Question 2 [10 Marks]

You are the auditor of motorway Ltd, a company trading in the motor industry. On examining the companys latest annual financial statements, you make the following observations The gross profit margin which had consistently been 30% over the past five years has dropped to 25%

The current ratio, which in the past has always been at the same level as the industry average of 2:1 has increased to 4;1

Required

1. List 3 possible factors which could have caused the reduction of the gross profit margin. (3 marks)

2. List 3 possible factors which could have caused the increase in the current ratio. (3 marks)

3. Briefly discuss whether an increase in the current ratio always represents an improvement for a business. (4 marks)