Analytical Procedures You have been assigned to the 2015 audit of Perkins Corp.

Question

Analytical Procedures

You have been assigned to the 2015 audit of Perkins Corp. You met with the controller of the company who provided you with the 2015 operatung results shown below. Your supervisor has asked you to perform the preliminary analytic review. The supervisor has asked you to use the audited data from the prior four year (shown below) as part of your reveiw. The supervisor has also provided you with a few ratios that she would like you to look at.

Required:
A. Prepare a horizontal AND a vertical analysis using the 5 years of financial data provided. (HINT: Another term for horizantal analysis is "trend" analysis. Vertical analysis is also referred to as "common size" analysis.) You do not need to prepare this analysis for the two balance sheet account shown.
B. Determine the ratios that were requested by your supervisor for each year (below).
C. MOST IMPORTANT: Identidy five account, ratios, or trends that might concern you as the auditor of the 2015 statements. Remember, you're looking for unusual relationships or significant changes that might identify an area that will need more testing.

31,345

Selected ratios: (do for each year)
A) Depreciation as a % of PP&E
B) R&M as a % of PP&E
C) Interest as a % of Debt
D) Payroll taxes as a % of Salaries

Operating Results 2011 2012 2013 2014 2015 Revenues 1,750,000 1,872,500 2,033,575 1,883,361 2,034,029 Cost of goods sold (1,050,00) (1,217,125) (1,362,431) (1,205,351) (1,261,098) Gross Profit 700,000 655,375 641,144 678,010 772,931 Salaries expense 350,000 360,500 367,710 360,356 374,770 Advertising expense 91,000 87,500 35,000 40,250 122,500 Facilities expense 85,000 86,700 88,868 87,090 91,445 Payroll tax expense 38,500 37,853 42,287 42,882 29,982 R & M expense 28,000 29,120 30,139

31,345

21,001 Depreciation expense 14,500 14,500 13,775 13,637 10,910 Interest expense 8,300 8,317 8,135 8,053 7,973 Legal fees expense 3,500 4,200 3,800 5,600 14,562 (618,800) (628,590) (589,713) (589,214) (673,142)    Operation Income 81,200 26,786 51,431 88,796 99,789 Selected accounts from balance sheet Average pp&e 145,000 131,818 172,188 123,975 181,830 Average Debt 166,000 161,118 135,581 129,895 130,704

Explanation / Answer

Operating Results Trend analysis 2015 Trend analysis 2014 Common size alalysis 2015 Common size alalysis 2014 2011 2012 2013 2014 2015 $ % $ % Revenues 17,50,000 18,72,500 20,33,575 18,83,361 20,34,029 1,50,668 8% -1,50,214 -7% 100% 100% Cost of goods sold (1,050,00) -12,17,125 -13,62,431 -12,05,351 -12,61,098 -55,747 5% 1,57,080 -12% -62% -64% Gross Profit 7,00,000 6,55,375 6,41,144 6,78,010 7,72,931 94,921 14% 36,866 6% 38% 36% Salaries expense 3,50,000 3,60,500 3,67,710 3,60,356 3,74,770 14,414 4% -7,354 -2% 18% 19% Advertising expense 91,000 87,500 35,000 40,250 1,22,500 82,250 204% 5,250 15% 6% 2% Facilities expense 85,000 86,700 88,868 87,090 91,445 4,355 5% -1,778 -2% 4% 5% Payroll tax expense 38,500 37,853 42,287 42,882 29,982 -12,900 -30% 595 1% 1% 2% R & M expense 28,000 29,120 30,139 31,345 21,001 -10,344 -33% 1,206 4% 1% 2% Depreciation expense 14,500 14,500 13,775 13,637 10,910 -2,727 -20% -138 -1% 1% 1% Interest expense 8,300 8,317 8,135 8,053 7,973 -80 -1% -82 -1% 0% 0% Legal fees expense 3,500 4,200 3,800 5,600 14,562 8,962 160% 1,800 47% 1% 0% -6,18,800 -6,28,590 -5,89,713 -5,89,214 -6,73,142 -83,928 14% 499 0% -33% -31% Operation Income 81,200 26,786 51,431 88,796 99,789 10,993 12% 37,365 73% 5% 5% Average pp&e 1,45,000 1,31,818 1,72,188 1,23,975 1,81,830 57,855 47% -48,213 -28% 9% 7% Average Debt 1,66,000 1,61,118 1,35,581 1,29,895 1,30,704 809 1% -5,686 -4% 6% 7% Dep/PPE 11.00% 6.00% R&M/PPE 24.13% 16.07% interest/debt 6.20% 6.10% payroll tax/salary 11.90% 8.00%

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