Department of Business Administration †Free Samples to Students

Queston: Discuss about the Department of Business Administration. Answer: Introduction: Auditors are able to plan their audit by conducting preliminary analysis using analytical procedures. Such plan helps in cutting unreasonable cost associated with audit and clarifies any facts for accomplishing the verification of financial declaration of DIPL. There are many analytical procedures available to auditor for carrying out analysis and this involves common size analysis, benchmarking and ratio analysis. Application of ratio analysis tool would help auditor in providing information about trend of financial performance of organization (Boone et al. 2017). For the analysis of financial performance, auditor uses ratio analysis tool. Analysis is done by calculation profitability, liquidity, solvency and efficiency position of company. Profitability analysis: Table 4: Profitability Ratios Ratio 2013 2014 2015 Gross Profit Ratio 17.55% 16.13% 15.20% Net Profit Ratio 6.90% 6.08% 6.84% Operating Profit Ratio 19.82% 19.18% 19.12% Return on Assets 18.25% 14.41% 11.37% Return on Equity 25.78% 21.25% 24.26% The above table depicts profitability position of DIPL over the period of three years. It involves calculation of gross profit, net profit ratio, return on assets, return on equity and operating profit margin. Gross profit ratio has decreased since year 2013. Ratio stood at 17.55% in financial year 2013 as compared to 16.13% and 15.2% in year 2014 and 2015 respectively. Net profit ratio stood at 6.9% and 6.08% in year 2013 and 2014 as against 6.84% in year 2015. There was significant decline in return on assets from 18.25% in year 2013 compared to 11.37% in year 2015. Return on equity declined from 25.78% in year 2013 to 24.26% in year 2015. Liquidity analysis: Table 1: Liquidity ratios Ratio 2013 2014 2015 Current Ratio 1.42 1.47 1.50 Quick Ratio 0.83 0.94 0.85 Liquidity analysis is evaluated by calculating current ratio and quick ratio. Liquidity position of DIPL has marginally improved since year 2013. Current ratio of DIPL stood at 1.42 in financial year 2013, 1.47 in year 2014 and 1.5 in year 2015 respectively. On other hand, quick ratio has initially increased and subsequently decreased in year 2015. Ratio stood at 0.83 in year 2013 as compared to 0.94 and 0.95 in year 2014 and 2015 respectively. Solvency analysis: Table 2: Solvency Ratios Ratio 2013 2014 2015 Debt Equity Ratio 0.41 0.47 1.13 Debt to Total Assets 0.29 0.32 0.53 Interest Coverage Ratio 28.96 28.39 4.68 Solvency position of DIPL is analysed by calculating by interest coverage ratio, debt to equity ratio and debt to total assets. Debt to total assets of DIPL stood at 0.29, 0.32 and 0.53 in year 2013, 2014 and 2015 respectively. Figures represents that there has been decline in ratio since year 2013. There has been increase in debt to equity ratio to 1.13% in year 2015 compared to 0.41% and 0.47% in year 2014 and 2015 respectively. Interest coverage ratio has fallen significantly to 4.68% in year 2015 compared to 28.96 and 29.39 in year 2013 and 2014 respectively. Efficiency analysis: Table 3: Efficiency ratios Ratio 2013 2014 2015 Inventory Turnover Ratio 12.50 11.84 8.82 Debtors Turnover Ratio 13.78 8.73 8.57 Efficiency analysis is calculated using ratios such as inventory turnover and debtor turnover ratios. Inventory turnover ratio has declined to 8.82 in year 2015 compared to 12.5 and 11.84 in year 2013 and 2014 respectively. Debtor turnover ratio of DIPL has reduced significantly to 8.57 in year 2015 as against 8.73 and 13.78 in year 2014 and 2013 respectively. Fall in efficiency ratio depicts that DIPL has been efficiently utilizing their assets. Influence of results on audit planning decisions: Ratios Impact of identified ratios on audit plan Current ratio Analysis of current ratio will help auditors in evaluating the factors affecting liquidity position of DIPL. It can be ascertained from the given case study that reason attributable to increase I liquidity position is writing back of inventories allowance. Solvency ratio Financial risk of DIPL has increased in recent year and it assist auditors in identifying factors that are considered undesirable or desirable for organizations financial position. Profitability ratio Analysis of profitability position assist auditors in analysing factors that would impacts the profitability position of DIPL and whether sufficient steps are taken by management regarding (Quick 2016). Efficiency ratio Analysis of this ratio depicts that whether organization has been