Financial accounting - Assignment Example

? 7th January Question By upholding ethics in their auditing exercise, I think independent certified public accountants can maintain an independent audit engagement even if their fees are paid by the entity. By adopting the aspect of objectivity, that excludes prejudice, compromise and bias, auditors gives fair view of the company financial position. In addition, through integrity, external auditors are required to avoid conflicts of interest when making their reports. In this way, their judgment will be imperative to the shareholders, directors, banks and other users of the audited reports. Question 2 One of the major factors to consider before investing in the biotechnology company is the profitability of the company. Through the audited financial reports, an investor will note the amount of profits and divided paid to the shareholders. In this way, an investor is at a good position to make an appropriate decision before investing in the company. Secondly, an investor should know the sources of finance adopted by the company. Companies that have wide range of sources of finance have a higher probability to survive in the current competitive business arena. Similarly, through various sources of finance, the concept of business as a going on concern is guaranteed since the company is financially stable. Another vital aspect that as an investor I will need to know is the management of the company. If the company has a strong management and auditing team and policies, it implies that financial position of the company is good thus guaranteeing high returns to the shareholders. Likewise, it is fundamental to have adequate information on the strategic plans of the company. For instance, if the company is focused at being acquired by another major company, it may result to an expansion of its services thus generating more returns. On the other hand, a company with unclear plans may fail in future thus making it unviable to invest in. Question 3 One of the recent major accounting scandals is the one that involved Olympus, a Japanese based firm that specializes in the production and selling of medical equipments and cameras. According to New York based prosecutors, Chan Ming Fon, one of the company executives was engaged in covering more than $1.7 billion losses thus providing false information to the auditors. The funds that were illegally acquired by the executives together with other seven employees were transferred to unknown financial institutions through the wire transfer. According to the FBI, Chan notified the auditors that the company funds were held in the form of Japanese bonds while in the real sense they were used to repay a loan through a firm that was under the control of Olympus. The whistle blower of this scandal was Michael Woodford soon after he was fired as British CEO in 2011. To prevent such a scandal, I suggest that auditors would seek more details and prove of all the information provided by the company. It would be also imperative for the government to intervene by bringing on board external auditors at the initial stages when the fraud was detected. Question 4 Taking into consideration that accrual accounting matches the revenue generated with the expenses incurred within a specific period of time, I would first take the bank statements that depicts the cash collection and payments for the first six months the period that my clients want to be audited. In the same way, I would separate the invoices and the bills that are covered in the first six months. This will be followed by comparing whether the sales incurred in the first six months are inline with the expenses incurred within the same period. According to accrual accounting, selling products on credit may result to future revenue streams that may affect the current financial position of the company (Barry and Jamie 11). To avoid this scenario, I would treat all the credit sales within the first six months as account receivables. For example, computers that were repaired within the first six months but they have not been paid for will be indicated as accounts receivables. In this way, the company revenue will be increased. Question 5 According to cash basis, a company recognizes the income when the cash is actually received and the expenses are taken into consideration when they are actually paid for. On the other hand, transactions under the accrual basis are counted for when they happen whether cash is received or expenses are paid (Barry and Jamie 23). One of the key reasons why small businesses prefer cash basis over the accrual basis is to reduce the tax liability in the year they made the sale or incurred an expense. This is based on the argument that since the businesses have not been paid, they may not have adequate funds to pay the tax. Additionally, small businesses are not sure whether their customers will pay for the products. Thus, making them to record the cash only when they receive it even though they might have paid for the expenses related to such products. I think every company should be required to use same method of accounting. Even though the accrual basis may seem complex and expensive for small companies, it is essential for all firms since it provides accurate financial picture of a company especially at the end of accounting period. Question 6 One of the facts that indicate Symbol violated the revenue principle was the use of improper accounting entries that were made by the management to be inline with unadjusted quarterly reports as projected by the top executives. In the same way, the management fabricated the non-recurring charges in order to reduce the expenses thus increasing the company revenue. To conceal the negative implications of the revenue recognition schemes that were adopted by the company, the management manipulated the account receivables and the inventory levels. Additionally, the management emulated ineffective revenue recognition process and channel stuffing that affected the company sales. The unethical behavior by the Symbol management affected the shareholders, employees, auditors among other stakeholders. For instance, to cater for the remedies as stipulated by the court, the company agreed to pay $37 million as a penalty. In this way, the company reserves decreased thus reducing the shareholders dividends. To conceal their conducts, the management directed the employees to give false information to the investigators aspects that affected the trustworthiness of the employees. Question 7 Households are to blame for the high credit card debt. It is fundamental for households to match their consumption with the level of income to avoid excessive domestic borrowing and increased credit card debt. If minimum balance is paid, it may take approximately 15 years to pay off the total amount of the credit card debt. Works Cited Elliot, Barry & Elliot, Jamie. Financial accounting and reporting. London: Prentice Hall, London. 2004. Print. Read More