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# Business statistics is the science of good decision making in the face of uncertainty and is used in many disciplines such

as financial analysis, econometrics, auditing, production and operations including services improvement, and marketing research. These sources feature regular repetitive publication of series of data. This makes the topic of time series especially important for business statistics. It is also a branch of applied statistics working mostly on data collected as a by-product of doing business or by government agencies. It provides knowledge and skills to interpret and use statistical techniques in a variety of business applications. A typical business statistics course is intended for business majors, and covers statistical study, descriptive statistics (collection, description, analysis, and summary of data), probability, and the binomial and normal distributions, test of hypotheses and confidence intervals, linear regression, and correlation.

Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may:

Continue or discontinue its main operation or part of its business; Make or purchase certain materials in the manufacture of its product; Acquire or rent/lease certain machineries and equipment in the production of its goods; Issue stocks or negotiate for a bank loan to increase its working capital; Make decisions regarding investing or lending capital; Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.

Goals Financial analysts often assess the firm's: 1. Profitability - its ability to earn income and sustain growth in both shortterm and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;

2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term; 3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations; Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time. 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. Methods Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.):

Past Performance - Across historical time periods for the same firm (the last 5 years for example), Future Performance - Using historical figures and certain mathematical and statistical techniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects. Comparative Performance - Comparison between similar firms.

These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example : n / equity = return on equity Net income / total assets = return on assets Stock price / earnings per share = P/E-ratio Comparing financial ratios is merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:

They say little about the firm's prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms. One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm's performance.

Seasonal factors may prevent year-end values from being representative. A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible. Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values. They fail to account for exogenous factors like investor behavior that are not based upon economic fundamentals of the firm or the general economy (fundamental analysis) [1].

Financial analysts can also use percentage analysis which involves reducing a series of figures as a percentage of some base amount[2]. For example, a group of items can be expressed as a percentage of net income. When proportionate changes in the same figure over a given time period expressed as a percentage is known as horizontal analysis[3]. Vertical or common-size analysis, reduces all items on a statement to a common size as a percentage of some base value which assists in comparability with other companies of different sizes [4]. Another method is comparative analysis. This provides a better way to determine trends. Comparative analysis presents the same information for two or more time periods and is presented side-by-side to allow for easy analysis.[5].

Econometrics is concerned with the tasks of developing and applying quantitative or statistical methods to the study and elucidation of economic principles.[1] Econometrics combines economic theory with statistics to analyze and test economic relationships. Theoretical econometrics considers questions about the statistical properties of estimators and tests, while applied econometrics is concerned with the application of econometric methods to assess economic theories. Although the first known use of the term "econometrics" was by Pawe Ciompa in 1910, Ragnar Frisch is given credit for coining the term in the sense that it is used today.[2] While many econometric methods represent applications of standard statistical models, there are some special features of economic data that distinguish econometrics from other branches of statistics. Economic data are generally observational, rather than being derived from controlled experiments. Because the individual units in an economy interact with each other, the observed data tend to reflect complex economic equilibrium conditions rather than simple behavioral relationships based on preferences or technology. Consequently, the field of econometrics has developed methods for identification and estimation of simultaneous equation models.

These methods allow researchers to make causal inferences in the absence of controlled experiments.

Purpose The two main purposes of econometrics are to give empirical content to economic theory and to subject economic theory to potentially falsifying tests.[2] For example, consider one of the basic relationships in economics: the relationship between the price of a commodity and the quantities of that commodity that people wish to purchase at each price (the demand relationship). According to economic theory, an increase in the price would lead to a decrease in the quantity demanded, holding other relevant variables constant to isolate the relationship of interest. A mathematical equation can be written that describes the relationship between quantity, price, other demand variables like income, and a random term to reflect simplification and imprecision of the theoretical model:

