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Unformatted text preview: Unit 3 Project 4-56 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 Their debt to equity ratio has risen from 1.25 of 2 years ago to 4.85 in the current year. The industry standard is at 1.25. This is nearly 4 times higher than the industry standard. I would give this a moderate to high level of misstatement. I would look in the Accounts payable account and under stockholders equity for the possible error. I would dig a little deeper than normal to find out why this ratio has risen so high and stayed that way for 2 years. It is possible that the error has been overlooked and not seen. 2.Cost of goods sold as a percent of sales The COGS as a percent of sales has decreased over the past three years and is below the industry standard. This could be due to a miscalculation of sales recorded for the company and the inventory being used. I see this as a moderate level of misstatement. Net sales and Inventory would be the two accounts I would look into for errors. This percent has been falling consistently over the past three years but they are well below the industry standard. There could be an error in how the company is recording its expenses of COGS and this would be where I would start. 3.sales/total assets The sales to total assets ratio has fell significantly in the past two years and is way under the industry standard. Eighty percent of their sales are from prescriptions and I would think this number would be closer to industry due to that fact. This is a moderate level of concern as it shows they are earning less and less revenue over time. I would check their inventory and sales accounts for errors. I believe that there is an error in their inventory system. There is a low generation of revenue and the cause should be found through inventory. 4.Inventory turnover In looking at this ratio, I see that they are selling less and/or over making their product. When comparing to I think this is a low risk. Inventory and I would look at the industry and see if there are new drugs similar industries, their turnover is only half. sales are two definite accounts I would inquire upon. that have been introduced to accommodate for the lower ratio. Seeing as how their patent is about to run out, it could be that there is a new drug out there that does the same thing for less. B) I would look to see what the drug actually does. If it is a seasonal type drug, than they may be boosting their inventory for the upcoming season. There could also have been new drugs introduced that perform the same thing and are a cheaper alternative to this company. I would also look to make sure that their pricing for all other drugs are comparable to others. also look to make sure that their pricing for all other drugs are comparable to others....
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This note was uploaded on 08/22/2011 for the course AUDITING AC410 taught by Professor Prof during the Spring '11 term at Kaplan University.
- Spring '11