Fraud Risk Factor Identification- Free-Samples-Myassignmenthelp

Questions: 1.Explain how your results Influence your Planning decisions for the audit for the year ending 30 June 2015. 2.Explain why it is a risk and how it may affect the risk of Material Misstatement in the Financial Report. 3.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. Answers: 1.Analytical procedures Analytical procedures mean any procedures done by the auditor to make analysis regarding the financial statements of the organization. Analytical procedures are of two types one is preliminary analytical procedures and other is substantive analytical procedures. Preliminary analytical procedures are performed for planning nature, time and extant of substantive procedures required in the performance of the audit. On the other hand, substantive procedures are extensive procedures which include ratio analysis, trend analysis and comparative analysis of financial statements. Results of substantive procedures help the auditor in planning audit (Auditing and Assurance Standards Board, 2009). In the present case company under consideration, Double ink printers limited is a company works in printing industry providing serives of printing on demand as well as e-books with publishers titles, to its clients. The background information of Double ink printers limited indicate various factors which required to take into consideration by the auditor during the planning of audit. Some activities which required special consideration are, Recording of inventory value as well as accounts payble by the same person Indicating factor for impairment of assets purchased from Nuclear Publishing limited in last year Entrance in new loan with two specific conditions Change of chief executive officer and establishment of new internal audit depatment Change of external auditor Implementation of new IT system with insufficient staff No allowance for inventory obsolescence Allowance for inventory obsolescence made in previous years, written back Change in method of inventory valuation from average cost inventory valuation to first in first out based inventory valuation Change in estimated regarding the depreciable life of printing press by incereasing depreciable life, due to this depreciation expenses per year will decline E-book revenue recognization without completion of revenue genration process Results from ratio analysis and comperative analysis Trend analysis of balalnce sheet of Double ink printers limited 2013 2014 2015 Total Current Assets 41.65% 47.22% 36.72% Total Non-Current Assets 58.35% 52.78% 63.28% Total Assets 100.00% 100.00% 100.00% Total Current Liabilities 29.23% 32.19% 24.47% Total Non-current Liabilities 28.68% Total Liabilities 29.23% 32.19% 53.15% Net Assets 70.77% 67.81% 46.85% Total Equity 70.77% 67.81% 46.85% Trend analysis of income statement of Double ink printers limited 2013 2014 2015 Revenue 100.00% 100.00% 100.00% Cost of Sales 82.45% 83.87% 84.80% Gross Profit 17.55% 16.13% 15.20% Profit before tax 9.85% 8.68% 7.04% Profit after tax 6.90% 6.08% 6.84% Ratio relevent for loan conditions 2015 Current ratio 1.50 Debt equity ratio 1.13 Information which collected during the analytical procedures will affect the audit. All above mentioned financial and non financial factors auditor will effect planning for audit. Auditor will plan extensive procedures for reaching an appropriate opinion regarding these assertions (Putra, 2010). 2.Risk assessment and inherent risk identification Risk assessment procedures are procedures which followed by the auditor to measure risks related to financial information (Auditing and Assurance Standards Board, 2011). Audit risks are mainly of three types. Inherent risk arises because of nature of the transaction, control risk arises due to non availability of appropriate control and detection risk arises because of non detection of material misstatement due to lack of procedures followed by the auditor (Auditing and Assurance Standards Board, 2009). In the present case, inherent risk factors are, Change in method of inventory valuation from average cost inventory valuation to first in first out based inventory valuation Change in estimated regarding the depreciable life of printing press by incereasing depreciable life, due to this depreciation expenses per year will decline These changes are considered as an inherent risk factor because application of both changes will result in higher net income and in turn better financial position. Suggested change in method of inventory valuation will increase the value of closing stock and in turn, will increase net income. Suggested change in the life of the non-current asset will decline depreciation expenses and in turn, will increase net income. Due to nature of these two changes, these assertions involves inherent risk and this can be reduced up to an acceptable level by making appropriate audit procedures. 3.Fraud risk factor identification Fraud risk is the risk that financial reports of the organization are manipulated by a fraudster in such a way so that it becomes material for the users of financial reports. Fraud risk factors are the factors present in the reports of financial data which increase the suspicion of fraud (Auditing and Assurance Standards Board, 2013). Fraud can be initiated by any level of management of the organization. Fraud is performed by fraudster either because of pressure or because of misutilization of extensive rights provided to a person or group of persons. Fraud risk factors and effects of identification of these factors are, Non-allowance for inventory obsolescence, writing back the allowance for inventory obsolescence made in previous years and change in inventory valuation method indicates that there may be fraud risk factor due to pressure. The company needs to make current ratio at least 1.5 for the fulfillment of one condition out of two conditions of a loan from BDO finance. Current ratio can be increased by increasing current assets. Inventory is a current asset and non-creation of inventory allowances, wrtiing back the allowance for inventory obsolescence and change in inventory valuation method will enhance net inventory value. Due to the identification of this factor auditor will increase the extant of procedures for assessment of need of allowance for inventory obsolescence and inventory value. Recording of inventory value, as well as accounts payble by the same person, indicates that there may be fraud risk factor due to misutilization of extensive rights to accounts payable clerk. This employee may make a change in both values i.e. inventory and accounts payable for taking unjustified advantages. Due to the identification of this factor auditor will increase the extant of procedures for assessment of accounts receivable value, for this auditor may send confirmation requests to all accounts payables for confirming their due balance References Auditing and Assurance Standards Board, 2009. ASA 520 Analytical Procedures. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_520_28-04-06.pdf [Accessed August 20 2017]. Auditing and Assurance Standards Board, 2009. Auditing Standard ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/ASA_200_27-10-09.pdf [Accessed 20 august 2017]. Auditing and Assurance Standards Board, 2011. Auditing Standard ASA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. [Online] Available at: file:///F:/GS%20Solution%20(60%20paise)/Aug/16/risk%20assement%20procedure.pdf [Accessed 20 august 2017]. Auditing and Assurance Standards Board, 2013. Auditing Standard ASA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report. [Online] Available at: https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_240.pdf [Accessed 2017 August 20]. Putra, L.D., 2010. https://accounting-financial-tax.com. [Online] Available at: https://accounting-financial-tax.com/2010/04/the-use-of-analytical-procedures-in-auditing/ [Accessed 20 August 2017].