Question 1 (24 marks) The following table contains calculations of several key r

Question

Question 1 (24 marks) The following table contains calculations of several key ratios for a fictional company, 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 might signal the need to gather other industry or company specific data. INDIANOLA PHARMACEUTICAL RATIO ANALYSIS Current Ratios Current Ratio Quick Ratio Times interest earned Days' sales in receivables Inventory turnover Days' sales in inventory R&D; as a % of sales COGS as a % of sales Debt/equity ratio EPS Sales/Intangible assets Sales/Total assets Sales growth over past year 2017 2016 2015 2014 Indust 1.85 1.89 2.28 2.51 0.85 0.93 132 1.76 1.3 1.45 5.89 6.3 109 96 100 72 2.4 2.21 3.96 5.31 152 165 92 69 1.3 1. 1.94 2.03 38.5 40.2 41.2 43.8 4.85 4.88 1.25 .1 1.12 $2.50 $4.32 $4.26 0.68 0.64 0.89 0.87 0.33 0.35 0.89 0.87 39 59 29 4% 2.13 4.5 69 4.33 84 4.26 44.5 1.25 n/a 0.99 0.78 0% Required: Draw major conclusions regarding financial reporting risk from the information shown in the table. Be specific in identifying specific account balances that have a high risk of material misstatement. State how that risk analysis will be used in planning the audit. QUESTION 2 (19 marks) a) b) List the primary activities involved in the acquisition and payment cycle Outline the financial statement accounts normally associated with the purchase cycle

Explanation / Answer

1. Risk Analysis will be used in planning the Audit

Activity rations are used to measure how efficiently a company utilizes its assets, the rations provide investors with and idea of the overall oprerational performance of a firm.

here in terms of following activity rations high risk identify

inventory turnover ration decrasing by year to year , high inventory ratio denotes faster rate of sales stock

Receivable days ratio incrases year to means decreasing receivable turnover ratio.

Debt equity ration part of solvency ration increasing denotes more depency on debt so high risk

Current ration and Liquid ration not as per cuurent industry

2 b) Fiancial Statement normally associated with purchase cycle

--- Balance sheet

--- Income Statement

--- statement of retained earnings

--- Satement of cash flows

2 a) Activities Involved in acquisition and payment cycle

--- Requisition (request of goods and services)

--- Purchase of goods and services

--- receipts of goods and services

--- approval of items for payment

--- cash disbursements

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