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Running head: Sample Audit Program 1 Audit Program Sample Audit Program 2 Introduction Newham Company is publicly traded company operating in the personal product industry. The company produces cosmetic and body care products. Newham Company sells its products to large department chain stores such as Wal-Mart and Target that then sell to final consumers. The competitors of the company include Revlon Inc. and Avon products Inc. the company had a constant growth over the past years. However, there has been change in executive management, including the CEO and CFO. The change was sparked by questionable bonus payment that was paid to the executive management team based on the company performance. Consequently, a lawsuit was filed in the claim that new product was not properly advertised, leading to many customers to experience allergic reactions. Business risk analysis Business risks are inevitable part of the business. From the financial risks such as investments, new market competition, unwelcome threats in the business world. Therefore, the management need to equip the business with risk management strategies to be ready to meet risks and fight them with minimal disruptions of the business operations. The business risks for the Newham Company comes in many forms and it is important to consider different types of risks in order to properly assess the ones that greatly impact the business operations. Therefore, Newham Company need to create a list of the identified business risks helps the company to organise risks assessment. First in considering the business internal environment, the following risks will be looked at relating to the Newham Company: financial, marketing, operational, strategic and work force risks. Second, external business environments consider the changing economy, new market competition and natural disasters (Francis, 2011). However, some business risks are not easily noticeable and therefore, the identification process needs to be carried carefully. We are considering the business risks for each business function in Newham Company. Therefore, we are evaluating each business functions in regards to the effects that would occur if the function were interrupted, unavailable or significantly changed. Therefore we are going to consider: The types of events that may adversely impact the business function The upside and downside of failure scenarios for each business function. Also need to review the alternatives for each risk identified. Business risks considering in each department 1. Safety Potential for human loss of life or injury Potential for major incident or accident such as fire, explosion, spill or release Environment damage Office or facility security 2. Revenues Loss of customer base Recoverable monetary loss Lost opportunity in time to market Unrecoverable monetary loss Sample Audit Program 3 3. Costs Costs incurred due to problems that could have been prevented Costs due to lost discounts, increased warehousing space, vendor changes Legal defence costs 4. Legal Regulatory compliance failures Results or actions that could justify legal actions against the company(litigation) 5. Related exposure Loss of customer Loss of goodwill Loss of shareholders confidence Loss of reputation or public image or investor confidence 6. Security breaches System breaches causing lost data System breaches causing loss of capital Physical security breaches Audit program General items 1. Get relevant financial information Monthly financial reports Charts of accounts listing End year trial balance report CARL system quarterly report 2. Review relevant financial information for any unique or unusual items relating to the field. 3. Review previous internal auditors and obtain their findings: 4. Review the internal control questionnaire: What are the field perceived internal control strengths? Are there any weaknesses that require additional audit testing? 