The auditing process requires auditors to collect evidence that supports their work. During this process, auditors must ensure the evidence is sufficient and appropriate. This evidence then forms the basis for the auditor's report. Apart from the client's supporting documents, auditors must also possess proof of their plan and the work they perform. Therefore, they prepare audit working papers. What are Audit Working Papers?Audit working papers are documents prepared by auditors that show their plan and performance. These papers provide evidence that the auditors planned and performed the audit under the auditing standards. Similarly, they illustrate that the process followed any applicable legal and regulatory requirements. Auditors prepare audit working papers as a part of their work. Audit working papers summarize the client's nature and processes, the audit program, audit procedures, etc. These documents are a crucial part of any audit and form a part of a client's current file. Similarly, there are several procedures or evidence that audit working papers may include. It will usually differ based on the client's nature and how the auditors tackle the audit. Overall, audit working papers help auditors document the information they gather during an audit. They also act as evidence of the auditor’s work during an audit service. Similarly, they ascertain that auditors obtained sufficient evidence to support their opinions in the audit report. Audit working papers are also necessary for quality control and risk management in case of future issues. What do Audit Working Papers include?There are several documents that audit working papers may include. As mentioned, the auditors' work will differ from one client to another. Accordingly, these working papers will also vary based on the auditor's work performed. There are some prevalent items that the audit working papers may include. Some of these consist of the following.
The above represent some of the prevalent documents that are a part of audit working papers. Apart from these, auditors may also prepare other documents based on their requirements. What are the factors that affect Audit Working Papers?As mentioned, several factors dictate the audit working papers that auditors must prepare. The first is the client's nature, which includes its size and complexity. Usually, clients of larger nature and more complexity require more work. Therefore, auditors will perform more procedures which will result in a higher number of working papers. Apart from the client's nature, the audit's nature will also impact these papers. Similarly, the audit working papers will also get influenced by the client's risk assessment. The higher the risk for an audit service is, the more audit working papers will be required. Furthermore, the significance of the audit evidence obtained will also impact these papers. Lastly, if auditors identify material misstatements, the audit working papers will get affected. ConclusionAudit working papers include documentation of the work performed by auditors and their planning. These papers are of high significance for various reasons. Usually, audit working papers differ based on the client's nature. However, several other factors also impact them. Post Source Here: Audit Working Paper
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When it comes to bond futures contracts, there is a fairly obscure little secret that savvy traders know about. This secret allows those who are aware of it to cash in on the difference between what they need to pay for their bond and what they receive upon delivery. It's called "cheapest-to-deliver" and here we'll show you how it works and how you can use it in your bonds futures trading. What is the cheapest-to-deliver bondThe term CTD or cheapest-to-deliver refers to the contract with the lowest margin requirement when you are delivering bonds in order to cover a futures position. The CTD bond is related to your futures position because when you go short on bonds, you need to deliver them when the contract expires. If you sell 10 contracts of bond X at $100 and then deliver them when the contract expires, you will want to deliver the bond with the lowest margin requirement. In this case, that would be a lower-priced bond from the same issuer, so you might deliver bonds worth $90 each. In practice, you don't have to worry about determining which specific bonds are cheapest-to-deliver because nowadays bond futures exchanges do this for you. How does cheapest-to-deliver workThe CTD calculation is determined by the futures exchange, not by you. One factor that influences the calculation of cheapest-to-deliver is interest rates, specifically their recent movement. The current 30-day average rate on a bond will factor into its CTD status. When the price of one bond goes up relative to other bonds in the same issuer's series, its CTD status will go down because it might not be cheaper to deliver than other bonds in the issuer's series. If this happens, that bond may be automatically switched out for a different one when you deliver your position. The exchange automatically gives you the option of receiving the next CTD bond and takes care of this calculation and transaction for you, so you won't need to worry about this. Benefits of cheapest-to-deliver bondsThe main benefit of CTD positions is that the bond you receive has the lowest possible margin requirement when you deliver it to close your futures position. This can save you a lot of money, so smart traders know how to take advantage of it by buying or shorting bonds with this in mind. There are other benefits to using cheapest-to-deliver positions, including:
CTD positions will generally have a lower yield than other bonds because the issuer has already hedged its position in the bond futures market and is willing to sell at a lower margin (or deliver it with a higher margin).
