This is an auditing class.

References Mailings Review View Help Tell me what you want to do Paragraph Read each question, closely Provide detailed writen explanations clearty addressing the specific questions Your explanations may reference the readings from the cases or the supplementary reading. You must provide a minimum of 4 5 pages addressing 7-20 (a).(b) and (c), double-spaced. Chapter 7, Planning the Audit: Identifying, Assessing and Responding to the Risk of Material Misstatement 7-20 The following table contains calculations of several key ratios for a fictional company, Indianola Pharmaceutical Company, a maker of proprietary and prescription drugs Indianola Pharmaceutical Company is a small- to medium-sized publicly held pharmaceutical company Approximately 80% of its sales has been in prescription drugs, the remaining 20% is in medical supplies normally found in a drugstore. The primary purpose of the auditor's calculations is to identify potential risk areas for the upcoming audit. The auditor recognizes that some of the data might signal the need to gather other industry- or company-specific data. A.number of the company's drugs are patented. Its best-selling drug, Anecillin, which will come off patent in two years, has accounted for approximately 20% of the companys sales during the past five years The auditor's expectation is that the company's own trends from the past few years should be relatively consistent with this year's trends, and that the company will not have significant deviations from industry norms INDIANOLA PHARMACEUTICAL RATIO ANALYSIS One Year Two Years Three Years Current Ratio Current Year Previous Previous Previous Industry 2.13 1.40 185 189 228 0.85 Current ratio 2.51 1,76 6.3 450 Quick ratio Times interest earned Days'sales in receivables Inventory turnover Days' sales in inventory Research & development as % of sales Cost ofgoods sold as % of sales 093 130 1.45 96 2.40 2.21 165 1.4 5.89 100 3.96 92 1.94 69 5.31 433 152 69 1.3 203 426 38.5 40.2 43.8 445 1.25 $4.32 0.89 0.89 Debt/equity ratio Earnings per share 4.85 $1.12 0.68 1.13 125 4.26 087 0.99 087 0.78 $2.50 064 Sales/tangible assets Sales/total assets Sales growth over past vear 15% 1 NormalNo Heading 1 Heading 2Ttle Sales growth over past year 396 15% 2% 4% 6% a. What major conclusions regarding financial reporting risk can you draw from this information? Be specific in identifying specific account balances that have a high risk of material misstatement. How will you use this risk analysis in planning the audit? Identify a minimum of four financial reporting risks that you will address during the audit and discuss how you will address those risks. b. What other critical background information will you want to obtain when planning the audit? What information would you gather during the conduct of the audit? Briefly indicate the probable sources of that information c. What major actions did the company take during the immediately preceding year? Explain 8 0 5 6 O P