1. It is difficult to find a comparable firm within the same industry. This is because firms may have businesses which are diversified to a greater or lesser extent. Further, industry averages are not particularly useful when analyzing firms with multi-product lines. The choice of the appropriate benchmark industry for such firms is a difficult task.
2. Businesses operating in the same Industry may be substantially different in that, they may manufacture tile same product but one may be using rented equipment while the uses its own making comparison difficult.
3. Two firms may use accounting policies, which are quite different resulting in difference in financial statements. It is usually very difficult for an external user to identify differences in accounting policies yet one must bear them in mind when interpreting two sets of accounts.
4. The analyst must recognize that ratios with large deviations from the norm are only the symptoms of a problem. Once the reason for the problem is known management must develop prescriptive actions for eliminating it. The point to keep in mind is that ratio analysis merely directs attention to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem
Judiesiz answered the question on May 22, 2018 at 12:45
- Outline the limitations of financial ratios.(Solved)
Outline the limitations of financial ratios.
Date posted: May 22, 2018. Answers (1)
- Discuss the uses of financial ratios.(Solved)
Discuss the uses of financial ratios.
Date posted: May 22, 2018. Answers (1)
- Outline the agency costs incurred by shareholders in trying to control management behavior and actions.(Solved)
Outline the agency costs incurred by shareholders in trying to control management behavior and actions.
Date posted: May 22, 2018. Answers (1)
- Outline the actions that a shareholder may take which may conflict the interest of the government as the principal.(Solved)
Outline the actions that a shareholder may take which may conflict the interest of the government as the principal.
Date posted: May 22, 2018. Answers (1)
- Examples of actions by shareholders through management that could lead to a conflict between them and creditors
(Solved)
Examples of actions by shareholders through management that could lead to a conflict between them and creditors
Date posted: May 22, 2018. Answers (1)
- Give examples of decisions by managers which would result in a conflict with shareholders.(Solved)
Give examples of decisions by managers which would result in a conflict with shareholders.
Date posted: May 22, 2018. Answers (1)
- State five the disadvantage of management accounting(Solved)
State five the disadvantage of management accounting.
Date posted: April 24, 2018. Answers (1)
- Clearly, give the differences between management accounting and financial accounting(Solved)
Clearly, give the differences between management accounting and financial accounting.
Date posted: April 24, 2018. Answers (1)
- Describe the functions of a management accountant(Solved)
Describe the functions of a management accountant.
Date posted: April 24, 2018. Answers (1)
- Explain the various types of management accounting(Solved)
Explain the various types of management accounting
Date posted: April 24, 2018. Answers (1)
- State three limitations of auditing(Solved)
State three limitations of auditing.
Date posted: April 14, 2018. Answers (1)
- Outline four contents of a letter of representation(Solved)
Outline four contents of a letter of representation.
Date posted: April 14, 2018. Answers (1)
- a) Explain the following terms as used in auditing: (i) Audit risk. (ii) Inherent risk. (iii) Control risk. (iv) Detection risk.(Solved)
(a) Explain the following terms as used in auditing:(i) Audit risk. (ii) Inherent risk. (iii) Control risk. iv) Detection risk.
Date posted: April 14, 2018. Answers (1)
- (a) Define the term recurring audit (b) State the circumstance under which the auditor may send a new engagement letter to the existing ...(Solved)
(a) Define the term recurring audit (b) State the circumstance under which the auditor may send a new engagement letter to the existing ...
Date posted: April 14, 2018. Answers (1)
- Explain the procedures an auditor should follow before and after accepting nomination. (Solved)
Explain the procedures an auditor should follow before and after accepting nomination.
Date posted: April 10, 2018. Answers (1)
- (a) Internal controls over non-current assets are designed to ensure the
orderly and efficient running of the business, adherence to management
policies, safeguarding of assets,...(Solved)
(a) Internal controls over non-current assets are designed to ensure the
orderly and efficient running of the business, adherence to management
policies, safeguarding of assets, the prevention of fraud and error and
the completeness and accuracy of the accounting records.
