Risk In Fianncial Reporting And Audit †MyAssignmenthelp.com

Question: Discuss about theAssessment Of Causes Risk In Fianncial Reporting And Audit. Answer: Synopsis The title of the report Assessment of causes of Risks in Financial Reporting and Audit in itself suggest the reason for preparation of the report. The report has been prepared for the Double Ink Printers Limited with the intention to identify the different aspects which are related to financial reporting and audit. The report has been prepared to analyze and ascertain the impact of financial results in the planning of an audit with the help of analytical procedures. The another purpose of preparation of report is to identify the different risk factors that are presented in the financial reporting, whether related to inherent limitation of the organization or due to fraud situations occurred in the organization. Also, this report helps in assessing how the risk factors affect the misstatement and audit procedures in the organization. Preamble The Financial Reporting of any entity is very important for everyone associated with that entity. The Financial Reporting helps in ascertainment of correct financial arrangement and workings of an entity which in turn is the base for taking decisions regarding entity by different users associated with that entity. Thus, it is the responsibility of the entitys management to present financial reports with full correctness and full disclosures. The financial reports will be used by different users only if they are certified by professional independent third party. The opinion of the auditors on the Financial Reports will act as important factor for making decisions about the entity. For this, the report has been prepared to assess the different risk aspects which can affect the financial reports as prepared by the management and auditor opinion about the correctness and accuracy of the financial reports. The first section of the report dealt about the impact of the financial results shown in financial reports by the management on the planning decision of the auditor. The second section dealt about the different inherent risk factors that presented in the chosen entity financial reports and which are beyond the management control. This section also includes the assessment of these factors on the misappropriation of assets and misstatements in Financial Reports. The third section of the reports dealt with impact of fraud factors on audit and opinion of the auditor. The report has been prepared using reliable secondary data and wind up with proper conclusion Impact Of Results On Planning Decision The company under consideration is Double Ink Printers Limited (DIPL) is engaged in Printing Business and print different material on demand basis. The company is doing printing business for Publishing, Educational and Advertising Industries. Also, the company has e portal on which different publishers books are listed so that it is easy to order the books to be published by the company. Audit is the check the correctness and accuracy of the financial results presented in financial reports by the management by using the different audit procedures. For identification of which audit procedures will be applied by auditor during audit, the auditor has to first plan the audit using different procedures of Audit Planning. The Analytical Audit procedures are the audit procedures which the auditor applies in the planning stage of the audit to ascertain the level of the risk and causes of risks in financial reports. As per ISA 315, Primary analytical procedures are required to be done at the time of planning stage to ascertain the level of risk and misstatement in the financial reports. Primary Analytical procedures include the analysis of trends and ratios of the past year performances of an entity to identify the risky areas in the company so that details and substantive audit procedures can be taken place over there. In this method of audit planning the comparisons and rat ios from one year to another year is studied and analyzed and on that basis the future forecast has been done to find out the areas influencing planning decision of audit. In the given case of DIPL, the analysis has been done using the financial information given in the question for past three years ending on 30th June, 2013, 30th June 2014 30th June 2015. Ratios have been calculated and trends have been analyzed in the following manner which in turn helps the auditor to plan the audit in efficient and effective manner:- Loan Interest Bearing Liabilities from BDO Finance: - The Company has taken loan worth $ 7.5 million from BDO Finance for expansion of business in 2015 only which was zero in previous years. The utilization of extra funds and its implication on the working on financial leverage of the company needs to analyze by the audit team. Non-operating Expense Interest Expense :- The company has increased the interest cost in 2015 to $ 808038 as compared to previous year cost of $ 83663 which is very high but the in relation to this high cost the net profit has increased to $ 2972183 in 2015 from previous year $ 2291362 in 2014. The audit team needs find out in detail the reason for opposite reaction of profit on interest expense. Net Profit Ratio: - The Net profit ratio has been increased from last year by 0.76% in 2015 in comparison for high expenses. On the other hand the tax expense on profit has been decreased from last year to $ 87116 in 2015 as compared to $ 982012 in 2014 clearly showing certain manipulation has been done by the management to show high profits.