue and Receivables, Cash, Inventory. The changes in method of inventory should be assessed in appropriate manner that whether the same represent books of accounts in more appropriate manner (Arens, Elder, Beasley and Hogan, 2016). The above-specified accounts are the most significant; thus the same should be assessed in detail Evaluating and ascertaining significant differences: A variety of substantive procedure is available and the same is chosen by the auditor in accordance with his objectives of theprocedure. In present case ratio analysis and trend analysis has been applied for accomplishing the objective. Ratio Analysis Trend Analysis: The three groups of ratios have been assessed in anappropriate manner: Profitability ratios (Amount in $) Profitability Ratios Formula 2013 2014 2015 Sales 34212000 37699500 43459500 Gross Profit Gross Profit / Sales *100 17.5509 16.1262 15.1969 Net Profit Net Profit / Sales *100 6.8958 6.07796 6.83897 As per the analysis, it has been concluded that even though, sales of DIPL Ltd. have been increased each year but gross profit net profit is not having increasing trend in that accordance. The reason for decreasing gross profit might be an increase in the cost of goods. It is necessarily required to be assessed in detail. However net profit does not have that much change even after a major change in interest expenses on loan taking during thecurrent year. The reason behind same can be an allowance for inventory obsolesce written back and amajor increase in revenue from operations and e-book storage fees. It should be checked in anappropriate manner. Liquidity Ratio Formula 2013 2014 2015 Current Ratio C A /CL 1.42485 1.46656 1.50073 Quick asset ratio (CA - Inventory) / CL (Khan, Serafeim and Yoon, 2016) 0.82798 0.94483 0.84727 Note: CA = Current Assets , CL = Current Liabilities An increase in trend of the current ratio of DIPL Ltd. can be assessed which means the liquidity of company has increased in comparison to previous years. As current ratio is more than 1 existsin the entire scenario which indicates that no issues regarding going concern assumption are present.However, the condition in case of quick asset ratio is not the same as it comparatively fluctuates. The reason for the change required to be assessed by asking the management about the reasons behind it and the same required to be resolved. Risk ratio Formula 2013 2014 2015 Gearing Ratio Long term loan finance / Equity Financials - - 0.61222 Interest coverage ratio Operating Profit Before Interest / Interest 40.9421 40.1257 2.78608 Indebtedness of a company can be analysed in anappropriate manner with theapplication of risk ratios. The increase in gearing ratio specifies that risk relating to increasing in non-payment of interest increases (Jiao, 2015). From above calculations, it can be assessed that a major change has occurred in interest coverage ratio and the same is due to theloan of $7500000 in thecurrent year. Even after taking aloan, thecompany is having thecapability of earning profits more than twice of its interest expenses which mean interest can be paid during lean times. Calculations relating to interest need to be verified with loan statement and other available documents. Investing significant difference and making conclusions If the results are significantly different as desired, the auditor must do discussion regarding this with management. A definite degree of uncertainty is required while discussing, as management might not research into anintellectual explanation, ormight befalse or hiding. The response of management must be looked and considered as valuable while conducting asimilaranalysis in the next year. Involvement of auditors is essential in analytical procedures. As per the provisions available in ISA 320, it is vital to document the applied analytical procedures for understanding the work done in more appropriate manner. Inherent risk can be specified as the receptiveness of an assertion regarding a group of transaction, balance or revelation relating to misstatement which might be material either on an individual basis or in aggregate with another misstatement before consideration of any related control (Knechel and Salterio, 2016). The same has been specified in ASA 200 Overall Objectives of Independent Auditor and conduct an audit in accordance with Auditing Standards. In present scenario in case of DIPL two inherent risk factors which arise from the nature of DIPLs business operations nature have been explained below along with reason behind same and the manner in which it will affect the possibility of material misstatement available in the financial statement: Inappropriate evaluation of allowance relating to obsolescence of Inventory: As per the study of Krahel and Titera, (2015) inherent risk result due to the failure of control or misleading information in the accounting system. In thepresentcase, as thecompany was following valuation of raw material at average cost and providing allowance relating to obsolescence of Inventory; but in present year they have decided to write back the same in books of account. As it will affect the profit, as well as the valuation of inventory and any error in this calculation, might lead to risk relating to incorrect valuation of inventory. This risk can be reduced through assessing in detail manner that what is the reason for changing the policy regarding valuation of Inventory and whether the same provide a more fairer view of books of accounts or not (Ruhnke and Schmidt, 2014). In case it does not provide afair view of books of account than the policy should be reassessed and alterationsare required to be done accordingly. Reconciliation and testing issue relating to New IT System: DIPL has decided to adopt a new IT system which is fully computerized and integrate the whole existing accounting process of organization. However, the system has been installed with theapplication of great pressure of the management and reconciliation and testing procedures continued until year end. Thus, the reports and calculation made by the system cannot be accepted without assessing the same in detail. The risk comprises the nature of inherent risk. Thus the same is treated as aninherentrisk. As the reports, calculations and account balances which are part of thefinancial report might be misstated. In accordance with views of Simunic, Ye and Zhang, (2017) thus, the overall impact of small errors due to this new IT system might increase the risk relating to a material misstatement in the financial statement. The same risk can be reduced by the auditor by applying test procedure on the new IT system to ascertain to what extent the report, account balances and other information pr ovided by the same can be relied on or not. ASA 240 Auditors Responsibilities Relating to Fraud in an Audit of Financial Report deals with issues relating to risk fraud factors existing in an organization. Fraud can be referred as abroad concept for the purpose of Australian Accounting Standard; though auditor is concerned with the fraud which results in amisstatement of the financial report whether intentional or unintentional (Toy and Hay, 2014.). It has been specified in ASA 240 that fraud risk factors mean situations or conditions which encourage committing of fraud or provide an opportunity of committing fraud. It case of DIPL following key fraud risk factors have been specified below along with the manner in which they will affect the conduct of audit: Pressure on management for theadoption of New IT system: In the present scenario, management of DIPL has been pressurized for adopting the new IT system to a major extent. Even though it had been complained by many times by the IT manager regarding the manner, it has been installed. Thus, as whole management is having various issues, thus same can result in opportunity available for fraud and gain undue advantage. The manner in which they will affect the conduct of audit: The same will affect the auditing procedure applied by the auditor for assessing the effectiveness of the system.The auditor can apply CAAT tools for analysing the transparency of the system (Van and et.al. 2014). Further for ascertaining whether all entered transactions have been included while preparing afinancial statement of the company; few dummy transactions can be entered into the system, and the impact of same on the financial statement can be evaluated. Internal Control system is deficient due to inadequate monitoring of control: No appropriate internal control system is present in DIPL for evaluating whether the provided obligations have been appropriately applied by the management or not. The same might result into revenue recognition higher in comparison to actual revenue. The manner in which they will affect the conduct of audit: This fraud factor will also have aneffect on the audit procedure applied by the auditor in acase like reports provided by management relating to various operations and activities of thebusiness. In accordance with views of William, Glover and Prawitt, (2016) the auditor will require increased recognition for corroborate management explanations or representing concerned matters. These risk factors will affect the audit procedures to be applied for providing anappropriate opinion relating to the financial statement of DIPL. References Abraham, S. and Shrives, P.J. 2014. 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