Strategic Audit Michael Hill - Essay Example

The Porters five forces model measures the firms’ profitability in the various markets irrespective of the external forces fighting against the success of the firm. The five forces model analyzes the forces that affect and limit the profitability of the firm in the industry and how the firm is able to counter these forces, thus maintain a stable profit margin over the years (Ahlstrom & Bruton, p.131). The five forces include: buyers, suppliers, new entrance, substitutes and rivalry. The profitability of the firm will thus depend on how well the firm handles these forces.

If the firm is able to conquer these forces its profitability remains constant or goes higher over the years. Value chain management is another tool to be used in the audit. Value chain analysis gives the auditor information on what the company is best at, that is what it produces the lowest possible cost and is profitable to the firm (needles, powers and Crosson 2011, p.805) the result of the value chain will help the firm concentrate more on the efficient products while eliminating the inefficient ones or possibly outsourcing what is cheaper to outsource than to produce.

The information required includes the sales of the firm for the period for every specific line of product, the cost of production of that line and the profit earned from the product. This aids in comparing the profitability of each production line, thus showing the firms strong point in production. Moreover, financial ratios are important tools in internal audit. Among the ratios to be assessed include the leverage ratio and liquidity ratio. Liquidity ratio measures the firm’s ability to meet its current obligations while the leverage ratio measures the firm’s ability to cover long term financial debt obligations.

A high the liquidity ratio is an indication of the firm’s ability to meet its current financial obligations thus is an indicator of the firm’s short term