Maximizing Business Wealth: Auditing, Taxation, and Financial Analysis of eBay Inc.

This report discusses auditing, taxation, and financial analysis of eBay Inc. to maximize business wealth. It covers the process of understanding the entity and its environment, role of auditors, calculation of key ratios, and efficiency of eBay Inc. It also highlights the importance of taxation and tax planning strategies.

MAXIMIZING BUSINESS
WEALTH

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Introduction or Description of eBay Inc.....................................................................................4
Process of understanding the entity and its environment............................................................4
Role of auditor in appraising the environmental uniqueness in which the company operates...5
Calculation of Key Ratios of eBay Inc.......................................................................................6
Ability to use analytical procedures to understand entity...........................................................9
Importance of taxation................................................................................................................9
Basic principle of computing transfer of value.........................................................................11
Life time transfer and transfer on death....................................................................................11
Example of tax calculation on an individual’s death................................................................12
Tax planning can be done from transfer grandparents to grandchildren’s................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Every business aims to maximize its wealth by increasing the value of its shares which results in
higher value of the business and subsequently, companies are able to maximize its shareholders
wealth. The business's value increases with its consistency in generating profits and cash flows
for its stakeholders. The present report is based on the discussion related to taxation and auditing
where it will be demonstrated that how auditors gain understanding over the entity's
environment. Also, how analytical procedures are used by auditors in computation of financial
ratios of the company to determine its financial position which helps in gaining insights about
the entity. Furthermore, significance of taxation in the economy will be discussed along with
highlighting how lifetime transfers differs from transfer on death from the purpose of tax
treatment. In addition to this, various principles that are adopted while computing transfers of
value in the event of death will be discussed along with quoting example of tax calculation that
take place on death of an individual. At last, tax planning will be done on how IHT could be
saved if grandparents transfers house directly to their grandchildren.
MAIN BODY

Introduction or Description of eBay Inc.
eBay Inc. is an American International business which operates under the e-commerce
industry and sector. The main aim of the company is to provide online channel for both business
and customers where they can sell and buy the goods and services. eBay company was founded
in the year 1995 and have around 26 year of experiences in the sector. The company have its
headquarter in San Jose, California, US along with this they also provide its service all over the
world. It means the online shopping service is serve by the company to their worldwide
consumers i.e., around 32 countries. The company has also acquired the various companies such
as PayPal, Skype, StubHub etc. The financial and operational health of the company is better and
growing rapidly. It is because in the year 2020, the total revenue of eBay is US$10271 million
and total operating income is US$2711. Also, total assets and equity of the company in the year
2020 is US$19310 and US$3561 which is basically higher than the previous year. The company
is listed under the NASDAQ-100 stock exchange. The company's websites and shopping app is
free for the buyers but sellers need to pay fees for listing their products.
Process of understanding the entity and its environment
The process with the help of which the auditors of the company can understand the business and
its environment via
performing risk assessment procedures. As per the International Standard of
Auditing (ISA) — 315, the following audit procedures the auditors of the e-bay company need to
perform in order to understand the entity are as follows: Recognizing the nature of the company: The auditor of eBay is PWC which need to be
recognized the nature of company by analysing the market overview of company.
Further, the auditors also need to identify whether eBay follow rules and regulations of
Securities Exchange Commission or not. Examining the quality of company management: The quality of company management
examination is also one of the process which helps the auditors to understand entity.
Here, they will analyse employees turnover and communicate with the management
regarding the material misstatement. The auditors will analyse whether the management
of the eBay are involved in the material misstatement or not. Material misstatement might
be because of fraud and errors. Asking employees for information: In order to get the accurate idea of the business, the
auditors of eBay need to communicate with the different level of authorities and

employees. It will help them in obtaining the internal audit evidence which is a part of the
risk assessment procedure. Performing analytical procedure: The analytical procedure is also one of the process in
which the auditors need to identify the relationship between the financial and non-
financial data. Thus, in order to understand entity, the auditors need to perform trend
analysis, ratio analysis and identify the reasonableness of expenses such as depreciation. Observing employees at work: Observation is also one of the step of risk assessment
procedure in which PWC auditor of eBay need to observe the staffs taking count of
physical inventory. This will helps the auditors to understand the operation of the
business beyond its books and records. This will also help them in analysing and
understanding the internal control system of eBay company.