CTD positions tend to be less volatile because they are hedged. The exchange takes all the risk out of the position for you, so while CTD positions may have a lower yield, their prices tend to hover around par -- unlike other non-CTD issues which fluctuate wildly with market conditions.
CTD positions are considered more secure by investors because they are hedged. In the event that a company goes bankrupt, CTD positions will be paid off at par value at maturity, unlike other non-CTD issues which could be worth less than what you bought them for. Keep in mind that cheapest-to-deliver is only one factor to keep in mind when making your investment decisions. ConclusionInvesting in cheapest-to-deliver bond futures can help you improve your returns and cut costs, but it's no panacea. As with any investment strategy, trading CTD might work for some traders and not others. So make sure to conduct extensive research before you begin trading. Originally Published Here: Cheapest-to-Deliver Bond The cost of goods sold represents all direct costs incurred on manufacturing a product or acquiring it. Usually, it includes a company’s purchases and other similar expenses that directly contribute to the products. This figure is crucial in calculating gross profits. For service-based firms and companies, however, the cost of goods sold is not applicable. Instead, these firms use the cost of services. What is the Cost of Services?The cost of services is similar to the cost of goods sold. Instead of purchase expenses, it includes all direct costs incurred on providing a service. For most firms, these costs will involve direct labour expenses incurred for employees. These include salaries, wages, bonuses, overtime, etc., paid to staff who provide services. In some cases, the cost of services may also include expenses incurred on direct materials. However, these materials are not for manufacturing physical products. Instead, they consist of items that are essential to the provision of services. Apart from these, they may also include any other expenses that contribute to the rendering of services. Like the cost of goods sold, the cost of services is crucial in measuring gross profits. Similarly, these do not include any indirect expenses incurred for operation or other purposes. Firms report the cost of services in the income statement and deduct it from their revenues to reach gross profits. Overall, the cost of services is highly crucial for companies and firms involved in rendering services. What is the Accounting for Cost of Services?The accounting for the cost of services is similar to the cost of goods. As mentioned, this amount includes any expenses incurred directly toward providing services. Usually, it involves the labour costs incurred for employees who render services. In essence, the cost of services is an expense for firms. However, it is crucial that any item in this heading directly contributes to the services provided. When firms incur an expense, they must determine whether it is a direct or indirect expense. Once they ensure it directly contributes to the services, they can record it as a cost of services item. The journal entry for cost of services is as follows.
In the above journal entry, the debit side will include the account for the expense. Firms will separate these accounts into the cost of services category. The credit side will consist of the source for the expense. Usually, firms pay for them or may also get them on credit. Either way, this entry will increase the firm’s cost of services in the income statement. ExampleA firm, Red Co., provides accountancy services to its clients. During one of its assignments, the firm pays one of its employees $10,000 through a bank account to render accounting services to a client. Since this expense relates directly to the provision of services, Red Co. recorded it as a part of its cost of services. The journal entry for the transaction is as below.
During the assignment, Red Co. also purchased stationery items for the employee to help document progress. The firm acquired $1,000 worth of goods for which it paid through cash. These items contributed directly to the provision of services. Therefore, they will be a part of the cost of services. The journal entry is as below.
