1 8 Crazy Eddie

1 8 Crazy Eddie - Emilia Skupiewska-Drozd Acct 723 Prof A...

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Emilia Skupiewska-Drozd Acct. 723 Prof. A. Dignam Case 1.8 Crazy Eddie Inc. Question 1. Key Ratios for Crazy Eddie: Liquidity: Quick ratio Current ratio Solvency: Times interest earned Long-term debt to equity Debt to assets 0.7 Activity: Inventory turnover Age of inventory Acc. receivable turnover Age of acc. receivable Profitability: Gross margin Profit margin on sales Return on total assets Return on equity 1987 1.4 2.41 4.9 0.97 0.7 3.22 111.8 D 53.9 6.7 D 22.8% 3% 5.4% 15.6% 1986 0.6 1.4 33.3 0.18 0.7 4.51 80.0 D 105.2 3.4 D 25.9% 5% 11.1% 39.8% The red flags for Crazy Eddie are as follows: Cash balance – in the period of 1984-1985 cash balance increased drastically (1500 %) and dropped to 40% in 1986 and to 9% in 1987. This would be a sign that company tied up most of the money into investments and did not leave much for other expenses.
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Inventory - in the period of 1984-1987 inventory balance decreased from 63.8 to 37. This would suggest that inventory was overstated in the books. In addition, company’s inventory turnover in the period of 1986 to 1987 dropped from 4.5 a year to 3.22 a year. On the top of that the age of inventory needs a little attention as well. In the 1986 the age of inventory was 80 days and in 1987 it increased to 111.8 days which suggest the number was overstated. Accounts payable - from 1985 to 1986 Crazy Eddie’s payables increased 124% but then decreased by 3% in the period of two years (1986 -1987). In addition its short term debt increase drastically n the period of three years, which is related to company’s rapid expansion The accrual expenses dropped from 16.6-1.9 in the years 1984-1987. This could be related to artificial inflating the company revenue. Question 2. Auditors are required to obtain sufficient appropriate audit evidence which would allow them to draw reasonable conclusion as to whether the client’s financial statement follow GAAP. To do so, auditor uses the following procedures: risk assessment tests of controls Risk assessment procedures are preliminary during the audit engagement. Through these procedures auditors acquire the understanding of the client, its environment, and internal control. As in the Crazy Eddie Case, the auditors should have found out the nature of the transshipping transactions, and the potential high risk placed in the inventory accounts by
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1 8 Crazy Eddie - Emilia Skupiewska-Drozd Acct 723 Prof A...

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