Quality Assurance and Improvement Program †Free Samples to Students

Question: Discuss about the Quality Assurance and Improvement Program. Answer: Introdcution: Analytical procedures deal with the evaluation of financial information and the use of this procedures helps in increasing the efficiency of auditors. Procedures deal with the analysis and evaluation of expected and plausible relationship between non-financial and financial data by auditors. It might involve use of simple methods for analysis purpose along with using complex models comprising of elements of data and existing of relationships. Using the analytical procedures is helpful to auditors in planning state or preliminary stage. Investigation threshold of auditors helps in increasing the efficiency of procedures in planning stage. This would help in increasing the understanding of audit about the nature of business of clients and recognize any audit risks that would arise by considering unexpected balance or unexpected relationship between data presented. Auditors modify audit plan by depicting the extent of deviations from expected values (Knechel et al., 2016). Several tools that are used in analytical procedures include common size analysis, ratio analysis and benchmarking. Common sizing helps in making the financial performance between the entities over the time and it also makes comparison of financial performance over two different time periods. Auditors such as assets can consider many items and liabilities for examining deviations arise. The audit plan can be analysed by auditors by using the benchmarking tool. Such tool will assist auditors in ascertaining the cause of deviations for detecting variances and determining the root cause. In the current case study, the analytical procedure use by auditors would be ratio analysis. This particular tool helps auditor in identifying the performance tends of DIPL over the period of time and comparing it with other indicators. In the particular case study, calculation of several ratios has been done such as current ratio, solvency ratio and profitability ratio. Application of technique of rati o analysis has been applied in the evaluation of financial information provided by DIPL over the period of three years (Decaux Sarens, 2015). Particulars 2013 2014 2015 Profit margin 0.068 0.60 0.06 Solvency ratio 0.62 0.44 0.21 Current ratio 1.42 1.46 1.50 Ratio Explanation Audit impact Current ratio The liquidity position of DIPL is depicted by calculation of Current ratio. DIPL has witnessed an improvement in their liquidity position as demonstrated by increase in current ratio over the time period. Ratio stood at 1.42 in financial year 2013 and it increased to 1.46 and further to 1.50 in financial year 2014 and 2015 respectively. Increase in current ratio is indicative of the fact that ability of DIPL to meet its current obligations using its current assets. Improvement in current ratio 0f DIPL is mainly associated with is writing back of allowance for loss resulting from inventories. Auditors would be efficient while planning the audit because it will assist them in evaluating the financial position of organization (Knechel, 2016). Profitability ratio The comparative analysis is depicted by calculation of profitability ratio for three-year period. Profit margin of IPL has remained more or less same for three year. Ratio stood at 0.068. 0.60 and 0.60 for financial year 2013, 2014 and 2015 respectively. There have been variations in the ratio only by fewer points. Increased profits have been mainly associated with saving of tax amount resulting from higher amount of interest expenses. Any deviation in ratio would assist auditors in ascertain the reason behind the deviation compared to previous years. There has not been any improvement in profitability ratio. Auditors will be able to assess the going concern ability of DIPL by analysing the reason for falling ratio. Future prospects of organization will be planned due to analysis of this ratio (Earley et al., 2016). Solvency ratio From the above figure, it can be seen that there has been fall in solvency ratio is indicative of fact that there is high probability that company will make default on its debt obligations. Solvency ratio for financial year 2013 stood at 0.62, 0.44 and 0.21 for financial year 2014 and 2015 respectively. Falling ratio indicates that company has been relying more on debts borrowed from financial institutions. Auditors would be assessed in determining financial stability during favourable and unfavourable conditions. This particular ratio helps in identifying that there is an increase in financial risks and it is required by DIPL to maintain adequate flow of cash for meeting long and short-term obligations (Chambers Odar, 2015). Identification of two inherent risk factors due to the nature of operation of business of DIPL: The inability of business to meet their obligations and daily requirements lead to generation of business risks. Inherent risk Risk of material misstatement Information technology risks An organization is posed to several threats due to the adoption of advanced technology for carrying out daily operations. Company adopted an Information technology system in year 2015 for integrating into general ledger system. There can be adverse impact on operations of organization if there exists any deficiency in technology system adopted. DIPL has currently adopted a novel accounting system and there are several risks associated with it. Workers currently working in organization do not have sufficient knowledge and expertise in running the accounting system. Moreover, installation and reconciliation of system will put excessive workload on workers and this will pressurize them to get indulge in fraudulent activities. Accounting information system is exposed to several risks due to some sort of uncertainties arising from natural or manmade disasters (Doelitzscher, 2014). It becomes difficult for company to maintain balance between existing system of