( As calculated on Appendix 1) Change in Policy of Allowance of Obsolesce Inventory: - The Company has changed the policy of recording the allowance for normal loss of inventory in 2015 as compared to 2014 showing drastic change in expense amount of $ 125876 in 2014 to $0 in 2015. Foreign Exchange Gain or Loss: - The management has booked $ 0 gain or loss in 2015 as compared to $ 49750 in 2014. The 50% purchases of the company have been done from Foreign Country. From the above points, it has been clearly understand that the auditor needs to do the detailed assessment and analysis of the key areas impacting the audit. The auditor in the planning stage has to consider the audit procedures which help the auditor to do substantive audit on above identified risky Identification Of Inherent Risk Factors On assessing the inherent risk, auditor is liable to evaluate how far the assumptions for the financial statements are prone to the material misstatements depending upon the nature of the business of the Double Ink Printers Limited. Following are the inherent risk factors depending upon the background information of the company. The reasons as to why said factor is risk and how it will affect the risk of material misstatement in the financial report is mentioned below: Inventory Valuation As per the background information of the company and the boards discussion, the company has been valuing its inventory on the basis of the average cost basis. The effect of adopting this method is that the companys inventory value will always be at the lowest. It is because the price of the last purchase is high as compared to the average price. This is the major risk because the company can easily manipulate its financial position and performance by simply valuing its inventory and that too majorly done in case purchase and sales (Gary, 2017). Expiry of Copyright of Nuclear Publishing Limited The Company in the month of September of the year 2014 has purchased the copyright from Nuclear Publishing Limited as having the large range of specialized medical text books. In the recent article published in the Medical Journal which states that the medical textbooks of Nuclear Publishing Limited will soon become obsolete with the introduction of the new theories. This will lead to the severe competition in the market and the company will face the problem of liquidity with sudden high increase of obsolete inventory of e books. Thus, in this way, the aforementioned inherent risk factors will affect the risk of material misstatement in the financial report. Impact On Audit Of Fraudulent Risk Factors It is the responsibility of the management to supervise and keeps the check on the internal control system and procedures of the company so as to reduce the chances of having the fraud happen in the company. While planning for the audit, the auditor is required to consider each factor whether it is material or immaterial so as to give true and fair view of the financial position and performance of the company (Weiss, 2014). The auditor is required to modify its audit plan accordingly while conducting the audit. Following are the two key fraud risk factors arising from fraudulent financial reporting to which the company has the probable chances of occurrence: Maintain the Accounting Ratios The Company have obtained the loan from the BDO Finance of $ 7.5 Million and the BDO Finance has stipulated the condition that the company is required to maintain the current ratio of 1.50 and the debt equity ratio of 1. In case the aforesaid ratios are violated then the BDO Finance has the power to call back for the loans and reducing the eligibility of the loan sanction to the company. This stipulation will lead the companys management to enter into the fraudulent transactions which may lead to increase of the debtors or the inventory so as to increase the current ratio to 1.50 like the companys board has decided to value the inventory on the FIFO basis rather than the average cost basis. Advance Booking of Revenue Storage Fees The Company receives the storage fees from the publishers on an annual basis. The fees are received in twelve months advance. The fees bill is invoiced at the different times of the year and is revenue is recognized in the month when these are invoiced. It is recognized despite of the fact that the company receives the storage fees for the twelve months in advance. As per the generally accepted accounting principles, the company is required to book the revenue for the period ending as on that date and defer the revenue by booking the Accrued Income but not due and account for that revenue in the year of its accrual which will be the next year. By following the wrong practice the company has been able to report the higher income which instead pertains to the next financial year. The above identification will affect the audit as the auditor will now have to apply the additional audit procedures so as to substantiate his audit opinion based on the identified risk factors and in some cases he will have to increase the sample size also. Conclusion Every company shall prepare its financial statements in the true and fair manner so that the users of the financial statements can have the maximum information out of the financial statements. In the given case the company Double Ink Printers is engaged in the business of printing medical and accounting books including the magazines and other material. The analytical procedure has been performed from the view of the auditor and it has been described as to how the procedures will affect the audit. Secondly, inherent risk factors have been identified and it has been detailed as to how it will affect the financial statements of the company. Thirdly, apart from the inherent risk factors, the factors that will contribute towards the fraud or the fraudulent reporting of the transactions have been identified and detailed as to how the audit will be affected. In this way, the company has been facing various risk factors and which shall be removed so as to have the smooth functioning of the b usiness. 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 15-08-2017. Anastasia, (2015), Financial Statement Analysis : An Introduction available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 16-08-2017. Capital Markets Advisory Committee Meeting, (2013), Conceptual Framework available on https://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP%203%20conceptual%20framework.pdf accessed on 16-08-2017. Cooper S, (2015), A Tale of Prudence, available on https://www.ifrs.org/Investor-resources/Investor-perspectives-2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF accessed on 16-08-2017 Gary S., (2017), The Importance of Inherent Risk Factors: Auditors Perceptions, Australian Accounting Review, Vol 3, Pp 38-44. Weiss D, (2014), Faithful Representation available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October%202014.pdf accessed on 16-08-2017..