CHAPTER 1INTRODUCTION OF AUDITINGEconomic decisions in every society must be based upon the information available at the time the decision is made. For example, the decision of a bank to make a loan to a business is based upon previous financial relationships with that business, the financial condition of the company as reflected by its financial statements and other factors. If decisions are to be consistent with the intention of the decision makers, the information used in the decision process must be reliable. Unreliable information can cause inefficient use of resources to the detriment of the society and to the decision makers themselves. In the lending decision example, assume that the barfly makes the loan on the basis of misleading financial statements and the borrower Company is ultimately unable to repay. As a result the bank has lost both the principal and the interest. In addition, another company that could have used the funds effectively was deprived of the money. As society become more complex, there is an increased likelihood that unreliable information will be provided to decision makers. There are several reasons for this: remoteness of information, voluminous data and the existence of complex exchange transactions 3 As a means of overcoming the problem of unreliable information, the decision-maker must develop a method of assuring him that the information is sufficiently reliable for these decisions. In doing this he must weigh the cost of obtaining more reliable information against the expected benefits.A common way to obtain such reliable information is to have some type of verification (audit) performed by independent persons. The audited information is then used in the decision making process on the assumption that it is reasonably complete, accurate and unbiased.Definition:

Is an audit carried out by a tax collecting agency in order to determine if a taxpayer paid the correct amount of tax. Taxpayers are chosen for audits if they have suspiciously high claims for deductions or credits, or if their reported income is suspiciously low, but an audit may be done simply as part of a random sampling. If the auditor finds a tax deficiency, the taxpayer has to pay back-taxes, as well as interest and penalties.

OBJECTIVES OF AUDITINGThere are two main objectives of auditing. The primary objective and the secondary or incidental objective. Primary objective as per Section 227 of the Companies Act 1956, the primary duty (objective) of the auditor is to report to the owners whether the balance sheet gives a true and fair view of the Companys state of affairs and the profit and loss A/c gives a correct figure of profit of loss for the financial year. Secondary objective it is also called the incidental objective as it is incidental to the satisfaction of the main objective. The incidental objective of auditing are: Detection and prevention of Frauds Detection and prevention of Errors. Detection of material frauds and errors as an incidental objective of independent financial auditing flows from the main objective of determining whether or not the financial statements give a true and fair view. As the Statement on auditing Practices issued by the Institute of Chartered Accountants of India states, an auditor should bear in mind the possibility of the existence of frauds or errors in the accounts under audit since they may cause the financial position to be mis-stated. Fraud refers to intentional misrepresentation of financial information with the intention to deceive. Frauds can take place in the form of manipulation of accounts, misappropriation of cash and misappropriation of goods. It is of great importance for the auditor to detect any frauds, and prevent their recurrence. Errors refer to unintentional mistake in the financial information arising on account of ignorance of accounting principles i.e. principle errors, or error arising out of negligence of accounting staff i.e. Clerical errors

LIMITATIONS OF AUDITING1. Non-detection of errors/frauds:- Auditor may not be able to detect certain frauds which are committed with malafide intentions. 2. Dependence on explanation by others:- Auditor has to depend on the explanation and information given by the responsible officers of the company. Audit report is affected adversely if the explanation and information prove to be false. 3. Dependence on opinions of others:- Auditor has to rely on the views or opinions given by different experts viz Lawyers, Solicitors, Engineers, Architects etc. he can not be an expert in all the fields4. Conflict with others: - Auditor may have differences of opinion with the accountants, management, engineers etc. In such a case personal judgement plays an important role. It differs from person to person. 5. Effect of inflation: - Financial statements may not disclose true picture even after audit due to inflationary trends. 6. Corrupt practices to influence the auditors:- The management may use corrupt practices to influence the auditors and get a favorable report about the state of affairs of the organization. 7. No assurance:- Auditor cannot give any assurance about future profitability and prospects of the company. 8. Inherent limitations of the financial statements :- Financial statements do not reflect current values of the assets and liabilities. Many items are based on personal judgement of the owners. Certain non-monetary facts cannot be measured. Audited statements due to these limitations cannot exhibit true position. 9. Detailed checking not possible :- Auditor cannot check each and every transaction. He may be required to do test checking.

