Financial Ratio Analysis of EasyFit Pty Limited

The assignment introduces a brief explanation over auditing and auditing skills that is applied for providing varied analysis and verification of financial values of business entities. In the assignment with different case scenarios usage, validity, assessment, significance and approach of financial ratio and financial auditing system has been discussed.    

The current ratio evaluates the financial liquidity of business to the capability of the firm to meet short term obligations. In the case of EastFit’s, the current ratio has declined in the present year of 2017 compared to the previous year which dictates company able to meet its short term debt has declined in the present year. The efficiency of a business entity is to use its assets for business performance in the market that is measured with the receivable turnover ratio (Easton and Sommers, 2018). As per EastFit’s, the company has reduced the usage of assets in the present year of 2017 in compare to 2016, which reflects the declining performance of the organization. The inventory turnover describes the efficiency of a business entity to sell its average inventory during a particular period in terms of dollar valuation. In EastFit’s, the sales of product and services might have declined in the present year of 2017 compared to the previous year, which has resulted in a decrease in inventory turnover of the company. The return on total assets describes earnings before interest of an organization in the context of its total assets in the market (Damodaran, 2016).  In the year of 2017, the return on assets of EastFit’s has increased by 13% in comparison to 11% in 2016, which states the earnings of the company has increased due to increase in revenue and profit margins. The net profit ratio analyses and measures the profit of the business entity after covering all its business expenses.  EastFit’s net profit has been constant in these two years shows the company was able to maintained and sustain its profit through managing its business expenses. As per the gross profit margin, it measures the revenue of an organization after covering its cost of production (Zainudin & Hashim, 2016). As per the analysis, EastFit’s has increased its sales in the present year of 2017, which has resulted in an increase in its gross profit compared to the year of 2016. In the process of auditing and investigation, one of the risk that could be the barrier in front is a misstatement of financial values and financial records of the company and receiving incorrect or improper information from sources. In addition to that, the detection risk is another potential barrier to the auditor in which auditors might find issues with proper detection of in current or misstatement of financial values presented by an organization. 

Identification of Audit Risks

a).

As per case information Herbert Manufacturing Ltd, the financial information of land and building is analyzed $ 1 million in the year of 2004 during its purchase. In the present year of 2016, with a depreciated amount of $200000, the value of land and building after 12 years requires to be nearly $300000. Thus, it is necessary for the auditor requires analyzing and evaluating the proper value of land and building that is to be inputted or presented in the financial statement of the company in the year of 2016.  On the other hand, the final valuation of land and building in the year if 2016 has reported separately, although the information of specific valuation of land and building separately during its purchase is not provided (Boiral et al. 2018). Thus, it is necessary that auditor require engaging brief observation of specific valuations of these properties as there might be changes of misevaluation or presentation of properties amount one another to provide an incorrect valuation to be presented in the financial statement.

As per Herbert Manufacturing Ltd, the depreciation analysis and assessment requirements to be conducted by the auditor to ensure the amount provided by the organization to be instated in financial statement need to be developed. In addition, case analysis also highlighted that the valuation of land and building has stated by an individual who is not an employee for the company. In this case, it could be possible that the land and building value might be incorrectly analysed or measured. As the management and top financial executives of the organisation could be able to evaluate and analyze the accurate and actual valuation of land and building (Chiu, Liu & Vasarhelyi, 2018). The auditor requires re-examining the valuation of properties by checking possible bills, data and financial valuation records of the building. The auditor could also require and request for presenting ledger and books of accounts for analysis and evaluating the proper valuation of the land and building of Herbert Manufacturing Ltd. In addition to that auditor could also analyse and evaluate financial statements of previous years of business to investigate changes, differences and variance of land and building value.

b).

As per the analysis, Herbert Manufacturing Ltd plant and machinery existence and competence could be evaluated and analysed through documents and records of the company. The auditor could evaluate and investigate over local purchase order’s supplier’s invoice, approved budgets, cash books for analysing existence and authentication of plant and machinery of the organisation. As per case analysis, computerised books of accounts has introduces accumulated depreciation and depreciation of all noncurrent assets of organisation (Louwers et al.  2015). The auditor responsibility is to ensure the accounting policies and standard depreciation guidelines are followed for evaluating the present valuation of plant and machinery.  In most of the cases reducing balanced method of depreciation is avoid due to its inaccuracy to analyse the values of plant and machinery of the organisation.  Thus, the auditor has to evaluate and assess the straight-line depreciation method has applied by the firm for analysis of business plant and machinery. In relation to evaluating the existence of plant and machinery of Herbert Manufacturing Ltd, auditing individuals require to make a sequential investigation on the books of accounts for these are existing physical assets of an organisation (Chan, Chiu & Vasarhelyi, 2018). However, as these are fixed assets auditing individual’s finds it difficult to dictate the actual valuation of these assets are correct as per the financial records and financial balance sheet reports of the company. The fixed assets register is another point of discussion that helps to evidence the presence and existence of plant and machinery owned by the company in the marketplace. As per the analysis, it is necessary for business entities to maintain fixed assets registers which is an independent force of evidence that could be used by auditing individuals to investigate validity and accuracy of fixed assets valuation in the financial statement presentation of the company (Glover, Taylor & Wu, 2016). According to Herbert Manufacturing Ltd case analysis, it has observed that auditing individuals require observing the internal controlling system of business entity for evaluating location, placement, working and performance level of plant and machinery. Thus, the depreciation valuation and value of these fixed assets could be justified properly in the market.   

