Importance of Auditing and Accounting

“Auditing and Accounting” Words: 1000

Table of Contents
1 Long Term Solvency and Short Term Liquidity..........................................................3
1.1 Introduction...........................................................................................................3
1.2 Analysis of BP Plc 2015.......................................................................................3
1.3 Conclusion............................................................................................................4
2 Importance of Auditing and Assurance the confidence of investors...........................4
2.1 Introduction...........................................................................................................4
2.2 Importance of Auditing and Assurance................................................................4
2.3 Conclusion............................................................................................................5
References.........................................................................................................................6
Appendices........................................................................................................................7

1 Long Term Solvency and Short Term Liquidity
1.1 Introduction
Liquidity ratios and solvency ratios are calculated by the investors in order to find out
the performance of a company. Liquidity ratio explains the ability of a company to pay
off its liabilities in a short term using its assets (Deegan, 2013). However, solvency
ratios describe the ability of a company to meet its financial obligations for both short
term and long term. Liquidity ratios are of three types which include current ratio, quick
ratio and cash ratio. Solvency ratio consists of debt ratio, debt to equity ratio, and long
term debt ratio. Liquidity ratios define the short term position of a company while
solvency ratios are related to short term and long term (Weil, Schipper and Francis,
2013).
1.2 Analysis of BP Plc 2015
The short term liquidity ratios help investors to identify that how many assets are held
by the company for the payment of its liabilities. However, long term solvency ratios
indicate the ability of the payments of liabilities when they become due and the ability to
generate income from the long term liabilities of the firm. The analysis is done for the
BP Plc by the calculation of short term liquidity ratios and long term solvency ratios as
shown in the table 1. It can be seen that the company is showing 1.29 for the year 2015.
It indicates that the company has 1.25 assets to pay off a single liability. The best
current ratio is 2:1 which shows that a company holds double amount of assets as
compared to the liabilities.
Quick ratio has also been calculated as it contains more liquid assets for the calculation
as compare to the current ratio. The benchmark is 1.5 and the calculations show that
the performance of BP Plc is below benchmark as it is showing quick ratio of 1. In the
case of cash ratio which should be 1 for the perfection, the company is showing 0.48
only. The debt ratio of the company is less than 1 which is good as it is showing that the
liabilities of BP Plc are controlled. Debt to equity ratio is 1.13 which is negative for the
investors as it is showing that the company is highly dependent on its loans. Finally, the