5. Get a copy of the field accounting policy manual if available in the company Cash 1. Get the information from the field treasurer about the procedures for receiving and disbursement of cash. Sources of cash Frequency of deposits Sample Audit Program 4 Who makes the deposits The level of cash received The nature of documentation of expenditures such as check requests, invoices, agreements. Authorization procedures 2. Examine whether the level of cash held in the field and in the office is appropriate 3. for petty cash funds Is the company maintaining an accurate petty cash voucher? The internal auditor needs to know whether Physical cash counts are conducted routinely by people who are not direct custodian of petty cash funds. Also are the physical cash reconciled with the petty cash voucher and are all variances explained. Finally, are the physical cash counts documented by those people who performed the counts and reconcile these counts against the petty cash voucher (Trotman & Wright, 2012). 4 for field checking accounts Determine the number of signatures required on each check Examine the process by which cash is received for mission operations Get bank statements for each bank account Determine the timing and frequency of the preparation of bank reconciliations and know who does the reconciliation Summarize listings of deposits from the bank statements and reconcile the amounts with reported home office transfers and the other sources of income reflected on the field financial reports. Get the test of accuracy and bank reconciliations Verify whether second party reviews bank reconciliations monthly. The examinations need to be documented with a date of examination and a signature of the second party. Expenditures 1. Through the review of the check registers for the prior periods, months, select a sample of checks and review the following: Cancelled checks for the agreement of endorsement, payee, amount Supporting invoices for agreement of description, amount, and date and account classification. Proper authorization in accordance with the agency policy 2. Evaluate the check register for the prior moths and concentrate on the unusual items such as large amounts, payments to staff, payment to field treasurer/director related persons, payments to banks, payments to individuals (Johnson, Iacob, Vlja, van Sinderen, Magnusson & Ladhe, 2013). 3. In case of any travel advances, be concerned with the reimbursement with the field treasurer and determine whether the documentation includes the person incurred expenses, purpose, date, place and reason for incurring the expenses. Sample Audit Program 5 Revenues From that audit program, the following audit procedures will be followed regarding the trial balances: Confirm selected banks accounts and any other special arrangements: this will help on confirmation for the purpose of getting moderate to low level of assurance. In any internal auditing, the audit objectives are the risks that cash may not exist and cash transactions may not be recorded accurately. Review confirmation replies: therefore, for confirmations returned, agree with the account information and account balance to comparatively summary. Second, investigate the discrepancies reported and questions raised in review and evaluate whether the adjustments are necessary (Vona, 2012). Report of recommendation Basing on our audit and experiences, we have come up with the following recommendations basing on further risk analysis, sample methods and other major concerns. The company need to list and prioritise the business functions that require contingency planning. The activities provide a means to determine the order to develop the contingency plans for all the business functions. First, managers need to rate all failures scenarios for all the business functions and pre-emptive planning items. Second, the managers should make the items with a threat to the top priority and rank the remaining items by combining their risks totals (summing up all the risks values in each business function). Then perform a