Question

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)

Answer 1

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.