Inspecting company records: After observing the employees and counting the physical
inventories, the auditors of eBay company need to compare the data with the records of
the company. It will help them in understanding that the recording of transactions within
the business is done properly by the bookkeeper or not.
Role of auditor in appraising the environmental uniqueness in which the company operates
With the examination of the company’s financial statements, auditors undertake to assess the
company’s financial performance and position which helps in ensuring that the concern has
demonstrated true and fair view of its financial conditions in front of its stakeholders and
shareholders (Rixon, Downer and Faseruk, 2018). For developing such an understanding,
auditors uses different financial ratios such as liquidity, gearing, efficiency and profitability ratio
to understand the entity and its environment well. Therefore, sufficient knowledge of taxation
law, business finance and accounting must be there in auditors to assess and understand the
environment of an entity.
Auditor’s basic aim is to identify the risk associated with its client concern which they determine
by talking to the management, applying analytical procedures, observing client systems and staff
and reviewing previous year’s financial statements and establishes control over different areas to
minimize risk to the external parties (Kusano, 2020). Generally, ratios are used by auditors
through which liquidity, profitability and financial risks are identified and accordingly, various
measures are indicated to the company’s management through which financial and liquidity
crisis can be overcome and financial performance can also be improved.

In this way, auditors appraise the business environment to identify uniqueness and its
nature that is, whether it is a strength or weakness or opportunity or threat to the organization and
provide guidance accordingly.
Calculation of Key Ratios of eBay Inc.
eBay Inc. 's ratio Calculation
Particulars Formula 2019 2020
Profitability ratios
Net Income 1786 5667
Total Sales 8636 10271
Operating Income 1861 2711
Capital employed Total assets — Total current liabilities 14108 15308
Shareholder's equity 2870 3561
Net profit margin Net Income / Total sales * 100 20.68% 55.17%
Return on capital
employed
Operating income / Capital employed
* 100
13.19% 17.71%
Return on equity Net Income / Shareholder's equity *
100
62.23% 159.14%
Liquidity ratio
Current assets 4706 7190
Current liabilities 4066 4002
Current ratio Current assets / current liabilities 1.16 1.8
Quick Assets Current asset - inventories 4511 6002
Quick ratio Quick assets / current liabilities 1.11 1.5

Gearing ratio
Debt to equity ratio Debt / Equity 2.35 2.17
Long term Debt 6738 7745
Total equity 2870 3561
Total debt 15304 15749
Total assets 18174 19310
Debt ratio Total debt / total assets 0.84 0.82
Efficiency ratio
Accounts receivables 555 412
Sales revenue 8636 10271
Accounts receivables
collection period
Account receivables / Sales revenue *
365
23.46 days 14.64 days
Accounts payables 229 332
Cost of goods sold 2136 2473
Accounts payables
Payment period
Account payables / Cost of goods
sold * 365
39.13 days 49 days
Comment on the financial position of eBay business:
Profitability ratio:
The profitability ratio of eBay company in the year 2020 is higher than as compared to
previous year. It is because the net profit margin, return on capital employed and return on equity
of company in the year 2020 is 55.17%, 17.71% and 159.14% respectively while in the year
2019 the ratio was 20.68%, 13.19% and 62.23% respectively. This means that the financial
position and health of the business are increases which might be because of its e-commerce
business. The company able to sale its provide its service to its clients even during the pandemic
and it is because of the eBay online shopping channel and websites. With the help of these ratios,

