Report to the Non Financial Directors of PetroChina

Document Type:Thesis

Subject Area:Finance

Document 1

The analysis reveals that the enterprise is healthy compared to industry norms though in terms of liquidity it is much less than its leading competitor. Since these two are market leaders there figures are assumed to be industry average. It then discusses the auditor report accompanying the report. It discusses the independent audit and assurance. Looks at audit gap arising from the public perceived roles of an auditor and also checks the current developments in auditing standards trying to address the gap. Lastly it looks at the 2007-2008 financial crisis effects, causes and lessons that enterprises like PetroChina and BP can infer from it. PART A: Ratio Analysis Liquidity ratios: also known as working capital ratios. They reveal an enterprise capability to honor its financial obligations as and when they come for payment. Their interest is current assets and current liabilities. They measure short-term liquidity. The group ratios under this category comprise current ratio which is 0. from 0. the previous year. A favorable 2% increase. This means the group has its current liabilities covered 0. times over. That is PetroChina has 0. current assets for every 1 Renminbi current liability. The higher the ratio the better to the short-term creditors’ perspective. With respect to PetroChina a high ratio indicates liquidity nonetheless may also signify inefficient use of cash and other short-term assets. Therefore it is okay with the current figure ( Pandey, 2015). Compared to 1. times of BP it means that the PetroChina is less liquid. Quick ratio: this is more refined as it excludes amounts of inventory of the firm.

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This on account that inventory is valued on historical cost or purchase price and also it is not easily convertible into cash. PetroChina is doing poorly and need to check on this. Cash ratio is a refinement of quick ratio. It reveals enterprise ability to honor its current obligations from its most liquid assets. PetroChina ratio is 0. compared to 0. PetroChina has 42 Renminbi for every 1 Renminbi in assets. Accordingly, there is 58 Renminbi in equity (1-0. for every 42 Renminbi in debt. This ratio reduced by 0. from 0. The ratio is 1. implying interest bill is covered 1. times over. This is a. reduction from 2. decline in earnings per share in 2016; however it is below 1 which is favorable within market standards. This decline is attributed to decrease in profit. Basic earnings per share is a core component in calculating price of a share and price-to-earnings valuation ratio.

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By dividing PetroChina share price by its earnings per share, an investor can have an insight of the fair market value with regards to how much the market is ready to pay based on its current earnings ( Pandey, 2015). It has a Price-Earnings ratio of 200 this means that the its shares sell two hundred times earnings. decrease. This is attributable to a rise in inventory in the current year and decline in the cost of goods sold respectively. BP has 7. which mean it is better than the industry norm. Total asset turnover is 0. One has to be impartial and should not give room to prejudice when coming up with judgements. Audits are usually carried out on several enterprises especially where there is separation of ownership among owners and executive. At the end of an audit process the auditor is obliged to issue a report to provide reasonable assurance to the users of financial statements.

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An audit is thus necessary in the current world. It is usually carried out against set standards and for PetroChina its applicable to China Accounting Standards and international financial reporting standards. This has left current auditors report as being seen as not offering value or relevant information (Ifac. org, 2018). There is existence of users’ variations with regard to an auditors role. They view the auditor is meant to unravel thieves. Nonetheless auditors have a view that executive is the one tasked with instituting proper internal control systems so as to deter fraudulent activities and errors. Fraudulent doings: stakeholders even the government inclusive have expectations of auditors to unravel fraudulent doings and report them. Many are un informed that prevention and fraud detection rests with the executive. Aware of this KPMG has informed the stakeholders that this is the responsibility of executive.

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Illegal doings: there is a hanging balance of whether illegal undertakings should be made public by auditors. This is also raises the issue of duty confidentiality. Part C: Global Financial Crisis The crisis was as a result of several factors: Opaque and complex financial instruments: the emergence of financial innovations like securitization resulted to shadow operations that were risky and beyond public understanding. Inappropriate incentives for bankers and consumers: this is where many banking enterprises in Europe used a lot of borrowing in order to invest in mortgages in pursuit of their American counterparts. This had a negative effect with the since it resulted to an housing bubble in their respective markets. This means the prices were exaggerated as they did not reflect reality and this resulted to massive losses upon the burst of the bubble (Brunnermeier, 2008).

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Monetary imbalances: due to the lowering of rates in US and Europe the high uptake of credit resulted attractive investments opportunities. Laxity of regulations also saw concealment of true state of affairs during financial reporting. Investor losses: with the collapse of banking institutions and plummeting of stock exchanges worldwide investor wealth was eroded in trillions. Also losses were experienced as a result of low asset prices especially in the housing industry. This crisis was characterized by bank runs: arise when customers demand their deposits from a bank at once making it impossible for the institution to honor their demands. This happened as customers across the globe run to have their deposits from their banking institutions due to uncertainty within the financial system (Rhee, Kang and Pyun, 2013). Reduced consumption: faced by uncertainty economic units worldwide cut down on their spending.

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This led to reduced uptake of produced good and decline in industrial production. This in turn translated to a lower number of goods produced and consumed locally across all globe economies. From the crisis enterprises around the globe can draw the following lessons; it is very important to have transparency in financial reporting. Concealment of over borrowing by firms in their statements of financial positions escalated the crisis. These include poor lending practices. Enterprises can use financial derivatives like options to hedge against risk. However these need proper understanding of how they work. They are very useful especially in the oil and gas industry where PetroChina sites volatility in prices as a key contributor to low profits. This can be taken care by use of hedging strategies like forward contracts, currency swaps and options.

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pdf [Accessed 7 Mar. Bp. com. online] Available at: https://www. bp. org/news-events/2015-01/iaasb-issues-final-standards-improve-auditors-report [Accessed 7 Mar. Pandey, I. Financial Management. Noida: Vikas Publishing. Petrochina. cn. 勘探院DMZ网站前置. online] Available at: http://www. petrochina. com. Cash Ratio Cash/C. L 98617/499263 73692/471407 0. Total Debt ratio (Total assets- total equity)/total assets 1023922/2396950 1049806/2394094 0. Times interest earned ratio EBIT/Interest 45192/23348 58166/24328 1. Price-to-earnings ratio MPS/EPS 8/0.

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