Auditing Assignment Example | Topics and Well Written Essays - 1000 words

Auditing - Assignment Example There are many factors reported in the profit and loss account that have affected the company's profit. The most prominent of them being increasing cost of sales and interest expenses. The major trends and tendencies in the company's financial position and performance for the current year as indicated by Adios Ltd's financial statements can be assessed with the help of the following factors: The company's balance sheet shows that the company has enhanced its investment in tangible asset by 84% whereas the investment in the intangible assets of the company has been reduced by 80%. But overall as compared to the previous year, the company's investment in total assets has been increased. Working capital is the capital, which remains with the company after accounting for all the current liabilities of the company out of its current assets. This capital is required by every company to meet its short-term obligations or liabilities without any hassles, whenever a need arises. Working capital can be obtained by subtracting a company's current liabilities from its current assets. The Adios Ltd's total current liabilities are about 25% of its total current assets, which shows a good working capital position for the company. The company's fiIncreased Long-term Borrowings The company's financial statements indicate that the company's long-term debts and borrowing has been increased to a great extent. As compared to the previous year, the company's long-term debts have been increased by about 7 times. Consequently, the company's interest expense has also been 6 times more than that of the previous year. Increased Sales According to the Adios Ltd's profit and loss account, the company's total sales are increased by 11.46% as compared to the previous year. Simultaneously, the company's cost of sales has also increased by 55%, which has resulted into a decline in the company's gross profit margin. Adios Ltd's gross profit margin was about 55% in the year 2004, which has decreased to 23% in 2005 despite of an increase in company's sales. Decreased Profit The company's profit margin for the year 2005 has declined by 30% as compared to that of the year 2004. Company has shown many factors responsible for this in the financial statements. The most prominent of which being the increasing cost of sales and increasing interest expense resulting from an increasing trend in the company's long-term debts and borrowings. INFORMATION IMPORTANT TO BE ASKED BY AN AUDITOR An auditor needs to obtain the following information from the company's management in order to gain a better insight of company's financi