The importance of audit independence can be categorized into four reasons: Firstly, audit independence can hold the public confidence and avoid interest conflicts; Secondly, audit independence can help auditors to provide high quality financial report and avoid scandals like ‘Enron bomb’; Thirdly, the development of no-audit services make it more difficult but more important to maintain audit independence; Lastly, audit independence can improve the quality of audit and it can assist managers to make strategy formulations. Stakeholders make economic decisions by taking advantage of financial reports. Whether those reports are related and reliable are questions. Audit can help to solve this problem. However, auditor fails to fulfill the duty if they cannot remain independence in the conducting process. On one hand, report users will doubt this kind of dependence if they thought auditor and consigner belong to the same party. On the other hand, when auditor cannot keep an unbiased Continue reading
Business Finance Concepts
Essentials of Budgetary Control
Budgetary control is not only an accounting exercise, but also a tool of management at all levels. In organizing a budgetary control system, it is essential to obtain the full co-operation of each member of the management team. A number of preliminaries will be necessary for the implementation of a budgetary control system: 1. Organization For Budgetary Control The proper organization is essential for the successful preparation, maintenance and administration of budgets. A budgetary committee is formed which comprises the departmental heads of various departments. All the functional heads are entrusted with the responsibility of ensuring proper implementation of their respective departmental budgets. The chief executive in the overall charge of budgetary system. He constitutes a budget committee for preparing realistic budgets. A budget officer is the convener of the budget committee who co-ordinates the budgets of different departments. The managers of different departments are made responsible for their Departmental Continue reading
Similarities Between Financial and Management Accounting
Financial accounting and management accounting play an important part in accounting information system. They co-exist in enterprise production and operation of management, constituting the modern enterprise accounting system together. Much information which management accounting required is from financial accounting, while financial accounting also put the established budget, standards organizations, and such daily accounting data from management accounting as the basic premise. Financial accounting focuses on external services, but internal services is also included. Information which financial accounting provided on the funding, costs, profits and other information is very important for business management. In particular, financial statements can comprehensive and reflect all aspects of enterprise’s financial position and operating results. Study of the financial statements can grasp the overall situation of the enterprises, managers must first be aware of the overall situation, so that guide enterprises to continuously move forward. Therefore, managers must pay close attention, and be very concerned about Continue reading
Why Firms not Consider Profit Maximization as their Financial Objective?
Profitability objective may be stated in terms of profits, return on investment, or profit to-sales ratios. According to profit maximization objective, all actions such as increase income and cut down costs should be undertaken and those that are likely to have adverse impact on profitability of the enterprise should be avoided. Advocates of the profit maximization objective are of the view that this objective is simple and has the in-built advantage of judging economic performance of the enterprise. Further, it will direct the resources in those channels that promise maximum return. This, in turn, would help in optimal utilization of society’s economic resources. Since the finance manager is responsible for the efficient utilization of capital, it is plausible to pursue profitability maximization as the operational standard to test the effectiveness of financial decisions. However, profit maximization objective suffers from several drawbacks rendering it an ineffective decisional criterion. These drawbacks are: Continue reading
Appropriate Capital Structure
An Appropriate Capital Structure is that capital structure at that level of debt — equity proportion where the market value per share is maximum and the cost of capital is minimum. It is important for a company to have an appropriate capital structure. Features of an Appropriate Capital Structure Return- The capital structure of the company should be most advantageous subject to other considerations it should generate maximum returns to the shareholders without adding cost to them. Risk- The use of excessive debt threatens the solvency of the company. To the point debt does not add significant risk it should be used otherwise its use should be avoided. Flexibility- The capital structure should be possible for a company to adapt its capital structure with a minimum cost and delay if warranted by a changed situation. It should also be possible for the company to provide funds whenever needed to finance Continue reading
Capital Structure and Risk-Return Tradeoff
The capital structure of a firm should be designed in such a way that it keeps the total risk of the firm to the minimum level. The financial or capital structure decision of a firm to use a certain proportion of debt or otherwise in the capital mix involves two types of risks: Financial Risk: The financial risk arise on account of the use of debt or fixed interest bearing securities in its capital. A company with no debt financing has no financial risk. The extent of financial risk depends on the leverage of the firm’s capital structure. A firm using debt in it capital has to pay fixed interest charges and the lack of ability to pay fixed interest increases the risk of liquidation. The financial risk also implies the variability of earning available to equity shareholders. Non-Employment of Debt Capital (NEDC) Risk: If a firm does not use Continue reading