Overall, Red Co.’s cost of services for the specific client was $11,000 ($10,000 salary expense + $1,000 stationery expense). ConclusionCost of services represents all direct expenses incurred on the provision of services. It includes various items for firms that are in the services industry. The accounting for the cost of services is similar to that of the cost of goods. Firms record any direct expenses in the relative account and treat them as a part of the cost of services. Article Source Here: Accounting for Cost of Services Governments use bonds to raise money for various reasons. These may include paying off debts, building infrastructure (such as roads, bridges, railways), or running national programs like social security and medicare. Governments also issue bonds when they want to borrow large sums of money in order to pay for wars or natural disasters that the government can't afford at the time. Government bonds can also be a secure investment. Since they are issued by the government, they are considered to be low risk, meaning the chance of the government not being able to pay back its debt is extremely low. In this article, we are going to take a look at what government bonds are, how do they work, and what their benefits are. What are government bondsWhen a government needs to borrow money, it issues bonds. Bonds are essentially debt instruments issued by the government on which interest is paid (just like on your typical bank loan). This means that when a person purchases a bond from the government, they receive a part of the principal and an agreed-upon amount of interest at predetermined dates in the future for lending the government money. How do government bonds workTypically, bonds are issued for a specific amount of money that the government must pay back at full value. They can also be issued with certain terms (such as giving the bondholders the option to buy more bonds). When you purchase a bond, you're actually loaning money to your country's government and in return, you will receive interest at regular intervals (the "coupon payments"). This means that by purchasing a bond, you are essentially lending money to the government. The issuer agrees to pay interest on the bond for an agreed-upon amount of time and repay the principal when the bond matures. How to invest in government bondsThe most common ways are to purchase them from a brokerage account or over the counter. If you want to invest in Government Bonds through your brokerage account, all you have to do is pick a bond with a maturity date that best fits within your investing goals. Once you purchase the bond, it will be held by your broker until it matures Most brokers will allow you to sell your bond before it matures, however, if the market price isn't as high as the purchase price, they might charge a penalty for making an early sale. You can also invest in government bonds over the counter. This means that you will buy from someone directly instead of going through a broker. Benefits of government bondsBonds are considered to be low risk since they are issued by the government. This means that if you invest in a bond, your investment is protected against inflation since the purchasing power is not likely to decrease. Also, investing in government bonds can actually lead to higher returns than most other investments. Here are a few benefits of government bonds
As you can see, government bonds have a lot of benefits that make them an attractive investment option. For investors who want to diversify their portfolios, investing in government bonds is a great choice. ConclusionGovernment bonds are a low-risk investment option. Investing in them can help investors diversify their portfolios and earn significant returns over time. If you are considering putting your money to work by investing in government bonds or other types of investments, make sure that you consult with a financial adviser first. You can also do some research and read more articles like this one to understand what your options are. Post Source Here: What are Government Bonds For those who love to dig into the root of problems and proffer possible solutions, Econometrics and Operations Research could be the right options. In analyzing models, one can make decisions that are apt for the now and future. However, through an understanding of the focal points of each of them, some differences may be extracted. What Is Econometrics?Econometrics is the application of statistical and mathematical methods for the quantitative interpretation of economic phenomena and systems. It involves the use of statistical theories and tools to test hypotheses, to explain and predict future trends. The goal of econometrics is to convert qualitative statements into quantitative statements. This means that instead of using conceptual words for a descriptive judgment, numbers are used to represent phenomena. Econometrics is a working tool for practitioners of econometrics (econometricians), to modify economic models into versions that people can use to make estimates. According to Stock and Watson, “econometric methods are used in many branches of economics, including finance, labor economics, macroeconomics, microeconomics, and economic policy.” Econometrics is essential for making economic policies as it examines their impact on the economic system. What Is Operations Research?Operations research (OR) is an analytical method used in organizations for decision-making and problem-solving. It is a useful procedure for organizational management as it breaks down problems into basic components and uses mathematical analysis to seek solutions to them. By providing a step-by-step approach to solving these problems, an organization can make progress. The theory of operations research was triggered by military planners during World War II. And thereafter, the techniques of this concept have remained relevant in addressing issues in business, the government, and society at large. Operations research entails five major steps:
The three fundamental traits of all operations research efforts are optimization, simulation and probability, and statistics. Econometrics and Operations ResearchEconometrics and operation research are similar techniques, they both have the goal of using existing data and theories to enhance quantitative decisions. And, of course, these decisions have their relevance in the future. The use of mathematical data to discover and provide insights valuable for making reliable predictions and possible solutions is their fundamental drive. Also, both use models, improve on them to proffer and test solutions before applying them. In other words, they compare and narrow down options to find the best fit. However, OR is a vast discipline. Econometrics can be seen as an application of OR with a specialization in economics. Also, econometrics is more forward-looking in idea, it uses quantitative data and techniques from statistics, mathematics, and algorithms to back up economic decisions. Operations Research uses advanced mathematical tools to solve problems and optimize processes, such as scheduling, transport logistics, etc. ConclusionEconometrics is specific to the economic discipline, seeking to strengthen economic decisions. Operations research, on the other hand, can be applied in economics as well as other fields to solve complex issues. Although they slightly differ in core focus, they are complementary. Originally Published Here: Econometrics and Operations Research Credit Value at Risk (cVAR) is a measure of the potential economic loss on credit exposures due to credit events. Credit Value at Risk may be calculated for individual assets, portfolios, or even institutions. It can be expressed in absolute terms, such as Euros or Dollars, or as a percentage of total exposure. The calculation requires three inputs: the current market price, the planned sales price, and their respective default probabilities. It becomes important to calculate credit value at risk when there is a need to determine the level of an institution's capital adequacy requirement. In this article, we will be talking about credit value at risk, what causes it, and how to calculate it. What is Credit Value at RiskCredit Value at Risk is a number that tells you how risky your credit portfolio is. It will tell you the unexpected losses of the credit portfolio over one year at some confidence level. The losses are expressed in terms of currency units or credit exposure. It helps banks and financial institutions to determine the level of their capital adequacy requirement. In other words, it is a measure of how much money you stand to lose from exposure to credit risk over one year under normal market conditions. What causes Credit Value at RiskCredit Value at Risk is influenced by three factors
Importance of Credit Value at RiskThis is a measure of the amount that you could lose from a credit portfolio over one year under normal market conditions. It is important to determine levels of capital adequacy requirement in order to show prudence in making business decisions and effective management of risk. How to calculate Credit Value at RiskIn general, there are three steps in calculating Credit Value at Risk Step 1 - Define the inputs needed. First, list your portfolio of assets or credits. Next, you need to obtain the current market value of each asset or credit. And thirdly, obtain the expected probability that is being assigned for each borrower breaching their loan agreement/contract terms during the year. Step 2 - Calculate the expected loss for each instrument in your portfolio Expected Loss = Probability of Default X Exposure at Default X Loss Given Default Loss Given Default = 1 – Recovery Rate Step 3 - Calculate Credit Value at Risk The loss distribution of the credit portfolio is determined by simulation, and the Credit Value at Risk is calculated as follows, Credit Value at Risk=Worst Credit Loss-Expected Credit Loss ConclusionCredit Value at Risk is a number that tells you how risky your credit portfolio is. This number tells you the unexpected losses over one year at a confidence interval. The losses are expressed in terms of currency units or credit exposure. The capital adequacy ratio helps banks and financial institutions to figure out how much money they need. Originally Published Here: Credit Value at Risk (cVAR): Definition, Formula, Calculation, Interpretation A company’s book value is basically the net worth of its assets as found on the balance sheet, and it's usually about equal to the amount that all shareholders will receive if the company liquidates and pays off all of its liabilities. Book value has been one of the most important accounting metrics used by value investors when assessing investments. It has been used by investors for decades. However, with the shift to a knowledge-based economy, it has become less important these days, as pointed out by Reference [1], In recent decades, however, book values have become a less relevant valuation anchor. One reason is that, with the shift to a knowledge-based economy, public companies’ most valuable “assets” are often related to intellectual property, brand recognition, and customer loyalty, which are typically omitted from firms’ balance sheets. The authors went on to study the usefulness of the book-to-market ratios and concluded, We study the use of firms’ book-to-market ratios in value investing and its implications for comovements in firms’ returns and trading activity. We show that B/M has become increasingly detached from common alternative valuation ratios over time while also becoming worse at forecasting returns and growth in absolute and relative terms. Despite these trends, some major U.S. stock indexes and funds continue to rely on B/M when identifying value stocks and forming