Value To Both Management And The Auditor â€Myassignmenthelp.Com

Question: Discuss About The Value To Both Management And The Auditor? Answer: Introducation In relation to decision-making, analytical processes can prove to be of significant value to both the management and the auditor. Besides, not only financial decisions but also non-financial decisions can be taken with the help of analytical processes. In the given case of DIPL Ltd, such analytical processes have been performed in order to highlight the true performance of the company and thereafter, make decisions based on the same. Moreover, if there are any material misstatements forming part of the companys financials, implementation of such processes can assist in identifying the same in order to safeguard any fraudulent affairs (Church et. al, 2008). Nevertheless, based on the background information of the company, such processes can be performed in order to achieve the intended results. The first analytical process conducted in relation to DIPL Ltd is an analysis of its trends. In this process, the financial information forming part of the companys financials is compared with the last year figures so that variations can be identified, thereby resulting in effective decision-making. In simple words, the patterns or trends can be taken into account for making relevant decisions (Heeler, 2009). Besides, reasons behind major differences in the trends can be easily evaluated so that future complications can be prevented. Nevertheless, from the financials of DIPL Ltd, it can be identified that there was a massive enhancement in the sale figures of the company that is a good indicator in terms of performance. However, one important consideration must be noticed in this scenario. If the sale figures are compared with the underlying stocks of the company, it can be seen that the difference is huge despite such enhanced sales. This becomes a matter of issue for the company, a s the stocks must have declined owing to enhancement in the sale figures. Hence, the auditor must evaluate such trend to find the reason behind inflation of stocks even though the company achieved greater sales (Johnstone et. al, 2014). In the second process, evaluation of ratios has been conducted in order to ascertain the true financial position of the company. For such purpose, various ratios can be calculated and compared with that of the last years in order to find the true nature of the companys operations. Based on the trend and profitability of DIPL Ltd, solvency, liquidity, and profitability ratios can prove to of immense importance. Liquidity ratios will assist in determining the liquidity position of the company whether it is able to repay its obligations, Solvency ratios will assist in ascertaining whether there is a proper balance in the capital structure of the company, profitability ratios focuses on the revenues attained by the company. Liquidity Ratio Current Ratio 2013 2014 2015 Current assets 5385938 7509150 9600929 Current liabilities 3780000 5120250 6397500 C.A/C.L 1.42 1.47 1.50 Quick Ratio 2013 2014 2015 Quick assets 3129750 4837788 5420429 Current liabilities 3780000 5120250 6397500 Quick assets/current liabilities 0.83 0.94 0.85 In order to ascertain the liquidity position of DIPL, quick and current ratios have been computed for the period of three years. Since the current ratio has been consistently above one, it signifies that the company is able to pay off its obligations without facing any issues. Similarly, when it comes to the quick ratio of the company, it can be witnessed that the ratio is equivalent to the normal ratio of 1:1, which signifies that the companys liquidity position is strong in nature (Guerard, 2013). Solvency Ratio Equity Ratio Particulars 2013 2014 2015 Total Equity 9150000 10783650 12250491 Total Assets 12930000 15903900 26147991 Equity Ratio 0.71 0.68 0.47 Debt Ratio Particulars 2013 2014 2015 Total liabilities 3780000 5120250 13897500 Total Assets 12930000 15903900 26147991 Debt Ratio 0.29 0.32 0.53 It can be viewed from the ratios that the debt of the company has enhanced over the period of three years. Besides, the debt ratio has depicted 0.53 in the year 2015 that signifies the immense amount of debt in the capital structure of the company. In relation to this, it must be noted that increased debt in the capital structure can hamper the profitability of the company because there must be a proper balance betwixt debt and equity so that the performance is balanced as well (Berk et. al, 2015). On a whole, the above ratios clearly depict that the profits of the company may be highly affected and the auditor must evaluate these for implementing future courses of action (Berk et. al, 2015). Profitability Ratio Gross profit ratio 2013 2014 2015 Gross profit (I) 6004500 6079500 6604500 Sales (II) 34212000 37699500 43459500 GP ratio = I/II 17.55% 16.13% 15.19% Net profit ratio 2013 2014 2015 Net profit (I) 2359190 2291362 2972183 Sales (II) 34212000 37699500 43459500 NP ratio = I/II 6.90% 6.08% 6.84% In relation to the profitability ratios of DIPL Ltd, both net profit and gross profit ratio have been calculated in order to ascertain the profitability situation of the company. In relation to the net profit ratio, the figures have remained more or less consistent in all the three years but still, it has declined from what was reported in the year 2013. This shows that the company is facing some issues in managing its expenses. In contrast to this, the gross profit ratio has significantly decreased over the years that signify issues in the management of cost of sales of the company (Guerard, 2013). Therefore, the auditor must evaluate this scenario so that better decisions can be implemented based on this information. In addition, corrective actions are very important in this scenario so that the company does not deteriorate its entire resource base. In relation to inherent risks, such risks cannot be easily rid of because they will be present in the financials of a company. Besides, internal control policies and audit processes also cannot restrict the prevalence of such risks. This is because of the fact that such risks do not depend on any material misstatement or error. The inherent risks prevailing in the financials of DIPL Ltd are as follows: Immoral appointment standards In relation to the appointment of an executive, it must be noted that a person who does not possess any kind of interest within the company must undertake the appointment. Therefore, when it comes to the appointment of CEO in DIPL Ltd, the person undertaking the appointment must not possess any financial interest with the company. However, the contrary