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HI6026 Audit, Assurance and Compliance

Published : 03-Sep,2021  |  Views : 10


As an auditor, you are conducting your preliminary analytical procedures based on the background information for DIPL contained in the case. Apply analytical procedures to the financial report information of DIPL for the last three years. Explain how your results influence your planning decisions for the audit for the year ending 30 June 2015.

You are conducting your risk assessment of DIPL, as part of the planning for your audit for the year ended 30 June. Identify two inherent risk factors that arise from the nature of DIPL’s business operations. Explain why it is a risk and how it may affect the risk of material misstatement in the financial report.

 As part of your audit of DIPL for the year ended 30 June 2015, you are considering the risk that fraud may have occurred (a) Based on the background information for DIPL contained in the case, identify and explain two key fraud risk factors relating to misstatements arising from fraudulent financial reporting to which DIPL may be susceptible. (b) Explain how the risk factors identified in (a) above would affect the conduct of the (a) audit.


Audit is a post facto activity to the preparation of the books of accounts conducted by the auditors to see the viability of the same. Multiple regulations across the world and the accounting organisations ask for the audit to be conducted. It is an independent checking of the books of accounts, whether profit  or loss incurring, small or big, trading or manufacturing, with the view to express an opinion whether the financials are prepared as per the financial reporting framework and whether they give the unbiased view of the state of affairs.

The purpose of the audit is not to find the frauds or checking the mistakes and finding out errors, it is a review of the overall statements. It gives both the internal and external users the assurance about their investments, stake, etc. Audit also results in the discussion with the management in case the audit findings are not clear to the auditors and management has applied some estimates and adjustments in the presentation and it helps in giving the suggestions to the management to improve on the internal control and other diverse areas.

Various procedures are being applied by the auditors to get  reasonable assurance, however two major procedures are substantive and compliance audit procedures. Substantive audit Procedures are the overall checking of the incomes, gains, expenses, losses, etc recorded in the books. The supporting and relevant evidences should back these. It also includes on its ambit the verification of the assets and liabilities being reported in get balance sheet at the yearend date. The main purpose of the auditor behind checking this is to whether the falsification of the accounts has not occurred and whatever has been recorded in the books is backed by value and substance over form. It also ensures whether the uniform accounting practices have been followed by the entity and whether it is aligned to the principle requirement of consistency.

Once this done, the auditors needs to check the internal financial control being implemented in the entity and whether there is any need to changes or enhance the control procedures. If the internal financial control is weak, it would clearly indicate more chances of fraud and more risk and hence, the extent of the audit procedures as well as the sample selection would be widened.

Whereas, if the internal controls strong in the entity, less risk would be perceived and less of audit procedures need to be applied and hence the auditor can focus more on the key result areas. Analytical audit procedures include a wide variety of analysis including ratio analysis, balance sheet and income statement variation analysis, trend analysis from the industry trends, comparison of the actuals from the standard and the budgeted figures, etc. All this is done with the primary view of determining the nature, extent and timing of the audit procedures to be undertaken to complete the audit, it also helps in audit planning and how the activities needs to be aligned to detect the material misstatements, if any, in the financials (Bae 2017).

In the given case study, the client is DIPL, a printing press, and now the audit is being taken over by Stewart and Kathy forms the old auditors Jay and Associates, so it also becomes necessary to have a check on the opening balances and take the key transition from the old auditors, if any. A ratio analysis has been done to check the trend of the company from 2013 to 2015 and whether the ratios adhere to the standard limits. It includes all the 4 crucial parameters of ratio analysis basis which conclusion can be made, i.e., liquidity ratios, profitability ratios, debt management ratios and asset management ratios. Since no data has been made available for the industry, the same has not been included in the workings (DeZoort & Harrison 2016).

The current and the liquid ratio has moved steadily and has remained within the limits of 2 and 1 respectively, which is the standard, which states that the company would be able to meet its present obligations and current liabilities with its current assets at any point of time.

The debt equity ratio has from 0.41:1 to 1.13:1, which is still under the standard trend of 2:1, which means the company has an adequate cushion to take loans and thus the benefit of low interest cost.

Here, the debt collection cycle and the inventory liquidation cycle both are on the negative trend which have increased from 26 to 42 days and 29 to 41 days respectively. This shows the loss of control over these areas such that the funding is not coming at the right time to the company.