reality check on the prioritized lists. This need to be done for the risk of higher cost or loss of revenues since they may be more critical to business than litigation costs due to businesses poor liquidity (Alali & Yeh, 2012). The company need to manage the identified risks as being part of the operational management practices: there are many vicissitudes that takes place due to strategic, daily operations and the compliance projects. Therefore, the company should ensure that new risks are not incurred by reviewing change to determine if it increases or eliminate the risks. Thus, the manager need to revise the information recorded for the business function and adjust contingency planning accordingly (Sadgrove, 2015). Management of the company need to use continuous audit procedures that will assist in determining if controls are effective and the information produced for decision making are relevant and reliable. The continuous auditing ensures that errors and fraud are minimised. It also ensures that operational efficiency is increased and bottom line results are improved through a permutation of cost savings and reduction in overpayments. In this case, internal auditors are required to address end to end business process and internal controls that are present in the business activities (Budescu, Peecher & Solomon, 2012). Management of the company needs to install new technology in their system that will make it easier to access data. Technology will also give computing power and this makes real time analysis feasible. This will ensure that information to be audited is generated by reliable systems. This will result to an effective connection between the auditors system and that of the audited company. To be able to overcome the business risks, the internal auditors must understand the business functions well before determining the appropriate analytical techniques and identifying the potential risk and key control points. Sample Audit Program 6 We also recommend on security and maintenance of the work document files. The work documents need to be maintained for at least 6 years from the date of publication of the final report. Files need to be protected and ensure that only staff members with relevant authorities' will have access to the documents. Conclusion To conclude, following the procedures used in the auditing of the Newham Company, we randomly selected a sample of 216 transactions across the year within which 18 from each calendar month. The auditors found all the invoices in the sample and none was missing. Finally, all the invoices were properly posted to the general ledger sales and account receivables control accounts, and each was posted to the rights customers' individual account. References Sample Audit Program 7 Alali, F. A., & Yeh, C. L. (2012). Cloud computing: Overview and risk analysis. Journal of Information Systems, 26(2), 13-33. Budescu, D. V., Peecher, M. E., & Solomon, I. (2012). The joint influence of the extent and nature of audit evidence, materiality thresholds, and misstatement type on achieved audit risk. Auditing: A Journal of Practice & Theory, 31(2), 19-41. Francis, J. R. (2011). A framework for understanding and researching audit quality. Auditing: A journal of practice & theory, 30(2), 125-152. Johnson, P., Iacob, M. E., Vlja, M., van Sinderen, M., Magnusson, C., & Ladhe, T. (2013). Business model risk analysis: predicting the probability of business network profitability. In Enterprise Interoperability (pp. 118-130). Springer Berlin Heidelberg. Sadgrove, M. K. (2015). The complete guide to business risk management. Ashgate Publishing, Ltd.. Trotman, K. T., & Wright, W. F. (2012). Triangulation of audit evidence in fraud risk assessments. Accounting, Organizations and Society, 37(1), 41-53. Vasarhelyi, M. A., Alles, M., Kuenkaikaew, S., & Littley, J. (2012). The acceptance and adoption of continuous auditing by internal auditors: A micro analysis. International Journal of Accounting Information Systems, 13(3), 