Ch 7 - Audit Group 11.docx - Chapter 7 Prepare a group answer and submit by class-time a completed response to the following assignments 19-22 19a Sales

Ch 7 - Audit Group 11.docx - Chapter 7 Prepare a group...

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Chapter 7 Prepare a group answer and submit by class-time a completed response to the following assignments: 19-22. 19a. Sales went up by 10% from the prior year but inventory did not go up by 10% it went up by 58% which indicates it could be a potential risk area as their inventory turn- over ratio went down meaning they aren’t selling their inventory as quickly or buying too much. Also their accounts payable went up 65% which is a huge jump. This could mean they’re struggling to pay or are incurring more liabilities than assets. Employee turn-over is up 60% which means they aren’t keep quality employees and having to continuously train new ones. Their debt to equity ratio jumped 71% again indicating they’re incurring more debt but not paying them as fast. 19b. All of the above that I mentioned are areas where the auditor should increase the level of professional skepticism. Inventory, inventory turn-over ratio, accounts payable, employee turn-over, debt to equity ratio. All of those areas are areas where the large increase/decrease is worrisome for the company and the auditor should take care to spend extra time looking into. 20a. From the information given, I was able to draw some conclusions regarding financial reporting risk for the company. For one, there should be a presumption in every audit that there is the risk of material misstatement due to revenue recognition fraud. Revenue is a common component in multiple ratios that we use to compare to other data provided from past years and the industry during our preliminary analytical procedures to help indicate possible fraud. Therefore, if revenue fraud is committed in one year compared to another it could distort the ratio in favor causing the company to look better on their financials. In regards to specific account balances and their ratios provided, I paid close attention to the current/ quick ratio, the inventory turnover and number of days sales in inventory, the debt to equity ratio and the days of sales receivables ratio which I believe provides useful evidence in determining account balances that have a high risk of material misstatement. The current/ quick ratio assesses the company's liquidity and ability to pay their short-term obligations. The
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  • Spring '11
  • PeggyDwyer

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