Analysis Of Financial Information And Risk Factors Of Double Ink Print

Question: Discuss about theAnalysis Of Financial Information And Risk Factors Of Double Ink Printers Limited (Dipl). Answer: Introduction Financial statement plays a very vital role for assessing the financial position and financial performance of the company. Financial position is displayed by the statement of affairs or the balance sheet and the financial performance is given by the statement of profit and loss for the period ending. These financial statements should be prepared and presented in such a manner that the financial position and the financial performance of the company shall be displayed to the users of the financial statements in the true and fair manner. If in any case the financial statements are not prepared in that manner then the chances of having the bad reputation of the company in the market increases and gradually the chances of having the fraud occurrence within the company will increase. Thus, the financial statements are the backbone of the company and it shall be prepared with utmost due care. Through this report, the financial statements and its requirements have been better viewed from the angle of the auditors of the company. Auditors are the persons who certify that the companys financial statements reflect the true and fair view of the financial position and performance of the company. Thus, while conducting the audit, the auditors are required to plan the audit in such a way that no area shall be left and escape without the proper scrutiny by the auditors. The aforesaid duty of the auditor is the major underline objective of the report. For the purpose of the analysis, the company Double Ink Printers Limited has been made available with proper background information and the last three years financial information. In the beginning the executive summary has been detailed giving the aims of the report. Thereafter, introduction has been given about the report. Then the main body of the report has been started with the layout of the plan that the auditors have prepared using the analytical procedures and how the same have affected the planning decision. Secondly, as part of the audit, the risk assessment has been done and two inherent risk factors have been identified from the nature of the operation of the business and it has been explained as to how the risk have affected the risk of material misstatement in the financial statement. Thirdly, the risk factors have been identified which contributes to the fraudulent reporting of the transa ctions and has been explained as to how the risk factors have affected the audit. The report then has been ended with the proper conclusion and recommendation. Audit Planning Double Ink Printers Limited is the company engaged in the business of printing books, magazines and other similar materials for the various industries including the education and publishing, etc. The company prints on the basis of the demand and the order thereby the company receives from the vendor. Before, planning of the audit, the auditor usually applies the analytical procedures. Analytical procedures are the main part of the audit process and it provides the auditor with an understanding of the nature of the business of the company. It helps the auditor to identify the risk areas so as to plan the audit procedures accordingly. The analytical procedure entails the evaluation of the financial information through analysis of the relationship among the various financial matters like sales, profit, etc. As per the International Standard on Auditing 315, the analytical procedures are conducted throughout the audit process and it helps in assessing the risk of having the material misstatements in the financial statements and also helps in knowing and assessing the nature, timing and extent of the audit procedures (ACCA, 2016). Although International Standard on Auditing 315 has described the three stages of the analytical procedures preliminary, substantive and final, but for t he purpose of the report, the preliminary analytical procedure will be detailed. Preliminary analytical procedures of the financial information includes the comparison of the figures of the financial statements for one year with the base year, with the budgets, forecasts and with the company operating in the similar industry (Anastasia, 2015). In the given case, the financial information for the last three years has been given and hence the comparison has been made accordingly. Ratios Double Ink Printers Limited S. NO. Particulars 2013 2014 2015 1 Net Profit Margin Net Profit After Tax 2359190 2291362 2972183 Revenue 34212000 37699500 43459500 Net Profit Margin = 2359190/34212000*100 = 2291632/37699500*100 = 2972183/43459500*100 6.90 6.08 6.84 2 Current Ratio (Current Assets / Current Liabilities) Current Assets 5385938 7509150 9600929 Current Liabilties 3780000 5120250 6397500 Current Ratio 1.42 1.47 1.50 3 Debt to Equity Ratio Total Liabilities 3780000 5120250 13897500 Total Equity 9150000 10783650 12250491 Debt to Equity Ratio 0.41 0.47 1.13 4 Equity Ratio Total Equity 9150000 10783650 12250491 Total Assets 12930000 15903900 26147991 Equity Ratio 0.71 0.68 0.47 5 Interest Expense 84379 83663 808038 6 Allowance for Doubtful Debts 6.23 46.36 4.52 7 Allowance for Obsolescence of Inventory 106312 125876 0 8 Foreign Exchange Loss 38500 49750 0 9 Interest Bearing Liabilities 0 0 7500000 From the above table, these are major areas which require the urgent attention of the auditor while planning for the audit for the year ending 30th June 2015 (Capital Markets Advisory Committee Meeting, 2013). Interest Expense Interest Expense for the year ending 2015 has been increased considerably to 808038 from 83663 in the year 2014. Even After having the high interest cost approximately ten times of the previous year the company has still earned the net profit of 6.84% as compared to 6.08% in the year 2014 and 6.90% in the year 2013. Also the company has recorded Income Tax of 87116 in the year 2015 as compared to 982012 in the year 2014 despite of having the increased net profit ratio in the year 2015. Interest Bearing Liabilities Company has obtained the interest bearing liabilities in the year ending 2015 amounting to 7500000. The reason for having this much of loan is required to be checked in comparison to the earlier interest bearing liabilities which is equivalent to zero. Allowance for Doubtful Debts These have been considerable decreased from 46.32 percentage in the year 2014 to 4.52% in the year 2015. Allowance for Obsolescence Inventory No allowance has been given in the year ending 2015 as compared to 125876 in the year of 2014. Foreign Exchange Loss No foreign exchange gain or loss have been booked as compared to 49750 in the year of 2014. The aforesaid analysis and the results will have the great impact on the planning decisions of the audit. Firstly, the need for obtaining interest bearing loan will be checked as to why the same have been incurred and why the increased cost have been incurred by the company. Secondly how the company has been able to maintain the same net profit ration even after incurring the high interest expense for the year ending June 2015 (Cooper, 2015). The auditor