267-281. Vona, L. W. (2012). Fraud risk assessment: building a fraud audit program. John Wiley & Sons. Chester,Inc Income statement for the year ended 2013 2014 2015 Revenu e Sales 307,716,148 Less: Sales return (5,621,979) Net Sales Cost of Sales 271,839,067 302,094,169 (12,432,247) 302,094,169 288,876,206 259,406,820 (23,110,096) 259406819.8 265,766,109 265766109.2 Freight 5,378,689 4,749,095 4,325,068 Cost of goods sold 176,961,527 161,029,981 179,103,248 Depreciation 166,250 581,012 617,155 Research and Development 39,015,418 166,952,423 80,572,285 Gross Profit Operating Expenses Selling Expenses 221521884.1 592,335 3,080,313 92,454,397 187,125,783 78,640,326 Advertising Expense 1,121,425 1,161,276 1,057,591 Warranty Expenses 1,375,352 1,297,104 1,444,381 Auto Expenses Administrative expenses 261,218 Warehouse Salaries Property Tax Expense 5,791,730 2,757,995 235,763 5,348,208 2,694,144 214,713 4,870,689 2,716,685 100,619 111,252 101,319 Legal and Professional Expense 4,506,417 10,435,113 9,503,406 Bad Debt Expense 2,028,032 5,875,403 13,963,800 Insurance Expense 1,067,428 1,045,085 951,774 Maintenance Expense 76,420 96,220 87,629 Utilities 169,554 170,855 155,600 Phone 95,467 58,911 53,651 Postal 160,042 87,140 79,360 Miscellaneous Office Expense 21,279 27,879 25,390 Payroll Tax Expenses 1,938,736 1,767,149 1,609,368 Pension/Profit-Sharing Plan Ex 3,750,000 3,696,000 3,366,000 Rent or Lease Expense 3,254,357 1,351,363 2,230,705 Administrative Wages Expense 21,094,132 18,344,399 19,706,506 Bonus expense - 504,000 459,000 Loss on Legal Settlement 23,965,000 68,019,215 0 48,918,977 9,795,075 - 40,841,276 18,759,443 Other revenue Income from Investments Interest Income - (1,227,199) 57,164,198 (1,138,905) (255,379) (255,379) (147,707) (1,374,906) (142,168) (1,281,073) Other Expenses Interest 1,093,750 3,373,056 2,842,147 Income before tax Income tax 8,956,704 38,843,126 17,198,369 Income Tax Expense - State 536,250 3,492,500 2,503,200 16,645,440 1,258,000 8,527,540 Net Income 5,464,204 22,197,686 8,670,829 EPS No of shares 0.66 8,275,000 2.68 1.05 8,275,000 8,275,000 Retained Earnings Statement 2013 2014 2015 Retained Earnings (Opening) 2,773,901 2,238,105 9,185,791 Add: Net Income 5,464,204 22,197,686 8,670,829 Less: Dividend declared (6,000,000) (15,250,000) (15,000,000) Retained Earnings (Closing) 2,238,105 9,185,791 2,856,620 Vertical Analysis-Income Statement Income statement 2013 Revenue Sales 101.86% 2014 104.79% 2015 108.70% Less: Sales return Net Sales Cost of Sales Freight Cost of goods sold Depreciation Research and Development Gross Profit Operating Expenses Selling Expenses Advertising Expense Warranty Expenses Auto Expenses Administrative expenses Warehouse Salaries Property Tax Expense Legal and Professional Expense Bad Debt Expense Insurance Expense Maintenance Expense Utilities Phone Postal Miscellaneous Office Expense Payroll Tax Expenses Pension/Profit-Sharing Plan Ex Rent or Lease Expense Administrative Wages Expense Bonus expense Loss on Legal Settlement -1.86% 1.78% 58.58% 0.06% 12.91% 0.37% 0.46% 0.09% 1.92% 0.03% 1.49% 0.67% 0.35% 0.03% 0.06% 0.03% 0.05% 0.01% 0.64% 1.24% 1.08% 6.98% 0.00% 7.93% 100.00% 100.00% 73.33% 26.67% -4.79% 1.83% 62.08% 0.22% 0.23% 0.91% 0.45% 0.50% 0.09% 22.52% 2.06% 0.04% 4.02% 2.26% 0.40% 0.04% 0.07% 0.02% 0.03% 0.01% 0.68% 1.42% 0.52% 7.07% 0.19% 0.00% 100.00% 100.00% 64.36% 35.64% -8.70% 1.63% 67.39% 0.23% 1.16% 100.00% 100.00% 70.41% 29.59% 1.04% 0.40% 0.54% 0.08% 1.02% 18.86% 1.83% 0.04% 3.58% 5.25% 0.36% 0.03% 0.06% 0.02% 0.03% 0.01% 0.61% 1.27% 0.84% 7.41% 0.17% 0.00% 21.51% Income from operations Other revenue Income from Investments Interest Income Other Expenses Interest Income before tax Income tax Income Tax Expense - Federal Income Tax Expense - State Net Income Revenue Sales Less: Sales return Net Sales Cost of Sales Freight Cost of goods sold Depreciation 3.24% 0.00% -0.08% -0.08% 15.74% -0.47% -0.06% 0.36% 2.96% 0.98% 0.18% 1.16% 1.81% -0.53% 7.06% -0.43% -0.05% 1.30% 14.97% 5.45% 0.96% 6.42% 