Financial Analysis of Double Ink Printers Limited -myassignmenthelp

Question: Discuss about theFinancial Analysis of Double Ink Printers Limited. Answer: Introduction Every company shall have the sound accounting system clubbed with the internal control system so as to have the effective and efficient working of the company. Accounting system plays crucial in assessing the financial position of the company as on date and the financial performance of the company which the company has gained over the period. Both the financial position and the financial performance are judged by the financial statements of the company. These financial statements are prepared by the accounting system. On these financial statements the auditors of the company gives their opinion and they give their opinion after having the true and fair audit of the books of accounts of the company. These financial statements give the company an image in the market and in case it is not prepared in accordance with the relevant accounting standards then the reputation of the company gets deteriorated not only in the market but also in the eyes of the different stakeholders. Having the need of the proper financial statements, the report has been prepared with defined aims and mainly from the auditors view. The auditors view has been chosen so as to provide the insights of the financial information of the company that the company has presented to their stakeholders. For the purpose of this report the background information and the financial information of the company Double Ink Printers Limited has been made available. The report has been started with the Executive summary detailing the major aims of the report and the outline view of the report. Thereafter the brief introduction has been given detailing the flow of the report as to how different topics of the report have been dealt. At first the analytical procedures that is performed by the auditor in the financial report level has been discussed and that too for the last three consecutive years and thereafter the results of the analytical procedures are analysed as to how the audit plan of the auditor will differ from the normal plan of audit. At the second level, the risk assessment has been conducted and the inherent risk factors that are prevailing has been identified and detailed as to how it can affect the risk of material misstatement in the financial reporting level. At the last in the main body of the report, the factors has been considered which can lead to fraud at the financial reporting level and how it will affect the audit has been detailed. In the last the report has been concluded with the due recommendation. Analytical Procedures To The Financial Report For the report, the company - Double Ink Printers Limited has been made available. The company is in the business of books printing, magazines printing and other articles which is required to be printed and bind. The company prints the books or magazines as and when the demand and order comes. The company follows the due procedures for the documentation and the accounting of the revenue or other incomes during the year. Analytical procedures are the first stage of the audit planning which every auditor performs before starting up of the audit. It applies to all the companies whether small, medium or large and the analytical procedures provides the insights to the auditors as to which areas more focus of the auditors is required and to which areas less focus is required. The analytical procedures are conducted for both the financial as well as non financial information (Anastasia, 2015). In the given case of Double Ink Printers Limited the analytical procedures have been performed basically for the financial information. The International Standard on Auditing has provided as to how the analytical procedures are performed and has been provided through the standard number 315. It defines that the analytical procedures are required to be conducted throughout the process of the audit till the time it does not gets completed and in the given case the preliminary analytical procedures has been performed wh ich is defined as the identification of the relationship between different items like revenue, net profit, gross profit, debt and equity, current assets and current liabilities, etc. Through the preliminary analytical procedures the auditor will be able to find whether there is any risk which can have the material effect in the financial statements leading to material misstatements (ACCA, 2016). The 315 standard has defined three different processes of analytical procedures which includes preliminary, substantive and lastly the final. As per the given relevant financial information of the company for the last three co0nsecutive years ending 2013, 2014 and 2015, the analytical procedures have been performed and the same have been detailed below in the table. ANALYTICAL ANALYSIS - DOUBLE INK PRINTERS LIMITED S. NO. Heads for Analysis YEAR 2013 YEAR 2014 YEAR 2015 1 Net Profit Net Profit 2359190 2291362 2972183 Total Revenue 34212000 37699500 43459500 Net Profit Ratio = 2359190/34212000*100 = 2291632/37699500*100 = 2972183/43459500*100 6.90 6.08 6.84 2 Current Ratio Current Assets 5385938 7509150 9600929 Current Liabilities 3780000 5120250 6397500 Current Ratio 1.42 1.47 1.50 3 Debt to