Required:
List the internal controls that a small printing company with office
equipment, motor vehicles and plant and machinery should have in place
to achieve the objectives described above.
(b) Audit sampling is a technique for drawing conclusions about the
characteristics of a population by testing a sample drawn there from.
Internal and external auditors use it for both tests of controls, and
substantive testing.
Required:
Describe the following:
(i) Judgement sampling and statistical sampling;
(ii) A representative sample;
(iii) Tolerable error;
(iv) Two different methods of selecting a representative sample;
(v)The extrapolation of errors.
Date posted: April 3, 2018. Answers (1)
- Your firm is the newly appointed external auditor to a large company that
sells, maintains and leases office equipment and furniture to its customers
and...(Solved)
Your firm is the newly appointed external auditor to a large company that
sells, maintains and leases office equipment and furniture to its customers
and you have been asked to co-operate with internal audit to keep total
audit costs down. The company wants the external auditors to rely on
some of the work already performed by internal audit.
The internal auditors provide the following services to the company:
(i) A cyclical audit of the operation of internal controls in the company’s
major functions (operations, finance, customer support and
information services);
(ii) A review of the structure of internal controls in each major function
every four years;
(iii) An annual review of the effectiveness of measures put in place by
management to minimise the major risks facing the company.
During the current year, the company has gone through a major internal
restructuring in its information services function and the internal auditors
have been closely involved in the preparation of plans for restructuring,
and in the related post-implementation review.
Required:
a) Explain the extent to which your firm will seek to rely on the work of
the internal auditors in each of the areas noted above.
b) Describe the information your firm will seek from the internal auditors
in order for you to determine the extent of your reliance.
c) Describe the circumstances in which it would not be possible to rely on
the work of the internal auditors.
d) Explain why it will be necessary for your firm to perform its own work
in certain audit areas in addition to relying on the work performed by
internal audit.
Date posted: April 3, 2018. Answers (1)
- Why would a company not share all its profits to shareholders?(Solved)
Why would a company not share all its profits to shareholders?
Date posted: March 30, 2018. Answers (1)
- You are auditing the financial statements of Newbridge Trading plc, for the year-ended 31 October 1997.
The senior partner of your audit firm has...(Solved)
You are auditing the financial statements of Newbridge Trading plc, for the year-ended 31 October 1997.
The senior partner of your audit firm has asked you to consider the auditor‟s responsiresponsibilities for identifying subsequent events. Also, he has asked you to describe the audit procedures, which examine subsequent events. He has suggested that an example of one point in answer to part (b) below would be:
„Checking sales ledger cash received after the year-end to determine the realisability of debtors at the year-end and highlight doubtful debts.‟
The detailed audit work was completed on Friday 5 December 1997. It is proposed that:
a) The audit report will be signed on Friday 19 December;
b) The financial statements will be sent to shareholders on Monday 5 January 1998; and
c) The company‟s annual general meeting will be held on Wednesday 28 January 1998.
Required:
a) Consider the auditor‟s responsibilities for detecting material subsequent events in the periods:
i) 31 October to 5 December 1997 ii) 5 December to 19 December 1997 iii) 19 December 1997 to 5 January 1998
iv) 5 January 1998 to 28 January 1998
v) After 28 January 1998
b) List and briefly explain audit procedures, which involve examination of subsequent events.
c) Describe the audit work you will carry out in period (a) (ii) above.
Date posted: March 28, 2018. Answers (1)
- (a) What is meant by the term "fraud"? Give four examples of fraudulent activities.(Solved)
(a) What is meant by the term "fraud"? Give four examples of fraudulent activities.
(b) What do you consider to be the auditor?s responsibilities in the course of
the normal annual audit in relation to the detection of fraud?
(c) Explain the way in which the auditor should approach and perform his work in order to meet these responsibilities.
Date posted: March 28, 2018. Answers (1)