Auditing and Assurance Analytical Procedures

Question: Describe about the Auditing and Assurance for Analytical Procedures. Answer: Part 1 Analytical Procedures Analytical procedures are the assessment of financial information of the organizations through relevant relationships between the elements of financial and non- financial information. In order to analyze the performance of the company and evaluate the financial position that helps in taking business decisions. Various financial ratios can be used to understand the business information of the company related to the income statement and financial statement (Cao, Chychyla Stewart, 2015). In order to understand the given financial statement of the client company financial ratios on income statement and balance sheet have been evaluated for the year ended 31 March 2016. Analytical procedures related to the financial performance year 2016 Financial Ratio Calculation Formula Ratio Profit margin ratio (year 2016) Net income/ Net sales $183,000,000-135,000,000/183,000,000= 26.23% Profit margin ratio (year 2015) Net income/ Net sales $83,000,000-55,000,000/83,000,000= 33.73% Profit margin ratio (year 2014) Net income/ Net sales $88,000,000-59,000,000/88,000,000= 33.00% Return on shareholder's equity (year 2016) Net income for the year/ average shareholders' equity $48,000,000/130,000,000= 36.92% Return on shareholder's equity (year 2015) Net income for the year/ average shareholders' equity $28,000,000/75,000,000= 37.33% Return on shareholder's equity (year 2014) Net income for the year/ average shareholders' equity $29,000,000/75,000,000= 38.67% Analytical procedures related to the financial position, year 2016 Financial Ratio Calculation Formula Ratio Working Capital (year 2016) Current assets- current liabilities $222,170,000-153,000,000 = $69,170,000 Working Capital (year 2015) Current assets- current liabilities $108,550,000-125,800,000 = $(17,250,000) Working Capital (year 2014) Current assets- current liabilities $164,900,000-119,500,000 = $45,400,000 Current ratio (year 2016) Current assets/ Current Liabilities $222,170,000/ 153,000,000 = 1.45 Current ratio (year 2015) Current assets/ Current Liabilities $108,550,000/ 125,800,000 = 0.86 Current ratio (year 2014) Current assets/ Current Liabilities $164,900,000/ 153,000,000 = 1.07 Inventory turnover ratio (year 2016) cost of goods sold for the year/ Average inventory for the year $135,000,000/ 148,670,000 = 0.91 Inventory turnover ratio (year 2015) cost of goods sold for the year/ Average inventory for the year $55,000,000/ 79,000,000 = 0.70 Inventory turnover ratio (year 2014) cost of goods sold for the year/ Average inventory for the year $59,000,000/ 93,000,000 = 0.63 One of the essential analytical procedures to evaluate the companys financial performance during the year is profit margin ratio that is considered after tax and other business expenses. In case of Client Company, net profit margin for the year ended 31 March 2016 is 26.23% that means the company is earning profit on sales 26.23% after deducting all other expenses. However, in the present case, data of other expenses including tax expenses have not been provided. Therefore, it is assumed that the profit margin is considered after tax and other expenses. Since, the companys profit percentage is 26%, it can be said that the organization is highly efficient and strong in business operation. Another important procedure for evaluating the companys performance is return on shareholders equity, computed by considering net income and shareholder equity capital (Alles, 2015). Since, the companys return on shareholder's equity in the year 2016 is around 37%, it can be said that the company is highly efficient in providing return to its investors. On the other hand, company working capital expresses the ability to pay off the current obligations like loan payments, bills etc. As the company has working capital amounted to $69,170,000 in 2016 the company is capable to pay off the short-term obligations. However, the companys current ratio is 1.45, which is less than 2 hence, it can be said that the entity is required to improve its current ratio to meet the current liability obligations. Moreover, the inventory turnover ratio is also less than 1 that means the company is not efficient in rolling its cash balance by selling off the inventories. Summary of financial information analysis During the year 2016, the performance of the company was quite efficient but the ratio between current asset and current should be improved since it is less than 2. Additionally, the inventory turnover ratio is less than 1, which states that the company should improve its marketing structure by selling more inventories. Although the efficiency of company to generate returns for investors is good yet its financial position need to be improved. In the financial year 2015, the company has current liabilities more than current assets therefore the company was not efficient in paying off the obligations. Additionally, in the year 2016 the company gained the current ratio to 1.45 that means the company maintained the efficiency as in the year 