Subject Title AUDITING ,ASSURANCE AND COMPLIANCE
Subject Code HI6026B
Lecturer Khokan Bepari
Assignment Title INDIVIDUAL ASSIGNMENT 1
Due Date Friday Week 6
Contact Details Student ID EGU8594
Student MAULIK
Name
Student e- [email protected]
mail
address
Auditing and Assurance
INTRODUCTION
Analytical procedures are an important type of evidence in an audit. ASA 300
(ISA 300). Audit standards require the auditor to perform analytical
procedures in audit planning. Analytical procedures may be useful in
identifying the existence of unusual transactions or events, and the amounts,
reports. Ratios and trends that may affect audit planning. They include a
recommended comparison of expectations with values developed by
auditors. Evaluations to consist of financial information made by a study of
plausible relationships between financial and non-financial data. For
example, this year's accounts receivable balance can be compared with
previous year's balances, adjusted for any increase or decrease in sales and
other economic factors.
Financial Ratios of Double Ink Printers Ltd (DIPL)
Financial ratios are a valuable and easy to interpret figures found in
statements. The analysis of the report makes it possible to understand the
relation between the number of spreadsheets. It can help you answer key
questions such as whether the company is carrying too much debt or
inventory, whether customers pay according to terms, and whether the
operating costs are too high. When calculating financial ratios, a clear
indication of the strengths and weaknesses of the financial firm is clear.
Examining these proportions over time gives an idea of how effective the
business is being operated.
Here are the most critical ratios for Double Ink Printers Ltd (DIPL)
companies, but others can be calculated.
The financial ratio is a valuable statement and easy to interpret in the data.
The analysis of the report makes it possible to understand the relation
between the number of spreadsheets. This can help you answer key
questions such as whether the company pays too much debt or inventory,
that the customer is paying according to the terms and conditions and
whether the operating costs are too high. When calculating the financial ratio,
it clearly indicates the advantages and disadvantages of the financial
company. With the passage of time to examine these proportions, you can
understand the effectiveness of business operations.
This is the largest proportion of dual-ink printing company (DIPL), but others
can be calculated.
Liquidity
It measures the ability of a company to pay its debts to maturity. There are
two reasons for evaluating liquidity.
Current ratio- Determines how the company uses only current assets to
pay current liabilities. Also called working capital ratio. The general rule for
the current ratio is 2 to 1 (or 2: 1 or 2/1). Real quality and asset management
should also be considered for Dipl.
The formula is:
Total Current Assets
Total Current Liabilities
Year 2013 2014 2015
Current Ratio 1.424 1.466 1.500
Quick ratio - This ratio has declined in 2015 and is well below the usual
benchmark of 1. This is an indicator of short-term liquidity concerns for the
company. This is particularly worrying as it appears that accounts receivable
has increased during this period (deducted from the "receivables" ratio). It
would be useful to review the company's cash flow for more information on
its short-term liquidity.
The formula is:
Cash + Accounts Receivable
(+ any other quick assets)
Current Liabilities
year 2013 2014 2015
Quick ratio 0.83 0.9448 0.84725
2. safety
means that the company faces the risk of vulnerability - that is, the degree of
protection provided by corporate debt. Three relationships help evaluate
security:
Debt equity ratio - It quantifies the relationship between the owner and the
investment capital of the investor and the funds provided by the creditor. The
higher the proportion, the greater the risk of current or future creditors. The
higher the ratio, the higher the risk is high for a current or future creditor. This
relationship has increased over the three years, indicating the company's
greater dependence on equity. Since much of the investment in productive
assets occurred in previous years, it would be useful to evaluate what the
recent loans used to finance.
The formula is:
Total Liabilities (or Debt)
Net Worth (or Total Equity)
year 2013 2014 2015
Debt equity ratio 0.413 0.474 1.1344
Interest coverage ratio or time interest ratio - assess the company's
ability to meet interest payments. It also evaluates the possibility of assuming
more debts. The higher the proportion, the greater the ability of the company
to pay for interest or debt. this means that the company earns more than
enough money to pay its interest bonds with some additional earnings
remaining to make principal payments.
The formula is:
Earnings Before Interest & Taxes
Interest expense
year 2013 2014 2015
Time interest 40.9420 40.125 4.786
earn
3. Profitability measures the company's ability to generate a return on
resources.
Gross profit margin - Indicates how the company can generate a return on
gross profit. It addresses three areas: inventory control, price and production
efficiency. This indicates that the company can use a larger discount to
generate sales.
The formula is:
Gross Profit
Total Sales
year 2013 2014 2015
Gross profit ratio 0.212 0.1922 0.1792
Net profit margin - shows that the net result is calculated from the total
amount of each sale. This shows how the operating costs of the business. It
is also possible to emphasize whether the company has sufficient sales to
cover the minimum fixed costs and even the acceptable profits.
The formula is:
Net Profit
Total Sales
year 2013 2014 2015
Net profit ratio 0.0836 0.0724 0.0806
Return on Assets -Evaluates the effectiveness of the company by
using its assets to generate returns. It is prudent for a higher proportion to
be more favorable to investors, since it shows that the company manages its
assets more efficiently to produce higher returns. A positive ROA ratio also
indicates an upward trend in earnings.
