Work Paper 5-2 EARTHWEAR CLOTHIERS Preliminary Analytical Procedures Summary of Ratio Analyses & Assessment of Financial Condition December 31, 2019 1. Comments and Summary Based on your review of Work Paper 5-1, list one or two ratios in each of the following categories that you believe increase potential misstatement. Explain why you believe the risk is increased and identify possible causes of a potential misstater indicate if you believe the auditor would need to revise his or her typical audit approach to address the risk. For example, "Days of Inventory on Hand" increased significantly indicating merchandise is held in inventory for a longer prior years and it is also held for a longer period than the industry average. This increases the risk of obsolete inventory an market value dropping below recorded cost. The auditor should increase the extent of inventory valuation testing and/or nature of the testing to address the increased risk SHORT-TERM LIQUIDITY RATIOS: ACTIVITY RATIOS: PROFITABILITY / PERFORMANCE RATIOS: COVERAGE RATIOS: 2. Assessment of Financial Position Based on your review of Work Paper 5-1, assess the client's ability to continue as a going concern (to stay in business) by responding to the following questions. A. Identify ratios and trends, if any, that cause concern about the client's ability to continue as a going concern. B. Identify ratios and trends, if any, that indicate a high likelihood that the client will continue successfully as a going concern. Work Paper 5-2 EARTHWEAR CLOTHIERS Preliminary Analytical Procedures Summary of Ratio Analyses & Assessment of Financial Condition December 31, 2019 1. Comments and Summary Based on your review of Work Paper 5-1, list one or two ratios in each of the following categories that you believe increase potential misstatement. Explain why you believe the risk is increased and identify possible causes of a potential misstater indicate if you believe the auditor would need to revise his or her typical audit approach to address the risk. For example, "Days of Inventory on Hand" increased significantly indicating merchandise is held in inventory for a longer prior years and it is also held for a longer period than the industry average. This increases the risk of obsolete inventory an market value dropping below recorded cost. The auditor should increase the extent of inventory valuation testing and/or nature of the testing to address the increased risk SHORT-TERM LIQUIDITY RATIOS: ACTIVITY RATIOS: PROFITABILITY / PERFORMANCE RATIOS: COVERAGE RATIOS: 2. Assessment of Financial Position Based on your review of Work Paper 5-1, assess the client's ability to continue as a going concern (to stay in business) by responding to the following questions. A. Identify ratios and trends, if any, that cause concern about the client's ability to continue as a going concern. B. Identify ratios and trends, if any, that indicate a high likelihood that the client will continue successfully as a going concern
