FINAL STAGE OF AUDIT CHECK, Analysis of the financial condition of the entity being audited, Analysis of liquidity and solvency - Audit


As a result of studying the chapter, the student must:


• the content and methodology for analyzing the financial condition of the enterprise;

• the main indicators that characterize the financial condition;

• the procedure for the formation of information obtained by audit results to an audited entity;

• types of audit reports;

• procedure for forming an audit report;

be able to

• calculate the main indicators that characterize the financial condition of the enterprise;

• determine the financial status of the enterprise and its trends;

• Form a written message to the audited person but the audit results;

• justify the opinion in the audit report;


• modern methods of processing and analyzing financial reporting data;

• forms and principles of drafting an audit report.

Analyzing the Financial Condition of the Audited Entity

One of the types of audit services is the assessment of the financial condition of the enterprise, which is most interested in knowing how it looks in the eyes of the founders, owners, shareholders, potential investors, controlling bodies, etc. The latter are interested not only in the current state of things, but also in the prospects for the development of the enterprise, determined only in the process of financial analysis. Therefore, in recent years, audit subjects have a great need for auditors to conduct a qualified analysis of the financial situation.

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In addition, analytical calculations are used in the preparatory phase when planning an audit in order to determine the content, scope of work, identify possible places for the occurrence of intentional and unintentional errors. The auditor should also assess the ability of the audited entity to continue to operate and fulfill its obligations for at least 12 months following the reporting period.

Doubt in the applicability of the assumption of business continuity may arise in the auditor when reviewing financial (accounting) statements or performing other procedures. Financial indicators are one of the main ones on the basis of which such doubt can arise.

The main characteristics of the financial condition of the enterprise are liquidity and solvency.

Liquidity and solvency analysis

Liquidity of assets - is their ability to transform into cash. The level of liquidity of assets is determined by the duration of the time period during which this transformation can be implemented. The shorter the transformation period, the higher the liquidity of assets. Liquidity of assets characterizes the ability of the management of the organization to form and manage property and sources of financing.

The liquidity of the enterprise - its ability to fulfill obligations on all types of payments in a timely manner. The more the degree of ability to fulfill obligations on payments, the higher the liquidity level of the organization. The level of liquidity depends on the scope of activity, the ratio of current and non-current assets, the speed of turnover of funds, the composition of current assets, the magnitude and urgency of payment of current liabilities.

This indicator is used to assess the image of the organization, its investment attractiveness. The higher the level of investment attractiveness, the higher the level of solvency.

The term & quot; solvency & quot; is somewhat wider, since it includes only so much the possibility of transforming assets into cash, as the ability to timely and fully fulfill their obligations arising from trade, credit and other transactions of a monetary nature.

The liquidity of the enterprise's balance sheet is the level of security of current assets by long-term sources of formation. Liquidity of the balance assumes the search for payment means at the expense of internal sources, i.e. sale of assets.

Liquidity is a necessary and indispensable condition for solvency. The liquidity level of the balance sheet is determined by comparing the articles of assets grouped by the degree of liquidity and liabilities grouped by the urgency of their payment.

Enterprise assets are grouped as follows:

• A1 - absolutely and most liquid assets, including cash and cash equivalents, as well as short-term financial investments:

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A1 = page 1250 + p. 1240;

• A2 - quick assets, including receivables, for which payments are expected within 12 months, and other current assets:

A2 = p. 1233 + p. 1260;

• A3 - slowly sold assets, including inventories and VAT:

A3 = p. 1210 + p. 1220;

• A4 - hard-to-sell assets, including immobilized (non-current) assets, long-term receivables, illiquid stocks of raw materials, materials and finished products:

A4 = page 1100 + p. 1231.

To assess the liabilities of the enterprise, the balance sheet items are grouped according to the urgency of their payment:

• P1 - the most urgent liabilities, which include accounts payable

P1 = p.1520;

• P2 - short-term liabilities, including short-term loans and loans, estimated liabilities, other short-term liabilities:

P2 = p. 1510 + p. 1540 + p. 1550;

• P3 - long-term liabilities:

P3 = page 1400;

• P4 - permanent liabilities - the organization's own capital (charter capital, additional and reserve capital, retained earnings, revaluation of non-current assets, as well as deferred income):

P4 = page 1300 + p. 1530.

The balance is considered to be absolutely liquid if four inequalities are simultaneously satisfied:

A1 ≥ Π1; A2 ≥ P2; A3 ≥ P3; А4 ≤ П4.

If the inequality A1 ≥ Π1 is satisfied, this indicates the solvency of the organization at the time of the balance sheet. The organization has enough to cover the most urgent obligations of absolutely and most liquid assets.

If the inequality A2 ≥ P2 is realizable, quickly realized assets exceed short-term liabilities, and the organization can be solvent in the near future, taking into account timely settlements with creditors, receiving funds from selling products on credit.

If the inequality A3 ≥ P3 is satisfied, in the future, with the timely receipt of cash from sales and payments, the organization can be solvent for a period equal to the average duration of one turnover of working capital after the balance sheet date.

The fulfillment of the first three conditions leads automatically to the fulfillment of the condition A4 ≤ П4. This indicates compliance with the minimum conditions for the financial stability of the organization, the availability of its own working capital.

In practice, these conditions are not always fulfilled at the same time, the liquidity of the balance differs more or less from the absolute one. Therefore, for a comprehensive liquidity assessment, a common solvency index (Kpl) is used, which is calculated using the formula

where λ1, λ2, λ3 are the weights that characterize the significance of the respective group of assets and liabilities.

In practical calculations, the following values ​​are often used: λ1 = 1; λ2 = 0.5; λ3 = 0.3. Substituting these values ​​in the above formula, we get:

If Rt ≥ 1, the battalion is liquid. If & lt;/RTI & gt; 1, batan is not liquid. The closer the value of Kpl to zero, the lower the liquidity level of the organization's balance.

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