1. Differentiate outstanding checks from unreleased checks.
An outstanding check draws on the funds in an individual's or business' bank account, but has
not yet been cashed or deposited by the payee while unreleased checks are company's checks
drawn and recorded but are not actually issued or delivered to the payees as of the reporting
date.
2. In what instances does a company with high profit have a low cash balance?
When a major part of their sales is on account.
When inventory turnover of the company is quick. They immediately convert their cash to
inventory to keep up with the demands of the business.
3. What component of financial statement best summarizes the movement of cash?
The Statement of Cash Flows best summarizes the movement of cash. It shows how changes in
balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis
down to operating, investing, and financing activities.
4. What financial methodologies are used in conducting analysis? Provide 4 methodologies.
The following are the 4 common methodologies used for financial statement analysis:
Horizontal Analysis - Horizontal analysis is used in financial statement analysis to compare
historical data, such as ratios, or line items, over a number of accounting periods
Vertical Analysis - method of financial statement analysis in which each line item is listed as a
percentage of a base figure within the statement.
Ratio Analysis - Ratios are used to calculate the comparative size of a number in relation to
another number. After a ratio is calculated, it can be used to compare a similar ratio calculated
for a previous period, or a ratio founded on an average of a particular industry in order to
establish whether the company’s performance is in harmony with set expectations.
Trend analysis - entails reviewing financial statements of three or more periods, an extension of
horizontal analysis. The earliest year in the set data represents the base year. In trend analysis,
users assess statements for incremental change patterns. A change in financial statements can
indicate that there are either increased income or decreased expenses.
5. Enumerate cash intensive businesses.
Examples of cash intensive businesses are the following according to EU.
1) Sectors of bars
2) Restaurants
3) Constructions companies
4) Motor vehicle retailers
5) Car washes
6) Art and antique dealers
7) Auction houses
8) Pawnshops
9) Jewelleries
10) Textile retail
11) Liquor and tobacco stores
12) Retail/night shops
13) Gambling services
14) Banks and other financial institutions
6. What companies have high receivables?
Companies under the following industries have high receivables
1) management companies,
2) oil and gas producers,
3) technical and trade schools, and
4) auto rental/leasing companies
7. What accounts should be taken into consideration when analyzing accounts receivable?
One of the simplest methods available is the use of the accounts receivable-to-sales ratio. This
ratio, which consists of the business’s accounts receivable divided by its sales, allows investors to
ascertain the degree to which the business’s sales have not yet been paid for by customers at a
particular point in time. A higher figure suggests that the business may have difficulty collecting
payments from its customers.
Another simple method consists of examining the manner in which the business’s allowance for
bad debts has changed over time. This allowance is typically reported in the notes to the
financial statements, although it is sometimes included in the balance sheet. If the allowance for
bad debts has grown substantially, the business may suffer from a structural deficiency in regard
to its ability to collect payments from its customers.
At the same time, dramatic declines in the allowance for bad debts may indicate that the
business’s management has had to write off portions of their accounts receivable altogether.
8. In auditing payroll expenses, what information should be requested to have a better correlation of
the fluctuations?
Look at the employees listed on your payroll
Reconcile payroll records with your bank statements. Compare the amounts listed in payroll
records to what was withdrawn from the payroll account or from bank relating to payroll
9. Is higher days sales outstanding better? What affects the DSO number?
No, higher days sales outstanding shows that a company is selling its product to customers on
credit and waiting a long time to collect the money. This could lead to problems in the cash
flows.
The following affects the DSO number:
a) total number of accounts receivable
b) total value of credit sales
c) number of days in the period being measured
It is computed by dividing the total number of accounts receivable during a given period by the
total value of credit sales during the same period and multiplying the result by the number of
days in the period being measured.
10. What is the difference of preliminary analytical procedure and subsequent analytical procedure in
terms of areas to focus?
Analytical procedures used in planning the audit generally use data aggregated at a high level.
Furthermore, the sophistication, extent and timing of the procedures, which are based on the
auditor's judgment, may vary widely depending on the size and complexity of the client. For
some entities, the procedures may consist of reviewing changes in account balances from the
prior to the current year using the general ledger or the auditor's preliminary or unadjusted
working trial balance. In contrast, for other entities, the procedures might involve an extensive
analysis of quarterly financial statements. In both cases, the analytical procedures, combined
with the auditor's knowledge of the business, serve as a basis for additional inquiries and
effective planning.
The subsequent analytical procedure is focused on providing the level of assurance he wants
from substantive testing for a particular audit objective. It is focused on identifying potential
misstatements through consideration of the following: (a) the nature of the assertion, (b) the
plausibility and predictability of the relationship, (c) the availability and reliability of the data
used to develop the expectation, and (d) the precision of the expectation.
11. When is it better to use line graph than pie graph?
A pie chart serves the same purpose of a line graph in the sense it is designed to show
differences between two separate subjects although it eschews the common linear style found in
the other graph. But this cannot show changes over time so line graph would be better to use for
presenting that information.
12. Enumerate at least three (3) financial industry services institutions. Why are they highly
regulated? Who are these regulators in the Philippine setting?
1) Banking institutions
2) Insurance Companies
3) Banks
Philippine Securities and Exchange Commission (SEC), Insurance Commission and Bangko Sentral ng
Pilipinas (BSP) regulate them closely because these institutions contribute substantially to the stability of
the country’s financial market and to the growth of the economy.
13. Why does the timing of audit procedures differ for balance sheet and income statement accounts?
The balance sheet shows a company's total value while the income statement reflect business
activities and profitability for each accounting period. The timing of audit procedures differ
because for balance sheet, the information may not be available until after close. So that’s why
usually balance sheet accounts’ audit procedures are undertaken at year-end while for income
statement accounts, information needed could be available interim. So auditors may be able to
start gaining assurance over income statement accounts during interim testing.
