Maximizing Business Wealth: Understanding the Entity and Analyzing Financial Performance of Amazon

This report discusses wealth maximization in business, audit and assurance, taxation, and the financial performance of Amazon. It also covers the process of understanding the entity and its environment, and the use of analytical procedures to gain knowledge about the business.

MAXIMIZING BUSINESS
WEALTH

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Wealth maximization in business involves maximizing shareholder's wealth through generating
maximum returns for them. Also, from the perspectives of financial management, wealth
maximization means maximum or enhancing the price of company's common stock which in
turn increases the business' s value (Argilés-Bosch and et.al., 2020). This could be possible
through consistent increase in the company's profitability and cash flow generation. In this
project report, the discussion pertaining to the audit and assurance and taxation will be done in
the context of Amazon.com Inc. which is a US based multinational company operating in
technological sector whose focus is on e-commerce, digital streaming, artificial intelligence and
cloud computing. It is among the big five companies of USA's IT industry and is headquartered
in Seattle, Washington, US. In this report, discussion will be done regarding how auditor's gain
knowledge about the entity and its environment and how analytical procedure has been utilized
to understand by computing and interpreting key ratios calculated from the company's financial
statement. Also, the importance of taxation, principles of computing transfer value and various
other tax planning and calculations associated with different events of an individual.
MAIN BODY
Description of Amazon company
Amazon In was one of the American multinational technology company whose focus in
on E-commerce business, cloud computing, digital streaming and artificial intelligence. The
company was founded in the year 1194 with having around 27 years of experience in E-
commerce business. The company basically provide the online buying and selling of products to
their clients which includes Business to Business (B2B) and Business to Consumers (B2C).
Amazon company have its operation all around the world and serve its customers with the best
service of products delivery. Amazon is one of the leading and growing e-commerce business
because it comes under the Big Five companies including Google, Apple, Facebook and
Microsoft.
Jeff Bezos, founder of Amazon company has expanded into variety of products and
services category such as web service, satellite internet company, whole food market etc. The
company have its headquarter of company was in Seattle, Washington, US. Also, the financial
and operation performance of e-commerce business is best. It is because, Amazon has earned

revenue of US$ 386.064 billion in the year 2020 along with the operating income of US$ 22.9
billion in the same year. Beside this, in the year 2020, the number of employees worked in the
business is 1,468,000 along with the net income, total assets and total equities of US$ 21.331
billion, US$ 321.2 billion and US$ 93.404 billion (Timpe and Kaplan, 2017).
Process of Understanding the Entity
The process of understanding the entity and its environment helps the auditors to identify
the nature, procedure and internal control of the business. As per International Standard on
Auditing (ISA-315), the auditors need to perform the audit procedure to obtain the
understanding of entity and its environment. The audit procedure will help the auditor of
Amazon to understand the company, e-commerce industry and its environment such as internal
control, risk of material misstatement, relevant assertion levels. This procedure is also known as
risk assessment procedure which helps the auditors to identify whether Amazon has prepared its
financial statement fair and truthfully or not. The risk assessment procedure which auditor have
to perform includes the inquiries of management, analytical procedure, observation and
inspection (Rose and et.al., 2017).
Inquiries of management is one of the process of risk assessment which helps the
auditors to understand the fraud and error within the business. For example, the external auditor
of Amazon company is Ernst and Young (E&Y) that perform the inquiries to identify the level of
fraud and error involve in the business. Further, they also need to identify that whether the
management of the company are involved in this fraud and error or not. The process of
management inquiry involve the conversation between the E&Y auditors and Amazon
management company where the auditors simply ask the management of the company about an
transactions nature and amount. This is basically the part of audit evidence and used by the
auditors to understand the nature of business and the e-commerce industry along with the
accounting transactions. However, it is quite hard for the auditor to consider the information
from inquiry as audit evidence and thus it is not appropriate for Amazon auditors that they use
only management of inquiry as audit procedure (Appelbaum, Kogan and Vasarhelyi, 2018). It is
advisable to the E&Y that they have to use other audit procedure as well along with this
procedure.

