IFRS Compliance and Audit Quality

Question: Discuss about the IFRS Compliance and Audit Quality. Answer: Introduction: The analytical method pertaining to the financial information of DIPL could enable in preparing the audit plan. Such plan could be adjudged as a specific guideline, which is required to be followed during the undertaking of audit. Specifically, this enables the assessor to maintain the overall cost of audit at an effective level, which helps in minimising understanding with the clients (Zureigat 2015). The analytical approach to the financial announcements of DIPL indicates the procedure of information dissemination from the same. Such evaluation method could be conducted by using a group of mechanisms. However, with the help of analytical method of evaluating financial announcements, various financial analysts as well as accountants could decipher information for enabling in arriving at crucial business decisions (Barr-Pulliam et al. 2017). The common sizing analytical method enables in assessing the financial announcements to a common point of reference. As a result, the financial statements could be contrasted in relation to various timeframe or in relation to various entities. The assessors could consider the various item lines depicted in the financial report along with their method of reporting. For instance, the method of registering items like assets, liabilities and owners equity in the financial reporting of the organisation along with investigating digression from usual scenario (Bayer and Cowell 2016). Benchmarking is considered as an analytical process and it could be used further for the assessment of audit plan. The variance of the real financial declaration from the yardstick enables in recognising the deviation and it assists in evaluating the reason of the identified variance. Along with this, ratio analysis could be adjudged as an effective analytical method, which could be used for contrasting financi al declarations coupled with the assessment of audit plan (Bepari and Mollik 2015). Explanation: The outcomes of the planning decisions related to audit planning is influenced primarily through the outcomes of analytical method to disseminate information from the financial reports. The following ratios have been taken into consideration: Particulars 2013 2014 2015 Solvency ratio 0.62 0.44 0.21 Profit margin 0.068 0.60 0.06 Current ratio 1.42 1.46 1.50 The above table signifies that the current ratio of DIPL has increased over the years. On the other hand, the profit margin has been observed as fluctuating over the years. With the help of this ratio, the net profit of an organisation could be compared with the overall revenues generated (Bryce, Ali and Mather 2015). However, this could carry immense value to the assessor in obtaining an overview of whether the expenditures are greater or lower and whether the management of the organisation has the need to reduce budget and overall expenses of the same. Any favourable or unfavourable change in the ratio could be utilised as a referential factor to assess the soundness of financial condition of DIPL. For example, the solvency ratio computed in the above table helps in depicting the favourable as well as unfavourable trends in the overall financial position of the firm. In a similar fashion, the contrast of ratios over the years would provide an insight of clearing both short-term and long-term obligations of the business. Hence, the auditors could gain an insight of the relative position of DIPL over the years along with evaluating the factors leading to undesirable position of the organisation (Cason, Friesen and Gangadharan 2016). Various significant factors are inherent in auditing constituting of incidence of material misstatements in the financial declarations of a particular entity. However, it is inherent that there are various kinds of both systematic and unsystematic risks depicting the way towards financial misstatements in the financial announcements of the organisations. In addition, the identified risks might be because of financial and non-financial factors, which could subsequently avert a particular entity in reflecting a fair view of the financial announcements. According to Devos and Zackrisson (2015), the detected risks might be associated with various risks of omission coupled with risks of various unthinkable errors for a particular bookkeeper. Thus, it could be adjudged as the inherent risk arising from the business operations of DIPL. Besides, the employees of DIPL are inexperienced and lack in proficiency, which have escalated the overall inherent risk of the organisation. In addition, such lack of experience might result in committing mistakes; thus, increasing the inherent risk. This is because the employees form a significant part of the organisation and it is not possible for the firm to ensure its business success and growth in future without effective employee contributions. The other important factors contributing towards inherent risk could be classified into various sections like environmental and external facets, material misstatements in past periods and false exercises (Gani, Wijeweera and Eddie 2017). The environmental facets directing the way towards inherent risk constitutes of rapid alterations where issues would arise associated with inventory valuation, intense competition in the market and lack of capital. Moreover, there is possibility of material misstatements, which would direct DIPL towards inherent risk in the upcoming years. The analysis of the present case of DIPL depicts the fact that the issues and complexities related to CEO succession comprise of inherent risk as well. In essence, the CEO succession could be adjudged as different, as the candidates are individuals (Graham 2015). Hence, the commencement of the process without compliance with the strategy, late initiation of the process, ineffective association of CEO and attrition of the staffs might result in inherent risk. The assessment of the provided case implies that the implementation process of the IT system has lead to certain issues. DIPL has employee shortage for managing the execution process and installation along with conducting the reconciliation and testing primarily before new arrangement at the end of the period. In addition, the initial assessment disclosed that several transactions carried out were