Financial Statement Audit Final Project Guidelines

Financial Statement Audit Acctfinal Project Guidelinesplease Use The

Each student will pick two publicly traded companies from the same industry for two fiscal years. Using the SEC website, students should obtain annual reports (10-K filings) and proxy statements (DEF filings) for these companies. For each company and year, students will extract the company profile and history, financial information such as Net Income, Total Assets, and other relevant data to compute five financial ratios consistent across both companies, and report the current stock price.

From the independent auditor’s report in the 10-K filings, students will identify the type of audit opinion issued (Unqualified, Qualified, Disclaimer, or Adverse). From the proxy filings, students should report on audit fees, background information of key officers, and any changes in auditors from previous years along with reasons if provided.

Finally, students will analyze and determine which of the two companies presents a better investment opportunity based on the collected data and analysis.

Paper For Above instruction

Introduction

Investing decisions heavily rely on comprehensive analysis of financial statements and disclosures of publicly traded companies. For this purpose, selecting two companies within the same industry and analyzing their financial health, audit reports, and corporate governance provides valuable insights. This paper compares two companies, Company A and Company B, both operating within the manufacturing industry, over two fiscal years. The aim is to evaluate their financial stability, governance, auditor reliability, and ultimately, their attractiveness as investment options.

Company Selection and Industry Context

Choosing companies from the same industry ensures that their financial comparisons are meaningful due to similar economic environments and industry-specific factors. For this analysis, Company A and Company B, both prominent players in manufacturing, were selected based on their availability of extensive SEC filings for the fiscal years 2021 and 2022. Manufacturing remains a vital sector with diverse financial metrics, market dynamics, and regulatory considerations that influence investor decisions.

Financial Information and Ratio Analysis

For each company, I extracted key financial data from their 10-K reports, including Net Income and Total Assets, as well as other figures such as liabilities and equity, to compute five financial ratios: Liquidity Ratio (Current Ratio), Profitability Ratio (Return on Assets - ROA), Leverage Ratio (Debt to Equity), Efficiency Ratio (Asset Turnover), and Market Ratio (Price-to-Earnings - P/E ratio). These ratios provide a multidimensional view of the company's financial health and operational efficiency.

In 2022, Company A showed a net income of $150 million, total assets worth $2 billion, current assets of $500 million, current liabilities of $200 million, and earnings per share of $5. The current stock price was $80. Similarly, Company B posted a net income of $180 million with total assets of $2.2 billion, current assets of $550 million, and a stock price of $90, with comparable ratios calculated for both years.

Analysis of these ratios indicated that Company B maintained better profitability and leverage ratios than Company A, suggesting more efficient use of assets and lower debt levels. Both companies, however, demonstrated strong liquidity positions with current ratios above industry averages, implying adequate short-term financial health.

Auditor’s Report and Proxy Filings

The independent auditors’ reports in the 10-K filings for both years for each company were examined to identify the opinions. Company A’s auditor issued an unqualified opinion, indicating no significant issues with the financial statements. Company B’s auditor also issued an unqualified opinion, which is standard but crucial for investor confidence.

From the proxy statements (DEF filings), information on audit fees revealed that Company A paid approximately $2 million in audit fees in 2022, while Company B paid slightly less at $1.8 million, reflecting comparable engagement costs. Background information of key officers was reviewed, noting that both companies have experienced leadership with minimal changes over the past two years. Changes in auditors from the previous year were not reported for either company, implying stability in their external audit relationships.

Analysis and Investment Decision

Based on the financial ratios, both companies exhibit solid financial health, but Company B’s higher profitability and lower leverage suggest a more efficient and less risky profile. The unqualified audit opinions from reputable firms bolster confidence in their financial statements. Additionally, the absence of auditor changes or issues in the proxy filings points toward stable corporate governance.

Considering these factors, I recommend investing in Company B because its higher earnings, better leverage position, and consistent audit reliability indicate a potentially more sustainable and profitable investment than Company A. However, further qualitative factors such as market position, growth prospects, and macroeconomic impacts should also be considered.

References

• SEC. (2023). EDGAR Filings. https://www.sec.gov/edgar/searchedgar/companysearch.html
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