Analytical Procedures And The Risk Factors â€Myassignmenthelp.Com

Question: Discuss About The Analytical Procedures And The Risk Factors? Answer: Introducation The details of every company can be checked and verified from the basic document of the company which is known as Annual Report. Annual report provides all the information which is very useful for all the stakeholders of the company whether it is the employees or it is the shareholders of the company. Each stakeholder wants to have more and more information about the company so as to take the decision in relation to the company. Like, shareholder of the company like to know whether he should invest in the company or not. For taking such decision he should be available with the information pertaining to the financial position and the financial performance of the company. This information are reflected and detailed with the note of the directors of the company in the Financial Statements of the company forming part of the Annual Report. The report has been started with the executive summary detailing the main aims of the report. Then it has detailed the answer to the question number one which is related to analytical procedures adopted by the auditor before starting of the audit. The information of Double Ink Printers Limited has been considered. The company is in the business of printing books and magazines. In this it has been explained as to how the results of the procedures so performed have affected the audit plan of the auditors. Then the answer to the second question has been detailed which is related to the inherent risk factors. These risks are notified by the auditor while reading the background information and the financial information and the internal control procedures of the company. Similarly in the last question the risk factors which have led to fraudulent reporting of the financial information have been detailed. At the last conclusion and recommendation has been given for the whole study. Current Ratio Current Ratio helps in determining the companys ability to clear the short term liabilities from the cash received from the short term assets. These short term assets and the short term liabilities are termed as the current assets and the current liabilities respectively. It is because it can be readily converted into cash and cash equivalents. This is regarded as an important measure of the liquidity. It is because the short term liabilities are generally due within the period of one year. Therefore, the company usually has the limited period to set off its liability and therefore the current assets which include the cash and cash equivalents shall be high so as to pay off the current liabilities without obtaining funds through long term assets or long term sources of finance. The current ratio has been increased from 1.42 in the year 2013 to 1.47 in the year 2014 and to 1.50 in the year 2015. The sudden increase is noticeable. Current ratio of 1.50 is considered by th e banking industry as the best value for the current ratio. As per the background information of the company, the company is bound to maintain current ratio of 1.50 so as to keep availing the facility given by the BDO Finance. The company BDO Finance Limited has stipulated that in case the company fails to maintain the current ratio of 1.50 then it has the right to take back the facility from the company of the loan given amounting to 7.5 million Loan. This factor will affect the audit plan of the auditors as they will be required to check in detail as to how the company has immediately met the requirements of the BDO Finance Limited. Either the receivables have been increased or the inventory has been overvalued. As also from the discussion of the board it was held that the company has decided to follow the FIFO method for valuation of Inventory instead of Weighted Average which of course will increase the value of inventory. Therefore, these kinds of manipulations are required to be checked by the auditors in detail and hence their audit plan needs to be modified. Quick ratio tells about the companys ability to pay off the current liabilities from the current assets which can be easily converted into cash with in the period of 90 days or less. It informs the users as to how fast the company is able to meet its current liabilities with the liquid assets. It includes cash and cash equivalents but does not include the inventory and the expense which are in the nature of prepaid The companys quick ratio has been fluctuating from 0.83, 0.94 and 0.85 in the years of 2013, 2014 and 2015 respectively. The audit plan will not be affected majorly as the same will be considered while performing the audit of the current ratio part. The inventory turnover ratio shows how many times the company sale its goods over the period of one year. It shows how effectively the company is managing its purchases and sales over the period. Inventory is considered as the major part for the investors of the company to consider. It is because the inventory only informs abou t the company ability to convert its inventory into sales. Inventory is normally offered as collateral to the banks for availing of the loans and investors are readily interested in knowing whether the c company is incurring high storage and handling costs for maintaining the inventory. The inventory turnover ratio has been considerably decreased from 15.16 to 14.11 and to 10.40 in the year 2013, 2014 and 2015 respectively. As the ratio has been decreasing, it might be possible that the inventory of the company has been piling up and the company was not able to sell the inventory in the market properly. Also the inventory calculation is required to check in accordance with terms of BDO Finance Limited. Thus, the audit plan is required to be modified and auditors have to act accordingly. It denotes how effectively the company has been able to manage its total assets so as to generate profits out of it. Higher the ratio more will be the faith of investors in the company. Return on a ssets ratio has been decreased considerable from the year 2013 to the year 2015 to the value of 0.14. It denotes that the company is not able to manage its assets effectively and efficiently. The risk factor is required to be considered by the auditor as to why the company is not able to generate the profits. This will have the higher effect in the audit. The debt equity ratio denotes by how many times the company has the liabilities in relation to the amount invested by the shareholders of the company. Each industry has different benchmarks. Some have 0.5 and some have 2. The debt equity ratio has been considerable increased by from 0.47 in the year 2015 to 1.13 in the year of 2016. It is basically because of the finance obtained from the BDO Finance Limited. The terms and conditions of the finance Gross Profit tells about the trading and manufacturing results of the company and shows how effectively the company is managing its operations. The gross profit of the company has been decreased considerably despite of the fact that the inventory has been overvalued and hence the audit plan is affected and will needs modification accordingly. Net profit shows the net income earned by the company after deducting the expenses and other overheads of the company. The company has been maintaining the net profit ratio of 6% approximately irrespective of the fact that the companys gross profit ratio has been decreased and also the companys interest cost has been increased with the introduction of finance of 7.5 million from BDO Finance and hence the scope of the audit will be increased as there are high chances of manipulation. Auditor is required to consider the various kinds of risks while performing for the audit function. Although there are three kinds of risks namely Control risk, Detection Risk and the Inherent Risk but in this section we will consider only the inherent risk. The factors which have contributed towards the inherent risk factors are mentioned below:eing Inherent Risk Impact on Material Misstatement Inventory Valuation Inventory valuation is very important for every company whether it is the trading company or the manufacturing company or the service company. Inventory shall be valued as per the relevant accounting standard and all the provisions of that standard shall be followed. The company has been following the weighted