External Audit Opinions

Unqualified Qualified
Audit Opinion Audit Opinion
1. Unqualified Audit Opinion:
There is no Material misstatements and error in the financial Statements.
2. Qualified Audit Opinion:
There is Material misstatements and error in the financial Statements.

2.1- Adverse Audit Opinion: Material error is pervasive

2.2- Disclaimer Audit Opinion: Sufficient information could not be
received to conduct the audit and form an opinion.
Material:
Any Omission of Accounting information that influences the decisions of the stakeholders.
Immaterial:
Any Omission of Accounting information that does not influence the decisions of the
stakeholders.

If the auditor believes that the financial statements may be relied upon in some part for
decision making, then the matter is material but not pervasive. If, however, they believe the
financial statements should not be relied upon at all for making decisions then the matter is
pervasive.
 Qualified Audit Opinion Matrix
Auditor’s judgment about the
pervasiveness of the matter
Nature of the matter Material but NOT Material AND
pervasive pervasive
Financial statements are Qualified opinion Adverse opinion
materially misstated ('...except for...') ('...do not present
fairly...')
Unable to obtain sufficient Qualified opinion Disclaimer of
appropriate audit evidence ('...except for...') opinion
('...we do not
express an
opinion...')
 Financial Statement Analysis

Horizontal Analysis

Vertical Analysis

Ratio Analysis
 Ratio Analysis
• Ratio analysis expresses the relationship among selected items of
financial statement data.
• A ratio expresses the mathematical relationship between one
quantity and another.
• The relationship is expressed in terms of either a percentage, a rate,
or a simple proportion.
 Assets Taka Liabilities Taka
Fixed Asset 435000 Owner’s 480000
Capital
Inventory 75000 Long term loan 60000
Calculate:
Accounts 45000 Accounts 50000 1. Current Ratio
2. Acid-Test Ratio
Receivable Payable 3. Debt to Asset Ratio
Notes 25000 Salary Payable 10000 4. Debt to Equity Ratio

Receivable
Cash & Bank 20000

Total 600000 Total 600000

1. Current Ratio = 2.75:1
2. Acid-Test Ratio = 1.5:1
3. Debt to Asset Ratio = 0.2:1
4. Debt to Equity Ratio = 0.25:1
 Problems
1. Net sales 210000, Gross Profit 42000, Operating Expense 8400, Opening inventory 16000 and Closing
Inventory 32000.
Calculate:
A. Profit Margin Ratio
B. Inventory Turnover Ratio (in both time & days)

2. Debt to Equity Ratio is 2:7. If total liabilities is 140000, what will be the total asset?
Solution 1:

A. Profit Margin Ratio = 16%

B. Inventory Turnover Ratio: 7 Times, 52 Days

Solution 2:

630000
 Financial Statements for Andrew Industries for 2016 are shown below:

2016 2015
Assets:
Cash $600 $500
Accounts Receivable 600 400
Inventory 800 600
Property, plant and Equipment 2000 2100
$4,000 $3,600
Liabilities and Shareholder’s Equity
Current Liabilities 1,100 850
Bonds Payable 1,400 1,400
Paid in Capital 600 600
Retained Earnings 900 750
$4,000 $3,600
Calculate the Following Ratios for 2016:
1. Inventory Turnover Ratio
2. Average days in inventory
3. Receivables Turnover Ratio
4. Average Collection Period
5.Asset Turnover Ratio
6. Profit margin on Sales
7. Return on Assets
8. Return on Shareholders’ Equity
 A credit analyst is evaluating the solvency of Alcatel as of the
beginning of 2015. The following data are gathered from the
company’s 2015 annual report (in € millions):

2014 2013
Total equity 4,389 4,038
Accrued pension 1,144 1,010
Other reserves 2,278 3,049
Total financial debt 4,359 5,293
Other liabilities 6,867 7,742
Total assets 19,037 21,132
The analyst concludes that, as used by Alcatel in its 2005 annual report, “total financial debt” consists of
noncurrent debt and the interest-bearing, borrowed portion of current liabilities.
i. Calculate the company’s financial leverage ratio for 2014.
ii. Interpret the financial leverage ratio calculated in requirement i.
iii. What are the company’s debt-to-assets, debt-to-capital, and debt-to-equity ratios for the two years?
iv. Is there any discernable trend over the two years?
 Rondo Corporation’s comparative balance sheets are presented below:

2017 2016
Assets:
Cash $ 5,300 $ 3,700
Accounts receivable 21,200 23,400
Inventory 9,000 7,000
Land 20,000 26,000
Buildings 70,000 70,000
Accumulated depreciation—buildings (15,000) (10,000)
Total $110,500 $120,100
Liabilities & Shareholder Equity:
Accounts payable $ 10,370 $ 31,100
Common stock 75,000 69,000
Retained earnings 25,130 25,130 20,000
Total $110,500 $120,100
Rondo’s 2017 income statement included net sales of $120,000, cost of goods sold of $70,000, and net income
of $14,000.
Compute the following ratios for 2017:
(1) Current ratio.
(2) Quick ratio.
(3) Accounts receivable turnover.
(4) Inventory turnover.
(5) Profit margin.
(6) Return on common stockholders’
(7) Asset turnover.
(8) Return on assets.
(9) Return on common stockholders’ equity
(10) Debt to Assets ratio.