not recorded in an appropriate manner. Hence, this results in material misstatement due to inherent factors, which is an error of omission in a particular financial announcement (Gray et al. 2016). The staff members of DIPL are needed to follow an appropriate sequence for registering accounts receivable and ledgers associated with accounts receivable. Along with this, the bank reconciliation is needed to be recorded appropriately as well (Milonas et al. 2016). Furthermore, the registration of revenue obtained from e-book and considering the reprint of textbooks in future could result in various inherent risks because of complexity associated with the process. Thus, the valuation of inventory pertaining to raw materials at average cost is not appropriate, as the average cost is well below the existing cost of paper. The detected inherent risks could be adjudged as the susceptibility of a specific assertion in relation to the material misstatements and they are depicted briefly as follows: Increasing burden on employees and management: Due to the rising burden of work on the staffs of DIPL, it has resulted in inaccurate bookkeeping. As a result, various attributes have happened that include the propensity in encountering cash flows, poor liquidity and operating results (Mumford et al. 2014). Reliability and intricacy are inherent due to risk associated with errors and misrepresentation in a simultaneous fashion. As per the case study, the management of DIPL has lack of integrity and it is expected to be ready for any loss of reputation in the business community. Often, it occurs that there is existence of incentives for the management. As a result, it leads to misstatement in the financial announcements (Nalewaik and Mills 2016). DIPL contributes to growth to major economic and competitive circumstances. In addition, these facets might have influence on the inherent risk of the business entity for the assessment of audit planning structure in an appropriate fashion. In the words of Saad (2014), the fraud risk could result in severe losses of assets due to fraudulent activities. The lack of motivation of the workforce due to additional work pressure of the staffs could induce them to engage in various kinds of fraudulent activities. Along with this, the expectations from the various groups of investors in reporting particular financial results or specifically on the part of the management in achieving particular targets of performance could result in increased fraud risk. Furthermore, strong pressure is exerted on the management of DIPL to announce particular financial results in a bid for averting generating the guarantees. The major types of risks that are identified in the context of the business operations of DIPL are briefly classified as follows: Types of risk Identification Engagement of workforce in fraudulent activities The primary fraud risk that might take place due to the business operations of DIPL is the engagement of the workforce in fraudulent activities because of greater level of employee dissatisfaction. The provided case study pertaining to the operations of DOPL states that the board has exerted heavy pressure on the organisation in acquiring a novel system of accounting. Such additional pressure on the staffs in conducting the installation process of the new information technology system for accounting might result in fraud. This signifies that the staffs might involve in fraudulent behaviours and activities for managing the process of reconciliation in an ineffective fashion and accordingly, material misstatements. The provided case depicts that the ineffective management of the execution process related to implementation of information technology for the system of accounting results in incorrect apportionment of various transactions at the end of the period. As a result, this might lead to severe loss because of material misstatement and fraudulent risk (DeFond and Zhang 2014). Method pertaining to financial reporting Another fraud risk that might confront the business operations of DIPL takes into account the risk related to financial reporting fraud. During certain situations, it has been observed that there is additional expectation from the external financiers or from the management. Such expectation is to achieve the particular targets of performance or other goals in order to qualify to obtain debt. As a result, there is enhanced risk of incorrect financial declarations. According to the balance sheet statement of DIPL provided in the case study, the net revenue of the organisation has increased from the year 2103 to the year 2015. Along with this, both the gross income and net income of the organisation have increased in tandem as well. Furthermore, the current assets and overall assets of the organisation DIPL have escalated as well. However, the provided case signifies that during the year 2015, DIPL has made a loan acquisition of $7.5 million, the major part of which has been obtained from BDO Finance. Apart from this, the provided case depicts that the loan obtained has a particular agreement of loan requiring DIPL in maintaining a current ratio of nearly 1.5 along with debt-equity of below 1. This depicts that such need might compel the organisation in maintaining the financial ratio for acquiring the credit terms. Hence, this might result in fraudulent activities, which could to lead inaccurate depiction of the financial position. As a result, the failure of the organisation in maintaining the standard yardsticks could make the organisation ineligible in acquiring funds from BDO Finance. Based on the provided case study, it could be remarked that the method of valuation associated with valuation of inventory of various raw materials at specifically average cost has not been appropriate. This is because of the fact that the average cost has been considerably lower in contrast to the existing paper cost. The risk of detecting fraudulent actions associated with implementing the new system pertaining to information technology could be conducted by monitoring various activities at various phases. The risk associated with financial reporting could be identified by conducting dissection of the financial statements on the part of the assessors along with reviewing the mechanisms of control over time (Stephenson et al. 2015). 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