2014. Balance in reserves in the year 2016 increased by almost 50% that that in the year 2015, which implies that the company has investment, plans that requires sufficient fund. Therefore, the company is focusing on retention of profits earned during the year to improve expand the business operation. Benchmarking Benchmarking is a procedure conducted by the organizational management to examine and analyze the best practices in the business activities within the industry. In the perspective of auditing, benchmarking is a process to examine the policies and practices conducting by the organizations with true and fair view (Mohamed, 2015). Auditing is the process of examining the financial statements of the company to check its transparency and fair presentation and disclosure of financial information. On the contrary, benchmarking is considered to examine the best practices for business sustainability, corporate governance and preparation and business operating activities (Juan-Borrs et al., 2015). In case of Client Company, the profitability ratio and return on shareholders equity are high whereas the current ratio and inventory turnover ratio are lower than the required standard ratio. Considering the results of current ratio 1.45 and inventory turnover ratio 0.91 calculated in the above part, it has been noted that the verification of inventory should be carried on to check its correct disclosure in the reports. Benchmarking in this respect should be analyzing the correctness of the valuation and disclosure of inventory for the year 2016 as it increased by around 46% from that of the year 2015. Part 2 Introduction Analytical procedures as a part of auditing process help the auditors to understand the companys business functions as well as identifying the potential risks. It assists the auditors to plan the other auditing procedures to examine and verify the business activities and financial information to detect the transparency and accountability (Lau Ooi, 2016). Discussion Risk analysis stage: For conducting the procedures of auditing, analytical procedures serves essential evidence, that includes the assessment of recorded financial information. The analysis of financial statement components is carried on by studying the current years and previous years financial data. While considering the analytical procedures in auditing the auditor can incorporate three types at three different stages, which are preliminary, substantive and final stage (Kim et al., 2016). Analytical procedures are conducted by determining the relationships among different elements of accounting balances in the form of ratio analysis and trend analysis. Draft account: At the preliminary stage analytical procedure is carried on by auditors to examine the accounting balances for purchases, sales, production costs, accounts receivables, payables and other relevant balances to verify the performance of the company (LeBaron Lister, 2015). It is the responsibility of the auditor to test the accounting balances and reported financial information of the client companies to evaluate the correct valuation. In case there is any discrepancy in the initial recording of the transactions, the same would affect the entire financial statement of the companies. Therefore, it is important to review the initial records of the transactions so that the effect of the same can be easily detected in the financial statements of the company (Oktorina Wedari, 2015). At the next stage, the auditor can perform analytical procedures by conducting sampling test or test checking by randomly selecting the account balances if there are large numbers of transactions . Final account: In order to check the correctness of the increase or decrease in the recorded transactions of the financial information, the auditor is required to conduct the ratio analysis and trend analysis different related components (Bills Cunningham, 2015). Such analysis is also computed to determine the relationship between the business activities as well as the efficiency of the companies to meet the obligation towards stakeholders. Apart from the analysis of financial information, analytical procedures are conducted to evaluate the non-financial data as well. Reports on business sustainability, corporate governance presentation of financial information according to the accounting principles and standards are examined through analytical procedures (Gros, Koch Wallek, 2016). Conclusion Analytical procedures are not only used to examine the correctness of the financial information but it is used through the entire audit process. The use of analytical procedures assists the auditors to plan the nature, timing and extent of other audit process. It helps the auditors to examine the appropriate use of accounting standards, principles and valuation methods that identifies the transparency of the statement of income and statement of financial position. Similarly, auditors carry substantive analytical procedures to generate the required evidence in the accounting reports if there are any possible frauds, errors or misrepresentations. 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