Auditing theory and practice Essay Example | Topics and Well Written Essays - 2000 words

Auditing theory and practice - Essay Example fy these weaknesses or considered as risks associated with these financial statements, we perform comparative year-on-year and ratio analyses which may be effective for us to identify possible problem areas for additional analysis and audit testing and for which we can provide other assistance. Among other: The company’s short-term debt paying ability. We analyse the company’s liquidity status, such as its current ratio is 1.28 (lower than 1.31 in 2004) but it indicates that the company should have sufficient fund to pay its short-term debts. Our calculation also indicates that the company will be able collect the amount owed by its customers, except the average day of collecting payment of 82 days (15 days longer than the previous year). This may have an affect on negative cash flow. Since the company does not have sufficient cash to meet its short-term obligations, the company may consider lengthening the time it takes to convert less liquid assets into cash. Short-term liquidity. The company’s balance sheet shows that it has negative cash balance. It is likely that the company or that the record shows that the company cannot meet its obligation. Therefore, its debt-paying ability would be the length of time it takes the company to convert its current assets into cash. The company’s balance sheet indicates a huge amount of bank overdraft. In case of necessary, the company has 2.5 times cash turnover rate (down by .89), 4.36 times of receivables turnover rate (down by .94), can recover the value of its fixed assets 51.17 (down from 56.93), and over all, 2.5 times (down from 3.2) chance to convert its assets into cash to cover bank over draft. With the absence of inventory, it may be possible that the company is having inventory obsolescence problem. Ability to meet long-term debt obligations. The company’s debt-to-equity ratio is 3.35, down from 3.97 in 2004. There is a possibility that the company would be able to raise fund through borrowing.