The profitability ratio of DIPL over last 3 years is evident of the fact that the profits has not increased and has remained constant at around 6.5-7%. In addition, the company is failing to give increased returns to the shareholders (calculated through ROE), even after increasing the mix of debt in the capital structure.

Risk analysis and management is an important part of auditing. In case of any audit, there are three types of risk elements involved. Inherent risks are the type of risks that occurs because of things that are not in control of the management, which includes non-routine transaction and for which it is hard to obtain necessary information for clarification. Control risk is the type of risk, which occurs if the management fails to ascertain proper internal control that might lead to material misstatement. It is important that the management ascertain proper control so that any kind of fraud is properly detected by the system. The other type of risk is detection risk that occurs in the case of auditor failing to detect any errors or there is a case of failure to apply proper judgement (Fay & Negangard 2017). In case the auditor fails to apply important audit procedures for proper vouching and verification of the accounts, may lead to material misstatement. In case of DIPL, there are two cases of inherent risk and the same has been explained here under-

Inherent risk

Reasons of inherent risk

Risk of material misstatement

The main element of risk is present in adoption of new strategies by the management that are of non routine nature.











2) The second of inherent risk is present in adoption of the new system for which the management did no research before hand and adopted the new system in haste.

In case the company is adopting a new system without proper verification.

And the management is considering changing the accounting policies and methods without proper research, like the CEO wants to change the method of inventory valuation and also to adopt new methods of depreciation. All these changes are based on personal

Opinion and not on research (Grenier 2017).


There is a risk of inherent risk because the management did no research. It might affect the financial viability of the company as the new It system is installed without any expert opinion. The management is not sure about the results of using the system. This causes high chances that in case the management fails it might affect the overall profitability of the company. Care should be taken to do proper research before undertaking such important changes that might affect the overall functioning of the company.




There is an inherent risk of material misstatement in case of non routine transaction because the auditor has no benchmark with which they can compare the actions of the management. Also since no past data is available it makes the overall process more difficult. Any change in the valuation method must be properly disclosed in the financial statements.




There is a risk of material misstatement because since the management failed to do any research and no reconciliation. It might lead to overvaluation or undervaluation of the system, and that might affect the overall profitability of the company. Thus proper care must be ascertained before making such changes in the system. Expert guidance must be taken by the management.

Fraud occurs in cases where the management or the employee of the company indulges in certain activity that poses a threat of material misstatement. Fraud takes place in cases where the personal motives of the employees or the management are involved. The work of the auditor is to identify such fraud and try to mitigate it effectively. Necessary procedures must be applied in proper verification of the accounts so that a true and fair view is ascertained (Jones 2017).

In case of DIPL, there might be chances of fraud on part of the management in few cases.

Fraud Risk

Risk Factor Identified

Approach of the auditor

 The first case of fraud may be seen in the non segregation of important duties by the management.

In case of DIPL, the management has not properly segregated the duties. A single person is handling all the important accounts and thus there are chances if fraud because the employees can easily defalcate the money for their own benefits. In case of DIPL, the cash receipts are managed and verified by a single clerk and the accounts receivable are also managed by the one person. This also shows that the management lack important controls that must be present in the system (Knechel & Salterio 2016).

In order to mitigate the risk, the auditor must ask the management to ascertain proper internal control and also to see that proper segregation of duty is there. The management must ascertain the ways by which the loyalty of the employees can be checked. Proper verification of the accounts must be done beforehand so that any kind of material misstatement is easily ascertainable.  Proper substantive and analytical procedures must be adopted by the auditor to mitigate the risk as much as possible.

The second case may be in the installation of the new IT system, because the management undertook the same without applying proper judgement. It was done in much haste which shows that there might be some personal motive of the management involved in the same (Raiborn, Butler & Martin 2016).

The management has installed a new system and there has been no reconciliation of the expense and the result. This is why there are chances that it might lead to overvaluation

And undervaluation of the new system.

The auditor can mitigate the same by making sure that the management has ascertained proper control. The management should see to it that all the necessary details about the system must be provided. The auditor can also get some expert opinion and that might help him in ascertaining the profitability of the system. These are the few ways in which the auditor can mitigate the overall risk elements that might be involved (Sonu, Ahn & Choi 2017).


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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