accounting software and the new advance system for accounting. Furthermore, certain transactions were not properly recorded as preparation of financial statements did not adhere to periodicity concept in accounting. Financial risks Financial risks are the risks that are related with the inability of organization to meet their long-term obligations. With increase in outside liabilities, financial risks of DIPL will also increase. Over the period of last three years, there has been increase in proportion of debt in comparison to equity. Organization has increasing burden of repaying the amount of loan and regular payment of interest. Inability of DIPL to make the regular payment of interests and principal amount on time would threaten the long-term solvency position of organization (Hardy et al., 2014). It is certainly possible in the current scenario faced by DIPL that certain transactions will not be properly recorded in the financial statements. There are several reasons associated with the fraudulent activities due to manipulation by staff members an workers working therein. Obtaining loan from the lending institutions requires DIPL to maintain the ratios at specific level in order to obtain required loan amount. It is required by DIPL to maintain current ratio at level or around 1.5 and solvency ratio less than one. Maintaining such level of current ratio requires organization to inflate their current assets through increasing value of inventories and receivables. For maintaining the level of prescribed debt ratio has forced the company and they have increased the value of retained earnings through inflating value of equity. In addition to this, there are certain factors that would lead to material misstatement in the financial statements presentations. Lack of proficiency and inefficiency among employees has resulted in improper recording of transactions and they are bound to make mistakes (Duncan et al., 2014). There are additional work load for installing the accounting system and this would also results in additional amount of errors. Two types of fraud risk factors that are related with material misstatements arising from fraudulent reporting due to fraud activities are discussed. There are possibilities on part of operations of DIPL that my lead to evolving of Fraudulent activities. Fraud risks Explanation Nature of control environment Fraudulent practices in financial reporting of DIPL would arise because of poor segregation of work and improper definition for description of job. Account payable clerk does the recording of all the transactions related to inventories. Purchase, valuation and quantity of inventories arrived in organization is prepared by accounting clerk. It is certainly possible that there can be manipulation of inventories recording. This can be done by mentioning fewer amount of inventories received during the time of arrival and manipulation of cash transactions can be done by mentioning that there has been excess arrival of inventories. Moreover, DIPL does not have any proper system of documentation that would help in escalating fraud activities. Other activities that can be accountable as fraud is due to excessive work pressure on existing workers resulting dissatisfaction. They will be asked to maintain particular level of inventories and ensure smooth running of novel accounting system. This particular act would also force and pressurized them to get engaged in activities that might evolve fraud in organization. Debt covenants It is required by the finance department of DIPL to meet various criteria and requirements of lending institutions such as maintaining prescribed level of solvency ratio and current ratio. Two covenants were required for acquiring loan of amount 7.5 million from BDO finance. It was required by DIPL to maintain current ratio at around 1.5:1. In addition to this, it was required by them to maintain debt ratio lower than one. The operations of DIPL would be adversely affected if the organization is not able to maintain the ratio at the prescribed level and loan would be taken back. It is certainly possible that DIPL would be able to maintain and stick on the conditions provided by indulging in fraudulent activities (Bepari Mollik, 2015). DIPL can maintain dent ratio below one by inflating value of retained earnings and inflating current assets would help in maintaining the prescribed level of current ratio. Therefore, in order to meet certain stakeholders, DIPL would be pressurized to indulge in some fraudulent activities. Impact of above two identified fraud risks on conduct of audit plan: It is required by auditors while conducting the audit of any organization to reduce the level of risks faced to some possible extents and to certain acceptable level. Fraud risks Impact of such risks on audit plan Nature of control environment It is required by auditors to carry out investigation for enquiring about any deflation in current liabilities and inflation in the current assets. In addition to this, there needs to bed one careful verification of value of retained earnings mentioned in balance sheet. Such fraudulent activities are mainly attributable to the fact that organization has pressure from the management and investors to maintain particular level of ratio as this will help them in gaining return in investment and good rank from credit agencies (Jones Beattie, 2015). Debt covenants It is required by auditors to make a through verification of the valuation of inventories that is arrival of inventories and their sales should be cross verified. Auditors are required to make reconciliation between the quantity of inventories received and quantities of inventories purchased. This will assist auditors in identifying whether the accounting clerk has made any manipulation or not. References: Ahmed Haji, A., Ahmed Haji, A., Anifowose, M., Anifowose, M. (2016). Audit committee and integrated reporting practice: does internal assurance matter?. 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