Regression analysis could be used to estimate the unknown parameters 0, 1, and 2 in the relationship, using data on price, income, and quantity. The model could then be tested for statistical significance as to whether an increase in price is associated with a decrease in the quantity, as hypothesized: 1 < 0. There are complications even in this simple example, and it is often easy to mistake statistical significance with economic significance. Statistical significance is neither necessary nor sufficient for economic significance.[3] In order to estimate the theoretical demand relationship, the observations in the data set must be price and quantity pairs that are collected along a demand schedule that is stable. If those assumptions are not satisfied, a more sophisticated model or econometric method may be necessary to derive reliable estimates and tests. Methods One of the fundamental statistical methods used by econometricians is regression analysis. For an overview of a linear implementation of this framework, see linear regression. Regression methods are important in econometrics because economists typically cannot use controlled experiments. Econometricians often seek illuminating natural experiments in the absence of evidence from controlled experiments. Observational data

may be subject to omitted-variable bias and a list of other problems that must be addressed using causal analysis of simultaneous equation models.[4] Data sets to which econometric analyses are applied can be classified as time-series data, cross-sectional data, panel data, and multidimensional panel data. Time-series data sets contain observations over time; for example, inflation over the course of several years. Cross-sectional data sets contain observations at a single point in time; for example, many individuals' incomes in a given year. Panel data sets contain both time-series and crosssectional observations. Multi-dimensional panel data sets contain observations across time, cross-sectionally, and across some third dimension. For example, the Survey of Professional Forecasters contains forecasts for many forecasters (cross-sectional observations), at many points in time (time series observations), and at multiple forecast horizons (a third dimension). Econometric analysis may also be classified on the basis of the number of relationships modeled. Single equation methods model a single variable (the dependent variable) as a function of one or more explanatory (or independent) variables. In many econometric contexts, such single equation methods may not recover the effect desired, or may produce estimates with poor statistical properties. Simultaneous equation methods have been developed as one means of addressing these problems. Many of these methods use variants of instrumental variable to make estimates. Other important methods include Method of Moments, Generalized Method of Moments (GMM), Bayesian methods, Two Stage Least Squares (2SLS), and Three Stage Least Squares (3SLS). Example A simple example of a relationship in econometrics from the field of labor economics is:

Economic theory says that the natural logarithm of a person's wage is a linear function of (among other things) the number of years of education that person has acquired. The parameter 1 measures the increase in the natural log of the wage attributable to one more year of education. The term is a random variable representing all other factors that may have direct influence on wage. The econometric goal is to estimate the parameters, 0 and 1 under specific assumptions about the random variable . For example, if is uncorrelated with years of education, then the equation can be estimated with ordinary least squares.

If the researcher could randomly assign people to different levels of education, the data set thus generated would allow estimation of the effect of changes in years of education on wages. In reality, those experiments cannot be conducted. Instead, the econometrician observes the years of education of and the wages paid to people who differ along many dimensions. Given this kind of data, the estimated coefficient on Years of Education in the equation above reflects both the effect of education on wages and the effect of other variables on wages, if those other variables were correlated with education. For example, people born in certain places may have higher wages and higher levels of education. Unless the econometrician controls for place of birth in the above equation, the effect of birthplace on wages may be falsely attributed to the effect of education on wages. The most obvious way to control for birthplace is to include a measure of the effect of birthplace in the equation above. Exclusion of birthplace, together with the assumption that is uncorrelated with education produces a misspecified model. A second technique for dealing with omitted variables is instrumental variables estimation. Still a third technique is to include in the equation additional set of measured covariates which are not instrumental variables, yet render 1 identifiable[5]. An overview of econometric methods used to study this problem can be found in Card (1999).[6]
AUDIT

The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and for energy conservation. Audits in accounting Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system's internal control. The goal of an audit is to express an opinion on the person / organization / system (etc) in question, under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors. Audit is a vital part of accounting. Traditionally, audits were mainly associated with gaining information about financial systems and the financial

