Week 4 Question (10 marks) You are the audit senior on the audit of Easy Fit Pty Limited, a large manufacturer of shoes. Easy Fit Pty Limited’s main market lies with 18 to 24-year olds. This is the first year in which your firm has performed the audit. As part of the planning work, you have performed analytical procedures on an annualised basis and compared the results to industry averages and last year’s audited financial information. The results are given below:
Industry Average Easy Fit Pty Limited
Ratio 20X7 20X6 20X7 20X6 1 Current ratio 2.84 3.27 1.89 2.24 2 Receivables turnover ratio 4.9 4.6 6.3 7.0 3 Inventory turnover ratio 3.7 3.8 5.0 5.5 4 Return on total assets 7% 5% 13% 11% 5 Net profit ratio 0.06 0.06 0.04 0.04
Required: Explain the general meaning of each of the above ratios (1 – 5), discuss the conclusions that you can draw about Easy Fit’s financial position and identify potential audit risks to be investigated further.
Week 5 Quest
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