LSE MODULE 7 UNIT 3 Activity: Financial Statement Analysis and Fraud

This assignment focuses on financial statement analysis, specifically addressing the limitations of ratio analysis, the impact of management pressure on the accuracy of financial statements, and strategies for mitigating the risk of fraud and misrepresentation. The student analyzes the 2017 annual report and financial statements of Marks & Spencer (M&S) to assess the company's financial performance, providing supporting arguments from the report. The analysis includes examining key financial metrics such as profit before tax, operating profit, and net profit, along with relevant ratios like operating profit margin and net profit margin. The student identifies the reasons for M&S's underperformance based on the financial data provided in the annual report. The assignment also addresses how management can mitigate the risk of fraud and how pressure from stakeholders can impact the financial reporting process. The assignment is based on the course module 7 unit 3 from LSE.

MODULE7 UNIT 3
Activity submission

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Learning outcomes:
LO5: Identify the limitations of ratio analysis.
LO6: Explain the impact that pressure exerted on management might have on the
accuracy of financial statements.
LO7: Describe how management can mitigate the risk of fraud and misrepresentation
in financial statements.
LO8: Analyse the financial statements of a business to determine its financial
performance.
Name:
1. Instructions and guidelines (Read carefully)
Instructions
1. Insert your name and surname in the space provided above, as well as in the file
name. Save the file as: First name Surname M7 U3 Activity Submission – e.g.
Lilly Smith M7 U3 Activity Submission.NB: Please ensure that you use the
name that appears in your student profile on the Online Campus.
2. Write all your answers in this document. There is an instruction that says, “Start
writing here” under each question. Please type your answer there.
3. Submit your assignment in Microsoft Word only. No other file types will be
accepted.
4. Do not delete the plagiarism declaration or the assignment instructions and
guidelines. They must remain in your assignment when you submit.
PLEASE NOTE: Plagiarism cases will be investigated in line with the Terms and
Conditions for Students.
IMPORTANT NOTICE: Please ensure that you have checked your course calendar
for the due date for this assignment.
Guidelines
1. There are 4 pages and 4 questions in this assignment.
2. Make sure that you have carefully read and fully understood the questions before
answering them. Answer the questions fully but concisely and as directly as
possible. Follow all specific instructions for individual questions (e.g. “list”, “in
point form”).
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3. Answer all questions in your own words. Do not copy any text from the notes,
readings, or other sources. The assignment must be your own work only.
Plagiarism declaration:
1. I know that plagiarism is wrong. Plagiarism is to use another’s work and
pretend that it is one’s own or to fail to cite references when necessary.
2. This assignment is my own work.
3. I have not allowed, and will not allow, anyone to copy my work with the
intention of passing it off as his or her own work.
4. I acknowledge that copying someone else’s assignment (or part of it) is
wrong, and declare that my assignments are my own work.
2. Mark allocation
Each question receives a mark allocation. However, you will only receive a final
percentage mark and will not be given individual marks for each question. The mark
allocation is there to show you the weighting and length of each question.
Question 1 4
Question 2 2
Question 3 2
Question 4 12
TOTAL 20
Please note: Unlike most other assignments, this assignment will not be marked using
a rubric, given the nature of the answers required.
3. Questions
Reminder:
You are not required to conduct independent research for this submission. However, if
you wish to make use of additional sources outside of the course material, you will
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need to reference these sources correctly. Please consult the Course Handbook in the
Orientation Module for guidance on referencing requirements.
In-text citations and reference lists are not included in the word count of your
submission.
Question 1
Identify and explain two of the possible limitations of ratio analysis.
Answer 1:
 The ratio analysis is carried out with the use of historical financial results and
therefore the results obtained with its use does not prove to be highly useful
for gaining an estimate into a firm future financial performance
 The results obtained with the use of ratio analysis can also be influenced by
the changes in the market condition such as inflation (Bragg, 2010)
Question 2
Describe how pressure exerted on senior management by shareholders and other
parties may impact the accuracy of financial statements. (Max. 50 words)
Answer 2:
The pressure exerted on the senior management by shareholders to boost the
profits may lead to adoption of fraudulent financial reporting practices to inflate the
earnings and thus achieving the financial objectives and goals determined by the
shareholders to be achieved. The senior management may align the rewards or
incentives of the managers with the attainment of the financial goals and this may
induce them to use the unethical practices to report the financial information and
achieve the stated goals and objectives (Zack, 2012).
Question 3
Suggest one action management can take to mitigate the risk of fraud occurring when
financial statements are being compiled. (Max. 50 words)
Answer 3:
The management can plan and perform an audit of the financial statements at
the time of their compilation to reduce the risk of occurrence of any type of fraud
within the financial statements. The auditing of the financial statements will help in
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determining the accuracy by identification of any type of materialistic errors and use
of fraudulent financial reporting practices (Hendricus and Swinkels, 2012).
Question 4
View the annual report and financial statements of M&S for 2017.
Do you think M&S is performing well as a business? Provide three examples or
arguments from the annual report to justify your answer. You may use any
information found in the report to support your answer.
Answer 4:
Marks & Spencer is multinational retailer company, primarily located at
London, United Kingdom. According to the information provided in the annual report
of year 2017 of this it has been found that there has been major downfall in the profit
in year 2017 as compared to year 2016. So it can be said that M & S is not performing
well as a business.
Three examples from the annual report that justifies the above answer:
 Profit before tax falls to pound 176.4 million reflecting downfall of 63.5% in
year 2017 as compared to previous year.
 More than 100 stores will closed down by 2022 to minimise the loss
 Operating profit margin and all other profitability ratios have fall down in year
2017 with very big difference when compared to year 2016 despite of increase
in revenue (Marks & Spencer: Annual Report, 2017).
Items 2016 2017
Net Sales 10555.4 10622
Operating profit 584.1 253.2
Net Profit 404.4 115.7
Ratios 2016 2017
Operating profit margin 5.53% 2.38%
Net profit margin 3.83% 1.09%
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References
Bragg, S. 2010. Business Ratios and Formulas: A Comprehensive Guide. US: John
Wiley & Sons.
Hendricus, W. and Swinkels, A. 2012. Exploration of a Theory of Internal Audit. US:
Eburon Uitgeverij B.V.
Marks & Spencer: Annual Report. 2017. [Online]. Available at:
https://corporate.marksandspencer.com/documents/reports-results-and-publications/
annual-report-2017.pdf [Accessed on: 25 June, 2019].
Zack, G. 2012. Financial Statement Fraud: Strategies for Detection and
Investigation. US: John Wiley & Sons
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