Verification of Fixed Assets of Herbert Manufacturing Ltd

(a).

The case scenarios suggest that there are different events that have happened within the financial period and after a financial period of different clients of the auditor. The prime time period for auditing the financial statement and different events might be in September 2017. As all the events have happened between the months of June to August including preparation of the financial statement. It has observed that debtor’s liquidation in August 2017 is required to be evaluated and analysed by the auditor. As per this event, the rest amount of $300000 that is still overpayment due for the company requires to be adjusted in the next financial year. The auditor needs to be sure and evaluate that the specific amount to be presented as a comprehensive expense for the entity which is not realised in the present year financial statement. (Simunic, Ye & Zhang, 2017). The auditors responsible are to observe and check over the documentation and records to be adjusted for rest of the count by the company. In another scenario, the auditor requires to evaluate the event of July 2017, in which it is necessary to analyse and evaluate the amount which is non-recoverable by the management which has lost in flood of warehouse required to be engaged in the financial records as bad debts. In case auditing the proper scenario of the company, it has stated that auditor requires to ensure ablaut all possible insurance documentation that is presented by management are genuine and proper, as well as the information, is required to be presented in the financial statements of entity (Damodaran, 2016). In addition to that, it is the responsibility of auditor to ensure and assess the interests, and premium payment values for insurance are documented and recorded by the management of the business entity. In addition to that the Outback Mining Limited report to be analysed And evaluated in August 2017, in this case scenario it is required to assess and observe the recording and validity of exploration licence to analyse and evaluate its worthiness and valuation of the licence with proper documents to be ensured by auditor for observing its accuracy and valuation (Zainudin & Hashim, 2016). The events of Bird Pty Limited require proper suggestion and advisory fro auditing committee. In this situation the business policies and laws to be reinvestigated by the auditor to ensure the act of business entity are valid or not. On the other hand, the coverage of expected loss in future selling could be reduced if there are more product and services to be introduced in the market.   

Conclusion

(b).

In the case of Galaxy Ltd, the auditor requires to take action over evaluating the documentation and assessment of the debtor rest values $300000 to be claimed by the management of company during the time of liquidations. The auditor required to recommend and mention in the report about the worth of amount to be input and adjusted in the financial statement of the company before making liquidation report and signed by the management for the organisation. The auditor needs to prepare a report over the non-recoverable amount of SuperSpring Ltd, which was unable to recover due to flood. The documentation and records to be checked and the receivable amount required to be adjusted by the organisation in the next financial report as well. As per the assessment, the report to be prepared by auditor also needs the proper justification of its decision making over adjustment of the recoverable amount due to the financial statement for the present year is already presented and the event occurred after that (Chiu, Liu & Vasarhelyi, 2018). In case of Outback Mining Limited, thru auditor requires to initial analysis over the licensing and land claiming issue, as well as to check over the validity and accuracy of licence and land claimed by evaluating licence agreement. In case of Outback Mining Limited, the auditor required to take action over investigating the reliable loss to be expected by the company and different options to be provided by the auditor over maintenance of governmental notice over limitations on a number of birds that are allowed to be kept in suburban areas. The auditor also requires making an assessment of the financial reports to investigate the valuation and financial records of the company to be accurate and précised.   

Conclusion 

The particular assignment has increased brief explanation over different roles responsibilities and decision-making skills of an auditor by assessing different case scenarios. In this study, the proper extended role and responsibilities of an auditor and their justifications of decision making have also been highlighted.  

References

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Chan, D.Y., Chiu, V. & Vasarhelyi, M.A. eds., (2018). Continuous Auditing: Theory & Application. Emerald Publishing Limited.

Chiu, V., Liu, Q. & Vasarhelyi, M.A., (2018). The Development & Intellectual Structure of Continuous Auditing Research 1. In Continuous Auditing: Theory & Application (pp. 53-85). Emerald Publishing Limited.

Damodaran, A. (2016). Damodaran on valuation: security analysis for investment & corporate finance (Vol. 324). John Wiley & Sons.

Easton, M. & Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.

Glover, S. M., Taylor, M. H., & Wu, Y. J. (2016). Current practices and challenges in auditing fair value measurements and complex estimates: Implications for auditing standards and the academy. Auditing: A Journal of Practice & Theory, 36(1), 63-84.

Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.

Michelon, G., Patten, D.M. & Romi, A.M., (2018). Creating Legitimacy for Sustainability Assurance Practices: Evidence from Sustainability Restatements. European Accounting Review, pp.1-28.

Simunic, D. A., Ye, M., & Zhang, P. (2017). The joint effects of multiple legal system characteristics on auditing standards and auditor behavior. Contemporary Accounting Research, 34(1), 7-38.

Zainudin, E. F., & Hashim, H. A. (2016). Detecting fraudulent financial reporting using financial ratio. Journal of Financial Reporting & Accounting, 14(2), 266-278.