Regards To The Accounting Policy Deployed †Myassignmenthelp.Com

Question: Discuss About The Regards To The Accounting Policy Deployed? Answer: Introducation It is imperative to apply preliminary analytical procedures in order to plan for the audit to be conducted. With regards to the accounting policy deployed, there seems to be aberration which is evident especially after the CEO has come in. This is reflected on mainly two counts (Arens et.al., 2013). The discontinuation of provision for obsolescence in inventory when in previous years this has been an accepted policy.Also, an attempt to increase the useful life of the printing press from the current standard of 20 years to 30 years even though a peer group company also considers the useful life of the printing press to be 20 years. Further, based on given financial statements for the three years, the following observations can be made which are critical for audit planning (Caanz, 2016). Even though from 2014 to 2015, the increase in sales is around 17%, but the corresponding increase in accounts receivables is by more than 50% which looks suspicious and may be aimed at jacking up the current ratio.Also, there is a huge jump in inventory in 2015 and also the obsolescence provision is discontinued which again hints at attempt to increase the current assets.Intangible assets in 2015 to the tune of $ 975,000 has been recognised even though there is serious doubt on the existence of this asset as NPL medical books may be rendered irrelevant.A long term loan to the extent of $ 7.5 million has been taken in 2015. The purpose of the same needs to be probed further.The rising bad debt clearly does not fit in with the description of operations whereby the printing is done based on previous credit history of the customer and also the turnaround period in the business is low. However, the increasing bad debts on a y-o-y basis seem suspicious.Also, there is an increase in the di scounts offered which seem to be increasing at a faster pace in comparison with the sales.here is a huge increase in the interest expense in 2015 on account of the long term loan of $ 7.5 million which needs to be clarified from the management.The accounts receivables for 2014 seem to be significantly less but corresponding bad debt as a % of receivables is very high for 2014 which is not the case in 2015. Based on the above, the audit planning would be influenced so as to explore the critical aspects such as inventory valuation, receivables determination and collection policy, bad debts, possible amortization of intangible assets need to be probed during the audit process and also explanation from the management need to be sought on the incremental loan raised in 2015. Further, management clarification on the inventory policy change and also recognition of intangibles without any provisioning would be critically analysed (Gay and Simnett, 2012). Inherent risk typically refers to the intrinsic business risk that the given entity is exposed to. Based on the given description of the business of DIPL, it is apparent that it is looking to venture into ebooks besides print on demand. In this regards, the company has acquired a company named NPL with copyrighted content. This stream of business has the inherent risk of obsolescence especially if the content deals with physical or medical sciences as discoveries are being made and new theories are being proposed which may alter the existing view and explanations. Thus, while on one hand, this business may lead to a higher business margin but on the other hand it enhances the risk of content obsolescence (Leung, Coram and Cooper, 2012).. Also, online piracy of these ebooks and security threat are also key inherent risks which the business would need to consider. Another key inherent risk is related to the fall in demand of the main business which is print in demand which may arise on account of growing popularity of e-books which are not only cheaper but convenient to access, store and read through various technological inventions. This poses a significant business which probably the company also recognizes which may be the precise reason why it is venturing into ebooks. Going forward, it would be imperative for DIPL to focus on e books segment of the business as it would prove to be future growth engine but for this it would need to improve the content availability so as to attract high number of customers (Arens et. al., 2013). One of the key fraud risks is associated with financial reporting of NPLs medical textbooks on account of obsolescence which has not been reflected in the financial statements but suitable provision needs to be reflected based on the future write off. Also, information regarding the potential obsolescence needs to be captured in the notes to account. Failing to do so would tend to overstate the asset which would lead to imprudent decision making on the part of the various stakeholders. Also, considering the high profitability generation capacity of this business, the obsolescence would severely impact the bottomline of the company (Caanz, 2016). Another key fraud risk relates to reporting of revenues especially at the closing time which may be misrepresented as these can then be used to jack up the account receivables which is a pivotal element of the current assets. Besides, inventory accounting is also likely to be misrepresented as evident from the new CEOs policy of discontinuing obsolescence allowance. This misrepresentation could potentially be done in order to ensure that the current ratio stays above 1.5 so that there is no recall of the bank loan (Arens et. al., 2013). Considering the risk factors that have been identified above, it is imperative that the audit procedures deployed and audit planning must ensure that attention is paid to these aspects. With regards to obsolescence of NPLs medical books, suitable audit tests need to be deployed in wake of the available information to determine the nature of disclosure. Further, obsolescence testing for the paper and other inventory would also need to be performed besides, conducting check for revenues especially towards the end of the accounting period. These considerations need to be reflected in the overall audit strategy (Gay and Simnett, 2012). References Arens, A., Best, P., Shailer, G. and Fiedler,I. (2013). Auditing, Assurance Services and Ethics in Australia, 2nd ed., Sydney: Pearson Australia Gay,G. and Simnett, R. (2012).Auditing and Assurance Services in Australia, 5th ed., Sydney: McGraw-Hill Education Caanz, S. (2016), Auditing and Assurance Handbook 2016 Australia, 3rd ed., Sydney: John Wiley Sons Leung, P., Coram, P. and Cooper, B.J. (2012), Modern Auditing and Assurance Services, 4th ed., New York: John Wiley Sons