8.56% -0.48% 1.07% 6.47% 2.74% 0.47% 3.21% 3.26% Income statement Horizontal Analysis Change Change 2013-14 2014-15 Amount % age Amount % age (35,877,081) -11.66% 17037138.46 6.27% (6,810,268) 121.14% -10677849.1 85.89% (42,687,349) -14.13% 6,359,289 2.45% (629,595) (15,931,546) 414,762 -11.71% -9.00% 249.48% -424026.309 18073266.04 36142.4164 -8.93% 11.22% 6.22% Research and Development Gross Profit Operating Expenses Selling Expenses Advertising Expense Warranty Expenses Auto Expenses Administrative expenses Warehouse Salaries Property Tax Expense Legal and Professional Expense Bad Debt Expense Insurance Expense Maintenance Expense Utilities Phone Postal Miscellaneous Office Expense Payroll Tax Exp Pension/Profit-Sharing Plan Ex Rent or Lease Expense Administrative Wages Expense Bonus expense Loss on Legal Settlement Income from operations Other revenue Income from Investments Interest Income Other Expenses Interest (38,423,083) 11,882,112 -98.48% 14.75% 2487977.956 (13,814,071) 420.03% -14.94% 39,851 (78,248) (25,455) 3.55% -5.69% -9.74% -103685.401 147277.1421 -21050.28 -8.93% 11.35% -8.93% (443,522) 10,633 5,928,695 3,847,371 (22,343) 19,800 1,301 (36,556) (72,901) 6,600 (171,587) (54,000) (1,902,994) (2,749,734) 504,000 (23,965,000) -7.66% 10.57% 131.56% 189.71% -2.09% 25.91% 0.77% -38.29% -45.55% 31.02% -8.85% -1.44% -58.48% -13.04% 0.00% -100.00% -477518.556 -9933.245 -931706.504 8088397 -93311.191 -8591.087 -15254.906 -5259.902 -7780.361 -2489.182 -157781.185 -330000 879342.6 1362107.257 -45000 0 -8.93% -8.93% -8.93% 137.67% -8.93% -8.93% -8.93% -8.93% -8.93% -8.93% -8.93% -8.93% 65.07% 7.43% -8.93% 0.00% 31,046,201 316.96% (1,227,199) 107,671 0.00% -42.16% 88294.06498 5539.02132 -7.19% -3.75% 2,279,306 208.39% (530,909) -15.74% (22,081,833) -54.07% Income before tax Income tax Income Tax Expense - Federal Income Tax Expense - State Net Income EPS No of shares 29,886,422 333.68% (21,644,757) -55.72% 11,185,990 1,966,950 16,733,482 2 - 378.38% 366.80% 306.24% 306.24% 0.00% -6872700 -1245200 (13,526,857) (2) - -48.60% -49.74% -60.94% -60.94% 0.00% Statement of Cash Flows www.excel-skills.com 2014 2015 38843126 17198369 559692 617155 (37374297) (1400000) (306) (43948861) 10209424 200000 383 8283113 Cash flows from operating activities Profit before taxation Adjustments for: Depreciation Working capital changes: (Increase) / Decrease in trade receivables (Increase) / Decrease in other receivables (Increase) / Decrease in supplies (Increase) / (Decrease) in inventories (1651331) 16697468 470311 227675 162752 (8638219) 98118 (66128) 19859 (5559) 19859 3388356 (5559) 2757606 13440000 9754000 (1355280) (295000) Cash generated from operations Income taxes paid (954449) (16645440) 29161175 Net cash from operating activities (17599889) (Increase) / (Decrease) in prepaid expenses Increase / (Decrease) in trade payables Increase / (Decrease) in interest payables Increase / (Decrease) in wages payable Increase / (Decrease) in Employee Payroll Withholdings Increase / (Decrease) in Employer Provided Benefits Increase / (Decrease) in taxes payable Increase / (Decrease) in current portion of long term debt Increase / (Decrease) in other payable Cash flows from investing activities (Purchase)/Sale of non-current assets (Purchase)Sale of land (Purchase)Sale of land improvements (Purchase) of equipment (Purchase) of investment Profit / (Loss) on the sale of investments (8527540) 20633635 (2739067) 0 0 (135000) 0 (1522770) 167899 Net cash used in investing activities (4098219) 32899 Cash flows from financing activities Proceeds from issue of share capital Proceeds/(Payment) for line of credit 0 37231360 (15250000) 21981360 283252 0 (5554149) (15000000) (20554149) 112385 4056327 4339579 Dividend paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period 67301 15210 81108 Cash and cash equivalents at end of period 2013 2014 LIABILITIES Current Liabilities: Accounts Payable 12.59% 16.76% Interest payable 0.00% 0.35% Payroll Liabilities Wages Payable 0.08% 0.20% Employee Payroll