CHAPTER 2ANALYSIS OF FINANCIAL STATEMENTThe accounting process begins with the recording of transactions in the books of primary entry. The accounting information resulting from the transactions so recorded gets posted in to various accounting heads in the ledger. In the ledger each account is balanced at the end of an accounting period and a summary of all balances in the various accounting heads from the ledger is prepared which is known as trial balance from such trial balances and after effecting certain adjustments considered necessary (which is dependent on the particular accounting system followed by the organizations) the financial statements relating to the accounting period are preparedFINANCIAL STATEMENT ANALYSISFinancial statement is an organized collection of data according to logical and consisted accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business form. It may reveal a series of activities over a given period of time, as in the case of an income statement.The focus of the financial analysis is on key figures in the financial statements and the significant relationships the exists between them. The analysis of financial statements is a process of evaluating relationships between component parts of financial statements to obtain a better understanding of the firms position and performance.

Financial Analysis:Financial analysis is the process of identifying the financial strengths and weakness of the firm by property establishing relationships between the item of the balance sheet and the profit and loss account. Financial analysis can be undertaken by management of the firm, or by parts outside the firm.USERS OF FINANCIAL ANALYSIS: Management Trade creditors Investors Government OthersManagement:Management of the firm would be interested in every aspect of the financial analysis. It is their overall responsibility to see that the resources of the firm are used most effectively and efficiently and that the firms condition is sound.Trade Creditors:The trade creditors are to be paid in a short term solvency of the concern. The current ratio and acid test ratio will enable the creditors to assets the short term solvency position of the concern.Investors:The Investors are interested their money in the firms shares, are not concerned about the firms earnings. They restore more confidence in those firms that show steady growth in earnings. As such, they concentrate on the analysis of the firms present and future profitability. They are also interested in the firms financial structure to the extent it influences the firms earning ability and risk.Government: The financial statements are used to asses tax liability of business enterprise. These statements enable the government to find out whether the business is following various regulations or not. Others:Trade associations, stock exchange and public at may also analyze the financial statements to judge the financial position of different concerns.Definition According to Myres Financial statement analysis is largely is a study of the Relationship among the various financial factors in a business as disclose by a single set of statement and a study of the trend of these factors as show in a series of statements.

Financial statements are indicators of the two significant factors1. Profitability2. Financial SoundnessAnalysis and interpretation of financial statements therefore refers to such a treatment of the information contained in the income statement and the balance sheet so as to afford full diagnosis of the profitability and financial soundness of the business. The term analysis means methodical classification of the data given in the financial statements. The term interpretation means explaining the meaning and significance of the data so simplified. Types of financial Analysis Financial analysis can be classified in to different categories depending upon. (a) The material used (b) The modus operand of analysis On the basis of materials used. According to this basis financial analysis can be of two types. a) External Analysis Those who are outsider for the business do this analysis. The outsiders include investors, credit agencies. government agencies and other creditors who have no access to the internal records of the company. These persons mainly depends upon, the published financial statements. Their analysis serves only a limited purpose. The position of this analysis has improved in recent times on account of increased governmental control over companies and governmental regulations regulations requiring more detailed disclosures of information by the companies in their financial statements.b) Internal analysis: This analysis is done by persons who have access to the books of account and other information to the books of accounts related to the business., Executives and employees of the organization or by officers appointed for this purpose by the government or the court under powers vested in them can therefore do such an analysis. The analysis in done depending upon the objective to be active depending upon the objective to be achieved through this analysis. On the basis of modus operandi according to this, financial analysis can also be two types. a) Horizontal Analysis In case of this type of analysis financial statements for a number of years are reviewed and analyzed. The current years figures are compared with the standard or base year. The analysis statement usually contains figures for too or more years and the changes are shown regarding each item from the base year usually in the form of percentages. such as analysis given the management considerable insight into levels and areas of strength and weakness. Since this type of analysis is based on the date from year to year rather than on one date, it is also termed as Dynamic Analysis?