Analytical Procedure is another part of risk assessment and audit procedure which
auditors of companies have to apply to obtain understanding of entity and its environment.
Analytical procedure involve the evaluation of the financial performance of the entity by
analysing the relationships between the financial and non-financial data. Observation and
Inspection is also part of audit procedure which helps the auditors in gaining knowledge of
business environment. These are the two procedures which helps in performing the test of
controls. For example, with the help of this procedure, the auditors of Amazon i.e., E&Y can
understand the internal control of the business. It means whether the internal control of Amazon
is strong or weak depends upon the accurate and reliable information. The strong internal control
of business indicate that management of Amazon has followed all the compliances such as legal
laws and regulations, contracts, policies and procedures.
Auditor's role in appraising the uniqueness of the environment in which the company is
operating
Auditor has the role to assess the financial position of the concern by examining its financial
statements in order to ensure that the true and fair view of the business financial situation has
been depicted to the stockholders and shareholders of the company. In this way, the company's
value can be determined by its auditors in different perspectives and on different grounds such as
profitability, liquidity, efficiency and solvency.
In order to assess the value of business environment in which the company is operating,
auditors need to have sufficient knowledge of business finance, accounting and taxation law.
Auditors generally calculates ratios for assessing different areas of the business and determine
how financially sustainable and favourable environment does the business have (Zhang, Dai and
Vasarhelyi, 2018). Calculating ratios helps in determining the profitability, liquidity, efficiency
and solvency trends existing in the company's environment and accordingly, allows for assessing
risks associated with the business and ensure that whether all these risks has been reported
appropriately in the company's financial statements or not. Also, company's auditors uses the
ratios and interpret it to assess how well the company is operating, what are its strengths,
weaknesses, opportunities and threats that may hamper or encourage organizational development
(Haapamäki and Sihvonen, 2019). They indicate various measures through which the business
can overcome its financial crisis and improves its financial performance as well.

Calculation of key ratios of Amazon.
The financial ratios help in understanding and analysing the financial performance and position
of the Amazon company using the following category:
Ratio Calculation of Amazon Plc
Particulars Formula 2019 2020
Profitability Ratio
Earning before
interest and tax
14541 22899
Total Assets 225248 321195
Total current
liabilities
87812 126385
Net profit 11588 21331
Net Sales 280522 386064
Return on Capital
Employed
Earning before interest and tax/ (Total
assets — total current liabilities) * 100
10.60% 11.80%
Net profit margin Net Profit / Net sales * 100 4.10% 5.50%
Liquidity Ratio
Current assets 96334 132733
Current liabilities 87812 126385
Inventories 20497 23795
Quick Assets Current assets - inventories 75837 108938
Current Ratio Current assets / Current liabilities 1.1 1.05
Quick Ratio Quick assets / Current liabilities 0.86 0.86
Solvency ratio

Total long term debt 23414 31816
Total equity 62060 93404
Debt to equity ratio Long term debt / equity 0.38 0.34
Total Assets 225248 321195
Total debt 163188 227791
Debt ratio Total debt / total assets 0.72 0.71
Efficiency ratios
Debtors collection
period
Trade debtors 20816 24542
Revenue from sales 280522 386064
Debtors collection
period
Trade debtors / revenue from sales *
365
27.08 days 23.2 days
Trade creditors /
payables
47183 72539
Cost of sales 165536 233307
Creditor's Payment
period
Trade creditors / Cost of sales * 365 104.04 days 113.48 days
Comment on Financial position and performance of Amazon company
Profitability performance:
The profitability position of Amazon company in the year 2020 is better than 2019. It is
because the net profit margin and return on capital employed of e-commerce company in the
year 2020 is 5.50% and 11.80% respectively. On the other side the same ratio in the year 2019 is
4.10% and 10.60% respectively which means that the ability of company to earn profit from the