the auditors of eBay able to complete its analytical procedures and understand the entity
including its internal environment. After analysing the ratio, the auditor can identify whether
they are needed to provide unqualified opinion of adverse opinion on financial statement. With
the help of this, it is analysed that the internal control of the company is strong but the company
also need to further improve it. For this, the company can implement value-based pricing policy
which helps them in increasing the sales revenue and further reducing the marketing cost.Liquidity performance of eBay Inc.
Liquidity ratios of the company are calculated to determine the liquidity position of the company
which indicates that whether the company's current assets sufficient or not in meeting its short
term obligations. For this, auditor's generally uses current and quick ratio which indicates the
proportion of company's current or quick assets to its current liabilities (Agostini and Favero,
2017). In case of eBay, its liquidity performance has improved in the current year as compared to
previous year as its current ratio moves from 1.16 to 1.8, however it is below the ideal
requirement that is, 2:1 which indicates that company have sufficient current assets to meet its
current liability but may face difficulty in meeting such short term obligations that may arise
during business courses. Also, quick ratio of the company has improved in the current year and
also it is above the ideal requirement that is, 1:1 which indicates that the company can meet its
current obligations immediately by liquidating its quick assets as and when need arise.Gearing or long term solvency of eBay Inc.
Gearing ratio are calculated to establish comparison between owner's equity and debt proportion
in the capital structure of the company (Eltweri and et.al., 2020). Here equity ratio has been
calculated to determine the proportion of debt and equity proportion in the capital of the
company which comes out to be quite higher indicating higher financial risk in the company as it
is raising more of capital through debt instruments. However, its debt ratio is quite good
indicating that company's assets are financed through more of equity capital rather than debt
capital, therefore, company has lower risk of loosing its assets for making payment of its debt
obligations. This ratio is used by auditors within their analytical procedures to determine how
much financial risk is involved in the company and ensures that its financial statements indicate
it correctly to safeguard the interest of its stakeholders.Efficiency of eBay Inc.

To determine the efficiency of eBay Inc., account receivables collection and accounts payables
payment period has been determined which is meant for demonstrating how efficient a concern is
in collecting payment from its debtors in order to make timely payments to their trade payables
(Sania and Yudianto, 2018). In case of eBay, account receivables collection payment has been
reduced from 23 to 14 days which indicates that the company has become more efficient in
collecting its outstanding dues, however, company's accounts payables payment period has
increased from 39 to 49 days which indicates that eBay is facing difficulty in making payment to
its creditors. Accordingly, it can be said that company is facing short term solvency issues and
reason for the same must be identified by its auditors.
Ability to use analytical procedures to understand entity
Besides, inspection and observation, external confirmation, inquiry etc. the analytical
procedure is also one of the part of risk assessment procedure which helps the auditors of the
eBay to understand the entity i.e., eBay. It is mandatory for the auditors that they should perform
the risk assessment procedures in which analytical procedure is one of the key which defines the
relation of the company's financial and non-financial data. Analytical procedure are mainly used
for the audit and assurance engagement where the auditors such as PWC can review the
prospective financial information of their clients (Al-Laban, Alhassany and Abbas, 2021). In
this, the auditors perform the ratio and trend analysis to evaluate and understand the plausible
relationships among financial and non-financial data. That's why it can be said that the ability of
the analytical procedures to understand entity and its environment is high.
This is used by the auditors at the time when they think that using analytical procedures is
more effective in reducing the material misstatement rather than any other procedure such as
observation, inspection etc. As per ISA-520, analytical procedure is also performed and review
the overall financial statement. With the help of this, the auditor can assess whether they have
understood the business in proper way (Han and et.al., 2018). This is one of the best way to
identify the risk of material misstatement and level of assertions. Reasonable testing is also one
of the type of analytical procedure which is enough for the auditors to understand the changes
taken place in the account between different accounting period.
Importance of taxation
Taxation is like compulsory financial charges that tax payer need to pay to the
government in against to make an earning out of living in the country. The taxation plays a very

