You have just been hired as an audit associate by Potter & Associates, CPAs. Your supervisor has given you a file containing materials regarding the audit of Hedrick Company, a manufacturer of auto components. Included in the file are financial statement data on the company for the last two years given below:
Your supervisor notes that you are a recent graduate with a major in accounting and thus is interested in what you know about the use of analytical procedures to plan the audit. Anxious to impress your supervisor, you decide to generate all the information you can about the company.
The first thing you do is find the following ratios are typical of companies in Hedrick's industry:
Based on what you learned in your auditing course, you know that what you should be looking for are signals or “red flags” of risks that could affect the audit. Thus, you diligently proceed to analyze the data available and prepare a memo with appropriate attachments to send to your supervisor,
Key points of your memo should include:
A. What you found from your analysis of Hedrick compared to typical companies in the industry with respect to ratios related to:
1.Liquidity
2, Activity
- Profitability
- Coverage
(Note: these categories are in the Potter & Associates Audit Procedure Manual and there are various ratios that could be considered. You should compute as many ratios as you can using the ratio summary provided in Blackboard whether or not industry benchmark data is available)
B, Along with the ratios in part A, what you find from common –size balance sheets and Income statements as part of your analysis.
C. Risks of material misstatement, if any, based on your analysis
Sample Solution