In auditing the financial statements of a manufacturing company that were prepared from data processed by electronic data processing equipment, the CPA has found that his traditional "audit trail" has been obscured. As a result the CPA may place increased emphasis upon overall checks of the data under audit. These overall checks, which are also applied in auditing visibly posted accounting records, include the computation of ratios, which are compared to prior year ratios or to industrywide norms. Examples of such overall checks or ratios are the computation of the rate of inventory turnover and computation of the number of days' sales in receivables.

Required:

a. Discuss the advantages to the CPA of the use of ratios as overall checks in an audit.

b. In addition to the computations given above, list the ratios that a CPA may compute during an audit as overall checks on balance sheet accounts and related nominal accounts. For each ratio listed name the two (or more) accounts used in its computation.

c. When a CPA discovers that there has been a significant change in a ratio when compared to the prior year's ratio, he considers the possible reasons for the change. Give the possible reasons for the following significant changes in ratios:

1. The rate of inventory turnover (ratio of cost of sales and average inventory) has decreased from the prior year's rate.

2. The number of days' sales in receivables (ratio of average daily accounts receivable and sales) has increased over the prior year.

15.23. Annette, CPA, is conducting the \(19 X 0\) audit of the financial statements of Johnson Company and has been given the following statement of changes in financial position:

Annette has completed necessary auditing procedures on the balance sheet, income statement, and statement of stockholders' equity and is satisfied that these statements are fairly presented with adequate disclosures in the statements and in the footnotes. Annette has not yet examined the statement of changes in financial position.
Required:

a. What general steps should be followed by Annette to examine the statement of changes in financial position of the Johizon Company? Do not discuss the presentation or verification of any specific item on the statement.

b. What additional specific steps should be followed by Annette to verify each of the four items marked with an asterisk (*) on the statement of changes in financial position of the Johnson Company?

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Johnson Company Statement of Changes in Financial Position For the Year Ended December 31, 19X0 Funds provided: (in thousands) Operations: Net income from operations Add or (deduct) items not requiring outlay of working capital in the current period: Depreciation Deferred income taxes Investment in unconsolidated subsidiary $46,000 5,500 1,500 (net of cash dividends paid) From operations prior to extraordinary loss Extraordinary loss From operations after extraordinary loss Proceeds from exercise of stock options Total (1,700)* 51,300 (13,000) 38,300 2,700* $41,000