vital role in the growth and development of the country. Taxation allow the government to
generate revenue that can further be investment in processing growth and development project
that can favour to the economic structure of the country. The role of taxation is directly for the
government to perform various civil operations that can support and empower the authorities to
support the overall growth and development requirements of the country. The role of taxation is
also to support the government undertaking to drive the basic operations of the country (Haffert,
2019). Without the proper structure of taxation law this is impossible for the government to run
the whole country. In case the country do not hold the strong tax collection system economic
activity would seem like paralyzed. In context to any country development can only take place if
the proper funds are available with the government. Role of taxation is vital for the government
to provide sufficient resources to operate various projects undertake by the respective authority.
Taxation further plays a role for the individual to make contribution towards thee economic
growth of the country. With the use of taxation policy individual and different organisation get to
contribute in the form of tax liability. This further allows such individual to contribute towards
the overall growth and development of the country as a whole. Stabilising economy is another
key advantage of having a strong taxation policy in the country (OKWOLI, 2020). This is
important for the stakeholders to stabilise the entire economic system and economic activity.
Taxation is a system that contributes towards strengthening the resources. Taxation law further
enhance the transparency in the whole system. This practice allows the stakeholder to get to
know about the income businesses and companies are generating out of delivering the business
operations. In simple language it can clarify that taxation is a process of creating change in the
country along with supporting the nation to grow forward and mark its dominance in the
international community.
Government also get support in clearing out the debt. Every country requires loan and
debt in order to meet the expenses. The amount received by the government in the face of tax
allows the respective stakeholder to clear the international due and debt. Taxation is one of the
major sources of income for the government. In order to clearing out the debt and due value
collected from tax provide the economic support in repayment of all the debt value. The use of
currency generated in the form of tax are further capitalised in improving medical infrastructure,
strengthening defence system, education related development in the form of school and colleges
and many other social activities (Cameron and McAllister, 2019). As financial resources are

limited in number hence the value collected in the form of tax support the government to make
available all different social services that can also be consider as the basic need of the people.
Government also run a several programs and campaigns for the poor people and economically
challenged people of society. Taxation allows the government to run all such campaign in the
best way possible. All different social activities require financial support and the taxation provide
the road map to the government on which requirement of financial resources can meet.
Especially for the developing countries tax revenue is among the most prominent source
and major source of funding for the government. As the developing countries require financial
resources in executing and developing every single infrastructure that is required to run the
country. The financial need is massive in number. Taxation revenue provides a massive support
to execute all different social activities.
Basic principle of computing transfer of value
Transfer of value is a concept use in taxation. This is all about computing the actual value
at which transfer has taken place. The transfers of value mean as disposition by an individual that
further reduces the value on the real estate for the inheritance tax purpose. For example in a life
insurance policy or any interest in such a policy is transferring for something of value that may
include money, property or any other commodity. The basic terminology behind the transfer of
money is to convert a currency into other form of assets or liquidity (Strieth-Kalthoff and et.al.,
2018). The transfer of value is computed with the use of certain aspects that involve the date at
which transfer has taken a place. The price of commodity on the date of transfer. Further in case
of any foreign currency is also included in the transfer than the currency exchange value on the
date of transfer is also a part of the transfer value. In the legal terminology this is a value at
which transfer has taken a place. This must be a legal transaction which is a basic condition to
the transfer is associated. The basic nature of this trade is to know the exact value of the transfer
that has been taken a place. Only, if the right value can identify than only the further tax liability
and legal implication can be done over the respective transfer.
Life time transfer and transfer on death
Transfer is a transaction that is all about transfixing the property or the asset to some
other person. This involves a person transferring its asset to the trustee in order to hold the
benefit of other people. Life time transfer is about to make a transfer of any property or any other
form of asset to other person for entertaining the life time advantage of the transfer. In case of

