Subject Description
- The main purpose is to analyse the financial statement of a company.
- The primary accounting theme that is being explored is the accounting fraud and malpractice.
- The following presentation is based on the case study of ABC Learnings.
- This presentation is helpful in assessing the significance of adhering to the laws and regulations laid down by the statute and not getting involved in any malpractices.
- The relevant auditing standards have been applicable in this case.
LITERATURE REVIEW
In this part of the lecture discussion will be made in respect of the relevant Auditing standards that are applicable on the auditor conducting audit of the company under the given circumstances
Some of the relevant standards are
a)ASA 200(quality control for an audit of financial report and other historical financial information)
b)ASA 220(quality control for an audit of financial report and other historical financial information)
c)ASA 230 (Audit documentation)
LITERATURE REVIEW
a)ASA 315 (Identifying and assessing the risk of material misstatement through understanding the environment and its environment)
b)ASA 500 (Audit Evidence)
c)ASA 240 (consideration of the laws and regulations in the audit of a financial report)
In order to conduct the financial analysis of the entity some tools had to be used primarily some financial ratios. This section deals with the same:
Trend analysis:
This enables the projection of the future performance using the present data (Kasasbeh et al., 2017).
Beneish M score:
This enables to find out whether the company has manipulated its data or not using various financial ratios of the company.
Tools Applied
DuPont analysis:
This analysis helps us to determine whether the company is giving the returns that is expected off its shareholders. this tool makes use of three ratio namely total asset turnover ratio, net profit margin and financial leverage of the company (Bonevski et al., 2015).
Common size statement:
the tool make use of a particular item of the financial statement as the base figure and projects the other items as percentage of the base figure.
Analysis
This section of the presentation explains the results as presented by the various tools that have been used in conducting the financial analysis of the company.
Trend analysis:
The trend analysis of the company threw light on the fact that the company’s operating expenses has increased substantially more than the operating profits of the company
Beneish M Score:
The score as recorded by the company based on its financial ratios have mostly been above -2.22 since the year 2003. this gives an indication of the fact the fact the company had been manipulating its data.
DuPont analysis:
The results presented by this tool suggests that the ROE of the company has been off to a good start in the year 2001. But, subsequently its returns started to decline and kept on declining there on. It recorded a minimum of 14%.
Group Formation and Allocations
Common size statement analysis:
Common size income statement:
The company was performing well in the respect of generation of good EBITDA and EBIT. But the diminishing profitability led to the downfall of the two to 17% and 19% respectively.
Common size balance sheet:
Summary of the findings
The entire results of the analysis can be summarised in the following points:
a)The company had not been able to increase its operating profits in proportion to its expenses thus reducing its overall EBITDA and EBIT.
b)The company has failed in its purpose of generating higher returns for its shareholders.
c)The reserves and surplus of the company has diminished to a great extent along with its cash reserves.
d)The company is continuously engaging itself in the manipulation of data and information as the Beneish M score is recording a score more than -2.22. This can spell doom for the company.
Recommendations
After conducting the overall analysis of the company the following recommendations can be made to the company with relation to its conduct of business activities:
a)The company should focus on reducing its overall operational costs to bring profitability to the business.
a)The company must refrain from entering into any kind of manipulation of accounts
b)The company must ensure that the reserves and surplus balance of the company is brought back to normal levels. This can be achieved only by increasing the profitability of the company.
c)The company should make the most out the fresh capital that has been introduced into it by the shareholders.
Conclusion
The entire presentation after factoring in the analysis and the corresponding results can be concluded as follows:
a)The company is misusing the funds of the shareholders and simultaneously involving itself in manipulation of data.
b)The company immediately needs to focus on improving its profitability to improve the status of its reserves and surplus.
c)The shareholders are expecting decent returns from the company and the company is not providing the same. Hence it might kill the initiative of the shareholders to invest further in the company.
Reference
´Ball, F., Tyler, J., & Wells, P. (2015). Is audit quality impacted by auditor relationships?. Journal of Contemporary Accounting & Economics, 11(2), 166-181.
´Bonevski, B., Magin, P., Horton, G., Bryant, J., Randell, M., & Kimlin, M. G. (2015). An internet based approach to improve general practitioners’ knowledge and practices: The development and pilot testing of the “ABC’s of vitamin D” program. International journal of medical informatics, 84(6), 413-422.
´Clikeman, P. M., & Diaz, J. (2014). ABC Electronics: An Instructional Case Illustrating Auditors’ Use of Preliminary Analytical Procedures. Current Issues in Auditing, 8(1), I1-I10.
´Goddard, A., & Simm, A. (2017). Management accounting, performance measurement and strategy in English local authorities. Public Money & Management, 37(4), 261-268.
´Griffin, H., & Stunda, R. (2016). The case of mis-management and lost accreditation. International Journal of Teaching and Case Studies, 7(2), 99-104.
´Kasasbeh, M. A. M., McCabe, C., & Payne, S. (2017). Action learning: an effective way to improve cancer?related pain management. Journal of clinical nursing, 26(21-22), 3430-3441.
´Le, N., & Lehmann, C. M. (2016). Purchasing Process Internal Control Assessment: A Comprenhensive Case Study Using Data Analytic Software. AIS Educator Journal, 11(1), 9-15.
´McKee, D. (2015). New external audit report standards are game changing. Governance Directions, 67(4), 222.
´Thornley, P., Quinn, A., & Elley, K. (2015). A qualitative evaluation of foundation dentists’ and training programme directors’ perceptions of clinical audit in general dental practice. British dental journal, 219(4), 177.
´Yusoff, M., Rahman, A., Rahman, J. A., & Ab-Rahman, M. S. (2016). Designing a Reliable Academic Quality Management System in Nurturing Future Engineering Professionals-A Case Study. Pertanika Journal of Social Sciences & Humanities, 24.
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