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 auditor’s 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 company’s 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.

Required
a. What major conclusions regarding risk can be drawn from the information shown in the table? State how that risk analysis will be used in planning the audit.
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 information.
c. Based on the information, what major actions did the company enact during the immediately preceding year?Explain.

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INDIANOLA PHARMACEUTICAL RATIO ANALYSIS Current One Year Two Years Three Years Current Industry Ratio Year Previous Previous Previous 1.85 0.85 2.51 1.76 2.13 1.40 Current ratio Quick ratio Interest coverage Times interest earned Days' sales in receivables Inventory turnover Days' sales in inventory Research & development as a 1.89 0.93 2.28 1.32 1.30 109 2.40 152 1.45 96 2.21 165 5.89 100 3.96 92 6.3 72 5.31 69 4.50 69 4.33 84 4.26 percent of sales Cost of goods sold as percent 1.3 1.4 1.94 2.03 of sales Debt/equity ratio Earnings per share Sales/tangible assets Sales/total assets Sales growth over past year 38.5 4.85 $1.12 0.68 0.33 3% 40.2 4.88 $2.50 0.64 0.35 15% 41.2 1.25 $4.32 0.89 0.89 2% 43.8 1.13 $4.26 0.87 0.87 4% 44.5 1.25 n/a 0.99 0.78 6%