the life time transfer the transfer is completely non negotiable till the time death of the person to
which the asset get transferred take a place (Chen and et.al., 2019). Life time transfer usually
takes place once there after there is not such a transfer from the person originally took transfer in
place. This transfer can be taken over any place that is negotiated between the parties involved in
the transaction.
Transfer on death is another form of transfer. The name itself indicates the fact that
transfer is only taken at the time of the death of the owner of the asset. Generally the death of
parent allows the transfer of property to the children. This can treat as an example of the transfer
on death. Generally this transfer can be taken place at any cost or a price. There is not any set
limitation of this type of transfer to take a place (Mimura, 2021). Transfer on death agreement
may also develop at any given point in which a person disclose that at the time of death of the
person all the property and asset will transfer to the person claimed as nominee. This transfer is
not necessary to be taken over a exchange of some price. There is not any statutory obligation
attached with the transfer to be taken a place.
Example of tax calculation on an individual’s death
Tax calculation for paying IHT when an individual dies can be explained through the following
example, such as:
Sonia died on 21st January 2020 after leaving an estate that is valued at £800,000. She has made a
gift to a trust on 12th October 2017 amounting to £400000 and trust paid IHT arising from the
gift. The nil rate band available within the year 2017/18 was £325000.
Treatment of lifetime transfer – 12th October 2017
Chargeable transfer = 400000
IHT liability = 400000 – 325000 = 75000 * 20% = 15000
Additional liability that take place on death – 21st January 2020
Chargeable transfer = 400000
Additional IHT liability on death = 400000 – 325000 = 75000 * 40% = 30000 less IHT already
paid = 15000.
Treatment of death estate – 21st January 2020
Chargeable estate = 800000
IHT liability = 800000 * 40% = 320000.

Therefore, a nil rate band is given every year and the NRB used for CLT was associated with
2017/18 when the tax on lifetime transfers was calculated.
The nil rate band available for tax calculation that is to be paid on death will be first provided
towards additional IHT liability on CLT and then to the death estate due to the reason that NRB
is allocated in chronological order.
Tax planning can be done from transfer grandparents to grandchildren’s
Ancestral properties are always transferring to the generation come next. Usually the
properties get transfer from parents to children. There are also various cases have been seen
where the grandparents directly transfer the property to the grand children. Usually the property
transfer from parents to children’s doing not involve any financial transaction as it is a legal right
of the children’s to own the property. House is a very common type of property that is transfer to
the next generation. In case of the pretty transfer to the children’s tax deduction are also involve.
The tax laws authorise the deduction of $120,000 is granted to the married couple with four
grand children’s in a year with no gift tax implications (Lentz, 2020). There are other provisions
as well in which the grand parents get to transfer the house property to the grand children’s. All
this is a part of the tax planning. The major aim of the individual while paying the tax liability is
to get the maximum amount of deduction possible. Tax planning involves taking the maximum
advantage of the tax deductions with the use of different transfer in the form of house property,
education, cash and many more. If the transfer of the house is done without any cost than the tax
deduction will not be eligible over the respective transaction. As the basic concept of taxation is
to levy tax liability over the income of a person. In case of free transfer of property no profits are
derived hence no tax liability will occur over the transaction. Grandparents are also hold the
annual limit of $15000 in the form of gifts. Tax planning is totally based on the amount of
deduction can be claimed by the individual in the face of gifts and other form of deduction. The
real estate tax exemption is also available to the value of $11.7 million. Deductions become the
basis to conduct the entire tax planning in the form of gifts to children’s.
CONCLUSION
The report has concluded the various concepts and aspects of auditing and taxation with
the examples. The report has concluded the analytical and other procedures of risk assessment
which help the auditors in understanding the entity & its environment. This report has also

calculated the key ratios which is uses under the analytical procedures and is helpful for the
auditors. The report has also concluded the importance of taxation, basic principles of transfer
value computation along with the knowledge of lifetime transfers and transfer of death. Lastly,
the report has also covered the example of tax on death of an individual along with the tax
planning on transfer of house from grandparents to grandchildren.

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