efficiently utilizing assets. Identification of inherent risks affecting operations of DIPL: Inherent risks Explanation Risks arising from using system of information technology Installation and reconciliation of novel IT system required additional knowledge and extra staff members. DIPL has shortage of employees and they were not capable of handling the system. This would exert excess pressure on employees who might be forced to get involved in fraudulent activities. Deterioration of accounting system would hamper the operational activities of DIPL. Several threats are posed to organization due to integration of noel accounting system with general ledger system Financial risk Several accounting transactions are improperly recorded by accountants of DIPL. External and internal factors of organization are also responsible for creating financial risk. In order to secure loan from lending institutions, it is required by company to maintain particular level of ratio that is regarded as eligibility criteria for granting loan amount. There is pressure from external parties as well as management to maintain ratio at particular level. This would force accountants and staff members if DIPL to get engaged in fraudulent activities and manipulate presented data or cause material misstatement in the financial declaration. Impact of inherent risk on material misstatement and audit plan: It is evidence from the analysis of case study that the financial transactions would be subjected to manipulation and there is a possibility of inflating the value of assets. Staff members would get engaged in manipulation of financial declarations in order to meet requirement of lenders and investors. It is also evident from the given case that management of organization has the inflated the retained earning value and accounts receivable for meeting the prescribe current ratio level (Chiu et al. 2014). There has been manipulation in value of payables for maintaining debt ratio. Workers responsible for reconciliation of accounting software find it difficult to maintain balance between exiting ledger system and employed novel accounting system. Inappropriate recording of some financial transactions have material statement of financial declarations (Byrnes et al. 2015). Furthermore, the periodicity concept of accounting is not properly followed by DIPL that has further added to material misstatement. Identifying two fraud risks arising from fraudulent financial reporting of DIPL: Fraud risks Explanation Risks of fraud of financial reporting Description of job within DIPL has not been properly defined and there is lack of segregation of works. Dual functions are performed by account payable clerk as he is responsible for recording transactions and making entry for same. It is certainly possible on his part to inappropriately represent financial data that would have damaging effect on operations and financial performance of company (Moroney and Trotman 2016). Excessive pressure on staffs leading them to get engaged in fraud activities There exists pressure from management and stakeholders of organization to have proper financial declarations that suits their business requirements and maintaining ratios at particular level. Incapability of DIPL for maintaining debt ratio less than one and current ratio around 1.5 would adversely affect the business operations of DIPL. Fraud risks impact on audit plan: It is essential on part of auditors to plan audit in such a way that they are able to reduce the impact of any associated risk to minimum possible level. For evaluation of financial statements, it is required by auditors to make investigation of financial data presented in terms of assets as well as liabilities. Balance of inventories should be investigated and they should check for any improper recording of transactions. Different activities in operational phase of organization should also be evaluated and their reliability should also be determined. While planning audit, it is required to evaluate each and every steps of recording transactions of inventories. Fraud risks would help in modifying audit plan to conduct faithful opinion of their financial declarations (van Buuren et al. 2017). References: Boone, J.P., Khurana, I.K., Raman, K.K., Chen, L.H., Chung, H.H.S., Peters, G.F., Wynn, J.P.J., Chen, Y., Knechel, W.R., Marisetty, V.B. and Truong, C., 2017. Auditing: A Journal of Practice Theory A Publication of the Auditing Section of the American Accounting Association. Broberg, P., Umans, T. and Gerlofstig, C., 2013. 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