Saturday, March 16, 2013

Question for auditors- do you all factor in inflation while doing sales analysis

We have one question that we want to hear from our fellow followers and readers of accounting and auditing blogs. As part of audit procedures for most of audit firms, it is compulsory to review and understand the fluctuation of certain accounts, for instance your sales revenue.

We would like to understand from you, do you all factor in inflationary rate while factor in the review of income statement, e.g. sales revenue, operating expenses, etc? To illustrate, your expenses level may stay relatively constant at prior period level. However, given the inflatinonary rate of 5%, should the expenses be higher, assuming volume stay constant??

We would like to hear from you on whether did you factor in the inflationary factor, and how did you address that. Thank you very much.

Wednesday, March 6, 2013

Something interesting: Warren buffet's comments on goodwill

Just want to share with you some interesting comments by Warren Buffet, a promoninent value investor relating to goodwill.

" ... $15.5illion of goodwill that is attributable to our insurance companies and inlcuded in book value as an asset. In effect, this goodwill represents the price we paid for the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true value, For example, if an insurance sustain large and prolonged underwriting losses, any goodwill carried on the books should be deemed valueless, whether its original cost" (Extracted from Berkshire Hathway- Letter by Warrent Buffet to the shareholders- 2012"

What Warrent Buffet commented is true from a commercial perspective. Goodwill represents the premium a company paid for in an acquisition. The true value on the book could be higher than its book value. If management opined that the true value of the goodwill is lesser than its book value, then the goodwill need to be written down to its recoverable amount. For a company in sustained losses position, it is no easy to proof that no impairment is required for this goodwill.

As a result, as a auditor, we need to perform thorough review on the impairment assessment of goodwill instituted by management.