Withholdings (Deductions) FICA Employee Withholding 0.00% 0.00% Medicare Withholding 0.01% 0.01% Employer Provided Benefits FICA Employer Withholding 0.00% Medicare Employer Withholding 0.01% Income Taxes Payable Income Tax Federal Payroll Taxes Payable State Payroll Taxes 4339579 4451964 Chester Inc. Balance Sheet 2015 ASSETS Current Assets: 12.07% Cash & Cash Equivalents 0.50% Cash in Hand Regular Checking Account 0.17% Savings Account 0.00% 0.01% 0.00% 0.00% 0.01% 2014 2015 0.01% 0.00% 0.00% 0.54% 0.19% 0.21% 8.28% 3.04% 3.66% 44.60% 43.00% 42.72% -3.43% -1.03% -2.56% Other Receivables 0.00% 1.04% 1.05% 0.73% 51.16% 0.01% 56.53% 0.01% 57.49% -8.19% -9.04% -9.20% 2.02% 2.11% 2.32% Trade and other receivables Accounts Receivable Less: Allowance for Doubtful Accounts 0.01% 0.00% 2.39% Office Supplies Inventories Less: Reserve for Inventory 5.24% Obsolescence 0.01% 0.01% 0.10% 0.05% 0.09% 0.04% Prepaid Expenses Prepaid Insurance 2013 Payable Current Portion of LT Debt Other Accruals Payable Bonuses payable Dividend payable Total Current Liabilities 0.00% 0 10.02% 10.53% 13.05% 0.00% 11.74% 0.00% 13.47% 25.75% 41.63% 42.12% Non-current Liabilities: Line of Credit Total Non-current Liabilities TOTAL LIABILITIES EQUITY: Common Stock Paid-in Capital Retained Earnings TOTAL EQUITY TOTAL LIABILITIES & EQUITY 27.18% 37.06% 38.48% 27.18% 37.06% 38.48% 52.93% 78.69% 80.60% 22.03% 20.17% 4.87% 7.55% 6.91% 6.85% 8.83% 8.08% 2.49% 47.07% 21.31% 100.00 % 100.00% Non-Current Assets: Land Buildings and Land Improvements Machinery, Equipment, Office Furniture Less: Accumulated Depreciation Total Non-Current Assets 0.54% 0.00% 0.00% 95.55% 95.84% 95.70% 0.32% 0.10% 0.11% 1.70% 0.52% 0.73% 1.18% 2.44% 2.86% -0.45% -0.57% -1.20% 2.75% 2.49% 2.49% 1.56% 0.15% 1.67% 0.00% 1.80% 0.00% 19.40% 100.00 % Prepaid Rent Total Current Assets Intangible Assets: Investments: Other Non-current Assets: TOTAL ASSETS 100.00% 100.00% 100.00% Ratio Analysis Financial diagnostic categories 1.) Liquidity Ratio 2.) Solvency Ratio Chester Inc. Year -Current ratio 2013 2014 2015 -Inventory turnover measures 2013 2014 2015 -Accounts receivable turnover 2013 2014 2015 3.71 2.30 2.27 8.95 2.53 3.23 9.35 2.86 3.89 Cash debt coverage ratio 2013 2014 2015 1.89 0.32 0.43 Debt-to total asset ratio 2013 2014 2015 0.53 0.79 0.81 -Times interest earned 2013 2014 2015 2013 2014 2015 3.) Profitability 2013 2014 2015 2013 2014 2015 8.96 12.11 6.6 -Net income/sales (profit margin) 1.81% 8.56% 3.26% -Net income/assets (ROA) 11.88% 16.54% 7.55% -Net income/shareholder equity (ROE) 25.24% 77.63% 38.94% Current Ratio shows the ability of the company to meet its current liabilities by use of current assets. The company has reported current ratio that shows an decreasing trend indicating great liquidity issues. Inventory turnover shows the selling position of the firm. A high turnover means higher sales and lower turnover inventory means more goods in the stores. In addition to this it indicates more storage costs are incurred for maintaining the maintaining the inventory. Chester Inc. is not good at selling its inventory as indicated by the turnover ratio as low as 3.23 for the year 2015 . Accounts receivable turnover indicates firm's policy of extending credit to its debtors. A high ratio shows firm is efficient in collecting payments from debtors and a low ratio tells the story of working capital blocked in receivables. The company is less efficient in managing its receivables in 2 out of 3 years under consideration. A higher current cash debt coverage ratio indicates a better liquidity position. Generally a ratio of 1 : 1 is considered very comfortable because having a ratio of 1 : 1 means the business is able to pay all of its current liabilities from the cash flow of its own operations. The company has real liquidity issues as shown by falling cash debt coverage ratio. As we all know, lower the debt, lower the risk. Debt is not a free lunch. It has high cost of interest and that too even fixed amounts. Thus to be