Audit: Analysis of Financial Statements and Relevant Audit Standards

This study contains a detailed discussion about the implementation of procedures that an auditor needs to assess in the process of conducting an audit. It includes analysis of financial statements using different tools, relevant audit standards, and recommendations.

Running head: AUDIT
Audit
Name of the Student:
Name of the University:
Authors Note:

1AUDIT
Table of Contents
Introduction:...............................................................................................................................2
Literature review:.......................................................................................................................2
Analysis of the financial Statement by using different tools.....................................................4
Recommendation........................................................................................................................6
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

2AUDIT
Introduction:
The presentation contains the details and importance adhering legal obligation and
requirements to operate the business activities of an entity that are describe under the statute.
The modes and methods of ABC learnings will be highlight in the presentation. This study
will contain detail discussion about the implementation of the procedures that an auditor
needs to asses in the process of conducting an audit. ASA 200, ASA220, ASA230, ASA 315,
ASA 500 etc. are some relevant audit standards, which has substantial relevance in this case
(Barnes 2016).
Literature review:
In the course of an audit, the auditor needs to form an opinion on the financial
statement of the client whether they are showing true or fair view or not, for the
determination the auditor needs to deliver his professional scepticism. In the substantive
procedure, the auditor might connect with some references in the auditing procedure, which
will positive or negative results. In both the cases, the auditor needs to assess the experience
and apply the relevant auditing standards depending upon the collected evidences for the
scrutiny of the indications (Bentley et al. 2017). The auditing standards are design to provide
guidance to the auditor in the practical assertion. In the given case the following auditing
procedure are consider and applied.
a. ASA 500 ( Audit evidence):
ASA 500 advised the auditor to collect sufficient and appropriate audit evidences in
the auditing procedure. Sufficient refers the quantum and appropriateness refers the
reliability of the evidences on which the auditor form the opinion.
b. ASA 240(consideration of the laws and regulations in the audit of a financial report):

3AUDIT
In this standard, the auditor needs to prescribe the knowledge of laws and regulation
that are attract by the clients business and the client has made all the application of the
applicable statues.
c. ASA 315 (Identifying and assessing the risk of material misstatement through
understanding the environment and its environment):
The auditor must observe the internal and external environments of the business
activities of the client to find out any material misstatement in the financial statement.
In case of any indication of material misstatement, the auditor needs to find out the
root of such to understand the competency of the indication (Bierstaker et al. 2017).
Further, the auditor needs to evaluate the internal control of the client, after examine
all the factors the auditor needs to decide the probability of material misstatement.
d. ASA 220 (quality control for an audit of financial report and other historical financial
information):
This standard elaborates the required steps that the auditor is compel to do in the
course of audit to ensure the quality and appropriateness. The following are the steps:
 The auditor report is truly reflecting the current circumstances
 The auditing procedure is complete in lieu of all the relevant standers of
auditing that ware issued by the Australian auditing standards. In addition to
that, all relevant laws and regulation of the statue that are enforceable to the
entity id duly conducted.
e. ASA 230 (Audit documentation):
This standard refers to the preparation and preservation of the audit working paper.
The evidences that are find in the auditing procedures they are to be record for the
following purpose:

4AUDIT
 These evidences are the prof that all the legal requirements are perform in
accordance with the Australian Auditing standards, also the applicable laws
and regulations.
 These documents are the sources to form an opinion by the auditor on the
financial statements of the client.
f. ASA 200 (the overall objective of the auditor and the conduct of audit in accordance
with the Australian auditing standards):
The auditor is only liable to form an opinion on the financial statements of the client
weather they are showing true or fair view or not. The client should not depend on the
auditor to discover the fraud and error of the entity unless specifically mentioned in
the audit engagement (De Gorostiza et al. 2018). Further, if any misstatements find in
the process the auditor must scrutinise the fact as per ASA 200.
Analysis of the financial Statement by using different tools
DuPont Analysis
DuPont analysis is executed to analyse the return on equity generated by the company
for its shareholders. Three types of ratios can be observed for this product, i.e. Total asset
turnover ratio, profit margin and financial leverage. These ratios were increased to their
maximum ROE in 2001. But the profit margin increased to 30% and was stable there while
the other two ratios started to decline eventually and resulted a decrease in the ROE of the
company from 25% to 14% (Fakhfakh 2017). This decline was kept on in successive years
and in 2007, the figure was decreased to 8% from 14%. Now the main agenda of the
company should be to increase its profit margin in terms of increasing ROE so that it can
provide better value for the shareholders.