b) Vertical Analysis: In case of this type of analysis a study is made of the quantitative relationship of the various items in the financial statements on a particular type, such an analysis is useful in comparing the performance of servral companies in the same group, or divisions or departments in the same company. Since this analysis depends on the data for one period, is nor very conductive financial position. It is also called Static Analysis as it frequently used to ratios developed on one date or for one accounting period. Tools or Techniques used for Analysis: 1. Ratio Analysis 2. Method of least Squares (Trend Values) 3. Comparative statement Analysis. These are explained in bring as follows.1. Ratio Analysis: Ratio Analysis is widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statements so that the strength and weakness of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items/ Variable. This relation can be expressed as. a. Percentagesb. Fractions c. Proportion of numbers. Accounting ratios showed the relationship in mathematical terms between two interrelated accounting figures. This is the most important tool available to financial analysis for their work. Ratio analysis is a process of identifying the financial strengths and weakness of the firm. This may be accomplished either through a trend analysis of the firms ratios over a period of time or through a comparison of the firms ratios with its nearest competitors and with the industry averages. The four most important financial dimensions which a firm would like to analyze are: liquidity, Leverage, Activity and Profitability. Nature of Ratio Analysis:A Financial ratio is a relationship between tow accounting numbers. ratios help to make a qualitative judgment about the firms financial performance. Financial Ratio: Financial Ratio is a relationship between two financial variables. It helps to ascertain the financial condition of a firm. Types of financial Ratios: Liquidity ratios Leverages ratios Activity ratios Profitability ratios Liquidity Ratio: Liquidity Ratio measure the firms ability to meet current obligations, and are calculated by establishing relationships between current assets and current liabilities. Leverage ratio:Leverage ratios measures the proportion of outsiders capital in financing the firms assets, and is calculated by establishing relationships between borrowed capital and equity capital. Activity Ratio: Activity ratio reflects the firms efficiency in utilizing its assets in generating sales and is calculated by establishing relationships between sales and assets. Profitability Ratio: Profitability ratios measure the overall performance of the firm by deterring the effectiveness of the firm ingenerating profit, and are calculated by establishing relationships between profit figures on the one hard, and sales and assets on the other. Utility of Ratio AnalysisAssessment of the firms financial conditions and capabilities. Diagnosis of the firs problems, weakness and strengths. Credit analysis Comparative analysis Time series analysisCautions in using ratio analysis Standards of comparisons Company differences Prices level Different definition Changing situations Past data Standard of Comparison: Time series analysis Inter-firm analysis Industry analysis Preformed financial statement analysis Advantages of Ratio Analysis: 1. It helps in analysis of the situation i.e. analysis on the financial situation and performance. 2. Inter-firm and Inra-firm comparison is both possible on the basis of accounting ratio 3. Accounting Ratio not only indicates the present position but they also indicate the cause leading up to the position of a large extent 4. It helps in obtaining best result when ratios for a number of years are put in tabular form so that the figure for one year can be easily compoared with those of other year 5. It indicates the trend of the change, which helps in preparation of estimates for the future. 6. They provide simplicity to the complex accounting information presented by the financial statements 7. They are very helpful to outsiders as well as for internal management 8. It is very helpful to internal managements, discharge of the basic managerial functions. 9. It also helps in planning, policy making & controlling the activities. 10. They are helpful in establishing the standard casting system.

COMPARATIVE STATEMENT ANALYSISComparative statement is those statements, which have designed in a way, so as to provide time perspective to the consideration of the various elements of financial position embodied in such statements. In such statements figures for two or more periods are placed side by side to facilitate comparison. The two statements are proposed for comparison. They are comparative income statement and comparative Balance Sheet.

