Overview of Forex Market
Forex trading is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are traded in pairs. For example, the EUR/USD currency pair tells traders how many US Dollars (USD) are needed to purchase one Euro (EUR). As the markets constantly fluctuate, traders look for ways to interpret and analyze the data to make informed decisions. Financial statement analysis have been around for decades and are used to assess the financial performance of a company, comparison with past performance or comparison with other companies. For stock & forex traders, financial statement analysis is an important tool.
Forex Trading & Financial Statement Analysis
Forex trading and financial statement analysis go hand in hand. As investors are making decisions to buy or sell shares, they must understand how the company’s financial statements are structured. Fundamental analysis of a company covers the entire financial statement, including the income statement, balance sheet, cash flow statement and footnotes. Traders often carry out financial analysis to understand how a company is performing – particularly regarding profitability, liquidity and solvency.
By understanding the financial performance of a company, traders are better able to assess the prospects of its stock, determine its true value, and decide whether or not to buy or sell shares. In addition to analyzing financial statements, traders should also look at risk factors, such as the company’s debt levels and whether or not the company’s earnings can support a dividend payout.
Using Benford’s Law to Identify Fraud
Benford’s Law is an approach to the analysis of financial statements that has gained favor in financial markets recently. Benford’s Law is a mathematical statement that states that in real-world data sets, the distribution of the first digits of numbers tends to follow a certain pattern. This pattern implies that financial statement fraud can be identified by looking at the randomness patterns in the data. By analyzing the data more closely and applying a statistical technique known as Benford’s Law, analysts and financial institutions can detect financial statement fraud or errors more quickly.
In conclusion, financial statement analysis is an important tool for traders when investing in the stock and forex markets. Through their understanding of the fundamentals of financial statements, traders are better positioned to make informed decisions. Furthermore, by analyzing financial statement data in light of Benford’s Law, traders can also detect financial statement fraud, enabling them to stay alert for scam investments and potentially save them a significant amount of money.
What Is a Financial Statement Review?
A financial statement review is an engagement in which an accounting professional obtains limited assurance that there are no material modifications that should be made to an entity’s financial statements. This assurance, however, is more limited than an audit. The accountant performs inquiry, analytical procedures, and other review-related activities to complete the engagement. Financial statement reviews generally require far less effort than auditing standards.
The purpose of a financial statement review is to give financial statement users moderate assurance that the financial statements are presented in accordance with the applicable financial reporting framework and are free from any material misstatements. Compared to an audit, the work performed in a financial statement review is far less and the financial statement user is also able to receive evidence from a third-party about the accuracy of the financial statements.
Significance of Financial Statement Reviews
In the accounting industry, an auditor’s opinion is the highest level of assurance. An audit includes a set of procedures which requires significant accounting effort and knowledge. Additionally, there are other review engagements with varying levels of assurance which are suitable for different situations. Depending on the size and complexity of the organization or transaction, auditing or review engagements may be suitable. In any case, the financial statements should be prepared in compliance with the applicable financial reporting framework.
A financial statement review gives greater assurance to the users of financial statements than the financial statements output from the accounting system. A financial statement review allows the accountant to apply professional judgement in testing the financial statements. This results in reasonable assurance that financial statements are free from material misstatement. The users of financial statements are typically able to make more educated decisions on how to utilize the financial statements with assurance form an accountant.
A Step By Step Guide To Financial Statement Reviews
The 10 steps of a financial statement review generally consist of the following:
- Understand the Entity’s Business and Its Environment
- Define the Engagement and Its Objectives
- Perform Preliminary Analytical Procedures
- Undertake Tests of Controls
- Perform Tests of Transactions
- Perform Tests of Balances
- Evaluate Results and Draw Conclusions
- Issue Review Report
- Discuss Findings with Management
- Send Completion Letter
The first step includes understanding the entity’s business and the outside environment. This step allows the accountant to gain an understanding of the entity including its size, operations, and industry. The second step is defining the scope of the review including the objectives, type of opinion requested, and the financial statements being examined.
The third step calls for preliminary analytical procedures in which the accountant evaluates relationships between numbers and trends in the financial data. The fourth step requires the accountant to conduct tests of controls ensuring the effectiveness of the entity’s internal controls. The fifth step entails the accountant to perform tests of transactions in which the accountant evaluates the validity of each transaction. The sixth step is performing tests of balances in which the accountant examines the accuracy and completeness of the financial statements.
In the seventh stage, the accountant uses their professional judgement in analyzing the results obtained through the first six stages. This is followed by the eighth stage of the review, issuing the review report. The ninth stage involves discussing the findings with the entity’s management. The final step is the accountant sending a completion letter to the entity.
Following these steps will allow the accountant to conduct a successful financial statement review. Knowing the purpose, format, and the steps involved in a financial statement review is critical to creating effective financial statements for the entity in question.