Audit Case Study

Executive Summary
In this article we will be analyzing the case study of a company called double ink printers
limited. In this scenario we will be playing the role as an auditor of a company who has been
called you provide assistance to the company. We are currently working as a senior manager
with Stewart and Kathy. Conditions of the business have been described in the case study and we
are to analyses it from an auditing point of view. Two questions are asked in the case study,
whether the assistance of an auditing expert is required, and then we have to determine the
materiality levels. The first part of this assignment will consist of an introduction to the
company. Various sources of income will be stated and business process applied in determining
the materiality. In the sub parts of question two there are three requirements. First we have
identified five factors which will influence our process of determining the materiality, in second
part we will explain the relevance that these factors have with the calculation of determining
overall materiality and in the third part we are to explain how these factors will overall be
effecting our decision. At the there is a conclusion about the overall situation of the company and
precautions that should be taken while conducting the Audit.

Introduction
Double Ink Printers limited is a printing company that works according to the orders they
receive. In this way they do not need to estimate the amount of order they will receive in
advance. William Jackson was appointed as the CEO in 2017 and he has considerable experience
in printing. Their products include magazines, print books and advertising materials. Their raw
materials are imported equally from Australia and Asia. There orders take two working days for
small orders and five working days for large orders. In 2017 the company implemented a new IT
system in which all the processes of the university will become integrated including the
accounting system. Other than their main business of printing, the company also maintains an
online e-book storage for which the company charges a fee. This serves as a source of side
revenue. The company purchased nuclear publishing as a subsidiary for the publication of
medical books. Although the number of orders was not significant but the profit marginal for
each book was considerable due to which the purchasing decision was made.

Need of an Expert
Judging from the overall condition of the company, I believe that an Auditing expert will
most certainly be required in this case.
The following are some of the reasons due to which we will require the assistance of a
professional
 The automatic system judges the credit history of the clients and determines their credit
worth. If the client is found to be exceeding his credit limit then production is halted and the
report is sent to the accountant and the head of productions who will check the credibility of the
clients. If they found that the credit analysis is correct then they further choose the next step to
negotiate with the client determining whether the order should be forwarded or halted. After
approval from these two persons and their proper signatures then the production is continued.
The company purchased nuclear publishing as a subsidiary for the publication of medical
books. Although the number of orders was not significant but the profit marginal for each book
was considerable due to which the purchasing decision was made. The acquisition was made of
not only the assets of the copy but the copyrights were also purchased. But this transaction
carried a risk as new theory was presented which might render the old medical books as obsolete.
In this condition the overall investment would be lost because these books will no longer be used
in medical studies and universities would stop teaching these books.
Their methods of receiving payments is also not fixed. Some payments are received
through email while others are sent through bank transfer. The confirmation of payment through
mail is dependent on cashier Judy Bones who checks the mail. The third mode of payments is
electronic transfer through which majority of mail is received. Judy records these transactions
and hands them over to Gary for recording it. Due to these diversified sources of collecting
revenue there is a chance of some mistake either due to human error or intentional manipulation
by some employee.
A new computer system was installed in the company which was meant to integrate the
overall accounting processes of the company. Although the system was installed, employees
claimed that they were forced to install that system and the company did not have sufficient man
power to maintain the system and resultantly there were some glitches in the system. Due to this
error in the system it was noticed that some transactions were not applied to the correct period
and the software had to be fixed.
Previously the company was applying average costing basis to measure the value of their
inventories. It was noticed that this method was no longer suitable because the cost of material
was rising considerably. Due to this reason the company decided to start measuring its inventory
using the first in first out basis (FIFO) and also start allowance of write back for inventory that
has become obsolete. Also the revenue recognition for e-book publications will be done using
according to the stage of completion. This change in the system of measuring inventory will also
add complications in the start until the company gets accustomed to it.
Materiality may be defined as the maximum amount that auditors believe could be
misstated either due to unknown error or intentional misstatement but will not severely affect the
decision of financial users.
Factors Affecting Determination of Overall Materialization
Several factors have been noted in the case study which will influence the level of
materiality
  The company purchases its raw materials from Asian and Australian sources
 A loan has been achieved from BDO finance limited for which the company has to
maintain a current ratio of at one and debt to equity ratio of one
 Change in valuation of costs from average costing to first in first out basis
 Net IT system caused the miss allocation of several transactions
 Acquisition of Nuclear Publishing may result in loss as the products its produce may
become obsolete.
In order to determine the level of materiality in the financial statements we can apply a number
of methods to make comparison between the ratios. We will be applying profit before tax
percentage and turnover percentage to find out the values. Materiality range for profit before tax
is 5% to 10% while that for turnover is 0.5% to 1%
We can see in the financial statements that in 2015 the earnings before taxes were 9.8%
of total revenue and decreased by 2.85% in 2016. In 2016 the earning before tax was 2.6% of
total revenue and the total revenue decrease by 6.5% in 2017. Therefore, we can see that the
overall income of the company is decreasing with time.