sales and use of capital is increases. The poor profitability of company in past year is poor which
might be because of the Covid-19 but as the impact of coronavirus are reducing the company
sales has also reduces. Further, the reason behind the best performance of Amazon is their e-
commerce business where they provide the products and services of the different companies to
ultimate consumers. The online shopping channel of business is one of the main reason behind
the increasing profitability of business (Li and et.al., 2018).
Liquidity performance:
The liquidity ratio indicates the ability of the company to pay off its current obligations
with the use of current and quick assets. The current ratio of Amazon in the year 2020 is 1.05
while in the year 2019 is 1.1. The quick ratio of the company in the year 2020 and 2019 is 0.86.
This means that company have the ability to control its quick ratio. However, this indicates that
the liquidity position of the company in the current year is poor as compared to past year and
industry standards (Rozario and Vasarhelyi, 2018). Thus, it is advisable to the company that they
should adopt the proper strategy such as providing discounts to their customers on early
payments. Also, the company can also sale its old and outdated assets in the market in order to
arrange cash within the business. After that, the company can use this money for the payment of
creditors and other current obligations.
Solvency of Amazon Inc.
Solvency ratios are helpful in determining the financial position of the company in terms of its
long term solvency. These ratios indicate a firm's ability to meet their long term obligations and
thus are generally tracked by investors in order to ensure that whether their investments are
secure and safe with the company. Also, with this ratio they can make informed decision about
whether they should increase their investment in the company or not. In the same way, auditors
also look at this ratio to ensure that whether the actual risk involved in the venture has been
demonstrated appropriately to its stakeholders or not, so that they can make informed decisions
regarding their investment in the company (Alkiviadis, Grigorios and Nikolaos, 2020). In the
present case, Amazon's debt to equity ratio has been reduced from 2019 to 2020 due to higher
proportion of equity than debt in the total capital of the company. This is the indicator of lower
financial risk for the investors of the company as the equity contribution within the company
capital is higher than long term debt raised by the business. Therefore, leverage available for the

business can also be found out through this ratio. Another ratio calculated for determining the
solvency of the company is debt ratio which indicates the proportion of the company's total
assets that has been financed through the debt capital and accordingly, total leverage of the
company can also be found out. In the given case of Amazon, this ratio has reduced in 2019 as
compared to 2020 which means the financial risk of the company has reduced resulting from
heavy debt obligations on the company's part. Thus, it can be said that the overall long term
solvency of the company is good.
Efficiency of Amazon Inc.
Here efficiency ratio are calculated to determine how efficiently a company is collecting its
outstanding dues from its trade debtors in order to make payments to their creditors arising in
normal course of the business (Mendoza, Wielhouwer and Kirchler, 2017). For this purpose two
ratios have been calculated that is, debtors collection period and creditor's payment period where
the former has been reduced from 27 to 23 days which indicates that the company's efficiency
has increased as compared to previous year in collecting its outstanding dues. However,
creditor's payment period has increased from 104 to 113 days which indicates that the company
is facing difficulties in making payments to its creditors and thus indicates company's short term
solvency is at risk. With these ratios, auditors are able to determine the liquidity position and
ability of the business in meeting its short term obligations.

Ability to use analytical procedures to understand the entity
In order to understand the entity and its internal environment, the auditors uses the
analytical procedure. This procedure will help the auditors to understand the plausible
relationship between the financial and non-financial data of the business using the ratio analysis
tool. For example, the above calculation of financial ratio of Amazon company on the basis of
profitability, liquidity, efficiency, market and leverage ratio is part of analytical procedure. By
using these ratios, the auditors of Amazon can understand the performance of the company and
also identify whether the company is going concern or not. As per ISA-520, analytical procedure
is a preliminary analytical review which is performed to understand the business and its
environment for example, ratio analysis with past year, competitors or industry average. Thus, it
can be said that, the ability of analytical procedures to understand entity is high as compared to
any other procedures (Zhang, 2019). Further, the analytical procedure also helps in identifying
that the risk of material misstatement on Amazon company is nil because of compliance of all
rules and regulations imposed by government.
With the help of analytical procedure, the auditors of Amazon able to form an
expectation on relation between account balances which is independent in nature. For example,
with the help of ratio calculation of Amazon, it is identified that the profitability, liquidity and
efficiency performance of the company is best and growing day by day because of its online
presence. Beside this, the analytical procedure is also able to identify the differences between the
expected and reported amounts along with the proper investigation of probable causes of any
discrepancies. Further, the analytical procedure guide the auditors of e-commerce company that
whether the requirement of additional procedure is needed or not. The additional analytical
procedure is substantive procedure which is used to obtain the sufficient and appropriate audit
evidences (Moffitt, Rozario and Vasarhelyi, 2018). For example, if E&Y auditor of Amazon
need to identify the risk in large amount of transactions such as acquisition of other company, in
that case the auditors can use substantive analytical procedure i.e., test of details.
Importance of taxation in a economy
In every nation or economy, tax are imposed proportionately depending upon the citizen's
economic circumstances which facilitates social and economic equality (Baldauf, Graschitz and
Müller, 2020). It is compulsorily levied by the government of the nation on its citizens to finance
governmental expenditure and to serve many other purposes as well.

