The utilisation of cash flow analysis in Maltese auditing : a study

Abstract

This study seeks to evaluate the use of the statement of cash flows and its analysis by auditors in Malta. It aims to provide valuable information about the level of analysis and importance given by auditors to various aspects of the statement of cash flows and to cash flow ratios. Primary data was obtained from two sources; questionnaires which were sent out to 268 auditors, of which 33 were received and used in the study, and interviews with 7 audit firms. According to the results of the study, auditors and audit firms find the statement of cash flows to be important, yet it is only moderately used in an audit. Moreover, less audit work is performed on this statement than on the statement of financial position and the statement of comprehensive income. The study determined that the primary use of the statement of cash flows is to assess the liquidity and solvency of the enterprise. Other popular reasons for using the statement of cash flows are to aid in determining whether the enterprise is a going concern and to obtain a better picture of the financial position of the enterprise by using information which is not found in the other financial statements and is free of accounting judgements and possible accounting errors. This research also notes that whilst traditional cash flow ratios, i.e. liquidity ratios, were found to be widely used in local auditing, the same cannot be said for ratios derived from the statements of cash flows. In fact, very few auditors and audit firms made use of the latter type of ratios since they are viewed as more complex ratios which enter into unnecessary detail for the purposes of the audit or are simply not known by the auditor. This study revealed that a major limitation for auditors with respect to the analysis of cash flow information is that the statement of cash flows is typically prepared by the client towards the end of the audit, resulting in the auditor not being able to pay sufficient attention to the statement of cash flows. Furthermore, ratios from this statement cannot be utilised if for the majority of the audit the statement does not exist. The statement of cash flows results in being a mathematical computation prepared at the end of the audit solely to satisfy accounting requirements. To address this problem, clients should be encouraged to prepare the statement of cash flows by the time the audit commences, so as to allow the auditor to utilise it. Some auditors and audit firms believe that further cash flow analysis can be incorporated in an audit. It could be used to obtain a better understanding of the client during the planning stage or to provide information on whether certain audit risks exist, such as those relating to fraud and going concern. It was concluded that auditors seem to have different opinions on how the statement of cash flows is used during an audit, with some emphasising certain uses over others. Not all the benefits which arise from using the statement of cash flows and cash flow ratios seem to be adequately known by auditors, so seminars should be held which would inform auditors of all the possible advantages of further utilising cash flow information during an audit.