The analytic approach to the economic declarations of the DIPL shows the method of the dissemination of information from it. Analytic approach can be in the form of financial ratios.
With the help of analytic method of evaluation of financial announcements however, several accountants as well as financial analysts can interpret the information for allowing the arrival at crucial business decisions (Barr-Pulliam et al. 2017).
The case of the common sizing analytical way allows the assessment of the economic announcements to a common reference point. This results in the possible contrast of the financial statements in connection to the different timeframes or in relation to several entities. The assessors can consider the several item lines shown in the economic report along with the reporting method. For example, the way of registration of the items like assets, liabilities as well as the owner’s equity in the economic reporting of the organisation along with the investigational digression from the usual situation (Bayer and Cowell 2016). The method of benchmarking is thought of as an analytic procedure and it should further be used for the audit plan assessment. The variance of the actual fiscal declaration from the standard enables the recognition of the deviation as well as helps in the evaluation of the reason of the recognised variance. Along with this the analysis of the ratio could be adjudged as an effectual analytic method that can be used for contrasting the financial declarations along with the audit plan assessment (Bepari and Mollik 2015).
The outcomes of the given analytical method can be analysed with the help of ratio analysis for the last 3 years of financial statements of DIPL:
The above table interprets about the liquidity, profitability and solvency status of the firm. The above table reflects that the current ratio of DIPL has declined in the last year in comparison with the last few years. This reflects that the company is not utilizing its working capital cycle. In addition to this, the profit margin of the firm has also declined, which infers that the company is not able to manage its direct and indirect expenses. On the other hand, it can be inferred that solvency ratio of the firm is lower, which interprets that the firm is not exposed to financial leverage risk. This is a good sign for the firm; however, it needs to increase its liquidity and profitability position in order to meet its respective short-term debt obligations.
Several significant factors are innate in the auditing process, which constitutes the incident of material misstatements in the economic declarations of a specific entity. It can however be said that, several kinds of both systematic as well as unsystematic risks showing the way in which the financial misstatements are there in the organisations’ financial announcements. Additionally the identified risks may be due to financial as well as non-financial factors which can subsequently prevent a specific entity in reflecting a just view of the economic announcements. Based on the information from Devos and Zackrisson (2015), the detected risks may be associated with several risks of omission connected with risks of several unimaginable errors of a specific bookkeeper. Hence it can be said that it is the business risk for the DIPL’s business operations.
Apart from this, the employees at DIPL are inexperienced and do not possess the requisite proficiency that has escalated the total inherent risk of the organisation. Additionally, such a lack of experience can result in the committing of errors or mistakes, thereby increasing the inherent risks. This is due to the fact that the employees constitute a significant segment of the company and it is not feasible for the firm to ensure its business success as well as its growth in the future without the effective contributions from the employees. The other significant factors contributing towards the inherent risk can be categorised into several segments like the external as well as the ecological or environmental aspects as well as the materialistic misstatements in the previous time points as well as the false exercises. The environmental aspects directing the method towards the inherent risk comprises rapid alternations where the matters could arise connected to the valuation of inventory, intense competition in the market as well as the lack of sufficient money. Apart from this, there is the chance of materialistic misstatements that can direct the DIPL towards the inherent risk in the years to come.
The analytical process of the current case of the DIPL shows the fact that the issues as well as the complexities related to the CEO succession constitutes the inherent risks also. In core it can be said that the succession of CEO is different as the candidates are individuals (Graham 2015). Hence, the commencement of the procedure, without complying to the strategy, delayed initiation of the process, ineffective connection of the CEO as well as staff attrition may result in an inherent risk.
The analysis of the case provided implies that the implementation procedure of the IT system has caused certain issues. DIPL has a shortage of employees for managing the implementation process as well as installation along with the reconciliation conduction as well as the testing which should be primarily before the new arrangement at the period end. Additionally, the initial assessment disclosed that numerous transactions carried out were recorded in a suitable manner. Thus the results in material misstatements because of the inherent factors that is an error of deletion in a specific economic announcement.
