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The following financial ratios have been calculated for Nova Ltd for the year ended 30 June...

The following financial ratios have been calculated for Nova Ltd for the year ended 30 June 2008: Ratio Actual results Budgeted results Previous year Industry Average Current ratio 1.97 1.92 1.87 1.92 Quick asset ratio 1.06 1.06 1.06 1.11 Inventory turnover 4.21 4.91 4.86 4.76 Net profit ratio 0.05 0.03 0.03 0.03 Gross margin 0.65 0.59 0.61 0.61 Required: Provide four (4) possible explanations for the results of the various ratios for Nova Ltd and explain their implications for the audit. (7marks) (Word Limit: Minimum of 200 words. Maximum 250 of words)

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Expert Solution

Ratio Actual Result 30 June 2008 Budgeted Result Previous Year Industry Average
Current Ratio                               1.97                           1.92                      1.87                        1.92
Quick Asset Ratio                               1.06                           1.06                      1.06                        1.11
Inventory Turnover                               4.21                           4.91                      4.86                        4.76
Net Profit Ratio                               0.05                           0.03                      0.03                        0.03
Gross Margin ratio                               0.65                           0.59                      0.61                        0.61
If we analyze NoVa Ltd's ratio for the year ended June 30,2018,
we can find that all the ratios except the Inventory Turnover  
have shown better result that the budget, previous years and  
industry average .
1. Current Ratio & Quick Ratio: Both the ratio are better than budget,
previous year and Industry average , it indicates that there is sufficient  
level of AR and Cash balance to meet current liabilibilties and  
the balances are better managed that budgted and previous years numbers.
So liquidity of the company is better than anticipated.  
The Current Asset schedules and Allowances for Bad debt will be audited  
in details to validate the improvement in these ratios.
2. Inventory Turnover is lower than budget, previous year and industry  
average. It indicates that Inventory holding was more than planned .
Auditors will look into the details of physical inventory verifications and
aging of inventory to rule out obsolescence. Auditors will also look into the
reasons for higher stock holding and management needs to explain that.
3. Net Profit Margin : Net Margin is 2% more than budget, previous year
and industry average. It indicates that sales revenue was higher than
planned and the costs were managed better than plan. In Audit the  
sales cut off , revenue recognition principles, expense invoices, accruals  
and deferrals will be subject to detailed review to validate the sales  
and expense details.
4. Gross Margin has been better than budget , previous year and industry
average. This indicates that sales revenue has increased and the  
corresponding cost of Goods sold is lower than planned. Though inventory
turnover was reduced, the COGS was managed well. So Auditor will
validate the stock valuation methods and records to ascertain that  
stock values were correct and COGS charges are correct to rule out any  
excess carry forward of cost through closing inventory.

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