Two THINGS to be ALERT.

1. Test of Control

2. Substantive Test

Maximising Market Value of Company & Financial Management Decisions

Maximising market value of company securities is important to investors due to the risk and return relationship involve in the decision making on the investment. The return of a security price is the change in the price of the security. If the price of the security increases, the investors would need to secure more of the securities and likewise when the price reduces.

From the company point of view, company must also understand market efficiency because any decision making made by the company will result in information to the market. In financial management, there are three important decisions namely the financing decision, investment decision and the dividend decision.

Financing Decision

In financing decision, the choice between equity and debt will affect the overall cost of capital of the company. The cost of capital constitutes the cost of making use of capital from the market i.e. shareholders and lenders. If the market perceives the choice made by the company is less than desired it will increase their risk and as such news about the financing will be made available in the market. This will in turn affect the demand for the shares to reduce and likewise for the share price. A fall in a share price if not desired and the market being efficient will reduce the capitalization of the company.

Investment Decision

An investment decision will affect cash flow of the company. As such investors will perceive a risk because of their potential dividend receivable or interest receivable. The perception whether good or bad, in addition to market being efficient will be translated as market information that will affect again the share price of the company.

Financing decision has an impact on investment decision and so is investment decision on dividend decision.

Dividend Decision

Dividend decision or policy i.e. how much being paid out and retained will send a signal to the market in respect to the affairs of the company such as cash flow availability, future projects potential or future commitment of the company. This will directly affect the demand for the share and the capitalization.

Therefore, the understand of market efficiency is important to company’s financial managers because to maximise the value of the company security, the manager needs to make sure the above three decision are made correctly.

Determination of Share Price Movement

Investors observing patterns in stock market prices are known as technical analyst and chartist. They believe that there is a predictable pattern that moves overtime for the stock prices. The technical analysts also believe that they can earn abnormal profit if they timed their investment decision following the analysis of the pattern.

In the market efficiency hypothesis, investors believe that stock prices move in a random fashion i.e. prices in the market change with the availability of the information. There is no predictable pattern of the movements.

The technical analysis in this case is not consistent with the efficient market hypothesis this is because of the assumptions of the efficient market hypothesis. Firstly, EMH assume that the market possess the same available information as the information arrives. This enables the market to interpret quickly the available information to act in a consensus manner. In that case, it is impossible to earn abnormal profit among the investors.

The EMH, the strong form efficient efficiency the investors may only make abnormal profit if private information illegally obtained. In technical analyst, the private information about when prices will rise or fall may of little use in the EMH, mainly because the information is not encouraged. This form will be violated should the technical analyst is correct about the timing of the stock price movement.

The weak and semi-strong form efficiency will observe price movement with publicly available information and past information respectively and as such the prices move in a random manner.

I seems like having plenty of public holidays and time before this. I wanted to go somewhere else for vacation and it failed. Arghh... Left few more weeks before my finals of my final year. Time to be serious and start revision!

Audit Assertion

Accuracy

Completeness

Cut-off

Allocation

Classification and understandability

Occurrence

Valuation

Existence

Rights and obligation

Based on the above assertions, the formula to remember these terms are by mentioning ACCA COVER. WOW! Isn't it amazing? Again, based on the assertions above, this is not the end but to ensure that all accounts such as revenue, assets, cash, etc are asserted in those terms so the auditor may be able to perform his/her job to express his/her opinion whether the financial statements are prepared in accordance to establish criteria/accounting framework and to report to the shareholders ultimately that the financial statements are prepared free from error and material misstatement/fraudulent.

Engagement Letter

Do not misunderstand me. I'm not talking about "marriage" but engagement letter by auditor. Just to remind myself that an engagement letter by auditor is a letter that provides a written agreement of terms of audit engagement between the auditor and management or those charged with governance. This is so to confirm there is an understanding of the terms of audit engagement between the auditor and management or those charged with governance and to avoid any misunderstanding in respect of audit work by the auditor. The matters covers in engagement letter include responsibility of auditor, responsibility of management, audit fee, the preparation of financial statements by management are prepared in accordance to the accounting framework, audit duration etc.