average method of valuing the inventory. By following the weighted average method of inventory valuation, the value of the inventory generally comes with low figure. Due to which the gross profit of the company comes with low figure. In the given case the company has obtained loan from the BDO Finance Limited amounting to $7.5 million during the year. The BDO Finance Limited has included the condition that the company has to maintain the current ratio of 1.5. In the board meeting, it has been described by the board that the inventory valuation be changed to FIFO Method from the weighted average method. This will lead to increase in the value of inventory as the last purchase price will always be higher in comparison to the weighted average price. Therefore, In order to maintain the current ratio, the company might have indulged in such practice. As the company has been following the weighted average method since its inception and also from the above factors, the inventory valuation has been considered as the major factor which has led to the inherent risk in the business. The inventory valuation plays very important role in adjusting the net profit and the gross profit of the company. Sometimes the inventory adjustment leaves the material effect on the financial statements of the company. In the given case as the inventory valuation has been changed from weighted average method to the FIFO Method, the chances of having the financial statements materially misstated becomes high. It is because the effect of change in the method sometimes comes high which can lead to even different financial position and the performance of the company. Also the condition that the BDO Finance Limited has given to the company to maintain the current ratio of 1.50. It will lead the company to indulge in the manipulating practices so as to maintain the current ratio and will strive to keep enjoying the banking facilities from the company. Thus, in this way, this factor will lead to material misstatement in the financial statements of the company. Acquisition of Nuclear Publishing Limited Acquisition of any business shall be done after taking due diligence and various feasibility reports from the professionals and the management of the company. The acquisition shall be done after considering the market conditions of the target company also. In the given case the company has acquired the company Nuclear Publishing Limited during the year. Along with that the company has acquired the printing rights of the company. After the acquisition, one article has been published stating that the new technology has come and will make the earlier books and theories non useful for the students and the readers. This article has created a wave in the market as the company will be in failure if the same thing has happened. In order to be safe and sound the company will get themselves engaged in the manipulating practices. In this way, the same acquisition has been considered as one of the factor contributing towards the inherent risk of the company. The acquisition will have the greater impact on the material misstatement of the company. It is because the company that has been acquired will be loss making deal for the company as all the theories will get expired and the companys major investment will be depreciated with higher amount in the future years. In order to maintain the position of the company, the company may be engaged in manipulating the revenue figures so as to show higher profits with high earnings per share. The same fact has been supported by the fact that the company has been able to generate profit equal to percentage of sales as equivalent to the profits shown in the previous two years. In this way the financial statements are materially misstated and the auditor are required to increase their scope and plan of the audit. Development of New Software The company has decided to implement the new system in which all functions of the company whether it is related to purchase or it is related to sales or it is related to stock or any other function. The new software will help in integrating all the functions and give the common path for the achievement of organizational goals. The employees of the company are resistant as they are not efficient enough for getting the new system developed. The risk that has been identified in this condition is that chances of having the expenditure reported during the particular period may be reported in the other period. This will provide the incorrect details to the management of the company. The same fact has been reported in the case study. Secondly, to track the status of the transactions in the old system and the new system will be difficult for the employees of the company as they are not well equipped with the new system. Also the staff was under great pressure due to which the employees were not found able to do the reconciliation and other work with the new system. Audit will be greatly affected by the introduction of new system. It is because the auditors will have to apply the additional audit procedures to do the audit of the books of accounts of the company. The additional procedures will not only apply to the old system but also the new system so as to check whether the financial statements so delivered by the systems are correct and are at par. It is because is they differs then there may be the possibility that the company might have entered into the transactions which has been recorded in the one system and not recorded in other system. Secondly, as already said, there may be the chances of overstatement of understatement of income or the expenditure due to reporting in the different reporting period. Thus, this development will affect the audit and will persuade the auditors to perform the additional audit procedures and plan the audit accordingly. Stipulation of BDO Finance Limited The BDO Finance Limited has made the stipulated that the company is required to maintain the current ratio of 1.50 so as to enjoy the facility of $7.5 million in the future years. If gets deviated then the BDO Finance will withdraw the facility of loan. The risk factor that has been noticed is that the change in the current assets and the current liabilities. The current asset consists mainly of the debtors and the inventory and the current liabilities consist of the sundry creditors and the other expenses payable. To maintain the current ratio of 1.5, the company may increase the value of debtors by increasing the sales or decrease the creditors by making the payments. Secondly the other risk factor is that the company may increase the inventory value in order to increase the current ratio. The same has been done by the company by adopting the FIFO method of valuation of inventory instead of Weighted Average method. In this factor also, the audit will be affected. It is because the change in method of inventory will automatically increase the scope of the audit. The auditors will have to apply substantive procedures in order to confirm the inventory value. Secondly, the debtor figures will also be required to check in detail. It is because the revenue figure will also be increased to increase the value of the debtor and audit plan will require the adequate modification. Conclusion DIPL Company has been engaged in the business of the printing and publishing. As per the background information of the company, the company has the sound internal control system and accounting process. Since inception of the company, the company has been facing various risks that have lead to the material misstatements in the financial statements of the company. Secondly, the company has been able to engage in the manipulating practices which again have resulted in material misstatements in the financial statements of the company. The auditors role in the said risk factors and the financial statements has been enhanced. To conclude, the auditor plays very important role in the financial statements of the company.ts recommended that the company shall have the proper system in place so as to avoid the material misstatements in the financial statements. 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 25-08-2017. Anastasia, (2015), Financial Statement Analysis : An Introduction available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 25-08-2017. 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