portfolios. Consistent with this reliance shaping market outcomes, we find firms’ stock returns and trading volumes comove along B/M in excess of comovement in their fundamentals. Taken together, our findings highlight a form of institutional inertia in financial markets, where some key participants shape market outcomes by continuing to rely on signals that previously worked well, despite a steady decline in signal content. In short, book-to-market ratios are no longer accurate at forecasting returns, and they are increasingly detached from other valuation ratios. References [1] Choi, Ki-Soon and So, Eric C. and Wang, Charles C. Y., Going by the Book: Valuation Ratios and Stock Returns (2021). Available at SSRN: https://ssrn.com/abstract=3854022 Originally Published Here: Are Book Values Still Useful in Value Investing? A professional accountant is responsible for satisfying the needs of their clients or employers. However, their responsibility also extends toward the public. The accountancy profession requires accountants to act in the public interest. The same concept applies to auditors. In the auditing process, the professional ethics of an auditor is highly crucial to gaining public trust. What is the Professional Ethics of an Auditor?The professional ethics of an auditor requires them to behave and be seen to behave professionally and ethically. The purpose of audit engagements is to increase the confidence of the intended users toward the subject matter. Therefore, the users must trust the professional who provides them with assurance. In order to achieve that level of confidence, auditors must be independent of their clients. One of the critical components of the professional ethics of an auditor is independence. It refers to having freedom from situations and relationships where their objectivity may be perceived as impaired. Since the primary duty of auditors extends toward intended users, it is crucial to act professionally and ethically. The primary benchmark for the professional ethics of an auditor comes from the IFAC code of ethics. What is the IFAC Code of Ethics?The International Federation of Accountants is a global accountancy profession advocacy organization. It provides a code of ethics which is a conceptual framework of the professional ethics of an auditor. This framework identifies the fundamental principles of ethical behaviour. These principles help auditors perform their work professionally and ethically. Similarly, the IFAC Code of Ethics identifies the potential threats to compliance with these fundamental principles. Furthermore, it also provides possible safeguards to eliminate these threats or reduce them to an acceptable level. The IFAC Code of Ethics takes a principle-based approach to ethics which is more flexible. However, auditors must use their professional judgement in using the code in practical situations. What are the Fundamental Principles of the IFAC Code of Ethics?As stated above, one of the areas where the IFAC Code of Ethics helps auditors is the identification of fundamental principles. This code requires auditors to follow all of these principles, which include the five below. IntegrityIntegrity refers to the use of honesty and directness during their work. The code states that members should be honest and straightforward in all their professional and business relationships. ObjectivityObjectivity deals with auditors’ independence during their work. The code states that members should not allow bias, conflicts of interest, or undue influence of others to override their professional or business judgements. Professional behaviourProfessional behaviour refers to acting professionally during audits. The code states that members should comply with relevant laws and regulations. Furthermore, it requires them to avoid any actions that discredit the profession. Professional competence and due careProfessional competence and due care relate to the auditor's knowledge and performance. The code states that members should maintain professional knowledge and skill at a specific level to provide competent professional services. Members should also act diligently under applicable standards. ConfidentialityThe code states that members should respect the confidentiality of the information and not disclose it to third parties. However, they can do so if there is a legal or professional right or duty to disclose or if they have the authority. Similarly, they must not exploit their professional and business relationships for personal gains. ConclusionThe process of audit involves providing intended users with confidence regarding the subject matter. For that, auditors must act professionally and ethically. The professional ethics of an auditor are crucial during audit engagements. The IFAC Code of Ethics identifies five fundamental principles that are critical in this regard. As mentioned, these include integrity, objectivity, professional behaviour, professional competence, and due care and confidentiality. Article Source Here: Professional Ethics of an Auditor A floating-rate loan is a type of mortgage or loan that provides the borrower with an interest rate that can change at any time. The interest rates will typically be set for one month, three months, six months, or one year and then adjust to reflect current market conditions. Floating-rate loans offer more flexibility in terms of adjustable payment amounts and long-term financial goals such as retirement. A floating-rate loan may be a good alternative for someone who needs access to the funds but is concerned with rising interest rates or is not comfortable with a fixed-rate mortgage. Floating Rate Loan DefinitionThe definition of a floating rate loan, which is also sometimes called a variable-rate mortgage or adjustable-rate mortgage, is a home loan with an interest rate that may change over time based on changes to an index such as the U.S. Prime Rate. This