Auditing and Corporate Governance - Essay Example

2. Auditing and corporate governance (a) There is a departure from the application of the financial porting framework by the Sandell to reflect the 30M into the statement will make the external auditors to give a disclaimer of opinion towards the company. (b) (i) Changed there opinion especially when the statements reveal a true and fair view and the audit alone with the appropriate legal and professional requirement. (ii)Clean audit reports will always reveal a true and fair value of statements with reported incidences of fraud and misstatement which is vital for business growth. (C) (i) There is no policy regarding the renumerations of the employees the renumerations of sale directors made other directors to fell there is need for an increase in line with the sales directors renumeration.The system is based on feelings. There is no balance of interests as the directors have varied renumerations opinions. The role of corporate governance is to balance the interest of various stakeholders. This causes controversies within the organization (ii) The company should institute a good renumerations policy that will not bring controversies among the members. The policy should set the salary towards performance and there should be relation between them. The company should also have control systems that are geared to budgeting. The systems should propagate the vision ad mission of the organization of making profits. This will also deter other mechanisms that may hinder the profitability of the firm. 3. Interpretation of financial statements The income statements of Sandrell Company have revealed the money that company generated, the money spent and the profit. The gross margin has increased from 10% to 19.4% from 2012 to 2013.Ordinarily the gross margin indicates the percentage of sales that is available for the expenses and also revealing the profits. Sandrell company has doubled its gross margin implying that it will have excessive money to spend on other expenses and get enough money to venture on the expansion process to the Western Europe. This upward trend of the gross margin is good since the company will not suffer insolvency and therefore the profitability of the company will rise. This is a positive impact on Sandells financial performance. Profit margin reveals the profits per sales after the deduction of expenses from the sales. The profit margin has increased. This upward trend in the profit margin is vital towards the future expansion Sandells Company. Higher profit margin is essential for the growth of the company for it gives the company more advantage over its competition. This gives it protection and the cushioning and prevents the company from collapsing. This is a positive impact on the financial performance of Sandells financial performance. This will enable the company to increase its market share in the long run and experience increased profitability. Return of Capital Employed (ROCE) is vital for the efficiency and profitability of Sandells Company. The ROCE of Sandells has undergone a good upward trend .It has risen from 0.42% in 2013 to 6.5%.This has a positive impact towards the financial performance of Sandells company. A higher ROCE oftenly indicates more efficiency. Normally, a higher ROCE indicates that the company is employing its capital affectively .This strategy was taken to ensure that. The profitability of the firm increases.Net (Operating) margin reveals how much Sandells makes on the sales .The upward trend of the operating margin from 0.47% in 2012 to 8.73% shows that the company is earning more on the sales of its products. The revenue of Sandells Company has increased from £248M to £252M. This shows increase in the company profitability .The revenue is important tool to the company since it determines major moves that the Sandells Company will take. The more the expenses the lesser the profitability .The Sandells company expenses have increased significantly from £24M in 2012 to £34M in 2013.This has a negative implication towards Sandells performance because it will reduce the profitability in the long run .The upward trend should be a point of concern for the company . 4. Interpretation of the statement of financial position and statement of cash how current ratio. (i) Working capital reveals how the company uses its short term assets to settle its short term depts. The collection of current assets divided by the current assets will give the working capital. In the cash flow, the working capital is used to manage the inventories, trade and other receivables and trade payables. (ii)Working Capital Ratios .This reveals Sandells ability to pay its current liabilities with its current assets. 2012 2014 Current assets 74 89 Current liabilities 33 87 W.C 2.24 1.02 Table 1 The company has undergone a risky short term liquidity in 2013.There were liquidity problems in 2012 and this has reduced considerably. The company working capital is reducing creating dangers to the company.Ordinarilly; a ratio of 1 is not safe since it replies that the company has to sell all the current assets to pay current liabilities. There has been increase in current assets indicating that Sandells Company has expanded and that there has been additional in both receivables and the inventories. The increase of the current liabilities indicates that the compares will have problems in settling its accounts payable which have increased. (iii)The operating cash cycle This shows the number of days Sandells will take to realize its inventories in cash. 2013 = (365/82 x 9/2) + (365/48 x 36/2) =95.71 2012 = (365/87 x 13/2) + (365/33 x 24/2) =72.021 There has been an increase in the number of days the company will take to realize its inventories. This implies that there is a decrease in the efficiency and the working capital of the company. A long operating cycle shows how the company’s cash is spent for long periods. (b)The funding that has been secured by Sandells is not sufficient