Question

As an auditor how can you determine if your client has too much idle working capital and a poor treasury operation?

Answer 1

The "idle' working capital and poor treasury operations are interlinked, an auditor could determine the inefficiency of the firm while scrutinizing the financial statements of the company and the doing ratio analysis.

Idle working capital can be identified by the Quick ratio,liquidity ratio and other financial ratios, the 4 major components of Working Capital are

1. Cash 2. Accounts Payable 3. Accounts Receivables 4. Stock/Inventory

Idle Working capital is when there is under utilization of owner's capital/investments, loans not diversified, loose credit; most importantly a well managed working cycle would ensure there is a optimum utilization from collection of raw materials-work in progress-finished goods-receivables-payments again to raw materials, minimize insolvency by maintaining a sufficient liquid current assets and also aim for maximum returns by cautiously investing the amount in less liquid assets.

Also ensuring that with idle working capital we can also clear any unattended bills that are to be cleared and as this is the function of "treasury operations" to ensure we have sufficient liquid assets and liabilities so that the company can provide when there i need for liquidity and payments or investments.

The Auditor monitors all the cash inflows and outflows to see if cash is available to meet the requirements and the excess cash is utilized and invested properly.

poor Treasury operations are when there are loose credit grants,cash concentration in hands of few/only in non profiting areas, futile investments also in huge volumes, funds raise but under or not utilized for the purpose , credit rating gone negative, misinterpretation of cash flows and also idle working capital.