Direct taxes are directly incidental to the person concerned and it is helpful in reducing
income inequalities existing in the economy with the application of progressive tax structure.
Citizens in advance know that how much tax they are expected to pay in a financial year and thus
they can make prepare themselves for the same in advance. With the imposition of direct taxes in
the country, it is easy to control inflation by changing tax rates as it is helpful in the regulation of
supply and demand in the economy.
Also, both direct and indirect tax generates revenue for the government through which
developmental expenditures and activities are undertaken which in turn helpful in economic
growth and development of the country (Karagiorgos and et.al., 2019). Also, government utilizes
their tax revenue for extending financial assistance to its citizens with the provision of subsidies
on various products and services that extraordinarily expensive and thus income inequalities can
be avoided while making purchase of necessities.
Indirect taxation also generates revenue for the government which is not specifically
charged to an individual however it is the result of automatic function accompanying the selling
and buying of goods and services within the geographical boundaries of the nation. With this
taxation, those sections of the society also contributes towards the governmental revenue who are
exempted from paying direct taxes (Khlif and Guidara, 2018). These revenues so generated are
utilized towards funding economic projects such as education systems, health care systems and
public transport facilities. Also, the money collected through taxes are used for providing
unemployment benefits and pensions that are meant for benefiting the society as a whole. In
many studies carried out till date, it has been found that approximately 10% of the GDP which
means there is an economic growth for that nation.
Basic principles of computing transfers of value
Transfer of value means reduction in the value of a estate of a person due to giving gifts.
Chargeable person: A person who is a resident or domiciled in UK is liable with respect to their
assets around world for inheritance tax. Also, the relevant chargeable person could only be an
individual (Kusano, 2020). Married couples and partners in a partnership firms are not even a
chargeable person and thus taxed individually.
A gift that made during the lifetime of an individual can be considered to be of two types: Potentially exempt transfer: A transfer could be a potentially exempt transfer if it is
made to another individual. Also, if the donor completes the seven years post transfer,

then PET becomes completely exempt and it can be ignored as well. Furthermore, PET
becomes chargeable to tax in the event of death of a transferor within the duration of
seven years from the date of transfer. Therefore, rates and allowances are applicable that
are prevailing in the year of death of transferor.
Chargeable lifetime transfer: When the transfer is made to the trust, then it is known as CLT. It
is immediately charged to IHT on the basis of rates and allowances applicable in the year in
which the CLT has been made (Haapamäki and Sihvonen, 2019). Also, additional liability of tax
may arises in the event of death of the transferor within the duration of seven years from making
CLT
 Diminution in value principle: Generally, the transfer value depicts the open market value
of the asset, but in case of other assets such as unquoted shares where it can be seen that
the transfer value is higher than its market value. In such cases, difference in estate value
has been calculated both before and after the asset has been gifted to determine its
transfer value (Zhang, Dai and Vasarhelyi, 2018).
 A nil rate band of £325,000 is available and inheritance tax is payable only when the
chargeable transfers are more than this band. Also, if the transfer took place for more
than seven years before the death of an individual, then IHT is not payable on death on
such transfers.
 Taper relief is allowed which reduces the amount of tax payable in the event when the
donor after giving a gift lives for more than three years but less than seven years.
Lifetime transfers and transfers on death
Lifetime transfers are gift made during the lifetime instead of transfer taking place due to or on
death (Rahayu, 2020). It may be due to providing financial assistance to child and elderly
parents. It is chargeable to tax as and when the gift is made. Example of lifetime transfer are as
follows:
Jane died on 21st June after the following gifts during his lifetime:
1. On 4 October 2013 - A gift of £500000 to a trust.
2. On 7 December 2018 – gift of house whose value was £700000 to a trust, by June 2021
the value of this house increased to £850000.
Taxability of the above events:

