1 6 C-4. A partially completed analytical ratios working paper for Keystone Computers & Networks, Incis. presented on page 239. a. Complete the working paper by computing the financial ratios for 20X5. b. After completing part (a), review the ratios and identify financial statement account should be investigated because the related ratios are not comparable to prior-year industry averages, or your knowledge of the company. c. For each account identified in part (b), list potential reasons for the unexpected balances and related ratios. unexpected account Audit Planning. Understanding the client, Assessing Risks, and Responding 239 KEYSTONE COMPUTERS & NETWORKS, INC. Analytical Review Ratios For the Period Ended December 31, 20X5 WL Prepared by Reviewed by Ending 12/31/X5 Industry Ending 12/31/X4 1.2 33.2 37.0 Ratio Current ratio Days' sales in accounts receivable, computed with average accounts receivable Allowance for doubtful accounts/accounts receivable Bad debt expenseet sales Total liabilitieset worth Return on total assets Return on net worth Return on net sales Gross profitet sales Selling, operating, and administrative expenseet sales Times interest earned 2.9 1.1% 0.2% 2.7 8.3% 30.5% 1.0% 23.2% 21.4% 9.0% 29.0% 2.3% 24.0% 23.9% 5.5 4.1 KEYSTONE COMPUTERS & NETWORKS, INC. Audit Strategy December 31, 20X5 Date Prepared by WL Reviewed by Page 1 Adjustments Adjusted Balance Dr (CF) Dr (C) Account 1000.10 1000.30 1050.10 1050.40 1050.90 1100.10 1300.10 2050.10 2050.30 2050.80 2050.90 2100.00 2200.00 3050 10 3100.00 3200.10 3300 30 3400.50 4400.10 5050.10 5100.10 5700.10 590000 KEYSTONE COMPUTERS & NETWORKS, INC. Working Trial Balance For the Period Ended December 31, 20X5 Prior Period Unadjusted Account Name Balance 12/31/X4 Trial Balance Dr (C) Cash First Natl. Bank 52.764 76,234 Cash in register 1,200 1.200 Accounts receivable-trade 8.534,524 10,235,457 Accounts receivable officers 57.643 84,670 Allowance for bad debts 196.000) (104,000) Inventories 1,234,589 1,375,835 Prepaid expenses 156.900 176,456 Furniture & fixtures 300,980 344,900 974,676 789,654 Office equipment Leasehold improvements 98.900 91,230 (404,560) (250,987) Accumulated depreciation 178,000 Software development cost Intangible assets 1.000.000 800,000 (1,429 033) (1,349,839) Accounts payable trade (43.2001 (45,675) Capital lease obligations current (203.450) (178,900) Accrued liabilities (42,300) Unearned service revenue (8,632,105) (6,612,550) Line of credit (456,700) (423,680) Capital lease obligations noncurrent 200,000) (200,000) Capital stock (423,500) (423.500) Pald-in capital 12.615.478) (1,626,203) Retained earnings 415,000 Dividends 989,275 229,877 (989.275) (229,877) Adjustre Dr Account 6000.10 6010.10 6020.10 6030.10 7020.10 7070.10 7070.50 7075.10 7080.10 7080.30 7090.10 7090.30 7090.50 7100.10 7140.10 7200.10 7260.30 7320.10 7410.10 7600.10 7650.10 7700.10 7800.10 7900.10 7900.70 9000.00 KEYSTONE COMPUTERS & NETWORKS, INC. Working Trial Balance For the Period Ended December 31, 20x5 Prior Period Balance Unadjusted Trial Balance Account Name 12/31/X4 Dr (CI) Sales of computers (44,890,788) (42,345,675) Software licenses (248,900) (236,700) Service revenue (4,567,888) (4,325,777) Consulting revenue (46,751,990) (45,677,899) Cost of sales 74,122,435 72,134,566 Salaries sales 3,167,889 2.765,677 Payroll benefits sales 913,456 857,368 Advertising & promotion 1,200,786 1,567,889 Travel & entertainment 609,788 445,600 Miscellaneous exp.-sales 334,890 278,656 Salaries-operations 4,878,900 4,544,860 Salaries administrative 4,234,234 3,945,670 Payroll benefits admin. 1,812,344 1,734,565 Rent 797,800 721,345 Utilities 210,495 234,839 356,890 378,677 Insurance Legal & accounting 457,577 485,767 234,500 256,678 Bad debt expense 478,900 556,345 Supplies Depreciation and amort. 334,565 367,867 289,100 345,645 Software development 234,556 245,456 Miscellaneous exp.-administrative 421,344 476,899 Interest expense 256,765 80,100 Current income taxes 45,632 9,150 Deferred income taxes 989,275 P & L Summary (229,877) 229,877