Assignment 1: Understanding the Client and Performing Analytical Procedures

Understanding the Client and Performing Analytical Procedures
Student Name
Institutional Affiliation
Understanding the Client and Performing Analytical Procedures
When an individual or group of individuals opens up a new business, they often start with an idea for a service or product. The business may be operated as a retail or wholesale entity. They invest money so as to produce and sell the product or service, eventually increase production, and look for stable forms of capital to support their business growth as the business evolves. The growth and evolution of a business is determined using various rations. Such business risk ratios help in examining the capital structure of a business. Notably, there are also various factors that influence business financial reporting (Basri & Arafah, 2020). They include the following;
Financial statements; profit and loss account, balance sheet, statement of change in the equity of the stock holder, and the cash flow statements.
Notes to the company’s financial statements.
Annual and quarterly reports such as in the case of listed companies.
Prospectus in the case of companies that go for IPOs.
Management analysis and discussion for public companies.
These ratios also help in showing the financial position of a company and its progress in terms of losses and profitability. Further, analysis of business risk entails evaluating four major ratios; the interest coverage ratio, debt-to-equity ratio, the financial leverage ratio, and the maximum earnings decline ratio. Application of these ratios to the audit of Cloud 9 shows the company is making progress, with a good financial health.
Debt-to-Equity Ratio
The ratio is computed as shown below;
Total Debt/Total Equity
In the case of the financials provided for Cloud 9, the total long term debt for 2022 is 16,675,384 and 18,088,462 for 2021. On the other hand, the total equity is 134,403,846 and 120,615,384 for 2022 and 2021 respectively.
For 2022, the ratio is; 16,675,384/134,403,846=12.41%
For 2021, the ratio is; 18,088,462/120,615,384=14.50%
The ratio shows a summary of Cloud 9’s capital structure. The company has low debt levels in both financial years, implying that it will see low returns on its equity. However, the risks the company is facing are low and cannot topple its operations, meaning that its sustainability is strong (Irman & Purwati, 2020). The trend shows that the company’s debt is reducing, as it will be higher in 2021 than in 2022. Normally, the company should be adding debt to its balance sheet since it is growing since the fixed charge can be handled by its earnings predictability.
Interest Coverage Ratio
The ratio is computed as shown below;
Earnings Before Interest and Taxes (EBIT)/Interest Expense
For Cloud 9, the EBIT is $364,953,846 for 2022 and $345,965,385 for 2021. The total expense is $329,515,385 and $310,611,539 for 2022 and 2021 respectively. This means that the ratios are as follows;
For 2022; 364,953,846/329,515,385=110.75%...