Discuss About The Evaluated From The Observation A Detailed?
Going by the case of DIPL Ltd, the auditor can take the help of various analytical procedures that will help in taking crucial decisions. Moreover, it will highlight a correct view of the entire business. The auditor needs to use the analytical procedure because it is vital for the auditor to provide an unbiased decision. To ensure this, the financial records need to be evaluated and from the observation, a detailed analysis can be made.
In the case of DIPL, the auditor can use the analytical process in the following manner:
Financial data comparison
The data of the current year can be compared with that of the previous year that will enable forecasting for the future course of time or any other peer group. A comparison is just process of evaluation that sheds light on the company performance and the trend that it has witnessed. To ensure a good comparison it is imperative for the auditor to compare the current data with that of the previous year that will highlight the variations (Carcello, 2012). Moreover, an increase or decrease in the figures can be a note with ease. The changes can be studied in the light of the prevailing situation and a judgment can be made accordingly. The changes that happened in the sales, turnover, debtors and creditors information needs to be analyzed by the auditor to gain an advantage in the process (Baldwin, 2010). The same comparison can be made with of the peer group to find the trend and the performance.
Computation of Ratio
Ratio computation can be defined as the best practice when it comes to evaluation of the data. Ratio sheds light on the performance of the company. The major ratios that speak volume of the company’s scenario are the profitability, liquidity, efficiency and solvency ratios. The profitability ratio of the company denotes that DIPL has performed on a consistent basis. The gross profit has declined in the past three years but the margin is a string. On the other hand, the net profit margin has increased in the past year signifying a strong control over the cost of goods sold. Further, the liquidity scenario of the company is strong and hence, no problem will arise in honoring the obligations (Brigs, 2013). The auditor needs to stress on the ratios and check whether the data align with the financial records. If there is a deviation then the same needs to highlight to the management. Moreover, the auditor needs to have applied the skills of due diligence so that any differences can be addressed.
The balances of the debtors and the creditors need to be cross checked so that no misstatements have been done in this regard. The balances might be collected but not shown in the statement leading to differences (Bedard et.al, 2014). Hence, the auditor must analyze such points.
The inherent risks are the risks that are due to the nature and policies of the business. Going by the analysis, the two inherent risk of the business are as follows:
Replacement of the old IT system with the new IT system
A new system of IT was introduced under a lot of pressure and the old one was discontinued. The old system was abolished ignoring the fact that the employees were not trained with the details of the new one. Moreover, there was a risk that the system was accessible by anyone and hence, vulnerable to the threat of tampering (Blay et. al, 2011). Moreover, wrong data was entered into the system leading to faulty results.
Internal audit team selection having a financial interest
The section of new CEO was vague as the CEO was having a financial pecuniary in the company. The CEO will receive a whopping 10% share in profit if the growth exceeds 10% or more. In this scenario, there is a possibility that the CEO will work hard to enhance the profit but might indulge into window dressing too (Church et. al, 2008). Hence, it constitutes an inherent risk.
Firstly, the software fails to record the entries that pertain to the previous year. This might be an act of the management to alter the accounts or to conceal any transactions so that the statement can mislead. When it comes to the year 2015, it can be seen that the cash position has declined and the same reason can be cited in this regard. Secondly, in the third year there is a significant increment in the level of inventory even considering the fact that the sales increased. This projects frauds and misstatements.
The fraud that has been traced above will have an impact on the financial statements. This will affect the process of audit. The auditor needs to evaluate a huge data to project such fraud. Since the top level executives are present in this fraud it will lead to the immense problem and if the auditor fails to find the missing entries or rectify such then will lead to material misstatement. The inventory levels are increased considerably and this will impact the profit figures. If the judgment is not done correctly then it will lead to an ineffective result (Cappelleto, 2010).
The management risks can be summarised through the following table:
Replacement of Old IT set up with a new IT set up:
The new It system was implemented in a unplanned manner as there was not proper way to implement it neither any training was imparted to the employees for running of new IT system. The IT system was not discussed properly within the company nor its consequences of non- implementation were understood. So all this created a situation where all the entries were not been captured by the IT software properly. It was a clear case of mis-management where the top management was also involved. Internal control of management failed to find out the problems and errors in IT set up.
Appointment of new CEO and Audit team:
The company appointed a new CEO whose part of remuneration was linked to company performance. The CEO although had vast experience in the same line but he was financially interested as well with performance of the company. On the basis of new CEO recommendation, a new Internal Audit team was also formed comprising of an ex audit manager and two new qualified chartered accountants. The new team did not have any experience of running an Internal audit department. So the decision was not a wise management decision.
Acquiring of Nuclear Publishing Ltd (NPL):
The company DIPL acquired NPL keeping in mind there market share in medical textbooks which had good margins and also was widely accepted in many universities as well. However after some time it came to knowledge that NPL medical books were soon becoming obsolete or no use due to some reasons. E books will replace NPL textbooks so acquire of NPL was also a bad decision, DIPL being a wise company should have understood the market requirements and its future. Also one more reason which creates doubt is purchasing of Net assets of NPL instead of shares of NPL which could have resulted in total ownership of the company. So the acquiring of NPL was not wise decision.
Following actions should be performed by the auditor:
1.The Auditor should take the services of some professional IT experts to successfully implement the new IT set up and find out errors and suggest remedial actions to correct them. Also his audit programme should incorporate vast features to audit the software.
2.The auditor should take every precaution while conducting the audit of this company. The reason behind these precautions is that the internal audit department team did not have any experience of running an Internal audit department before. Hence, auditor will have t monitor all the internal control factors.
3.When the new company NPL was acquired by DIPL Ltd., it was not done by the company after thorough study about the company and its assets. The textbooks of the NPL was soon to become obsolete. Now the auditor needs to go through each and every detail about the acquisition in order to make sure that there was no hidden transactions in this acquire as it may lead to material misstatements in the audit report and financial statements.
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.Internal audit team selection having a financial interest
Bedard, J.N., Gonthier, B, & A. Schatt. (2014). Costs and Benefits of Reporting Key. Harvard Press
Brigs, A. (2013). Financial reporting & analysis. Mason, Ohio: South-Western.
Blay, A. D., Geiger, M. A. & North, D. S. ( 2011). The Auditor's Going-Concern Opinion as a Communication of Risk. Auditing: A Journal of Practice & Theory, 30 (2): 77- 102.
Cappelleto, G. (2010). Challenges Facing Accounting Education in Australia. Melbourne
Carcello, J. (2012). What do investors want from the standard audit report? CPA Journal 82 (1), 7.
Church, B, Davis, S & McCracken, S. (2008). The auditor’s reporting model: A literature overview and research synthesis. Accounting Horizons, 22(1), 69-90.