type of home loan generally has lower initial rates than fixed-rate mortgages and the initial rate is not locked in for a specific period. This type of mortgage may be ideal for someone who expects their income and expenses to change substantially over several years or if they currently have a fixed-rate loan and want to avoid the higher payments that would result from changing interest rates. Benefits of a Floating Rate LoanThe primary benefit of a floating-rate loan is that it may be easier to qualify for than a higher payment amount on a fixed-rate mortgage. This type of loan may also offer more flexibility and mobility since it can adjust as interest rates change. If an economy is expanding and interest rates rise, borrowers will pay higher payments. However, if the economy weakens and interest rates fall, borrowers will have lower monthly payments that can be used toward other financial goals. Here are the benefits of Floating Rate Loan
Disadvantages of Floating Rate LoanThe major disadvantage of this type of loan is that the interest rate can change at any time. This means that the borrower may have to pay more or less for their monthly payment than they had planned on. Since lenders base all loans on a credit score, it may be difficult to get approved for a larger loan amount if your credit score is not in good shape. Here are some disadvantages of Floating Rate Loan
ConclusionSo now you know what a floating rate loan is. This type of loan generally has lower initial rates than fixed-rate mortgages and the initial rate is not locked in for a specific period. Floating-rate loans are ideal for someone who expects their income and expenses to change substantially over several years or if they currently have a fixed-rate loan and want to avoid the higher payments that would result from changing interest rates. Post Source Here: What is a Floating Rate Loan Both econometrics and machine learning provide a way for analysts to have a glimpse of the future, and on that basis, make predictions. As research methodologies, both strive towards the same goal: inducing new knowledge. And, for this purpose, they adopt statistical tools, making for precision in scientific research. However, although they share similarities, they also have their differences. An in-depth look at the two will reveal more. What Is Econometrics?Econometrics is an "economics" term that describes the quantitative application of mathematical and statistical models. Econometrics is useful for developing theories, testing existing ones, and predicting the future. For these functions, it takes into account theoretical historical data, tests them using statistical methods and tools, and then compares the results. Econometrics leverage such statistical tools as probability and probability distributions, frequency distributions, statistical inference, simple and multiple regression analysis. In addition, correlation analysis, simultaneous equations models, and time series methods are used in the process. Econometrics was the brainwork of three award-winning economists; Ragnar Frisch, Lawrence Klein, and Simon Kuznets. And, since its inception, many academics, researchers, and analysts have found this concept a worthy methodology for making inferences and forecasts. What is Machine Learning?Machine learning is a branch of artificial intelligence (AI) that studies how systems can imitate human learning using data. It focuses on how computer algorithms can automatically make decisions and improve in decision-making without human assistance (no explicit programming), but relying on data provided. The origin of the term "machine learning" is accredited to Arthur Samuel, who pioneered Artificial Intelligence and computer gaming. As an important part of the growing field of data science, machine learning uses statistical methods to train algorithms to make predictions. These algorithms can also provide basic knowledge that facilitates decision-making in businesses and applications, thereby impacting key growth metrics. In machine learning, the choice of algorithms to be used is a function of the available data and the activity that needs to be automated. Econometrics and Machine LearningEconometrics and machine learning share a philosophical underpinning, as well as purpose. Both rely on statistical inferences; using mathematical tools to investigate hard data, to the end of generating new knowledge. Since econometrics and machine learning takes the same research approach, they share the same risks and limitations. For instance, they are both prone to bias and overfitting, and the quality of input data can affect results as well, explaining the "garbage in, garbage out" idea. However, in differentiating the two, econometrics as a body of knowledge, has its relevance in the economic field of study. It was developed to address economic (financial) drawbacks and so, economic data is used. Machine learning on the other hand goes beyond the financial system, it is practically not committed to any specific field of application. Secondly, econometrics tends to assimilate economic background knowledge more easily, using it to estimate and forecast. This may not be so much of a smooth process in machine learning, hence background knowledge is fitted more into the data preparation phase, in heuristics, and technique-specific characterization. This may result in trial-and-error "data torture" and will most likely affect results, although this may depend largely on the practitioner's ethics. Nonetheless, both can share and benefit from each other sampling strategies, cross-validation, and model ensemble techniques, information compressing, model assessment. ConclusionAlthough econometrics and machine learning share the same research tools, they differ in what they seek to achieve. Originally Published Here: Econometrics and Machine Learning |
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