Question

Understanding Financial Statements (11th Edition)

1.6 Explain the importance of the notes to the financial statements.

1.7 What causes an auditor’s report to be qualified? Adverse? A disclaimer of opinion? Unqualified with explanatory language?

1.8 Why is the management discussion and analysis useful to the financial analyst?

1.10 What are the intangible factors that are important in evaluating a company’s financial position and performance but are not available in the annual report?

Answer 1

1.6

Notes to financial statements functions as a addition, providing clarity to those who require it without having the information placed in the body of the statement. It allows an easily accessible place for complex policies or calculations to be explained should a reader desire the additional information.

They help us to know the bifurcation of various items in the financial statements.

This can include further details about items used as reference, a clarification of any applicable policies, a variety of required disclosures or adjustments made to certain values.

1.7

Opinion	Reason
qualified	The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material but not pervasive to the financial statements, or the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
Adverse	After having obtained enough good audit evidence, the auditor concludes that misstatements, individually or when grouped with other misstatements, are both material and pervasive to the financial statements.
Disclaimer of Opinion	The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive
Unqualified	The auditor finds that the financial statements of a given entity are presented fairly, in all material respects in accordance with GAAP.

1.8
The financial analyst wants to know the future prospects and growth of the company to know the current value of company.

The management discussion and analysis provides:-

1) Future plans

2) Industry growth

3) Strategies to tackle completion

4) Key members

5) Capex in upcoming future

6) Expected revenue growth

7) Key financial ratios and highlights

All the above information helps to analyse the company future and value the company.

1.10

It does not show following intangible factors:-

1. Credit policy of company
2. Employee satisfaction level
3. Compliance of all the relevant laws and regulation
4. Cost of capital
5. Future plans of the company that are not reported
6. Competition analysis
7. Negative points of the company.