Equity Ratio Total Liabilities 3780000 5120250 13897500 Total Equity 9150000 10783650 12250491 Debt to Equity Ratio 0.41 0.47 1.13 3 Finance Cost 84379 83663 808038 4 Provision for Bad Debts 6.23 46.36 4.52 5 Provision for Obsolete Inventory 106312 125876 0 6 Loss in Foreign Currency 38500 49750 0 7 Loan 0 0 7500000 The above analysis depicts that if the analytical procedures has not been carried out then the auditor would have been facing much difficulty and thereby giving the wrong picture of state of affairs of the company and also the financial performance of the company. In order to have further deep analysis of the analysis, following has been detailed one by one (Capital Markets Advisory Committee Meeting, 2013). The net profit of the company has been at the rate of 6.90 in the year 2013, 6.08 in the year 2014 and again 6.84 in the year of 2015. It depicts that the company has the fluctuating revenue on year on year basis or the company in order to maintain the revenue figure due to the pressure of the stakeholders. Current ratio has been sudden increased from 1.47 to 1.50. As per the background information the company is required to keep the current ratio to the minimum to 1.50 so as to enjoy the financing facility obtained from the BDO finance limited. Therefore, in this case, there may be the chances that the company might have increased the debtors or reduced the creditors so as to maintain the current ratio or also have modified the inventory valuation. Interest has been gradually increased from the year 2013 to the year 2015. Despite of increasing the interest the company has been able to earn the same net profit after tax which the company has been earning before obtaining the loan facility from the BDO Finance. The company has it made provision for doubtful debts with the very less amount detailing that the company has overvalued its debtors so as to have the better current ratio. Also the company has written back the provision for doubtful debts which again shows that the company has manipulated its debtors. The company has not made the provision for obsolete inventory which again shows that the company has manipulated with the inventory so as to have the better current ratio of 1.50 as stipulated by the BDO Finance Limited. For foreign exchange loss the auditor is required to check the transactions and the related liability according to the relevant accounting standard (Cooper, 2015). The above analysis depicts that the planning decision of the auditor will automatically gets affected and is required to consider the same while planning for the audit. Risk Factors and its Impact Following are the two inherent risk factors that have been identified during the risk assessment process: First inherent risk is of the valuation of the inventory. The company has been valuing the inventory at the Average cost basis. As per the board meeting, the company decides to change the inventory valuation on the basis of the First in First Out method. Due to this, the value of inventory which has been coming with lower amount earlier will now come with higher amount and thus, it is the inherent risk factors and may affect the risk of material misstatements at the financial reporting level (Gary, 2017). Second inherent risk is of the acquisition of the Nuclear Publishing Limited along with the patent and the copyright of medical books. As per the news article the same will become redundant after sometime due to the introduction of new theory. Thus, it may adversely affect the financial statements as the assets of the company will get deteriorated suddenly. Risk Factors Leading Fraud and its Impact Following are the two fraud risk factors which have been identified using the background information and the financial information (Weiss, 2014). With the introduction of the new software, the employees of the company are under the great pressure to get the new software implemented and made available to the company. Due to this pressure there are high chances of having the mistakes and frauds being committed at the end of the employees only. Second major risk factor that will lead to the fraud is the covenant made by the BDO Finance Limited. The company has obtained 75 millions from the BDO Finance limited with the stipulation that the company is required to maintain the current ratio of 1.50 and in case it falls below than that then the facility given to the company will be withdrawn from the immediate effect and thus the company will be at the liberty to commit the fraud and manipulate the financial statements so as to avail the facility from the BDO Finance Limited at the best possible extent. Conclusion and Recommendation The company has been in the business of printing since its inception and has been growing since its incorporation. The financial information and the background information has been analysed by the auditors by performing the analytical procedures and with the identification of the inherent risk factors and the fraud risk factors and the same have been detailed. In order to end the report the company has the sound internal control system subject to the audit observations that has been noted separately at each stage. It is recommended for the company to avoid such manipulative and fraud practices. 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..