has been witnessed in the case of the company. It has happened that the companys CEO can obtain a ten percent share of the profits if the company witnesses a growth of ten percent or more in its operations. This poses a very big threat to the company because the CEO is in a position wherein he can manipulate the business affairs in a way that can grant him the agreed share in profits (Matthew, 2015). Besides, for such manipulation, he may even tamper the financial records in a way that may fetch him profits even though the company has not earned revenues in reality. Improper recording of accounts receivable The cashier of the company records the accounts receivables on a regular basis but recognition of the same is done through received mails. This means that he debtors enclose their cheque through mail and the same is forwarded to the company wherein the cashier does further recording and encashment. This signifies that the companys policy does not have any correlation with the adjustment of receivables and cheque encashment, thereby resulting in huge variations. Further, a different official undertakes the job of reconciling the bank statement every month. This depicts the fact that the company has not been following a systematic method of recording the receivables and reconciling the same with the bank statements (Matthew, 2015). As a result, there may be massive variations in the companys financials and if the auditors do not evaluate these concerns in a thorough way, he may be misguided and an incorrect judgement may be provided on his part. Hence, the auditors must analyze these i ssues and make further judgements. These two inherent risks are a massive problem for the company because it may not only hamper the companys financials but also misguide the auditors in offering an improper judgement. Moreover, the profit figures may be badly influenced because of such risks that may hamper the companys goodwill in the upcoming tenure if the auditor gets hold of such fraudulent measures. Fraud risks are the risks that prevail within the companys financials because of some fraudulent activities are undertaken by the management or by its official. The key fraud risks in the case of DIPL are as follows: Inventory valuation Based on the financial information of the company, it can be seen that its sale figures have depicted a positive and enhanced performance over the years. However, the main area of concern is that even though the company attained good sales over the years, yet its stock balances have not depicted a downward trend and instead, an upward trend in stock figures can be seen. This is a big issue for the company because the enhancement in the level of inventories must have been done through manipulation on the part of the management or accountant so that the accounts are tampered and it fetches good profits (Gilbert et. al 2005). Mail revenue recognition Since the cashier undertakes the job of encashment of the cheques attained through mail basis, it may create many difficulties for the company. The reason behind this can be attributed to the fact that prior verification from the bank is missing in this scenario and that can result in fraud on the part of the management or its officials. It is therefore required prior verification from bank statements must be undertaken so that efficacy of the transaction can be achieved. Moreover, if such system is not in place, the officials of the company might be in a position to deport the companys resources and credit the same to an unwanted persons account. This will not only deteriorate the financial resources of the company but also hamper its financial statements. Hence, it is required that the company must undertake proper bank reconciliation systems within its operations so that the possibilities of fraud are minimized to the fullest (Geoffrey et. al, 2016). Moreover, this will also resul t in strong corporate governance within the company because of transparency. Therefore, these two fraud risks pose a big threat to the companys affairs wherein both the management and its officials are in a position to tamper the accounts for their own benefits. As a result, the auditors judgement may be deteriorated because they may not identify the fraud done on the part of the management, thereby representing a bad auditor opinion (Geoffrey et. al, 2016). Fraudulent measures play a key role in affecting the entire audit process because the auditor may be influenced due to manipulation done in the companys accounts and therefore, they may provide an ineffective audit judgement. Similarly, in relation to the fraud risks recognized above, it must be taken into consideration that such risks may negatively influence the companys financial statements because of the ill intention on the companys part to attain maximum revenues. Owing to an insignificant number of transactions in a company, if the system of recording receivables is not done in a proper manner, the auditor may prove incapable of identifying falsification in the financials (Elder et. al, 2010). This is because every entry will become necessary to be verified and since the transaction was entered in the wrong period, the auditor may not identify the truthfulness of such claim. Moreover, in case of lack of evidence, the auditor is in no position to provide an ineffective judgemen t on the companys financials. If variations or differences can be witnessed in the financial statements, then the auditor may question the same and provide a qualified opinion. Furthermore, the inventory valuation system has also been a concern for the company and the auditor must evaluate the cause of such enhancement in figures even after the increase in sales. It may happen that the company to value inventories has done falsification and since the auditor has relied upon the same; he may offer an unqualified opinion (Gay Simnet, 2015). For such purpose, the auditor must implement proper judgement and skills to conduct the audit process. References Berk, J, DeMarzo, P Stangeland, D 2015, Corporate Finance, Canadian Toronto: Pearson Canada. Church, B, Davis, S McCracken, S 2008, The auditors reporting model: A literature overview and research synthesis, Accounting Horizons vol. 22, no. 1, pp. 69-90. Elder, J. R, Beasley S. M. Arens A. A 2010, Auditing and Assurance Services, Person Education, New Jersey: USA Gay, G Simnet, R 2015, Auditing and Assurance Services, McGraw Hill Geoffrey D. B,Joleen K,K. Kelli SDavid A. W 2016, Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors, Accounting Horizons, vol. 30, no. 1, pp. 143-156. Gilbert, W. Joseph J Terry J. E., 2005. 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