The DIPL staff members need to follow a suitable sequence for registering the receivable accounts as well as ledgers connected to the accounts receivable. Along with this, the reconciliation of the bank, is required to be properly recorded as well (Milonas et al. 2016). Further, it can be said that the revenue registration found from the e-book and considering the textbook reprinting in the future could possibly result in several inherent risks due to complexity associated with the procedure. Thus the inventory valuation applicable to the raw materials at an average cost is not at all suitable as the average cost is not apt, as the average cost is much below the existing paper cost.
The discerned inherent risks can be adjudged as the susceptibility of a particular assertion in connection to the materialistic misstatements and are shown briefly as follows:
Increasing burden on the employees as well as the management:
It is because of the increasing burden of work on the DIPL staff, that it has resulted in the inaccurate bookkeeping. As a result, several attributes have occurred that include the propensity in encountering the cash flow, operating results as well as the poor liquidity.
Risk of errors due to incorrect representation:
Intricacy as well as dependability is inherent because of the risk related with the errors as well wrong interpretation in a simultaneous manner.
Overall management integrity:
According to the case study, the DIPL’s management possess the lack of integrity it is desired that it will be ready for any possible loss in the business community.
Abnormal pressure on the management:
Occasionally it so happens that there exist incentives for the management. As a result financial announcements have several misstatements (Nalewaik and Mills 2016).
Nature of the business entity:
DIPL contributes to the major growth in economic as well as circumstances of competitive nature. Additionally, these aspects might have an influence on the underlying risks of the business entities for the audit planning assessment in a suitable fashion.
According to Saad (2014), the risks of fraud, could probably result in severe losses of the assets because of several fraudulent activities. The motivational lack in the workforce due to the additional pressure of work on the staff could probably influence them to get involved in several fraudulent activities. With this, the expectations form several groups of investors in the reporting of specific financial results or particularly in case of the management in achieving the suitable targets of performance had a chance of resulting in significantly increased fraud risks. Further, strong amount of pressure is exerted on the management of the corporation in order to announce specific economic results in a bid to avert the generation of the guarantees.
The main types of risks identified in the context of DIPL’s business operations are briefly classified as follows:
Types of risk
Engagement of the total workforce in fraudulent activities
The case study provided conforming to the operations of the DIPL states that the board has put immense pressure on the company in acquiring an innovative system of accounting. Such additional staff pressure in performing the new information installation process for accounting may result in fraud. This implies that the staff may be involved in fraudulent activities for managing the behaviours as well as the reconciliation process in an effective fashion, and also the materialistic misstatements. The provide case shows, that the ineffective management of the process execution connected to the implementation of the information technology for the accounting results system in incorrect allotment of several transactions at the period end. This results in severe loss due to the material misstatements as well as fraudulent risks (DeFond and Zhang 2014).
Way pertaining to economic reporting
Another risk of fraud that may confront the DIPL’s business operations may take the risk related to the financial reporting fraud into account. At the time of certain situations, it has been found that there is additional expectation from the management or from the external financers. This form of expectation is to achieve the particular targets of the performance of different goals to qualify for obtaining debt. There is enhanced risk of incorrect declarations of a financial nature. Based on the DIPL’s balance sheet statement the net revenue of the organisation has increased. Gross and net income has also increased. Current assets have also escalated. Due to the failure of the organisation in maintaining the standard yardsticks, the organisation became ineligible in acquiring funds.
Depending on the provided case study, it can be stated that the evaluation method associated with the inventory valuation of several raw materials at specific average costs is not appropriate. This is because the existing cost of paper is higher considerably that the average cost. The risk connected with the financial reporting could have been recognised by the dissection of the financial statements on part of the assessors. Benchmarking is thought of as an analytic process and could be utilised for the audit plan assessment. The real financial declaration from the yardstick helps in the recognising of the deviation and helps in the evaluation of the recognised variance.
Barr-Pulliam, D., Nkansa, P., Walker, K., appreciate helpful comments from Helen, W., Brown-Liburd, A.G. and Stefaniak, C., 2017. From Compliance to Strategy: Using the Three Lines of Defense Model to Evaluate and Motivate Internal Audit Contributions to Accounting Research.
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