Arthur, CPA, is auditing The Home Improvement Store as of December 31, 2018. As with all audit engagements, Arthur’s initial procedures are to analyze the entity’s financial data by reviewing trends in significant ratios and comparing the company’s performance with the industry so that he better understands the business and can determine where to concentrate his audit efforts. As part of Arthur’s audit of The Home Improvement Store, he performed analytical procedures by calculating the following ratios and obtaining related industry data. 

Required:

Compare The Home Improvement Store’s ratios with those of its industry. You may want to reference the advanced module in this chapter for more information regarding the ratios used in the analytical procedure. For each ratio provided in the table above 

a. Indicate the potential risks the ratio and/or historical patterns may present.  

b. Indicate one or two plausible explanations for why The Home Improvement Store’s ratios or historical patterns differ from those of the industry.

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The Home Improvement Store 2014 2015 2016 2017 2018 Quick ratio Days of inventory on hand Inventory/current assets Return on assets Debt to equity 0.67 62.73 0.73 1.38 0.29 80.52 0.45 84.02 75.15 45.51% 82.40 48.42% 5.70% 1.47 53.48% 16.10% 0.02 62.28% 2.16% 80.81% 6.05% 0.72 9.75% 0.07 2.36 Industry 2014 2015 2016 2017 2018 0.79 0.81 0.87 0.91 1.08 82.26 79.89 86.86 84.13 75.04 58.04% 56.44% 60.19% 60.92% 50.33% 6.98% 8.87% 7.05% 5.06% 11.73% 0.44 0.31 0.56 0.53 0.57