needs to plan the additional audit procedures to check with the proper documents with proper clarifications. Thirdly, the company made the less allowance for the doubtful debts and some doubtful debts have been written back in the year ending June 2015. The reasons for writing back is required to be checked as to what circumstances have led to wrong interpretation of the doubtful debts last year and how the same have been undervalued this current year. Fourthly, why the company has not made any allowance for the obsolete inventory de spite of having the high turnover as compared to the last year of the 2014. Lastly, as per the Accounting Standards, the company is required to account for gain or loss on foreign exchange. In the current year 2015, it depicts that the company has not entered into any foreign currency transactions. Thus, in this manner the results of the preliminary analytical procedures have greatly influenced the planning decision of the auditor. Inherent Risk Factors Audit risk plays very important role in the process of audit and without considering the same audit cannot be effectively completed. There are three types of audit risk Control Risk, Detection risk and the Inherent Risk. In the given case study, the inherent risk is required to be considered and discussed as to how the risk will affect the material misstatement in the financial reporting level. Company - Double Ink Printers Limited since its inception has been following the defined internal control processes and procedures and has the following inherent risk factor that has been arisen from the operations of the company. The company has been valuing its inventory on the average cost basis. Average cost method averages the prices and value the inventory on that basis. In this case even if the purchase price of the item is high, the value of that item will be less because it has been valued on average cost basis (Gary, 2017). Through this the company have been disclosing the inventory at lower of the cost and thus reducing the profit and the current ratio. But with the stipulation made by the BDO Finance from whom the company has obtained the loan, Board of the company decides to value the inventory at the FIFO basis rather than the average cost basis. This depicts that this inherent risk factor will always contributes towards the risk of having material misstatement in the financial reporting level. Second major risk is that the company has acquired the business of the company Nuclear Publishing Limited and also the copyright of having the medical text books. With the introduction of the new theory, the text books of the Nuclear Publishing Limited will become futile and hence there will be the high chances of having the high obsolete inventory. Therefore, the above two factors have pure chances of having the material misstatements at the financial reporting level. Fraud Risk Factors And Its Impact On Audit The management is held responsible for prevention and control of Fraud Risk factors in the organization and its financial reporting. The auditor should consider the presence of risk factors if exist at the time of planning of the audit so that the auditor can give fair opinion and his opinion is not deceptive. Auditor has to take into consideration about two types of fraud risk factors which are present in the organization like fraud factors by fraudulent financial reporting and fraud by misstatement of Assets (Weiss, 2014). In the given case of DIPL, the fraud factors that arising from fraudulent financial reporting which an auditor should consider are as follows:- Excessive Pressure on Employees :- With the implementation of new IT Software in DIPL without proper testing and reconciliations, the situation of fraudulent financial reporting increases. The IT Manager, Any Rogers was under extreme pressure to implement and go live with new accounting system and this pressure and high expectation from Board of the company can lead to high changes to frauds and wrong reporting with new accounting system. High Expectation from Outside Party:- In the year 2015, DIPL has taken a loan financing from BDO Finance of $ 7.5 million with a condition that the DIPL will maintain the Current ratio of more than 1.5.:1 and Debt Equity Ratio will not reach and exceed from 1:1 otherwise the DBO Finance will rolled back the funds ploughed in. This particular situation creates the high chances of Frauds at the level of Financial Reporting in DIPL. Effects Of Frauds Risk Factors On Audit The above factors impact the conduct of audit and the auditor has to remain cautious while doing audit about the above factors identified as fraud factors. The factors will enhance the working of the Audit team in the following manner:- The audit has to take big sample size for collecting accurate date and results from their audit. The auditor has to consider the high chances of instances of collision of the employees in presentation of financial reports. Conclusion And Recommendation Double Ink Printers is the company engaged in the business of printing books, magazines and other similar articles. Although the company has the sound internal control systems and procedures but still there are many risk factors which have contributed towards the material misstatement in the financial statements of the company. Through the analytical procedures, the auditor has been able to find out the areas where his planning decision may be affected and therefore he has to look considerably on the financial statements of the company. Secondly, the inherent risk factors that have been listed and detailed will definitely lead to the risk of having material misstatement of the financial statements of the company and lastly the risk of having the fraud and its underlying factors are so material that the risk factors will affect the audit. To conclude, the company has the inherent risk and has major deviations in the financial information which requires the urgent attention of the mana gement. To recommend, the company shall install such a system in place so as to avoid the factors which have contributed to the inherent risk and fraud and which in turn will affect the financial statements. Company shall install the best software where the intervention of the personal bias may be deleted. References ACCA, (2016), Analytical Procedures, available on https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/analytical-procedures.html accessed on 15-08-2017. Anastasia, (2015), Financial Statement Analysis : An Introduction available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 16-08-2017. Capital Markets Advisory Committee Meeting, (2013), Conceptual Framework available on https://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP%203%20conceptual%20framework.pdf accessed on 16-08-2017. Cooper S, (2015), A Tale of Prudence, available on https://www.ifrs.org/Investor-resources/Investor-perspectives-2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF accessed on 16-08-2017. Gary S., (2017), The Importance of Inherent Risk Factors: Auditors Perceptions, Australian Accounting Review, Vol 3, Pp 38-44. Weiss D, (2014), Faithful Representation available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October%202014.pdf accessed on 16-08-2017..