Auditing Unit 3 Projects

Auditing Unit 3 Projects - Gloria Deal Auditing Unit 3...

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Gloria Deal Auditing Unit 3 Projects Professor: Lexner April 11, 2011
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Chapter 4 4-56 (p. 162-163) Answers Part A: Ratio Analysis/Interpretation (Company trends, comparison to industry) High risk of misstatement? (and in which accounts) How does this affect your approach as an auditor as to how to test these areas? 1. Debt/Equity Ratio This type of ratio is completely backwards when being compared to the other ones. I see that the industry ratio is only 1.25 and last year as well as this year, the company is at 4.88 and 4.85. Therefor there is definitely something wrong with this portion of the analysis. This is a misstatement in either the company’s accounts payable or their equity accounts, and it is high risk. I would talk to the company and see if I could review their financial statements. I feel that the balance sheet would be a good statement one for me to check for the four years. It will show me their liabilities, and the stockholders equity of the company. Then after looking at those, I would be able to determine whether or not I can proceed with the actual audit. 2. Current Ratio I think that it looks like the company has had a downward trend for this ratio. Considering that the company had a significant decline and that there wasn’t a decline in the industry from one year to another, I would have to say that this is the result of them picking up more liabilities or they have a lot of accounts that are uncollectable accounts. Therefor this could also be a risk of them going out of business. This is a misstatement on either the company’s income statement or the accounts payable account, and is a moderate risk I would thoroughly review the company’s financial statements to locate the problem. Then I would move on to checking the accounts payable, and income statement accounts for the past three years to see where the discrepancies are and when they happened. 3. Inventory Turnover The Company’s ratio analysis shows a high ratio from three This is a misstatement, but it really depends on I would ask the company if I could check for the
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years ago followed by a significant drop two years ago. However last year’s as well as years, the numbers were pretty even but are at the lowest they’ve been in four years. The cause of this could be that the company is buying way more inventory and not selling it all, or they could’ve misstated their financial statements a few years ago. While looking at the current industry ratio, I really don’t think that is what is going on here. what was misstated.
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This note was uploaded on 08/02/2011 for the course MGMT 425 taught by Professor Brown/lexner during the Spring '11 term at Kaplan University.

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Auditing Unit 3 Projects - Gloria Deal Auditing Unit 3...

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