SIGNIFICANCE OF THE STUDY: Every company must consider their liquidity position, profitability and solvency position and also the main attention should be on smooth working capital position. For this analysis the ratios, working capital requirements for the next five years period to enables meaningful planning for the future. Researcher worked and applied various tables in relevant ratio from the data collection in Bharat Heavy Electricals Limited Researcher giving more suitable idea to the management and developed the company in various way. Researcher analysis some table in statistical approaches of trend line.

OBJECTIVES OF THE STUDY:The study has the following objectives. To provide a strong theoretical framework for analyzing financial statements. To study the growth profile of the company during the study period. To study the financial position of the company and operation of Bharat Heavy Electricals Limited To appraise financial soundness of the company. To offer suggestions for improvement in the company.

SCOPE OF STUDY:The study mainly attempts to analyze the financial performance of the company selected for the study. The financial authorities can use this for evaluating their performance in future, which will help to analyze financial statements and help to apply the resources of the company properly for the development of the company and IT employees to bring overall growth. The present study attempt to develop a trend analysis model for Sales and Working Capital and Profit and Loss Accounts. There can be forecasting to evaluate the overall performance of the Bharat Heavy Electricals Limited in future.

LIMITATION OF STUDY1. The Secondary data like annual reports of BHARAT HEAVY ELECTRICAL LIMITED is collected from BHEL Trichy, hints the accuracy of the result of the study will depends upon the accuracy of data provided by the company.2. The study covers only the period of 5 (2006 to 2011)3. Various techniques, ratio statistical tools used in this study will have its own limitation.

CHAPTER 3RESEARCH METHODOLGYMethodology is the systematic method or an activity, which is used to collect the information required to complete this project work. The data is collected by 2 methods:1. Primary data2. Secondary data.Primary data is collected through collecting information from company officers, from external guide.Secondary data, which is secondary in nature i.e. already, collected information this secondary data is collected through Companys Annual Report and discussion with them.Interpretation of: Balance sheet Profit and loss account Annual reports

RESEARCH FINDINGS

WHO REPORTS AN OPERATING MEASURE?

While half or less of survey respondents (Weis 1999, Fischer and Gordon 2002) reported that their institutions present an operating measure in the statement of activities, Table 1 shows that 59 percent of our sample report some type of operating measure. As shown in Table 1, institutions that report an operating measure tend to be significantly larger than those that do not on most dimensions, ranging from total assets to enrollment.We found that 80 percent (24 of the 30) institutions classified as research and doctoral universities presented an operating measure. In contrast, approximately half of the comprehensive masters and baccalaureate schools reported an operating measure, and specialized schools were the least likely (39 percent) to report an operating measure. Institutions with an operating measure also charged higher tuition per student and were less tuition-dependent. Panel A shows that colleges and universities that use the major (BigFive) accounting firms more often include an operating measure in their statements of activity. Nearly 64 percent of schools with a Big Five auditor presented an operating measure. The institutions audited by smaller CPA firms were significantly less likely to report an operating measure (Chi-square 12.915, 1 d.f., p=.0003). Panel B of Table 2Measuring Operations at U.S. Universities Page 10 shows that the Big Five audit firms were associated with the larger institutions. The differences were significant for both financial and enrollment-based measures of size.

WHAT IS INCLUDED IN NON-OPERATING SECTION?

Table 3, Panel A shows the nature of items classified as non-operating by schools that presented an intermediate measure of operations. Investment income and contributions were the two items most frequently included in the non-operating section of the statement of activities. Each item was reported by 60 percent or more of the 122 schools with an operating measure. The next most common item came in a distant third: actuarial gains or losses and other changes in value of split-interest agreements were reported in the non-operating section by 19 institutions (15.6 percent).INVESTMENT INCOME, GAINS OR LOSSES.