5AUDIT
Common Size Statement Analysis
Common Size Income Statement
From common size income statement the following points can be observed:
 The highest EBITDA generated by the company was 54% in the year 2001. After that
the Company. EBITDA witnessed a drop to a minimum level of 19% in 2007. That
figure signified the reduction of company’s earning over the year.
 The EBIT of the company resulted almost same as the EBITDA. It has also decreased
to a minimum level of 17% as the depreciation of the company has not experienced
any huge change over the year (it was circulating between 4-1). Thus the recorded net
Profit of the company is of minimum 9% in 2007.
Common Size Balance Sheet
It can be observed that the available cast with the company has decreased from 11%
to 6% in 2007. There was a complete loss of its reserves and surplus which declined
successively over the year. The Share capital of the company also reduced from 70% to 43%
in between 2006 to 2007.
Trend Analysis
Income Statement Analysis
According to the reports, the company has been succeeded to increase its operating
income to 16972% to the base year of 2000. Along with this, the corresponding operating

6AUDIT
expenses was also increased to over 24202%.There was some consistent growth recorded in
the EBITDA of the company
EBITDA of the company of 7699% which means a gradual hiking in its operational
profitability. The net profit of the company was on the par with the EBITDA and was able to
maintain a change of 9956% in accordance with the base year of 2000.
Balance Sheet Analysis
Though a slow growth rate was observed in the cash of the company but later a
significant change was highlighted due to the increased sale and profitability. The percentage
change to 8368 in the cash (Farkas and Murthy 2014). The share capital of the company has
also increased by 13783 in relation with the base year. There was a significant change in
retained earning can also be seen over the period which is of 10722%. It shows the high
operational profitability.
Benish M Score Analysis
The standard score of which is desirable for the company is -2.22 which means
anything higher than that score cause some manipulation of the earnings. It is evitable that the
company has faced some manipulation in its records from the table of year 2003. The highest
receivables index of the company was around 26.49 which was observed in 2006 where an
abnormal increase was found in the days sales. This index clearly states that the company was
manipulating the accounts (Foster et al. 2016).
Recommendation
The overall operational costs of the company must be reduced if it wants to restore
profitability in the business operation. The manipulation of accounts by the company should
also be ceased to escape its liquidation. Increasing the reserves and surplus of the company

7AUDIT
should be one of the major agenda of the company. Along with this, it should also
concentrate to regulate its cash flows and profitability properly. The utilisation of the share
capital from its shareholders is very important to improve the efficiency of its operation in a
significant way.
Conclusion
The company seems to gamble with the capital of the shareholders by engaging in
manipulating accounts which can close the company down permanently. Along with it, if the
company do not take any steps to increase its profitability, it will drain away the reserves and
surplus of the company. If the current situation of the company is not changed yet, it may
cause to shareholders to stop investing in it as the company has not provided a profitable
business to them.

8AUDIT
Reference
Barnes, P., 2016. Stock market efficiency, insider dealing and market abuse. Gower.
Bentley, J.W., Lambert, T.A. and Wang, E., 2017. The Effect of Increased Audit Disclosure
on Managerial Decision Making: Evidence from Disclosing Critical Audit Matters.
Bierstaker, J.L., Downey, D.H., Rose, J.M. and Thibodeau, J.C., 2017. Effects of Stories and
Checklist Decision Aids on Knowledge Structure Development and Auditor
Judgment. Journal of Information Systems.
De Gorostiza, J.A., Nordin, N.A.B., Pang, X.Y., Sabili, M.A., Ng, G. and Mariano, S.M.,
2018. Development of an Accounting Information System with Data Migration for Company
ABC. International Journal of Computing Sciences Research, 1(3), pp.50-64.
Fakhfakh, M., 2017. The harmonization of audit reports of Islamic banks: An advanced and
original empirical investigation. Journal of Islamic Accounting and Business Research, 8(2),
pp.203-228.
Farkas, M. and Murthy, U.S., 2014. Nonprofessional investors' perceptions of the incremental
value of continuous auditing and continuous controls monitoring: An experimental
investigation. International Journal of Accounting Information Systems, 15(2), pp.102-121.
Foster, B.P., Garrett, Jr, R.P. and Shastri, T., 2016. Independent accountant’s reports:
signaling and early-stage venture funding. Managerial Auditing Journal, 31(4/5), pp.362-
386.
Thomas, R.R., Van Greuning, H., Henry, E. and Michael, A.B., 2016. International financial
statement analysis.

9AUDIT