a conservative player, a lower debt in the capital structure is desired. Every Company is under obligation to make payments to debt holders in preference to equity holders, but the cost of equity is higher than the cost of debt. The debt content of the company is increasing with each passing year and is 0.81 in the year 2015. The Interest Coverage ratio shows the sufficiency of company earnings to meet the interest cost on long term debt. The lower the ratio, higher the concern. It shows whether the earnings before interest and taxes will be sufficient to pay off interest expense. The coverage ratio has not followed any specific trend but is as low as 6.6 for the year 2015. The net margin shows the margin or profit earned from the revenue after meeting all the operating expenses. The firm's net profit margin is additional cause of concern which is just 3.26% for the year 2015. The return on asset is an indication of the efficiency of the company in management of its assets. It is a description of the return earned from each dollar invested in the assets used to carry on its business. The firm is not efficient in management of its assets as shown by 2015 ROA of 7.55%. ROE is more than a measure of profit; it's a measure of efficiency. A rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital. The firm's low ROE is because of the falling net income even though the debt content of the firm has been increasing with each year. Points of differences between US GAAP and IFRS General Presentation 1 When a firm restates the financial statements, IFRS requires preparation and presentation of third balance sheet 2 GAAP uses the word "desirable" instead of "mandatory" for presentation of comparative financial statements of prior years. IFRS provides for one year comparative financial ' statement presentation. Income Statement 1 IFRS mandates for inclusion of minimum number of items on the face of income statement, which is not required under GAAP 2 IFRS does not allow to classify any expense as extraordinary item whereas GAAP restricts certain the list of expense that may be classified under extraordinary item. In the present case, loss on legal settlement may be taken as extraordinary item under GAAP but not under IFRS. 3 IFRS only provides for disclosure of basic and diluted EPS from continuing operations whereas GAAP also requires EPS from discontinuing operations and extraordinary items. 4 For development cost, IFRS requires capitalization of amount incurred on fulfillment of conditions whereas GAAP asks for considering it as revenue expense. 5 GAAP does not prescribe any basis for classification of expenses whereas IFRS prescribes to use natural basis or functional basis. 1 2 3 4 5 6 7 Balance Sheet IFRS mandates for inclusion of minimum number of items on the face of balance sheet, which is not required under GAAP IFRS mandated for preparation and presentation of classified balance sheet, except where presentation is in order of liquidity to provide more reliable information. GAAP does not have any such mandate. IFRS makes a prohibition on disclosure of deferred tax as current asset or liability whereas GAAP prescribes the given disclosure based on the nature of underlying asset. IFRS allows reversal of write downs on inventory on fulfillment of some criteria whereas GAAP prohibits it. For valuation of property, plant and equipment GAAP prescribes historical costing whereas IFRS allows use of either fair value or historical costs. For investment in unlisted equity, GAAP requires measurement at cost while IFRS prescribes fair valuation, if reliable information available. Under IFRS gain or loss on non-current asset is recognized while it is prohibited under GAAP. Cash Flow Statement Investment income Interest received Interest paid Dividend paid 1 2 3 4 5 6 GAAP Operating Activities Operating Activities Operating Activities Financing Activities IFRS Investing Activities Investing Activities Financing Activities Financing Activities Ratio Analysis Current ratio