The facts below represent the audited financial statements of a public company for 2005 and 2006, along with management's representation regarding the unaudited amounts (i.e., the UNAUDITED column) and the auditors' projected amounts for 2007 (i.e., the PROJECTED column, which represents their expectations based on industry trends and information that they know about this company's likely financial performance). In addition, financial ratios are presented that summarize the relationships among the various financial statement line items reported in the Balance Sheet and Income statements.
The company is in the telecommunications industry, has been in existence for ten years, and has had unqualified audit opinions throughout that time. The company has generally been successful in maintaining a competitive advantage in the industry, but there is always intense competition and maintaining that advantage (and associated profitability etc.) continues to be a significant challenge. Assume that you are the audit senior who is considering the planning for this year's audit engagement.

Required
Part 1. Review the financial statements and document the financial trends that seem most important for this company.
Part 2. Describe the patterns in the data that concern you, and explain why those particular patterns cause you concern.
Part 3. Brainstorm to consider possible errors in the financial data that might be consistent with the patterns you identified in Part 2.
Part 4. Considering the results of Part 3, discuss the specific financial statement line items that should receive heightened scrutiny during your audit of this company.
Part 5. Consider the PROJECTED column. Why would it be helpful for auditors to make projections of unaudited data based on industry tends and analysis? How would an auditor actually make such a projection? What could be a downside risk in making suchprojections?

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Selected Financial Ratios PROJECTED UNAUDITED 12/31/07 12/31/07 12/31/06 12/31/05 Current Ratio Current Assets/Current Liab.) Quick Ratio Current Assets Less Inventory 1.01 Current Liab.) Gross Margin % Income before Taxes as a % of Sales Net Income as a % of Sales Inventory Turnover (Cost of Good Sold/ Ending Inventory) Receivable Turnover (Sales/Net Receivables) 1.50 1.52 1.39 1.48 .95 90 287 278 291 290 075 045 100 088 048 092 052 060 2.47 2.27 2.63 2.58 2.44 2.47 3.39 4.96