Horizontal and vertical analysis
Balance sheet
The increase in cash balance followed by a decrease can be an indication that the company is experiencing liquidity problems. It can also result from the payment of debt. The intangible assets declined and thereafter increased. This can result from changes in the fair value of the assets. Finally, the common equity increased over the three years. The increase resulted from issuing new shares and retained earnings.
Income statement
The net sales declines thereafter it increased. This results from changes in sales volume. Net sales determine several values in the income statements such as taxes and net income. Operating income also followed the same trend as sales. This can result from the prevailing market conditions during the three-year period. Finally, the operating expenses increased thereafter it declined in 2012. The increase in operating expenses can be attributed to unfavorable market conditions while a decline is can be attributed to effective cost management strategies.
Time interest earned ratio shows the ability of the company to pay interest expenses from earnings before interest and taxes. The debt to equity ratio shows the proportion of debt and equity financing in the capital structure. Debt to tangible net worth gives the proportion of tangible net worth that is financed by debt financing. A review of the ratios shows that the earnings of the company can adequately cover the interest expense. Further, it can be observed that the debt/equity ratio is quite high. This implies that the company has a higher proportion of debt financing than equity financing. It is not a good indication to stakeholders.
Return on assets shows the ability of the company to generate revenue from the assets of the company. The sales to fixed assets ratio show the number of sales generated from a unit of a fixed asset. The profitability ratios show that the profitability declined between the years 2010 to 2011. Thereafter, it increased in 2012. The results show that the profitability is erratic and needs to be observed over a period of time.
Forensic accounting and financial audit
There are a number of ways by which financial audit differs from forensic accounting. To start with, forensic accounting is an investigative analysis of financial records. In forensic accounting, the party requesting for investigation defines the scope of the work that is to be carried out. The investigating accountant may use similar tests like those used in a financial statement audit though with completely different objectives. On the other hand, a financial statement audit is carried out on a periodic basis with an aim of establishing whether the financial statements of an entity give a true and fair view and comply with standards outlined in GAAP. Secondly, forensic accounting aims at establishing the magnitude of losses incurred as a result of fraud or a loss while financial statement audit aims at establishing the reliability of the internal control policies and procedures to safeguard the company from incurring losses as a result of fraud or crime. The third difference is that forensic accounting focuses on collecting enough evidence that can be used in a judicial process. Such information may help judges make an informed decision before making a ruling. On the other hand, a financial statement audit reviews adherence to various policies of the company and various statutory guidelines. The auditors make recommendations to management on various areas to improve on and areas of noncompliance. In summary, forensic accounting is often requested by a party who wants investigations to be carried out. It is not a statutory requirement and there are no stipulated guidelines that govern the execution of the profession. In some countries, auditing is a statutory requirement that must be carried out for all limited companies. Besides, there are stipulated guidelines that govern the auditing profession.