Only five schools in our study classified all investment-related revenues and gains as non-operating. In some cases, dividends and interest income were reported as operating and gains/losses were reported as non-operating. Other schools used their endowment spending policy to determine the amount included in operating revenue. In other words, interest and dividends might be in the non-operating section if they exceeded the spending formula. Likewise, some portion of investment gains from current or prior years might be included in operating revenue if investment income fell below the spending formula. In many cases, investment-related amounts were commingled so that the revenues (interest and dividends) and gains/losses could not be segregated. While nearly half of the institutions in our study (97 schools) discussed an endowment spending policy, only 78 of the 97 (80 percent) provided a specific percentage or range of percentages. The mean of the reported endowment

Measuring Operations at U.S. Universities Page 11 spending formulas was 5.3 percent. As discussed earlier, Moodys Investor Services excludes from operating revenue any investment income in excess of 4.5 percent of the beginning balance in cash and investments. For schools in our study that split investment income between operating and non-operating, the percentage of investment-related revenue classified as operating was 6.36 percent of the beginning balance in cash and investments.7 Any reported endowment spending percentage would presumably apply only to investments designated as true or quasi-endowments. Income, gains and losses on other investments held by the institution might be handled differently. This additional investment income probably explains why the actual spending percentage exceeds the average reported endowment spending formula.

CONTRIBUTIONS AND BEQUESTS.

Only 4 schools in our study classified all contributions as non-operating. Most (70 of 74) of the schools that reported contributions in a non-operating section also reported contributions among operating revenues. For these 70 institutions, the average proportion of contribution classified as non-operating was 58 percent of total contributions. The criteria used to determine whether a contribution was operating or non-operating in nature was rarely evident although permanently-restricted gifts were almost always reported in the non-operating section. However, unrestricted contributions were split between operating and non-operating by 44 of the 70 institutions that displayed contributions in both the operating and non-operating sections. For these 44 schools, 26.3 percent of total unrestricted contributions were, on average, classified as non-operating.

REVIEW OF LITERATUREThe Hershey Company engages in the manufacture, marketing, distribution, and sale of various types of chocolate and confectionery, refreshment and snack products, and food and beverage enhancers in the United States and internationally. The Hershey Company sells its products through sales representatives and food brokers, primarily to wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, department stores, and natural food stores. The company was founded in 1894 and is based in Hershey, Pennsylvania. The Hershey Company went public on the New York Stock Exchange (NYSE) in 1922 Tootsie Roll Industries, Inc., through its subsidiaries, engages in the manufacture and sale of confectionery products. The company sells its products under the registered trademarks. It distributes its products through candy and grocery brokers to wholesale distributors of candy and groceries, supermarkets, variety stores, dollar stores, chain grocers, drug chains, discount chains, cooperative grocery associations, warehouse and membership club stores, vending machine operators, the U.S. military, and fund-raising charitable organizations.

CHAPTER 4ANALYSIS AND INTERPRETATION OF DATAIn this chapter an attempt has been made to analysis how efficiently the analysis of Financial statement is managed in Bharat Heavy Electricals limited. Financial tools such as schedule of changes in ratio analysis, least squares, comparative statements have been used for the purpose of analysis.The financial statement involves recording classifying and summarizing of various business transactions. It is prepared for the purpose of presenting a periodical review or report of the progress made by the concern and deals with the state of the investment, in the business and result achieved during the accounting period. Financial statement, income statement and position statement are the outcome of accounting process.Ratio analysis is a technique of analysis and interpretation of financial statements. It is used as a device to analysis and interpret the financial health of a firm. Analysis of a financial statement with the aid of ratio helps to arrangements in decision making control.

LEARNING OBJECTIVES

Explain why ratio analysis is usually the first step in the analysis of a companys financial statements.

List the five groups of ratios, specify which ratios belong in each group, and explain what information each group gives us about the firms financial position.

State what trend analysis is, and why it is important.

Describe how the Du Pont equation is used, and how it may be modified to include the effect of financial leverage.

Explain benchmarking and its purpose.

List several limitations of ratio analysis.

Identify some of the problems with ROE that can arise when firms use it as a sole measure of performance.

Identify some of the qualitative factors that must be considered when evaluating a companys financial performance.

