Report on Auditing and Accounting: Liquidity, Solvency, and Assurance

This report delves into the critical aspects of auditing and accounting, exploring both short-term liquidity and long-term solvency. It begins with an introduction to liquidity and solvency ratios, highlighting their importance in assessing a company's financial health. The report then presents an analysis of BP Plc, calculating and interpreting various financial ratios such as current ratio, quick ratio, cash ratio, debt ratio, debt-to-equity ratio, and long-term debt ratio for the year 2015. The analysis provides insights into BP Plc's ability to meet its short-term liabilities, manage its debt, and generate income from long-term liabilities. Furthermore, the report emphasizes the importance of auditing and assurance in building investor confidence. It explains how auditing of financial statements ensures the authenticity of provided figures, while assurance confirms the reliability of audit reports. The report discusses the expectations of stakeholders regarding transparency in financial statements and the role of assurance committees in validating audit findings. It concludes by stressing the necessity of regular audits for maintaining investor trust and the significance of external opinions in investment decisions.

“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

long term debt ratio is also showing positive performance of the company in table 1 as
the answer is 0.53 which is less than 1.
1.3 Conclusion
In conclusion it can be said that the ratio analysis is useful for the investors for the
decision making about the investments as they analyse the performance of the
company from different perspectives. However, liquidity and solvency ratios are more
important as they identify the survival ability of a company in the coming future by
showing the results about the dependability of a company on its assets and liabilities. If
the ratios are according to their benchmarks, it indicates good performance and if not,
negative performance is indicated by the company which is being analysed for the
purpose of investment.
2 Importance of Auditing and Assurance the confidence of investors
2.1 Introduction
Auditing and assurance is necessary for the confidence of investors on a company’s
accounts. Auditing is basically done of the financial statements of a company to ensure
the investors that the figures and values which are provided by a company are
authentic. It is because the management of a company is separate from the invertors
and investors do not have any idea of the operations of a company. Assurance is also
needed for the confidence building because it concludes that the details which are
provided in the audit report are based on the real facts. However, the absolute
assurance is not possible because it is not possible or the auditors to analyse every
transaction and there are also some estimates present in the financial statements which
are based upon some future events (Auditing and Assurance, 2014).
2.2 Importance of Auditing and Assurance
Audit and assurance is necessary to build up the confidence of investors as they make
decisions on the basis of external opinions which are provided by the audit reports of a
company. There are certain expectations of the stakeholders from the audit and
assurance committees which are basically related with the transparency of the financial
statements. It is ensured by the assurance committees that the values which are

provided by the auditors after the analysis of the financial statement of a company are
based on the actual facts. It is necessary to assure the findings of the audit report as the
stakeholders may get the idea that the auditors are not externally hired rather they are
working as a part of a company (Ernst & Young, 2015).
The confidence of the shareholders exceed once they get assurance from the external
people that the audit report is transparent and provided by the external auditors. The
quality of the reports is also necessary for the building of the confidence by the auditors
as the reports which are of low quality has a negative impact on the investors regarding
the auditors also. The quality of the audit process and audit report depends upon
various factors which are mainly related to the communication process in the
organization. However, understanding about the process of business and risks involve
in them should also be taken into consideration (ASIC, 2016).
2.3 Conclusion
It can be concluded that the auditing and assurance is necessary for the building of
investors’ confidence as the details which are provided by them are regarded as the
external opinion which is welcomed by the shareholders with more trust. It should also
be noted that for the increase in the investments, it is necessary for the companies to
hold audit on regular basis as it ensures the reliability of the information provided by a
company. As the investors are not the part of the management of a company, they are
unaware of the operations and account handling processes. Therefore, they strongly
rely on the findings which are provided by the external auditors in the form of audit
report of a company’s financial statements.

References
ASIC (2016). “Audit quality - The role of directors and audit committees” [Online]
Available at < http://asic.gov.au/regulatory-resources/financial-reporting-and-audit/
auditors/audit-quality-the-role-of-directors-and-audit-committees/#why-important>
[Accessed: 7th December, 2016]
Auditing and Assurance (2014). “A guide to understanding Auditing and Assurance:
Listed Companies” [Online] Available at <
https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-
resources/auditing-assurance/guide-understanding-audit-assurance.pdf> [Accessed: 7th
December, 2016]
Deegan, C. (2013). “Financial accounting theory”. Australia: McGraw-Hill Education.
Ernst & Young (2015). “The future of assurance: The role of audit in society” [Online]
Available at < http://www.ey.com/Publication/vwLUAssets/EY-financial-services-
viewpoints-audits-role-in-society/$FILE/EY-financial-services-viewpoints-audits-role-in-
society.pdf> [Accessed: 7th December, 2016]
Weil, R.L., Schipper, K. and Francis, J. (2013). Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.

Appendices
Ratio Formula 2014 2015
Current ratio Current assets/Current liabilities 1.37 1.29
Quick ratio Current assets-Inventory-Prep. Exp/Current Liabilities 1.06 1.00
Cash ratio Cash and cash equivalents/Current liabilities 0.47 0.48
Debt Ratio Total liabilities/Total assets 0.61 0.63
Debt to equity ratio Long term debt/Shareholder's equity 0.98 1.13
Long term debt ratio Long term debt/Long term debt+Shareholder's equity 0.50 0.53
Short term Liquidity Ratios
Long term solvency ratios
Table 1: Ratio Analysis