records of a company or a business (see financial audit). However, recent auditing has begun to include other information about the system, such as information about security risks, information systems performance (beyond financial systems), and environmental performance. As a result, there are now professions conducting security audits, IS audits, and environmental audits. In financial accounting, an audit is an independent assessment of the fairness by which a company's financial statements are presented by its management. It is performed by competent, independent and objective person(s) known as auditors or accountants, who then issue an auditor's report based on the results of the audit. In Cost Accounting, it is a process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilisation of material or labour or other items of costs, maintained by the company. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting. As per ICWA London cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan. Such systems must adhere to generally accepted standards set by governing bodies regulating businesses; these standards simply provide assurance for third parties or external users that such statements present a company's financial condition and results of operations "fairly." The Definition for Auditing and Assurance Standard (AAS) 1 by ICAI "Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon." Integrated audits In the US, audits of publicly-traded companies are governed by rules laid down by the Public Company Accounting Oversight Board (PCAOB), which was established by Section 404 of the Sarbanes Oxley Act of 2002. Such an audit is called an integrated audit, where auditors have the additional responsibility (other than to opine on the financial statements) of expressing an opinion on the effectiveness of company's internal control over financial reporting, in accordance with PCAOB Auditing Standard No. 5. There are also new types of integrated auditing becoming available. This uses unified compliance material - see the unified compliance section in

Regulatory compliance. Due to the increasing number of regulations and need for operational transparency, organizations are adopting risk-based audits that can cover multiple regulations and standards from a single audit event.[citation needed] This is a very new but necessary approach in some sectors to ensure that all the necessary governance requirements can be met without duplicating effort from both audit and audit hosting resources.[citation
needed]

Audits vs. Assessments The difference between audits and assessments can be considerable or can be nothing at all. As a general rule, audits should always be an independent evaluation that will include some degree of quantitative and qualitative analysis whereas an assessment infers a less independent and more consultative approach. Types of auditors Auditors of financial statements can be classified into two categories:

External auditor / Statutory auditor is an independent Public accounting firm engaged by the client subject to the audit, to express an opinion on whether the company's financial statements are free of material misstatements, whether due to fraud or error. For publiclytraded companies, external auditors may also be required to express an opinion over the effectiveness of internal controls over financial reporting. External auditors may also be engaged to perform other agreed-upon procedures, related or unrelated to financial statements. Most importantly, external auditors, though engaged and paid by the company being audited, are regarded as independent auditors.

The most used external audit standards are the US GAAS of the American Institute of Certified Public Accountants; and the ISA International Standards on Auditing developed by the International Auditing and Assurance Standards Board of the International Federation of Accountants

Internal auditors of internal control are employed by the organization they audit. Internal auditors perform various audit procedures, primarily related to procedures over the effectiveness of the company's internal controls over financial reporting. Due to the requirement of Section 404 of the Sarbanes Oxley Act of 2002 for management to also assess the effectiveness of their internal controls over financial reporting (as also required of the external auditor), internal auditors are utilized to make this assessment. Though internal

auditors are not considered independent of the company they perform audit procedures for, internal auditors of publicly-traded companies are required to report directly to the board of directors, or a subcommittee of the board of directors, and not to management, so to reduce the risk that internal auditors will be pressured to produce favorable assessments. - The most used Internal Audit standards are those of the Institute of Internal Auditors.

Consultant auditors are external personnel contracted by the firm to perform an audit following the firm's auditing standards. This differs from the external auditor, who follows their own auditing standards. The level of independence is therefore somewhere between the internal auditor and the external auditor. The consultant auditor may work independently, or as part of the audit team that includes internal auditors. Consultant auditors are used when the firm lacks sufficient expertise to audit certain areas, or simply for staff augmentation when staff are not available. Quality auditors may be consultants or employed by the organization.

Quality audits Main article: Quality audit Quality audits are performed to verify the effectiveness of a quality management system. This is part of certifications such as ISO 9001. Quality audits are essential to verify the existence of objective evidence of processes, to assess how successfully processes have been implemented, for judging the effectiveness of achieving any defined target levels, providing evidence concerning reduction and elimination of problem areas and are a hands-on management tool for achieving continual improvement in an organization. To benefit the organization, quality auditing should not only report nonconformances and corrective actions but also highlight areas of good practice. In this way, other departments may share information and amend their working practices as a result, also enhancing continual improvement. In Project Management Projects can undergo 2 types of audits[1]:

Regular Health Check Audits: The aim of a regular health check audit is to understand the current state of a project in order to increase project success. Regulatory Audits: The aim of a regulatory audit is to verify that a project is compliant with regulations and standards.