OVERVIEW

Financial analysis is designed to determine the relative strengths and weaknesses of a company. Investors need this information to estimate both future cash flows from the firm and the riskiness of those cash flows. Financial managers need the information provided by analysis both to evaluate the firms past performance and to map future plans. Financial analysis concentrates on financial statement analysis, which highlights the key aspects of a firms operations.Financial statement analysis involves a study of the relationships between income statement and balance sheet accounts, how these relationships change over time (trend analysis), and how a particular firm compares with other firms in its industry (bench-marking). Although financial analysis has limitations, when used with care and judgment, it can provide some very useful insights into a companys operations. CHAPTER 5SUMMARY

The U.S. system of higher education has many characteristics other than size that make it unique in a broader international context. Nearly 3.5 million students attend some 1,700 private institutions of higher education in the United States. There is considerable latitude in the design of curricula, particularly for undergraduate programs. Private colleges often capitalize on this latitude to provide their vision of a liberal education. The diversity of the sector is treasured and protected by a number of national associations that look after the interests of and publicize the virtues of their member schools (Geiger 1986, 161). These schools compete with the public sector for students, strive to remain independent even while courting public support, and struggle to maintain diverse streams of revenue from students, alumni, and investments. Almost all of them periodically borrow money in the capital markets.

Consistent with the diversity of the sector, the flexibility in FASB Statement No. 117 was intended to let not-for-profit organizations make distinctions that they believe will provide more meaningful information for the users of their financial statements (66- 68). This study focused on one aspect of the permissible diversity in practice: operating performance measures on the statement of activities. Our findings indicate that only 60 percent of private colleges and universities report a separate operating measure. These schools tended to be the larger research institutions audited by a Big Five audit firm. Among the schools that chose to display operating income and operating revenue we found wide differences in definition and computation.

CONCLUSIONThis paper has presented a group-based financial statement analysis project that was incorporated into a preparer-based introductory financial accounting course, but the project easily could be adapted to other settings, or to address additional issues. Because the project does not require knowledge of journal entries, it could be incorporated into user-based accounting courses and/or courses in accounting or finance targeted toward non-business majors. If a written project is not desired, the questions posed by the project could be used to stimulate class discussions of financial topics. If individual assignments are preferred, the project is sufficiently compact as to make individual completion feasible. If an international dimension is desired, the project could be modified to require comparison of companies from different countries.For many years, business leaders have been emphasizing the need for universities to enhance students technical, communication, and critical thinking skills, to ensure that graduates can effectively handle unstructured problems, to improve students abilities to make and defend recommendations, and to improve students understanding of the broader business environment and the drivers of corporate success. Projects such as the one described in this paper help students to develop these desired abilities, and give students a richer understanding of the importance of accounting information and the usefulness of accounting disclosures in the decision-making process.

REFERENCES

American Institute of Certified Public Accountants, AICPA (2001), Proposed Statement of Position Accounting for Certain Costs and Activities Related to Property, Plant and Equipment. (Exposure Draft 6/29/01) (New York).Avery, S. A. (2001), Nonprofit Financial Management Guidelines, www.saverycpa.com.Chabotar, K. J. (1989), Financial Ratio Analysis Comes to Nonprofits, Journal of Higher Education, Vol. 60, No. 2, pp. 188-209.Dickmeyer, N. and K. S. Hughes (1980), Financial Self-Assessment: A Workbook for College, National Association of College and University Business Officers (NACUBO) (Washington DC).DiSalvio, P. (1989), Ratio Analysis in Higher Education: Caveat Emptor, Journal of Education Finance.Vol. 14, pp. 500-512.Engstrom, J. H. (1988), Information Needs of College and University Financial Decision Makers, Research Report, Government Accounting Standards Board (Norwalk, CT).Engstrom, J. H., and C. Esmond-Kiger (1997), Different formats, same user needs: A comparison of the FASB and GASB college and university financial reporting models, Accounting Horizons, Vol.11, No. 3, pp. 16-34.

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