Relevance Of Factors
The first factor that we see that may affect the materiality of the audit is price of raw
material. Raw materials are being imported from foreign sources due to which it can be affected
by price changes which may cause unexpected expenses. Secondly the conditions in Asian
countries especially changing trade policies was hinder the supply and effect overall
performance.
That company has acquired a loan from BDO bank to fund its activities. Loan of 7.5
million was given to the company on the terms and conditions that they must maintain an asset
ratio of 1.5 and debt to equity ratio of less than one. We see that in 2015 the current ratio of the
company is 3.42 while in 2016 the current ratio of the company reached 1.466, which is quite
low. Then the company acquired the loan in 2017 and their current ratio reached 1.5 which
barely reached the requirements. Therefore, the company is at a risk of losing its financing.
New IT system was installed in the industry against employee’s opinion. Despite having
the appropriate man power they took on the new system due to which the reliability of their
system was brought into questions and it also caused misplacement of transactions. This will not
only be putting light on the internal mistake but also be a question to the decision making
performance of the board.
The valuation system of the company for inventory that was currently being applied was
showing increased cost of material. Therefore, the income was being affected by this wrong
valuation. Decision was made to change the grading system of the company from average
costing to first in first out basis. This change in method would be effecting the financial records
of the company.
 Decision was made to acquire Nuclear Publishing which although did not have a high
production capacity yet still was beneficial as the high profit margin was present in the printing
of medical books. The company acquired this company using the loan and also acquired the
copyrights in order to get an extra source of revenue, but the problem that came up with this was
that the new theory might render all these books obsolete, if it gets accepted. Hence, all the
investment of the company may be at risk based on this possibility.

Effect On Overall Materiality

The concept of materiality is applied by the auditor both in planning and performing the audit;
evaluating the effect of identified misstatements on the audit and the effect of uncorrected
misstatements, if any, on the financial statements; and in forming the opinion in the auditor's
report. In planning the audit, the auditor makes judgments about the size of misstatements that
will be considered material. These judgments provide a basis for a. determining the nature and
extent of risk assessment procedures; b. identifying and assessing the risks of material
misstatement; and c. determining the nature, timing, and extent of further audit procedures. The
materiality determined when planning the audit does not necessarily establish an amount below
which uncorrected misstatements, individually or in the aggregate, will always be evaluated as
immaterial. The circumstances related to some misstatements may cause the auditor to evaluate
them as material even if they are below materiality. Although it is not practicable to design audit
procedures to detect misstatements that could be material solely because of their nature (that is,
qualitative considerations), the auditor considers not only the size but also the nature of
uncorrected misstatements, and the particular circumstances of their occurrence, when evaluating
their effect on the financial statements. The factors that have been mentioned in the previous
section will have the following effect of materiality figure.
The company has acquired a bank loan in a situation where its financial situation is
declining. Conditions of the bank loan may not be fulfilled by the company in the near future and
hence they will have to return in. The general investor might think that the acquisition of Nuclear
publishing was done for the purpose of acquiring its assets and copyright which would increase
assets hence balancing out the burden from the bank loan on liabilities. Generally, the company
should have focused on their main line of production instead of acquiring a loan for acquisition.
Since this was a mistake of judgment and bad predictions, we can say this was an internal cause
and may decrease materiality.
The new IT system that was implemented was already a bad decision from the side of the
directors because on their insistence the system was installed despite the warning of the
employees. Hence we can say that this negligence was an internal factor due to which the
credibility of records was put into question and may cause misstatements in the financial records.
Considering this as an internal factor, it will result in decrease of materiality.
Since evidence shows that the new company that they have acquired might soon be
rendered useless as its production demand will diminish. The stakeholders of the company will
be deeply concerned with this factor and put them in doubt whether their investment is secure or
not. This critical is necessary to be highlighted in the audit.

Conclusion