Arthur, CPA, is auditing The Home Improvement Store as of December 31, 2014. 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.

Yoenid Gordon ACC470 Chapter 5 5-34 Evidence comes in various types and has different degrees of reliability. Following are some statements that compare various types of evidence. a. A bank confirmation versus observation of the segregation of duties between cash receipts and recording payment in the accounts receivable subsidiary ledger. A bank confirmation is a better alternative since third party confirmation (bank in this case) is more reliable source. A bank confirmation is designed to substantiate the actual balance in an account. The auditor wants to determine that the balance is actually zero. Fraud can be carried out within a company by use of an account that has been supposedly closed out when it actually has not been. Thus, deposits can be made into the account without the company keeping any official record. While Segregation of duties as an internal matter of organization can be questionable at times. b. An auditor's recalculation of depreciation versus examination of raw material requisitions. An auditor's recalculation of depreciation is better alternative since depreciation being an important part in income assets. Fixed assets valuation net of depreciation is an integral component of balance sheet. So depreciation calculation should be properly examined. Determining policy followed by company: WDV or SLM. c. A bank statement included in the entity's records versus shipping documents. Shipping documents are valuable and reliable source in audit. Being issued by custom authorities, such documents provide fair bit of evidence regarding authenticity of export-import and other overseas transactions. Whereas a bank statement included in the client's record can be forged at times. Thus in comparison, shipping documents are more reliable. d. Physical inspection of common stock certificates held for investment versus physical examination of inventory components for a personal computer. Physical inspection of common stock certificates held for investment is a better technique of audit. Certificates being a prima facie evidence regarding ownership of investments are a reliable source. Physical examination of inventory components for a personal computer will be a more in depth analysis and that too value involved being less significant. Therefore it will lead to audit being dragged in a time consuming and inefficient manner. Required: For each situation, indicate whether the first or second type of evidence is more reliable. Provide a rationale for your choice. 5-39 Arthur, CPA, is auditing The Home Improvement Store as of December 31, 2014. 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