1. There are many types of ratios used to perform financial statement analysis. Please discuss three (3) financial analysis ratios.
• Give the name of the ratio,
• Explain what it measures,
• Explain how to calculate the ratio, and
• Describe how a company would use the ratio.
Liquidity ratio is the one that assesses the ability of a firm to meet its short term objectivesthrough the use of short-term assets. Short term objectives are recorded under current liabilities due within a single financial year. In many cases, short term assets entail the current assets. An example is a current ratio which is calculated by dividing the current assets by the current liabilities.
Efficiency ratios – These indicate the efficiency of the use of various assets to generate sales. There are numerous types of efficiency ratios. One of them is the average collection period which shows how long the firm has to wait after making a credit sale to collect the cash.It is calculated by dividing the receivables by the annual credit sales.
Leverage ratios–used to measure key elements of the debt used by an organization. Used When a company wants to know the degree of financial leverage applied and the firm’s ability to meet its debt obligations. An example is the debt ratio which is calculated by dividing the total debt by the total assets.
2. Explain the difference between horizontal analysis and vertical analysis of a company’s financial statements.
Vertical financial analysis is the one that shows the relative size of various accounts on a financial statement where each income statement amount is restated as a percentage of the net sales.On the other hand, the horizontal analysis examines the amounts from financial statements in several years. It shows the changes in resultant financial statement itemsover a given period.
3. How would you do a vertical analysis of an income statement? Explain the process and give an example using actual numbers.
To do a vertical analysis of an income statement, review the income statement as presented. Develop a common size income statement and undertake a vertical analysis. For every account on the income statement, divide the number given by the sales of the company for that given year.
4. How would you do a vertical analysis of a balance sheet? Explain the process and give an example using actual numbers
Vertical analysis of a balance sheet can be done by preparing the balance sheet and the base figures, expressing the accounts as a percentage, comparing the financial data, and analyzing the results to establish the underlying causes and determine whether the various hurts or helps the company in terms of performance.
5. How would you do a horizontal analysis of an income statement? Explain the process and give an example using actual numbers.
For horizontal analysis, one needs to compare account ratios and balances over different periods of time. For instance, comparing the sales of the company from 2015 to 2016.
6. How would you do a horizontal analysis of a balance sheet? Explain the process and give an example using actual numbers.
It is done usually in a two-year format with variance indicating the difference between the two years for the line item.
1. Discuss in what ways the internal audit department adds value to an organization
Internal auditing involves the identification of the risks that could deter an organization from achieving its goals. It ensures that the leaders know and understand the risk that the organization can face and recommend proactive strategies to help mitigate such risks. Generally, internal audits enhanceeffective internal control and efficient operationswithin an organization.
2. Discuss the factors that have led to the transformation of the Institute of Internal Auditors definition of “internal auditing.”
Some of the factors that have led to the transformation include the increased complexity of the international marketplace, corruption scandals and high-profile fraud, increasing stakeholder demand for better assurance, and new laws and regulations. Internal auditing serves to guide business decision making and ensures that management operations are consistent with the mission, goals, and strategies of an organization.
3. Discuss the advantages and disadvantages of outsourcing the internal audit function.
Advantages of outsourcing internal audit function include the fact that service providers often have good quality staffwith specialized skills and a high level of professionalism that improves the quality of advice it provides to the management. Outsourcing helps enhances independence and gives minimal room for collision hence adding value to reports. Additionally, outsourcing allows the auditor to understand the business procedures and policies, thus improving the credibility of the financial reports.
Outsourcing internal audits has certain disadvantages including high cost and a possibility of using the same firm for external and internal audit reports service resulting in inferior reports. It is not ideal for small businesses with little activities.
4. How do companies encourage compliance with rules and regulations set up by regulatory bodies within the corporate governance structure?
They encourage compliance with the rules and regulations by ensuring transparency, responsiveness, accountability, and participation. They also put significant focus on responsiveness, effectiveness, and efficiency, and inclusiveness in their business approaches.
5. How does the regulatory and legal environment of a country shape the corporate governance structure?
The legal and regulatory environment of a country shapes how reforms are mandated. In the case of ineffective market corrections, government interventions arenecessary. It can be implemented on various levels such as the local, regional, and federal level.
6. Describe the impact of regulatory conflicts and overload on the long-term attractiveness and global competitiveness of the U.S. capital markets.
The US approaches corporate governance from a regulatory-led system which offers high levels of protection for investorsinfluenced by regulators, policymakers, state laws, and listing standards for stock exchange. The regulations are expected to e efficient, scalable, and cost-effective to enhance best approaches to corporate governance. Any regulation conflict can result in increased cost of compliance, detrimentally affecting the long term attractiveness of the US capital markets
7. A close working relationship between the audit committee and internal auditors can improve the effectiveness of corporate governance. Do you agree with this statement? Substantiate your answer.
Yes. The effectiveness of corporate governance can be improved when the audit committee and internal auditors work closely together. They can help each other fulfill their oversight authorityfunctions like financial reporting, risk management, ethics, internal controls, whistleblowing, external audits, among others. The status and prestige of internal auditors can be improved when they work together.
8. How can an audit committee contribute to the success and effectiveness of internal auditors and the achievement of their value-adding activities?
They ensure that there are enough resources, focus, as well as competence needed to evaluate the internal control of a companyand enterprise management of risks. They have adequate knowledge of business corporate governance, financial reporting, and internal control. Additionally, they have the confidence and strategies to report controversial financial issues
Corporate Governance Part 2
1. The role of internal auditors has evolved from performing traditional appraisal activities and audit functions of evaluating internal controls to being considered an essential part of corporate governance by adding value to organizations by improving operations. Is the given statement true or false? Explain your answer.
True. Internal auditing has become an independent, focusing on objective assurance, and consulting services that aim at adding value and improving business operations. It enables a business to meet its goalsby applying a systematic, disciplined approach to assessment and enhancement of the risk management approaches, control, as well as the process of governance.
2. Explain how an internal auditors’ knowledge in internal controls can ensure the effectiveness of the corporate governance structure.
Their knowledge of internal control programs helps them serve as a monitoring device and a company’s policeman and watchdog. The knowledge of internal controls enables them to identify the potential risks the organization can face and recommend appropriate steps that can be taken to reduce them. Additionally, they understand organizational ethics and standards and can determine their implementation effectiveness. This, in turn,increases the efficiency of the governance structure
3. The public trust in auditors’ judgments and reputation is vital of the audit function as value-added services that lend credibility to published financial reports. Do you agree or disagree with the given statement? Explain your answer.
I agree with this statement because the audit function is regarded as value-added when it offers reliabilityto the published financial statementby decreasing the information risk related to those statements. Auditors often provide their opinions when giving assurance services through their professional judgment. The trust of the public relies on the reputation of the auditor and his/her judgmentand questions may be raised on the object of assurance accuracy. If the review is unreliable, the services may not be seen as value-addedor relevant to the organization.
4. An auditor has two responsibilities: to express an opinion according to the true and fair presentation of financial statements in conformity with GAAP, and to assess the quality of the reports. Is it possible for an auditor to discharge both duties? Explain your answer.
Yes, it is possible for an auditor to perform both duties. This can be achieved when there isan improvement in selection and client acceptance, evidence collection process, audit quality, independence of the auditor, integrated audit approach, and improving audit opinion.
Rezaee, Z. (2009). Corporate governance and ethics. John Wiley & Sons.
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