would be different under GAAP and IFRS due to difference in classification of current asset and current liabilities. Inventory turnover ratio would be different under GAAP and IFRS due to reversal rules. Cash debt coverage ratio would be different due to difference in classification of items as operating activities and current liabilities under GAAP and IFRS. Debt to total asset ratio will be different due to difference in recognition of debt under IFRS and GAAP Operating Income will be different due to difference in recognition rules of development cost. Therefore coverage ratio will change. ROA, profit margin and ROE will change due to difference in net income under IFRS and GAAP. Competitive Analysis Direct Competitor Comparison Chester Revenue : Gross Margin: EBITDA: Operating Margin: Net Income : EPS : UA COLM 0.266B 29.59% 19.3766 M 3.42B 49.00% 442.08 M 2.21B 46.00% 277.56 M 7.06% 10.00% 203.31 M 0.93 10.00% 141.17 M 1.98 8.671M 1.05 Industr y 899.07 M 40.00% 53.16 M 4.00% N/A 0.19 From the competitive and industry analysis, we can clearly see that Chester Inc is lagging behind its competitors and also in the industry. It has low earnings and high liquidity issues. Thus it needs to consider revising its working capital management policy to improve its short term liquidity position and report better earnings. Conclusion Thus it can be said that Chester Inc.'s current financial position is really concern some when considered on standalone basis after ratio analysis, horizontal and vertical analysis. The results are deteriorating with each year and the results reported for the year 2015 were really depressing. The company needs to revise its short term and long term solvency policies as well as asset management policy. Even when considered from industry view point, the firm is lagging behind and is therefore required to pull up its shocks to match industry standards. References: http://www.iasplus.com/en-us/standards/ifrs-usgaap/cashflows https://finance.yahoo.com/q/co?s=UA+Competitors Tax research memorandum II Date: FEB 12, 2016 To: Emma Shire From: S.N.H.U. LLC Subject: Personal Tax Planning Summary of facts: Emma Shire, single head of family having two dependent children receiving wages from Clifford Company and partner in clothing boutique, received during 2014 wages $65,000; interest $2,000; qualified dividend $1,718; child support $15,000 and income tax refund $900. She also earned short term capital gain on sale of 100 shares amounting to $2,500. She also has itemized deductions and payment of estimated federal income tax. Issues: Reporting for tax for the year 2014 and tax planning for future. Analysis: Federal Tax return Form 1040 for the year 2014 prepared along with schedules A, B, C, D, E and Form 8949 and tax liability comes $1,919. As per publication 504 of IRS children maintenance received is not taxable at all. There is Short Term capital gain of $2,500 on sale of shares as shares are held for a period of less than 12 months and is taxed at normal rates of federal income tax which are in tax bracket of 25% and tax payable on it comes $625. The shares are held for a period of 11month and 7 days. If shares were sold after 12 months then it would have been long term capital gain taxable @ 15% and tax would have been$375 and tax of $250 could be saved. Therefore Emma Shire should plan for long term capital gain rather than short term capital gain. Income Tax refund of last year $900 is totally taxable. Interests received are also taxable $2,000 but if this investment was made in US government approved securities then it would have been exempt from Tax. References http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-AskedTax-Questions-&-Answers/Interest,-Dividends,-Other-Types-of-Income/Alimony,-ChildSupport,-Court-Awards,-Damages/Alimony,-Child-Support,-Court-Awards,-Damages-1 http://www.irs.gov/pub/irs-pdf/i1065sk1.pdf Parez W. retrieved from http://taxes.about.com/od/Federal-Income-Taxes/fl/Federal-Income-TaxRates-for-the-Year-2014.htm