The following are your calculations of key ratios for your current audit client. Based on these ratios, answer the questions below.
|
Ratio
|
2015
|
2014
|
2013
|
|
Current Ratio
|
2.08
|
2.26
|
2.51
|
|
Quick Ratio
|
0.97
|
1.34
|
1.82
|
|
Days to Collect Accounts Receivable
|
86.90
|
66.36
|
89.02
|
|
Days to Sell Inventory
|
179.80
|
198.37
|
136.19
|
|
Total Days to Convert Sales to Cash
|
266.70
|
264.73
|
225.21
|
|
Profit Margin
|
13%
|
14%
|
16%
|
|
Return on Assets
|
9%
|
9%
|
12%
|
What is your assessment of the overall financial health and immediate future prospects for your client? Be sure to explain your position.
Hint - You need to take a holistic approach here to try to assess the firm's prospects for the next year or two. Consider both cash management and operating performance issues. Firms need to generate profits but also need to be able to turn those profits into cash to pay their bills. Keep in mind that the standard rule of thumb level for the current ratio is 2.0 and 1.0 for the quick ratio.
List three additional pieces of information that you would find useful to improve your assessment of the firm's future prospects and explain why you would include them.
Hint - Step back and think about what the issues you discussed above imply and what information you could use to refine your assessments. For example, if you detected cash flow problems above, then consider what uses of cash they might face in the future that might be threatened by weak cash flows.
Additional Information 1 -
Additional Information 2 -
Additional Information 3 -
Based on the information, discuss two accounts or related groups of accounts, or other issue might warrant further audit investigation and why.
Hint - I am looking for a demonstration of you understanding of how these ratios relate to account balances as well as how the overall picture might create audit issues. However, I want your explanation to focus on an audit issue and specific risk of material misstatement in the financial statements or affect your audit report. For example, falling profits are an operating issue. However, they can do things like put pressure on management to manipulate the financial statements to hide the operating weakness or may signal a going concern risk.