for the coverage of the total investment. This is evidenced when the company secures finance from the issuing share capital towards its shareholders. The investment is not fully supported by the external financing. The company has to issue these shares to raise the capital. The uses reserves as part of financing its activities for the financial year. REPORT To: Paveen Rostom From: Dutch Mark Date: Title: Sundell Executive report. Introduction. Sandell Plc CO. is a company which is 40 years old that supplies a range of material for building and construction industry. This spans from ironmongery, timber work, landscaping, painting and decoration, dry lining and insulation and the doors and joinery. The company was listed on the UK AIM in 2011. Executive summary. The financial growth of Sandells Company is demanding. The aim and the mission of the company are to achieve profitability. This is expected to be done by getting new suppliers relationship, pay good dividend to shareholders so as to encourage them to invest more and to expand the markets in Western Europe. Appropriate strategies were put in place so as to ensure this vision is accomplished. The company purchased infrastructure such as the fleet of lorries and four distribution warehouses, inventories to have diversity and also employed 30 more employees to add to the initial 100. The company also resorted to retender the supply of timber and iron monger which are the main products of the company which makes 60% of company’s revenue. Though Ashwell the supplier won the tender with 10% lower price than the previous, the company got low quality with incorrect dimensions from the supplier. This has caused disputed invoices and doubled delivery for the default goods. This has caused customers like House Builder to sue the company for this faulty goods alleged to be having poisonous elements. This allegation is claimed by the Sandells legal team that it would attract damages costs of £30M.The directors claimed that it should not be shown in the statements since they also expect the damages cost from the suppliers. Amidst these challenges the company sorts the external finance to its investments. This induces equity funding from AIM market and debt funding from loans. This is aimed at the expanding and venturing into new markets which have been estimated to increase sales from 80 to 100 M per year. However, this requires effective strategy from a talented and experienced sales director that the company is looking for. Purpose and key features of Sandells financial statements. The financial statements are progressive and comparative to the previous year. This implies that the trend of various elements can be compared. These statements are prepared with the legal and professional requirements. This is evidenced from the financial analysis motto and the demands of clean audit reports. This means that the statement are free from other misstatements and that they have materiality, i.e have effective documentaries and receipting especially during audit. Audit and corporate governance. Sandell finance team is mandated to produce clean audit reports. This unmodified report will reveal a true and fair view of the statements. It should be free from misstatement and any fraud. Disclosure of any key transaction in the Sandells Company is key. However, the company directors have not disclosed the £30M damages that their customer House Builder sued them for due to faulty goods provided. They are reluctant with a claim that their initial supplier Ashwell will pay for the damages. The external auditor think that their should be a provision of the potential £30M.If this is not disclosed to shareholders, there would be more profits to the firm and the shareholders would claim more dividends. This would affect the profitability of the firm in the long run. The auditors considered this issue of material and therefore they claimed to give modified audit opinion if the issue is not resolved. Interpretation of income statements. The income statement is vital to Sandells company, There has been general increase in the revenue from £248M to £252M.This shows that the profitability of the firm has increased and that the firm is doing well in terms of selling its products. However there is general increase in the expenditure from £24M in 2012 to £34M in 2013.This upward trend should be a point of concern to the company. There has been the increase of ROCE which shows the profitability and the efficiency of the company. The ROCE has increased from 0.42% in 2012 to 6.5 % in 2013.This indicates that the efficiency and the profitability have increased significantly. There has also been the increase of gross margin from 10% to 19.4% from 2012 to 2013.The doubled gross margin shows that there is enough money to spend on other expenses such as expansion to its markets to western Europe and the increase in the directors renumerations. Year 2012 2013 ROCE 10% 19.4% Table 2 Figure 1 Interpretation of the statement of financial position and the statement of cash flow. The working capital reveals Sandells ability to pay its current liabilities using current assets. The company is undergoing a risky short term liquidity though it has reduced considerably from 2012.The ratio is not safe for the company for it implies that the company has to sale all of its assets to sell its current liabilities. The operating cash cycle has increase from 72 to 95 days implying that the number of days the company takes to realize its inventory has increased. This means that there has been decreased efficiency and the working capital of the company. Conclusion In conclusion, the company has a mission to increase its profitability. This however has become a battle for the company. There are plan for the company to diversify and expands its markets to increase the profitability. The good strategies are needed and this is the reason for the company to search for new sales director who will steer this vision. (Report words 975) Read More