The following table contains calculations of several key ratios for Indianola Pharmaceutical Company, a maker of proprietary and prescription drugs. The company is publicly held and is considered a small-to medium-size pharmaceutical company. Approximately 80% of its sales have been in prescription drugs; the remaining 20% are in medical supplies normally found in a drugstore. The primary purpose of the auditors calculations is to identify potential risk areas for the upcoming audit. The auditor recognizes that some of the data may signal the need to gather other industry- or company-specific data. A number of the companys drugs are patented. Its number-one selling drug, Anecillin, which will come off of patent in two years, has accounted for approximately 20% of the company's sales during the past five years. INDIANOLA PHARMACEUTICAL RATIO ANALYSIS Ratio Current One Years Two Years Three Years Current Year Previous Previous Previous Industry Current ratio ----------------------------- 1.85 1.89 2.28 2.51 2.13 Quick ratio ------------------------------- 0.85 0.93 1.32 1.76 1.40 Interest coverage: Times Interest earned------------------- 1.30 1.45 5.89 6.3 4.50 Days sales in receivables-------------- 109 96 100 72 69 Inventory turnover---------------------- 2.40 2.21 3.96 5.31 4.33 Days sales in inventory---------------- 152 165 92 69 84 Research & development as a Percent of sales -------------------------- 1.3 1.4 1.94 2.03 4.26 Cost of goods sold as percent Of sales------------------------------------ 38.5 40.2 41.2 43.8 44.5 Debt/equity ratio------------------------- 4.85 4.88 1.25 1.13 1.25 Earnings per share----------------------- $1.12 $2.50 $4.32 $4.26 n/a Sales/tangible assets--------------------- 0.68 0.64 0.89 0.87 0.99 Sales/total assets------------------------- 0.33 0.35 0.89 0.87 0.78 Sales growth over past year---- 3% 15% 2% 4% 6%

b. What other critical background information might you want to obtain as part of the planning of the audit or would you gather during the conduct of the audit? Briefly indicate the probable sources of the informatio