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
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Outline the limitations of financial ratios.
(Solved)
Outline the limitations of financial ratios.
Date posted:
May 22, 2018
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Answers (1)
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Discuss the uses of financial ratios.
(Solved)
Discuss the uses of financial ratios.
Date posted:
May 22, 2018
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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State five the disadvantage of management accounting
(Solved)
State five the disadvantage of management accounting.
Date posted:
April 24, 2018
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Answers (1)
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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
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Answers (1)
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Describe the functions of a management accountant
(Solved)
Describe the functions of a management accountant.
Date posted:
April 24, 2018
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Answers (1)
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Explain the various types of management accounting
(Solved)
Explain the various types of management accounting
Date posted:
April 24, 2018
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Answers (1)
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State three limitations of auditing
(Solved)
State three limitations of auditing.
Date posted:
April 14, 2018
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Answers (1)
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Outline four contents of a letter of representation
(Solved)
Outline four contents of a letter of representation.
Date posted:
April 14, 2018
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Answers (1)
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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
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Answers (1)
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(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
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Answers (1)
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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
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Answers (1)
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(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
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Answers (1)
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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
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Answers (1)
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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
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Answers (1)
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(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
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Answers (1)
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Emali Co. Ltd. has undergone a period of substantial growth following its establishment five years ago. At the last annual general meeting Smith &...
(Solved)
Emali Co. Ltd. has undergone a period of substantial growth following its establishment five years ago. At the last annual general meeting Smith & Co. Associates, a tow-partner firm of Certified Public Accountants were re-appointed as auditors. However, Smith & Co. Associates have decided that they do not have the necessary resources to audit the enlarge company.
Required:
a) Briefly, explain how Smith & Co. Associates may resign from its appointment before the next annual general meting.
b) How any a casual vacancy arising from the resignation of present auditors be filled and what procedures are necessary before the company‟s next annual general meeting at which the appointment will be presented for ratification?
c) Outline the steps the prospective auditor must take before deciding whether or not to accept the nomination as an auditor.
Date posted:
March 28, 2018
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Answers (1)