The gift given to the trust on 4 October 2013 will be considered as a CLT and thus charged to
IHT immediately on the basis of rates and allowances applicable for the year 2013/14. Also, no
additional tax liability would be incurred as the gift was made before or more than seven years
from the date of Jane's death.
Also, the gift made on 7th December 2018 will be treated as CLT and accordingly, would be
chargeable to IHT on the basis of allowances and rates applicable for the year 2018 and 2019.
However, there would be an additional tax liability as Jane died within the seven years of giving
the gift where the rate and allowances for such additional tax liability associated with the year
2021 will be applied.
This is the example of lifetime transfer and its treatment in IHT.
Transfer on death
It is the transfer that took place on the death of an individual to the named beneficiaries who are
entitled to receive the assets belong to the deceased, therefore, the tax implications are such
where the recipient of transfer of value or who inherits some property or money incidental to the
death of an individual (Namazi and Namazi, 2017). The rate of IHT @ 40% is applicable as a
result of a person's death. The rate is applied on the estate of a person who has died, on PETs
resulting from the death taking place within the seven years of their transfer, thus becomes
chargeable and additional tax liability arising on account of CLT that has been made within the
seven years of death.
Example of calculation of tax on death of an individual
For instance, Jane died on 25 April 2021 and leaves behind an estate whose value is £300000.
Also, on 5 January 2018, he has given a gift amounting to £250000 to his daughter.
Treatment of above events for the tax purpose are as follows:
Gift made on 5th January 2018 is a lifetime transfer as the year passed post transfer is less than
seven years. However, it must be a PET initially, therefore, an additional tax liability would arise
on death of Jane where IHT is needed to be calculated for the gift amounting to £250000 as the
gift is being to an individual (Daughter) before where seven years has not yet passed from the
date the gift was made till the date of his death.
The nil rate band available for IHT is £325000 and out of this band £250000 will be utilized
towards additional tax liability on PET. So, there will be no IHT.
Transfer on death or death estate

Chargeable estate = £300000
IHT liability would be as follows -
325000 – 250000 = 75000
300000 – 75000 = 225000 will be charged to IHT @ 40% = 90000
Therefore, IHT payable would be £90000.
Tax planning that could be done for transfer of house from grandparents to grandchildren
For the purpose of saving IHT, it is beneficial for grandparents to made gift to their
grandchildren in order to save potential amount of IHT (Argilés-Bosch and et.al., 2020). This
possible as if grandparents will gave their house to their child and their child will definitely gave
it to their child which results in paying IHT for the three times with the death of three individuals
belonging from different generation. However, if grandparent will give house directly to their
grandchild it would result in paying IHT for twice only due to the involvement of two deaths
only as no third person is involved for moving the gift to third person.
CONCLUSION
From the above report its has been concluded that Amazon's financial performance has
improved in current year as compared to what it was in previous year. It has been determined
through calculating various ratios that auditors generally uses in order to determine company's
profitability, liquidity, efficiency and gearing position and ensures that the company's financial
statements are drawn up correctly to indicate true and fair picture of the company's operational
and financial affairs. In this report, it has been evaluated that how auditors uses risk assessment
procedures to determine risk involved in the venture and accordingly, they understand the entity
and its environment. Also, importance of taxation, basic principles that has to be followed while
computing transfers of value has been discussed along with demonstrating knowledge of lifetime
transfers and transfer on death. At last, tax planning associated with transfer of estate has been
included to indicate how IHT could be saved.

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