You are the auditor of FlyAway Ltd(FAL), a distributor of fly fishing equipment. Using the companys financial
Question:
You are the auditor of FlyAway Ltd(FAL), a distributor of fly fishing equipment. Using the company’s financial report, its budget for the year under review and industry benchmarks, as well as your understanding of the entity, you have compiled the following information:
- FALneeds to sell large volumes in order to cover overhead costs and generate a profit. As a result, tight control of overheads is needed to ensure a net profit from operations.
- FALdid not reach many of its set targets in the prior year, and budgeted to do better in the current year. FAL’sstrategy was to endeavor to keep its costs down in relation to sales, while allowing its gross profit ratio to drop, and plan to generate a large volume of sales.
- The company also planned to improve its working capital management by reducing levels of inventory and accounts receivable.
Ratio | Current YEar | Budget | Prior Year | Industry |
Current Ratio | 1.61 | 1.49 | 1.51 | 1.71 |
Quick asset ratio | 0.82 | 0.77 | 0.76 | 0.76 |
Times interest earned ratio | 6.83 | 7.69 | 7.29 | 6.63 |
Debt to equity ratio | 0.54 | 0.53 | 0.50 | 0.53 |
Days in inventory | 37.90 | 28.70 | 30.54 | 28.70 |
Days in receivable | 48.95 | 40.22 | 43.44 | 35.45 |
Gross profit ratio % | 8.80 | 9.61 | 9.31 | 9.01 |
Admin expenses/sales % | 1.02 | 1.52 | 1.66 | 1.70 |
Marketing expenses/sales% | 3.42 | 1.75 | 1.71 | 1.69 |
Required:
a. List two ratio results from the table above that the auditor would be particularly interested in when planning the audit of FAL. Explain why you chose these ratio results.
b. For each ratio you listed in part (a) indicate what general ledger account is primarily affected.
c. For each ratio you listed in part (a) indicate which assertion(or assertions)is/are most at risk. Explainwhytheassertion(s)is/are at risk.
Financial Reporting and Analysis Using Financial Accounting Information
ISBN: 978-1439080603
12th Edition
Authors: Charles H Gibson