Total assets
year 2013 2014 2015
Return on total assets 0.130 0.125 0.162
Return on Net Worth - Also known as Return on Investment (ROI). It
determines the rate of return on investment capital. Used to compare the
company's investment and other investment opportunities (such as stocks,
real estate, savings, etc.). There must not be a indirect relationship between
ROI and risk means there is direct relationship.
The formula is:
Net Profit
Net Worth
year 2013 2014 2015
Return on equity 1.0485 1.0183 1.320
4 Efficiency
It assesses the extent to which the company manages
its assets. In addition to determining the value of the company's assets,:
Account Receivable turnover-indicates many times accounts receivable
are repaid throughout the accounting period.
decrease ratio, similarly, can also suggest some elements about a business,
such as the company may have poor collection process, poor credit policy
or not, or bad clients or clients with financial difficulties. Hypothetically, the
decline ratio may also mean that if the company improves its collection
process, it has a high amount of accounts receivable in the collection account
of its various debtors. In general, however, the decrease ratio means that
the company needs to re-evaluate its credit policy to ensure the timely
collection of credit for which the company is not interested
The formula is:
Total Net Sales
Average Accounts Receivable
year 2013 2014 2015
Receivable Turnover 1.1148 0.8096 0.687
Accounts Receivable Collection Period It shows how many days it takes
to collect all debtors. With respect to the income received (above), Fewer
days mean that the company get their income in very quick time.This
proportion has increased considerably over the three years. This may
indicate greater leniency in terms of credit to try to generate sales. This may
have a subsequent impact on the recoverability of accounts receivable.
The formula is:
365 Days
Accounts Receivable Turnover
year 2013 2014 2015
Receiveable tuyrnover in 365 days 327 days 451 days 531 days
The risks identified are primarily related to operating costs and inventory
costs. These costs affect the company's financial factors and may be
therefore involve risks. The negotiations defined in the scenario are in AUS
dollars and the import and export procedures, counting foreign currencies,
have a very significant monetary impact. The exchange rate change can be
considered as one of the main sources of financial losses and can lead to an
economic risk. (Selisteanu, Florea, & Buziernescu, 2015).
Question 2
Economic and financial risks are very effective in the company and can result
in significant losses for the company. The cost of transporting raw materials
and other equipment can also affect commercial costs. The cost of selling
the property will increase and affect the overall commercial economy. Thus,
problems can result in the addressing of audit risk. (Selisteanu, Florea, &
Buziernescu, 2015).
The inherent risk may be information about the importance of disclosure,
account balance or transaction-related information, personal or
misstatement of the set prior to considering any relevant controls (Weirich,
Pearson, & Churyk, 2014). The risk of control may be based on the risk of
misstatement that may occur on disclosure claims, account balances or
transactions, and may be important errors that may not be corrected,
promptly discovered or prevented in a personal or erroneous summary
Stated by internal control entity.
In the case of Dipl's procurement inventory, the company is likely to generate
slow cash flows and business risk associated with the liquidity of Dipl's
transactions.
Question 3
The treatment of revenue and capital expenditure business risk
The risk here would have been related to the Existing of the facility and the
ownership of the equipment as the cost of revenue has been given priority
rather than cost in the reporting activity. (Blay & Geiger, 2012). This can
cause confusion because the auditor cannot determine the exact processing
of the transactions performed by Dipl when purchasing his inventory without
proper documentation. (Blay & Geiger, 2012). This is because the company
operates on a large scale and that complex network-related businesses can
be fake in the financial statements. This is a challenge when deciding to
allocate and analyze overhead during planning to audits.
Inventory valuation risk
This can be happen, for example, when there is a significant level of aging
inventory in DIPL(Hossain, 2013). DIPL may not be properly supervised by
the Company's financial factors for the qualified audit committee. The
company may even lack the internal audit service, which is a key control in
high regulatory surroundings, such as buying inventory of DIPL from Asia
Audit risk
Auditors are not only concerned with analyzing commercial documentation
or finding errors in the documentation. Auditors are not only interested in
analyzing sales literature or detecting errors in the documentation. They are
also responsible for describing the quality of annual reports and trade
publications. Analysis of the case study, the observation results show that
the company is challenged with an operational risk and a cost of inventory of
the two risks. As a result, the audit risk will arise from the determination of
fairness in the annual report.(Selisteanu, Florea, & Buziernescu, 2015).
Companies manipulate the cost of gold sold to statement of work more or
less profit. In addition, the distinction between foreign currencies will straight
affect the interests of the company's balance sheet. Therefore, increasing
inventory and operational costs with the cost of gold sold because of global
sourcing, auditors should be more vigilant and should focus on appropriate
monitoring. (Selisteanu, Florea, & Buziernescu, 2015) Audit risk can be
characterized as a risk that the auditor may explain an inappropriate audit
opinion when financial statements appear to be significantly misleading. The
audit risk may be the risk of risk function of detection and significant
anomalies (Weirich, Pearson, & Churyk, 2014). Auditor risk based on DIPL
cases is mainly focused on both detection risk and material misstatement.
The risk of material misstatement may be referred to as the risk of significant
false positives in the financial statements before auditing. They involve two
elements, known as controlling risks and inherent risks
Reference
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